PBT

Business Context and Reporting Period

Company: Permian Basin Royalty Trust (Trust)

Reporting Period: Quarterly period ended June 30, 2003 (Form 10-Q).

Business Overview: The Trust holds net overriding royalty interests in producing oil and gas properties, specifically a 75% interest in the Waddell Ranch properties (Crane County, Texas) and a 95% interest in Texas Royalty properties. The Trustee is Bank of America, N.A. The financial statements are prepared on a modified cash basis, not GAAP. As of August 1, 2003, there were 46,608,796 Units of beneficial interest outstanding.

Key Financial Metrics

Liquidity and Debt: The Trust holds cash and short-term investments of $2,601,810. Liabilities consist primarily of distributions payable to Unit holders ($2,601,810). The filing does not disclose any long-term debt or borrowings.

Material Changes vs. Prior Period

• Revenue Growth: Royalty income increased significantly compared to the prior year periods. For the three months ended June 30, 2003, income rose to $8.57 million from $5.65 million in 2002. For the six months, it rose to $15.55 million from $10.23 million in 2002.
• Price Drivers: The increase is primarily attributable to higher oil and gas prices. Average oil prices rose to $29.09 per barrel (Q2 2003) from $21.10 (Q2 2002). Average gas prices rose to $5.30 per Mcf (Q2 2003) from $2.52 (Q2 2002).
• Production Volumes: While underlying property production volumes remained relatively constant or slightly declined (e.g., total oil sales from underlying properties were 300,535 Bbls in Q2 2003 vs. 322,193 Bbls in Q2 2002), the revenue impact was positive due to price increases.
• Expenses: General and administrative expenses increased slightly ($147,705 vs. $134,628 for Q2) due to timing of payments. Capital expenditures on the Waddell Ranch properties increased to $2.59 million in Q2 2003 from $0.80 million in Q2 2002.

Outlook, Commentary, and Risks

• Management Commentary: The Trustee attributes the revenue increase to significant price hikes driven by worldwide political turmoil and increased demand. Capital expenditures for the Waddell Ranch properties were revised to a budget of $9.9 million for 2003, with $5.5 million expended through Q2.
• Subsequent Events: On July 18, 2003, the Trust declared a distribution of $0.054215 per Unit, payable on August 14, 2003.
• Risks and Contingencies:
  • Market Risk: Results are highly sensitive to oil and gas prices and production volumes, which are outside the Trustee's control.
  • Reserve Estimates: Proved reserve estimates are subject to change based on new information; actual recovery may differ.
  • Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. No specific material contingencies were identified as of June 30, 2003.
• Accounting Basis: Investors should note the financials are on a modified cash basis. Royalty income is recorded when received, not when produced, creating a lag between production and reported income.

Key Facts for Investor Verification

• Price Sensitivity: Verify current oil and gas spot prices, as the Trust's income is directly correlated to these market rates.
• Production Trends: Monitor production volumes from the Waddell Ranch and Texas Royalty properties, as declining volumes could offset price gains.
• Capital Expenditures: Track the execution of the $9.9 million 2003 capital budget for the Waddell Ranch, as high capital costs reduce net profits available for royalty distribution.
• Accounting Lag: Understand that reported royalty income reflects production from the prior quarter (e.g., Q2 2003 income reflects production from Feb-April 2003).
• Unit Count: Confirm the number of outstanding Units (46,608,796) to calculate accurate per-unit distributions.