Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2020
Trustee: Simmons Bank
Outstanding Units: 46,608,796 as of August 1, 2020
The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). The Trustee distributes monthly cash payments to Unit holders based on net profits from these properties. The financial statements are prepared on a modified cash basis of accounting.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Royalty Income | $2,446,502 | $4,767,067 | $8,701,011 | $9,297,512 |
| Total Income (Royalty + Interest) | $2,448,925 | $4,771,330 | $8,707,795 | $9,308,933 |
| General & Admin Expenses | $(470,893) | $(456,419) | $(799,756) | $(757,550) |
| Reserve for Expenses | $(50,000) | $0 | $(50,000) | $0 |
| Distributable Income | $1,928,032 | $4,314,911 | $7,858,039 | $8,551,383 |
| Distributable Income per Unit | $0.04 | $0.09 | $0.17 | $0.18 |
| Cash and Short-term Investments | $1,184,812 | $2,862,570 (Dec 31, 2019) | N/A | |
| Net Overriding Royalty Interests (Net) | $402,180 | $424,507 (Dec 31, 2019) | N/A | |
| Commitments and Reserves | $1,100,000 | $1,050,000 (Dec 31, 2019) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the quarter ended June 30, 2020, decreased by approximately 49% compared to the same period in 2019. This was driven by a significant drop in oil and gas prices and a temporary cessation of royalty income from the Waddell Ranch properties in June 2020 due to workover activities by the new operator, Blackbeard Operating, LLC.
- Commodity Prices: Average oil prices fell from $54.90 per barrel in Q2 2019 to $32.21 per barrel in Q2 2020. Average gas prices dropped from $2.72 per Mcf to $0.80 per Mcf.
- Operator Change: Blackbeard Operating, LLC became the operator of the Waddell Ranch properties effective April 1, 2020. This transition led to immediate workover activities that temporarily halted royalty generation from these assets in June.
- Expense Increase: Total expenses increased slightly due to professional services, timing of payments, and a new $50,000 reserve for expenses.
- Liquidity: Cash and short-term investments decreased from $2.86 million at year-end 2019 to $1.18 million at June 30, 2020, reflecting lower income and distribution obligations.
Outlook, Risks, and Management Commentary
- COVID-19 Impact: The pandemic caused a sharp decline in demand for crude oil and natural gas, leading to depressed prices. While prices have rebounded somewhat from April lows (where oil briefly went negative), they remain significantly lower than 2019 levels.
- Capital Expenditures: Blackbeard's revised 2020 budget for the Waddell Ranch properties includes approximately $7 million for drilling/completion and $3 million for recompletions and infrastructure. These expenditures are expected to occur later in the year.
- Net Profit Interest (NPI) Deficit: As of June 30, 2020, the Waddell Ranch properties had a cumulative NPI deficit of $1,254,292, meaning they did not contribute to royalty income for June 2020 until the deficit is recovered.
- Subsequent Event: On July 21, 2020, the Trust declared a distribution of $0.005702 per Unit, payable August 14, 2020.
- Risk Factors: Future distributions are heavily dependent on commodity prices, production volumes, and the ability of operators to maintain capital expenditures. The Trustee notes that unfavorable resolution of contingencies related to underlying properties would reduce future royalty income.
Investor Verification Checklist
- Operator Transition: Verify the progress of Blackbeard Operating's workover activities on the Waddell Ranch properties and the timeline for resuming royalty income generation.
- NPI Deficit Recovery: Monitor the $1.25 million cumulative NPI deficit on the Waddell Ranch properties to understand when net profits will again flow to the Trust.
- Commodity Price Sensitivity: Assess the impact of current oil and gas prices on the Trust's ability to meet distribution expectations, given the high correlation between prices and distributable income.
- Capital Expenditure Execution: Confirm if Blackbeard's planned $10 million in capital expenditures for the remainder of 2020 is executed, as this impacts future production volumes.
- Liquidity Position: Review the Trust's cash balance relative to upcoming distribution obligations and the $1.1 million reserve for contingencies.