PBT

Business Context and Reporting Period

Company: Permian Basin Royalty Trust (Trust)

Reporting Period: Quarterly period ended September 30, 2016 (Form 10-Q).

Business Overview: 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 is Southwest Bank. The Trust distributes all distributable income to Unit holders monthly. There are 46,608,796 Units outstanding.

Key Financial Metrics

Liquidity: The Trust holds $2,139,686 in cash and short-term investments. A reserve for expenses of $950,000 was established as of September 30, 2016, up from $500,000 at year-end 2015.

Debt: The filing does not report any outstanding debt or borrowings.

Material Changes vs. Prior Period

Three Months Ended September 30, 2016 vs. 2015

• Royalty Income: Increased by $672,600 (11.4%) to $6,554,901. This increase was driven by reduced capital expenditures and increased production volumes, which offset a decline in oil and gas prices.
• Prices: Average oil price decreased to $42.94/Bbl (from $54.26). Average gas price decreased to $2.01/Mcf (from $2.90).
• Expenses: Total expenses decreased to $311,802 (from $388,407), primarily due to lower professional service costs.
• Capital Expenditures (Waddell Ranch): Dropped significantly to $851,000 (from $6.5 million in Q3 2015). No new or workover wells were completed in Q3 2016.

Nine Months Ended September 30, 2016 vs. 2015

• Royalty Income: Decreased by $929,613 (6.4%) to $13,704,703. The decline is primarily attributable to substantially lower oil and gas prices.
• Prices: Average oil price decreased to $36.57/Bbl (from $52.82). Average gas price decreased to $1.97/Mcf (from $3.04).
• Expenses: Total expenses increased to $1,491,649 (from $1,435,459), driven by higher professional expenses.
• Capital Expenditures (Waddell Ranch): Decreased to $4.0 million (from $20.1 million in 2015). No new or workover wells were completed in the first nine months of 2016.

Outlook, Risks, and Management Commentary

• Production Activity: ConocoPhillips (owner of Waddell Ranch properties) has approved a 2016 capital expenditure budget of $2.45 million (gross), a significant reduction from the $27 million spent in 2015. No new wells or workovers were completed in Q3 2016.
• Market Risk: The Trust is highly sensitive to oil and gas prices. The Trustee notes that forward-looking statements regarding production and prices are subject to risks including market conditions and regulatory matters.
• Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. The Trustee maintains a reserve for expenses to address potential liabilities.
• Subsequent Event: On October 21, 2016, the Trust declared a distribution of $0.047121 per Unit, payable November 15, 2016.
• Tax Status: The Trust is a grantor trust for federal tax purposes and expects to remain exempt from Texas franchise tax as a "passive entity."

Investor Verification Checklist

• Verify the impact of the significant reduction in capital expenditures ($20.1M to $4.0M YTD) on future production volumes and long-term royalty income.
• Monitor oil and gas price trends, as the Trust's income is directly correlated to market prices which declined significantly in 2016.
• Confirm the status of the $950,000 expense reserve and whether it is sufficient for future administrative or contingent liabilities.
• Review the specific allocation formula between the Waddell Ranch and Texas Royalty properties to understand how cost deductions affect net profits.
• Check for any updates on the 2016 capital expenditure budget execution by ConocoPhillips for the Waddell Ranch properties.