PBT

Business Context and Reporting Period

Company: Permian Basin Royalty Trust (PBT)
Reporting Period: Fiscal year ended December 31, 2003
Structure: An express trust created under Texas law, holding net overriding royalty interests (75% in Waddell Ranch properties and 95% in Texas Royalty properties). The Trust is a passive entity with no employees; Bank of America, N.A. serves as Trustee.
Operations: The Trust receives net proceeds from oil and gas production on underlying properties operated by Burlington Resources Oil & Gas Company (BROG) and Riverhill Energy Corporation. Distributions are made monthly to Unit holders.

Key Financial Metrics

Production Data (Royalty Interest):
- Oil: 699,402 barrels (2003) vs. 728,313 barrels (2002).
- Gas: 3,160,921 Mcf (2003) vs. 3,192,175 Mcf (2002).
- Average Oil Price (Underlying Properties): $27.97/bbl (2003) vs. $22.31/bbl (2002).
- Average Gas Price (Underlying Properties): $4.69/Mcf (2003) vs. $2.74/Mcf (2002).

Material Changes vs. Prior Period

• Revenue Increase: Royalty income increased approximately 37% from 2002 to 2003, driven primarily by significant increases in oil and gas prices rather than production volume.
• Production Decline: Total oil and gas production attributable to the Royalties decreased slightly year-over-year (Oil: -4%; Gas: -1%), consistent with the mature nature of the underlying properties.
• Price Sensitivity: The increase in distributable income despite lower production volumes highlights the Trust's high sensitivity to commodity price fluctuations.
• Capital Expenditures: BROG reported capital expenditures for Waddell Ranch properties of $11.8 million in 2003, with a budgeted increase of 12% for 2004.

Outlook, Risks, and Management Commentary

Reserves and Future Cash Flows:
- Proved reserves as of Dec 31, 2003: 6,907,000 barrels of oil and 27,247,000 Mcf of gas.
- Present value of estimated future net revenues (discounted at 10%): $175,551,000 ($3.77 per Unit).
- Upward revisions in reserve values are attributed to higher oil and gas prices used in calculations ($30.70/bbl and $4.76/Mcf for Waddell Ranch).

Risks and Contingencies:
- Commodity Price Risk: The Trust's income is directly tied to market prices for oil and gas, which are volatile and outside the Trustee's control.
- Production Decline: The underlying properties are mature; future income depends on maintaining production levels through workovers and recompletions.
- Regulatory Risk: Operations are subject to federal and state regulations regarding drilling, production limits, and environmental protection.
- Counterparty Risk: The Trust relies on BROG and Riverhill Energy for accurate accounting and payment of net proceeds.

Management Commentary:
The Trustee notes that the Trust is a passive entity with no ability to influence production or pricing. The increase in 2003 income is explicitly linked to the favorable pricing environment compared to 2002.

Key Facts for Investor Verification

• Price Dependency: Verify current oil and gas prices against the Trust's historical performance, as income is highly correlated with commodity prices rather than production volume.
• Reserve Estimates: Confirm the accuracy of the proved reserve estimates (6.9M bbl oil, 27.2M Mcf gas) and the discount rate assumptions used for future cash flow valuations.
• Operator Performance: Monitor the capital expenditure plans and execution by BROG and Riverhill Energy, as these entities control the maintenance and development of the underlying assets.
• Distribution Consistency: Review the monthly distribution history to ensure the "Distributable Income per Unit" aligns with actual cash distributions received.
• Ownership Concentration: Note that Burlington Resources Oil & Gas Company LP owns approximately 59.17% of the outstanding Units as of March 1, 2004.