10-K: Permian Basin Royalty Trust 2024 10-K Filing Reveals Production Challenges and Blackbeard Dispute

The Permian Basin Royalty Trust's 2024 annual report highlights decreased royalty income, ongoing disputes with Blackbeard Operating, and the exclusion of proved undeveloped reserves due to lack of information.

Summary

• The Permian Basin Royalty Trust's 10-K filing for the year ended December 31, 2024, reveals a decrease in royalty income from $29.0 million in 2023 to $26.9 million in 2024.
• This decrease is attributed to lower oil and gas prices and the lack of royalty income from the Waddell Ranch properties for October and November 2024.
• A legal dispute with Blackbeard Operating, LLC, the operator of the Waddell Ranch properties, continues, with the Trust seeking over $25 million in damages.
• Blackbeard has counterclaimed, seeking to limit the information it provides to the Trust.
• Due to Blackbeard's refusal to provide a development plan, the reserve estimates for 2024 exclude all proved undeveloped reserves (PUDs), which constituted 38% of the total proved reserves for the Trust in 2023.
• The Trust's total proved reserves decreased from 16.456 million BOE in 2023 to 12.237 million BOE in 2024.
• The standardized measure of discounted future net cash flows decreased from $508.5 million in 2023 to $371.3 million in 2024.
• The Trust's distributable income decreased from $27.9 million ($0.60 per unit) in 2023 to $25.4 million ($0.55 per unit) in 2024.
• The Trust is considered a non-mortgage widely held fixed investment trust (WHFIT) for U.S. federal income tax purposes.
• The Trustee maintains a cyber risk management program designed to identify, assess, manage, mitigate, and respond to cybersecurity threats.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to declining royalty income, reserve reductions, and ongoing legal disputes. The lack of forward-looking information from Blackbeard adds further uncertainty.

Positives

• The Trustee maintains robust cybersecurity protocols, including technological capabilities, employee training, and independent verification of information changes.
• The Trust earned $150,779 in interest income during 2024 from investing monthly royalty receipts.
• The Trust has a reserve balance of $1,100,000 for administrative expenses related to potentially extraordinary events.

Negatives

• Royalty income decreased from $29.0 million in 2023 to $26.9 million in 2024.
• The Trust is in a legal dispute with Blackbeard Operating, seeking over $25 million in damages.
• Blackbeard has refused to provide a development plan, leading to the exclusion of proved undeveloped reserves (PUDs) from the 2024 reserve estimates.
• Total proved reserves decreased from 16.456 million BOE in 2023 to 12.237 million BOE in 2024.
• The standardized measure of discounted future net cash flows decreased from $508.5 million in 2023 to $371.3 million in 2024.
• Distributable income decreased from $27.9 million ($0.60 per unit) in 2023 to $25.4 million ($0.55 per unit) in 2024.
• The Waddell Ranch properties were in a deficit position as of December 31, 2024.
• Blackbeard has refused to provide the Trustee information necessary to calculate the monthly net proceeds as of the NYSE notification date beginning in May 2024, delaying distributions to unitholders.

Risks

• Fluctuations in crude oil and natural gas prices could reduce net proceeds payable to the Trust and Trust distributions.
• Increased production and development costs attributable to the Royalties will result in decreased Trust distributions unless revenues also increase.
• Trust reserve estimates depend on many assumptions that may prove to be inaccurate, which could cause both estimated reserves and estimated future net revenues to be too high.
• Government action, policies or regulations designed to discourage production of, reduce demand for, or promote alternatives to oil and natural gas could impact the price of oil and natural gas produced on the Underlying Properties.
• Future royalty income may be subject to risks relating to the creditworthiness of third parties.
• Operational risks and hazards associated with the development of the Underlying Properties may decrease Trust distributions.
• Increased concerns about climate change and environmental sustainability could have an impact on development of the Underlying Properties.
• Terrorism, continued hostilities in Eastern Europe and the Middle East, or other military campaigns could decrease Trust distributions or the market price of the Units.
• Unit holders and the Trustee have no influence over the operations on, or future development of, the Underlying Properties.
• Changes in the information historically made available to the Trustee by Blackbeard has delayed and may continue to delay Trust distributions.
• The operators developing the Texas Royalty properties have no duty to protect the interests of the Unit holders and do not have sole discretion regarding development activities on the Underlying Properties.
• The operator developing any Underlying Property may transfer its interest in the property without the consent of the Trust or the Unit holders.
• The operator developing any Underlying Property may abandon the property, thereby terminating the Royalties payable to the Trust.
• The Royalties can be sold and the Trust would be terminated.
• Unit holders have limited voting rights and have limited ability to enforce the Trusts rights against the current or future operators developing the Underlying Properties.
• Financial information of the Trust is not prepared in accordance with GAAP.
• The limited liability of the Unit holders is uncertain.
• The tax treatment of an investment in Trust Units could be affected by recent and potential legislative changes, possibly on a retroactive basis.
• Pandemics or other public health concerns, such as COVID-19, or the novel coronavirus, and any measures taken to mitigate such health concerns, could adversely affect the business and operations of the operators of the Waddell Ranch properties and the Texas Royalty properties, which in turn could have an adverse effect on Trust distributions.

Future Outlook

The Trust's future performance is subject to fluctuations in oil and gas prices, which are expected to remain volatile. The ongoing legal dispute with Blackbeard Operating and Blackbeard's refusal to provide a proposed capital expenditure budget for 2025 add uncertainty to the Trust's future prospects.

Management Comments

• Blackbeard has advised the Trustee that it will not be providing a summary of capital expenditures associated with its 2024 development plan.
• Blackbeard has advised the Trustee that they will not be providing a capital expenditures budget for 2025 to the trust, information that has previously been provided on an annual basis.

Industry Context

The oil and gas industry is facing increasing scrutiny regarding environmental impact and sustainability, with governments and financial institutions considering policies and actions to reduce greenhouse gas emissions and promote alternative energy sources. These trends could impact the demand for oil and gas and increase the costs of operations for companies in the industry.

Comparison to Industry Standards

• It is difficult to compare the Permian Basin Royalty Trust directly to other companies due to its unique structure as a royalty trust rather than an operating company.
• However, the decline in royalty income and proved reserves reflects broader trends in the oil and gas industry, including price volatility and the need for ongoing capital investment to maintain production levels.
• Companies like Viper Energy Partners LP (VNOM) and Black Stone Minerals, L.P. (BSM) are also mineral and royalty interest owners, but they actively manage their portfolios and pursue acquisitions, unlike the passive Permian Basin Royalty Trust.
• The exclusion of PUDs due to lack of a development plan is a significant deviation from industry standards, as most companies actively develop their reserves and provide forward-looking guidance.
• The legal dispute with Blackbeard is also a unique situation that adds further uncertainty to the Trust's outlook.

Legal Proceedings

• On May 8, 2024, the Trustee filed a petition in the District Court of Tarrant County, Texas against Blackbeard seeking to recover more than $15 million in damages to the Trust resulting from overhead costs and other expenses the Trustee alleges were impermissibly deducted from royalty payments to the Trust, including among other things, incorrect overhead charges, application of overhead charges to non-producing wells, duplicate charges for services, materials, and utilities, as well as other expenses the Trustee alleges are ineligible charges for the 2020 to 2022 period.
• The Trustees petition was amended in September 2024 to add additional claims relating to the 2023 joint venture audit and production volumes, seeking damages of more than $25 million.
• On June 10, 2024, Blackbeard filed its original answer and counterclaim to the lawsuit.
• Included in Blackbeard's original answer and counterclaim are requests for declaratory judgment by the court that it may deduct certain disputed overhead charges from Trust royalty payments and that it may limit information it provides to the Trust to quarterly statements of the net proceeds computation and inspection of books and records during normal business hours.
• The District Court of Tarrant County has set a trial date of November 17, 2025, 8:30 a.m., Central Time.

Stakeholder Impact

• Shareholders will experience lower distributions due to decreased royalty income and increased expenses.
• The legal dispute with Blackbeard creates uncertainty for shareholders regarding future distributions.
• The exclusion of PUDs from the reserve estimates may negatively impact investor confidence.
• The Trust's passive nature limits its ability to influence the operations of the Underlying Properties, which could further impact stakeholder value.

Next Steps

• The Trust will continue to pursue its legal claims against Blackbeard Operating.
• The Trustee will continue to monitor the operations of the Underlying Properties and the performance of the operators.
• The Trust will continue to provide tax information to Unit holders in accordance with applicable U.S. Treasury Regulations.

Key Dates