10-Q: Permian Basin Royalty Trust Income Plummets Amid Operator Dispute

Permian Basin Royalty Trust reports a significant decline in distributable income and distributions per unit, primarily due to a deficit in Waddell Ranch properties and ongoing legal disputes with operator Blackbeard Operating, LLC.

Summary

• Distributable income for the three months ended June 30, 2025, was $2,397,255, a substantial decrease from $8,436,688 for the same period in 2024.
• Distributable income per Unit for the quarter ended June 30, 2025, was $0.05, down from $0.18 in the prior year period.
• For the six months ended June 30, 2025, distributable income was $4,993,467, a significant drop from $13,928,894 in the first half of 2024.
• Distributable income per Unit for the six months ended June 30, 2025, was $0.11, compared to $0.30 for the same period in 2024.
• Royalty income for the three months ended June 30, 2025, was $3,089,889, a sharp decline from $8,803,389 in the second quarter of 2024.
• Royalty income for the six months ended June 30, 2025, was $6,144,586, down from $14,809,031 in the first half of 2024.
• General and administrative expenditures increased to $708,385 for the three months ended June 30, 2025, from $395,807 in the prior year, primarily due to legal proceedings with Blackbeard.
• The Waddell Ranch properties did not contribute to royalty income for the three and six months ended June 30, 2025, due to an excess in working interest costs, remaining in a deficit position.
• Cumulative excess costs for the Waddell Ranch properties totaled $35,879,439 (net to the Trust: $26,909,579) with accrued interest of $1,178,543 (net to the Trust: $883,907) as of June 30, 2025.
• Capital expenditures for drilling, remedial, and maintenance activities on the Waddell Ranch properties totaled $61.3 million (gross) for Q2 2025 and $109.2 million (gross) for H1 2025, significantly higher than prior year periods.

Sentiment

Score: 2

Explanation: The significant decline in distributable income and distributions per unit, coupled with the ongoing legal dispute and lack of cooperation from a key operator (Blackbeard), indicates severe operational and financial challenges. The substantial accumulated deficit in the Waddell Ranch properties further exacerbates the negative outlook, making the Trust's financial performance highly unpredictable and unfavorable.

Positives

• Texas Royalty properties continued to contribute positively to royalty income.
• Average realized gas price for Waddell Ranch properties increased to $2.41 per Mcf for January-March 2025 production, up from $1.83 per Mcf for February-March 2024 production.
• Average realized gas price for Texas Royalty properties slightly increased to $10.15 per Mcf for Q2 2025, up from $10.04 per Mcf for Q2 2024.
• Oil and natural gas volumes from the Waddell Ranch properties increased for the applicable period in 2025 compared to 2024.

Negatives

• Significant decline in royalty income and distributable income for both the three and six-month periods ended June 30, 2025, compared to 2024.
• Waddell Ranch properties are in a deficit position, contributing no royalty income for the current reporting periods due to high working interest costs.
• Blackbeard Operating, LLC, the operator of Waddell Ranch properties, has refused to provide timely information necessary for monthly distribution calculations since May 2024.
• General and administrative expenses increased substantially due to professional services associated with legal proceedings against Blackbeard.
• Average realized oil prices for both Waddell Ranch and Texas Royalty properties decreased in 2025 compared to 2024.
• Increased capital expenditures and lease operating expenses on Waddell Ranch properties are contributing to the deficit position.

Risks

• Income and monthly distributions are heavily influenced by volatile commodity prices (oil and natural gas), which are subject to geopolitical conditions, supply/demand shifts, and economic factors.
• The Trust is passive and has no control over the operations of the underlying properties, making it dependent on operators like Blackbeard and Riverhill Energy.
• The ongoing deficit position of the Waddell Ranch properties due to high costs and capital expenditures may continue to reduce or eliminate future royalty income from this segment.
• Uncertainty regarding the outcome of the lawsuit against Blackbeard Operating, LLC, which could impact future royalty income and Trust expenses.
• Blackbeard's refusal to provide timely and detailed operational and financial information creates transparency issues and hinders the Trustee's ability to calculate and distribute proceeds promptly.
• Changes in federal income tax provisions, such as those introduced by the One Big Beautiful Bill Act (OBBBA), could impact Unitholders' tax obligations.
• The Trust has limited liquidity and capital resources, relying solely on royalties for income, with only a limited ability to borrow for expenses.

Future Outlook

The Trust's income and monthly distributions are heavily influenced by commodity prices, which are subject to significant volatility due to geopolitical conditions, market uncertainty, and supply/demand dynamics. When crude oil and natural gas prices decline, distributable income is reduced, and exploration and development activity by operators may decrease. The Trustee cannot predict future crude oil and natural gas price movements, which reduces the predictability of future cash distributions to Unitholders. The One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, includes significant federal income tax provisions with multiple effective dates through 2027, which Unitholders should consult their tax advisors about.

Management Comments

• The Trustee believes that the expectations reflected in forward-looking statements are reasonable, but such expectations are subject to numerous risks and uncertainties, and the Trustee can give no assurance that they will prove correct.
• The Trustee has powers to collect and distribute proceeds received by the Trust and pay Trust liabilities and expenses, and its actions have been limited to those activities.
• The Trust is a passive entity and, other than its ability to periodically borrow money as necessary to pay expenses, liabilities, and obligations that cannot be paid out of cash held by the Trust, it is prohibited from engaging in borrowing transactions.
• Blackbeard continues to refuse to provide information regarding monthly net proceeds in time for the monthly distribution announcement.
• Blackbeard has opted to provide production, product sales, capital expenditure, and development information quarterly, approximately 30 days after the end of each fiscal quarter, instead of monthly.
• The Trustee maintains an expense reserve, currently $1,100,000, to pay Trust obligations if royalty income is insufficient.
• The Trustee concluded that the Trust's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting timely information, relying on information provided by Blackbeard Operating LLC and Riverhill Energy Corporation.

Industry Context

The oil and natural gas industry has experienced significant price volatility recently, influenced by geopolitical conditions in Eastern Europe and the Middle East. While prices increased in the first half of 2024 due to tensions and OPEC production cuts, they began to decrease in the third quarter of 2024 due to lower demand. The price of oil hit a high of $79.28 per barrel on January 17, 2025, but steadily decreased through May 2025, recovering slightly to $67.81 per barrel as of July 28, 2025. Declining commodity prices directly reduce the Trust's distributable income and can lead to reduced exploration and development activity by operators on the royalty properties.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct industry standard comparisons. Permian Basin Royalty Trust operates as a passive royalty trust, a unique structure that does not engage in active exploration, development, or production, making direct operational comparisons with typical E&P companies challenging.

Legal Proceedings

• On May 27, 2025, the Trustee filed a Second Amended Petition in the District Court of Tarrant County, Texas, in connection with its lawsuit against Blackbeard Operating, LLC.
• The lawsuit alleges Blackbeard failed to properly calculate and pay royalties due, impermissibly deducted overhead costs, labor expenses, and saltwater disposal fees, and failed to pay on all volumes of oil, gas, and other minerals produced.
• The Trustee seeks to recover more than $9 million in damages for claims related to April 2020 through December 2023 production months.
• Blackbeard filed its original answer and counterclaim to the lawsuit on June 10, 2024.
• The trial date is scheduled for November 17, 2025, at 8:30 a.m., Central Time, with discovery ongoing.

Stakeholder Impact

• **Shareholders (Unitholders):** Experience significantly reduced distributions and face uncertainty regarding future income due to the Waddell Ranch deficit and ongoing legal dispute with Blackbeard. Potential tax implications from new federal tax legislation (OBBBA) also exist.
• **Trustee (Argent Trust Company):** Faces increased general and administrative expenses due to legal proceedings and challenges in obtaining timely and accurate information from Blackbeard, impacting its ability to fulfill its distribution obligations efficiently.
• **Blackbeard Operating, LLC:** Is the subject of a lawsuit seeking over $9 million in damages, indicating significant operational and contractual disputes with the Trust.
• **Riverhill Energy Corporation:** Continues to operate the Texas Royalty properties, which are contributing positively to the Trust's income, but the overall Trust performance is overshadowed by issues with Waddell Ranch.

Next Steps

• The trial date for the lawsuit against Blackbeard Operating, LLC is scheduled for November 17, 2025.
• Discovery is ongoing in the legal proceedings against Blackbeard.
• A joint venture audit of the 2024 production months for the Waddell Ranch properties is underway, and the Trustee reserves the right to bring additional claims based on its findings.
• Unitholders should consult their tax advisors regarding the potential tax consequences of the One Big Beautiful Bill Act (OBBBA) and its impact on their ownership of Units.
• Monthly cash distributions to Unitholders will continue, with the most recent distribution of $0.015311 per Unit declared on July 21, 2025, payable on August 14, 2025.

Key Dates

Recommendation

The Permian Basin Royalty Trust's financial performance has deteriorated significantly, marked by a substantial decline in distributable income and per-unit distributions. This is primarily driven by the Waddell Ranch properties operating at a significant deficit due to high costs and capital expenditures, coupled with the operator, Blackbeard Operating, LLC, refusing to provide timely and detailed financial information. The ongoing lawsuit against Blackbeard, seeking over $9 million in damages, introduces considerable legal and operational uncertainty. These factors collectively point to severe challenges in the Trust's ability to generate consistent and meaningful distributions, making it a high-risk investment with a negative outlook for Unitholders.

Keywords

Permian Basin, Royalty Trust, Oil and Gas, SEC Filing, 10-Q, Distributable Income, Waddell Ranch, Texas Royalty, Blackbeard Operating, Legal Proceedings, Commodity Prices, Energy, Trust Management, Financial Performance