10-Q: Permian Basin Royalty Trust Q3 Income Plunges Amid Waddell Ranch Deficit

Permian Basin Royalty Trust reports a significant decline in distributable income for Q3 2025 and the nine months ended September 30, 2025, despite a $4.5 million partial settlement from Blackbeard.

Summary

• Distributable income for the three months ended September 30, 2025, was $6,861,887, or $0.15 per Unit, a decrease from $8,053,284, or $0.17 per Unit, in the same period of 2024.
• Distributable income for the nine months ended September 30, 2025, was $11,855,354, or $0.25 per Unit, a substantial decrease from $21,982,178, or $0.47 per Unit, in the prior year period.
• Royalty income for the three months ended September 30, 2025, was $7,258,464, which includes a $4.5 million partial settlement payment from Blackbeard, compared to $8,366,375 in the third quarter of 2024.
• Royalty income for the nine months ended September 30, 2025, was $13,403,049, including the $4.5 million settlement, down from $23,175,406 in the prior year period.
• The Waddell Ranch properties did not contribute to royalty income for the three and nine months ended September 30, 2025, due to an excess in working interest costs, remaining in a deficit position.
• A settlement agreement with Blackbeard Operating, LLC was reached on August 19, 2025, for $9,000,000, with $4,500,000 paid in September 2025 and the remainder to be paid in four equal quarterly installments of $1,125,000 during the 2026 calendar year.
• Unitholders have requested a special meeting to be held on December 16, 2025, to vote on a proposal to judicially reform the Trust Indenture to allow amendments with a majority vote.

Sentiment

Score: 3

Explanation: The Trust experienced a substantial decline in distributable income and royalty income, primarily due to the Waddell Ranch properties being in a deficit position and lower commodity prices. While a significant settlement was reached, it only partially offset the overall negative financial trend. Increased general and administrative expenses and high capital expenditures by the operator further weigh on performance.

Positives

• A $9,000,000 settlement was secured from Blackbeard Operating, LLC for alleged underpayment of royalties, with $4,500,000 already received in September 2025.
• Waddell Ranch properties showed increased oil sales volumes (913,912 Bbls in Q3 2025 vs. 533,073 Bbls in Q3 2024) and gas sales volumes (4,072,978 Mcf in Q3 2025 vs. 3,387,875 Mcf in Q3 2024) from the underlying properties.
• The average realized gas price for Waddell Ranch properties increased to $1.35 per Mcf in Q3 2025 from $1.19 per Mcf in Q3 2024.

Negatives

• Distributable income for the three months ended September 30, 2025, decreased by 14.8% to $6,861,887 ($0.15 per Unit) from $8,053,284 ($0.17 per Unit) in the prior year period.
• Distributable income for the nine months ended September 30, 2025, decreased by 46.1% to $11,855,354 ($0.25 per Unit) from $21,982,178 ($0.47 per Unit) in the prior year period.
• Royalty income for the three months ended September 30, 2025, decreased by 13.2% to $7,258,464 from $8,366,375 in the prior year period, despite the $4.5 million settlement payment.
• Royalty income for the nine months ended September 30, 2025, decreased by 42.3% to $13,403,049 from $23,175,406 in the prior year period.
• The Waddell Ranch properties were in a deficit position and did not contribute to royalty income for the three and nine months ended September 30, 2025, due to excess working interest costs.
• Cumulative excess costs remaining for the Waddell Ranch properties increased significantly to $43,549,283 (net to Trust: $32,661,962) as of September 30, 2025, with accrued interest of $2,049,458 (net to Trust: $1,537,094).
• Average realized oil prices for Waddell Ranch properties decreased to $62.32 per Bbl in Q3 2025 from $79.91 per Bbl in Q3 2024.
• Average realized oil prices for Texas Royalty properties decreased to $65.20 per Bbl in Q3 2025 from $79.06 per Bbl in Q3 2024.
• Average realized gas prices for Texas Royalty properties decreased to $8.65 per Mcf in Q3 2025 from $10.54 per Mcf in Q3 2024.
• Interest income decreased for both the three-month period ($15,049 vs. $54,534) and nine-month period ($47,324 vs. $122,688) due to lower funds available for investment and lower interest rates.
• General and administrative expenditures increased for both the three-month period ($411,626 vs. $367,625) and nine-month period ($1,595,019 vs. $1,315,916), primarily due to increased professional services associated with legal proceedings.
• Capital expenditures on Waddell Ranch properties increased significantly to $53.3 million (gross) in Q3 2025 from $24 million (gross) in Q3 2024, and to $162.5 million (gross) for the nine months ended September 30, 2025, from $67.9 million (gross) in the prior year period.

Risks

• Commodity prices, including oil and natural gas, are highly volatile and can fluctuate widely due to supply/demand changes, market uncertainty, geopolitical conditions (e.g., Eastern Europe, Middle East), OPEC actions, economic conditions, and governmental policies, directly impacting the Trust's income and distributions.
• The Trust is a passive entity with no control over the operations, capital expenditures, drilling activity, or production efforts of the underlying properties, relying entirely on the actions of operators like Blackbeard and Riverhill Energy.
• If monthly costs exceed revenues for either the Waddell Ranch or Texas Royalty properties, such excess costs must be recovered with accrued interest from future net proceeds of that specific conveyance, which can significantly reduce future royalty income and distributions.
• While a settlement was reached with Blackbeard, future disputes or litigation with operators could arise, potentially impacting royalty income and increasing general and administrative expenses.
• Changes in federal and state tax laws, such as the One Big Beautiful Bill Act (OBBBA), could have significant tax consequences for Unitholders, and tax-exempt Unitholders could be required to recognize unrelated business taxable income if the Trust borrows funds.
• The Waddell Ranch properties are currently in a significant deficit position, with cumulative excess costs remaining at $43,549,283 (gross) as of September 30, 2025, which must be recovered from future net proceeds before the Trust receives royalty income from these properties.

Future Outlook

The Trust's income and monthly distributions are heavily influenced by volatile commodity prices, which are subject to numerous risks and uncertainties including geopolitical conditions, supply and demand dynamics, and global economic factors. While the Trustee believes forward-looking expectations are reasonable, there is no assurance they will prove correct. Declining crude oil and natural gas prices are expected to reduce distributable income and may lead to delays or elimination of exploration and development activities by operators on the royalty properties.

Management Comments

• "The Trustee believes that the expectations reflected in such forward-looking statements are reasonable, such expectations are subject to numerous risks and uncertainties and the Trustee can give no assurance that they will prove correct."
• "The Trustee believes such information includes all the disclosures necessary to make the information presented not misleading."
• "The Trustee has relied, to the extent considered reasonable, on information provided by Blackbeard, the owner of the Waddell Ranch properties, and Riverhill Energy Corporation, the owner of the Texas Royalty properties."

Industry Context

The energy market is experiencing significant volatility in oil and natural gas prices, influenced by geopolitical conditions in Eastern Europe and the Middle East, as well as OPEC's production cuts. While prices saw an increase in the first half of 2024, they began to decrease in the third quarter of 2024 due to lower demand. Oil prices fluctuated in Q2 and Q3 2025, with a notable price of $61.79 per barrel on November 3, 2025. These global market dynamics directly impact the Trust's royalty income, as its revenue is tied to the realized prices of oil and gas production.

Corporate Governance

Legal Proceedings

• A settlement agreement and release was entered into on August 19, 2025, with Blackbeard Operating, LLC, resolving a lawsuit where the Trustee sought over $9 million for alleged underpayment of royalties.
• Blackbeard agreed to pay $9,000,000, with $4,500,000 paid in September 2025 and the remainder in four quarterly installments of $1,125,000 during 2026.
• The settlement also established the overhead rate that may be charged to the Trust, permits Blackbeard to pass through third-party charges for saltwater disposal and gathering and transportation, and charge technical labor on reservoir engineers using an agreed allocation methodology against the net overriding royalty.
• The parties agreed that the Trust would not make future claims for lost volumes in the case of ordinary line loss (as defined by third-party purchase agreements with purchasers).
• The Trust will have the option to conduct annual site audits, at its expense, and Blackbeard will provide agreed reporting going forward.
• No other material pending legal proceedings to which the Trust is a party or of which any of its property is the subject are known.

Stakeholder Impact

• **Shareholders (Unitholders):** Directly impacted by significantly lower distributable income and distributions per unit. The proposed Trust Indenture amendment could impact their voting power on future changes to the Trust's governing documents.
• **Operators (Blackbeard Operating, LLC and Riverhill Energy Corporation):** Blackbeard is subject to a settlement payment schedule and new terms regarding cost allocation and reporting. Riverhill Energy continues to operate the Texas Royalty properties.
• **Creditors:** The Trust's ability to borrow funds for liabilities is limited, but the expense reserve helps manage obligations, potentially reducing immediate risk to creditors.

Next Steps

• The Trustee intends to call a Special Meeting of Unitholders on December 16, 2025, to vote on a proposal to judicially reform the Trust Indenture to allow amendments with a majority vote.
• Blackbeard Operating, LLC will pay the remaining $4,500,000 of the settlement in four equal quarterly installments of $1,125,000 during the 2026 calendar year.
• The Trust will have the option to conduct annual site audits of the Waddell Ranch properties, at its expense.
• Blackbeard Operating, LLC will provide agreed-upon reporting to the Trustee going forward.

Key Dates

Recommendation

The significant decline in distributable income and royalty income, coupled with the ongoing deficit position of the Waddell Ranch properties and increased operating costs, indicates a deteriorating financial performance. While the Blackbeard settlement provides a temporary boost, the underlying operational challenges and exposure to volatile commodity prices, without direct control over operations, present substantial risks. A seasoned investor would likely view the current trend as unfavorable, suggesting a 'sell' to mitigate further potential losses or reallocate capital to more promising opportunities.

Keywords

Permian Basin Royalty Trust, PBT, oil and gas, royalty, Waddell Ranch, Texas Royalty, Blackbeard Operating, distributable income, commodity prices, energy trust, unitholders, settlement, legal proceedings, corporate governance, capital expenditures, financial results, SEC filing, 10-Q