SCHEDULE: SoftVest Pushes Permian Royalty Trust Conversion

SoftVest Advisors has filed a preliminary proxy statement to convert Permian Basin Royalty Trust into a corporate entity, citing sub-optimal royalty structure and limited unitholder distributions.

Summary

• SoftVest Advisors, LLC and its affiliates (Reporting Persons) beneficially own 6,217,107 Units of Beneficial Interest in Permian Basin Royalty Trust, representing 13.3% of the outstanding units.
• The Reporting Persons filed a preliminary proxy statement on October 15, 2025, for a Special Meeting to propose converting the Trust into a publicly traded corporation or limited liability company (Newco).
• This 'Proposed Conversion' aims to transfer the Trust's assets to Newco, distribute Newco's equity interests to unitholders, and terminate the Trust.
• The current structure of the Trust's royalties on the Waddell Ranch properties is deemed sub-optimal due to being burdened by significant Production Costs and Post-Production Costs.
• Production Costs for Waddell Ranch increased from $28,405,719 in 2019 to $224,970,682 in 2024, while gross proceeds rose from $39,425,195 to $242,067,954 over the same period.
• Distributions to the Trust from Waddell Ranch royalties decreased from 21.0% of gross proceeds in 2019 ($8,264,606) to 5.3% in 2024 ($12,822,955).
• The Waddell Ranch properties have not generated royalty income since October 2024 and currently hold an approximate $28 million deficit as of June 30, 2025.
• Blackbeard Operating, LLC, the operator, has invested almost $500 million in capital expenditures into Waddell Ranch properties since 2020.
• The Trust Indenture's super-majority voting requirements make it practically impossible to effect necessary amendments for the Proposed Conversion or other strategic transactions.

Sentiment

Score: 3

Explanation: The filing expresses strong dissatisfaction with the current structure and performance of the Trust, highlighting significant financial underperformance and governance issues. While it proposes a path to unlock value, the current state is presented negatively.

Positives

• The Proposed Conversion aims to unlock value for unitholders by restructuring the sub-optimal royalty interest into a traditional, unburdened mineral royalty.
• Conversion to a corporate structure (Newco) would allow for modern governance principles and professional management, facilitating value-maximizing transactions.
• Potential strategic transactions include investing in similar properties, partnering with Blackbeard to monetize expertise, and implementing a hedging strategy to mitigate risk.
• The Indenture Reformation, even without full conversion, could provide flexibility for the Trustee and unitholders to approve strategic transactions.
• Eric L. Oliver, with his expertise, may stand for election to Newco's board, potentially bringing experienced leadership.

Negatives

• The current net overriding royalty structure on Waddell Ranch properties is burdened by significant Production Costs and Post-Production Costs, limiting distributions.
• Waddell Ranch properties have not contributed royalty income since October 2024 and are in an approximate $28 million deficit as of June 30, 2025.
• Distributions from Waddell Ranch royalties have significantly decreased as a percentage of gross proceeds, from 21.0% in 2019 to 5.3% in 2024, despite increased gross revenue.
• Unitholders are not informed about how Blackbeard's nearly $500 million in capital expenditures are being invested, including returns, break-evens, and projections.
• The Trust, as currently structured, cannot hedge economic risks, unlike the operator Blackbeard, creating a misalignment of incentives.
• The restrictive nature of the Trust Indenture and its super-majority voting requirements make it extremely difficult to implement necessary changes or strategic transactions.

Risks

• The current royalty structure exposes unitholders to substantial economic risk, as returns on horizontally fractured wells are highly dependent on crude oil prices in the initial months of production, and the Trust cannot hedge this risk.
• There is a potential misalignment of incentives between Blackbeard Operating, LLC and unitholders due to the Trust's inability to hedge and the burden of Production Costs.
• The super-majority voting requirements under the Trust Indenture make it practically impossible to achieve the necessary votes for the Proposed Conversion or other strategic amendments.
• There is no guarantee that the Indenture Reformation will be approved, or that the Proposed Conversion will be pursued or completed even if approved.
• Even if the Proposed Conversion is completed, there is no guarantee that Blackbeard or other counterparties will enter into any Potential Strategic Transaction on acceptable terms.
• Production Costs may continue to be elevated for the foreseeable future, leading to limited or no distributions under the current Trust structure.

Future Outlook

The Reporting Persons believe that converting the Trust into a publicly traded corporation or limited liability company (Newco) would enable the exploration of value-maximizing transactions. These potential transactions include restructuring the existing net overriding royalty interest into a traditional oil and gas mineral royalty free from Production Costs, investing in similar regional properties, seeking partnership opportunities with Blackbeard, and implementing a hedging strategy. They anticipate that Blackbeard will be incentivized to exchange the current royalty for a more industry-standard structure. However, there is no guarantee that the Proposed Conversion will be completed or that Blackbeard or other counterparties will agree to strategic transactions on acceptable terms.

Management Comments

• "The Participants now believe, based on their work, that the current structure of the Trusts Royalties on the Waddell Ranch properties is sub-optimal for Unitholders."
• "We believe these Production Costs may continue to be elevated for the foreseeable future and as a result, under the current Trust structure, there will continue to be limited, if any, distributions to the Trust."
• "The Participants believe that Unitholders would benefit from the ability to effect various transactions that are currently restricted activities under the Trust Indenture."
• "We believe both the Proposed Conversion and the Potential Strategic Transactions are not permitted under the Trust Indenture and could not be effected without amendments to the Trust Indenture, which requires a super-majority vote."
• "The Participants have been advised that achieving such a vote is practically impossible given the disperse ownership of Unitholders and historical lack of participation by Unitholders at special meetings."
• "Therefore, the Participants believe that the only pragmatic path to effect the Proposed Conversion and Potential Strategic Transactions is by means of the Indenture Reformation."
• "SoftVest cannot guarantee that if (1) the Indenture Reformation is approved, the Proposed Conversion will be pursued or completed or (2) the Proposed Conversion is completed, Blackbeard and its affiliates (or any other counterparty) will enter into any Potential Strategic Transaction on terms acceptable to the board of directors or other governing body of Newco or that the board of directors or such other governing body of Newco will engage in any discussion related to one or more Potential Strategic Transactions."

Industry Context

The filing highlights a common challenge in older royalty trust structures, particularly in dynamic basins like the Permian. The advent of horizontal drilling and hydraulic fracturing has significantly changed oil and gas production economics since the Trust's formation in 1980. This has led to increased capital and operating costs (Production Costs) that burden the Trust's net overriding royalty, a structure less common for new royalty interests which are typically free from such deductions. The inability of the Trust to hedge price risk, unlike modern operating companies, also puts unitholders at a disadvantage compared to current industry practices. The proposed conversion seeks to align the Trust's structure with more contemporary and value-maximizing models prevalent in the energy sector.

Comparison to Industry Standards

• The Trust's current net overriding royalty interest, burdened by Production Costs, is sub-optimal compared to a traditional oil and gas mineral royalty, which is typically free from such deductions. This burden has led to significantly reduced distributions to unitholders, even with increased gross proceeds.
• The Trust's inability to implement a hedging strategy, unlike many modern oil and gas operators and investment vehicles, exposes unitholders to unmitigated commodity price volatility, which is not standard practice for managing risk in the current energy market.
• The restrictive Trust Indenture, requiring super-majority votes for strategic changes, contrasts sharply with the more flexible corporate governance structures of publicly traded corporations or limited liability companies, which allow for more agile management and value-maximizing transactions.
• The lack of transparency regarding Blackbeard's nearly $500 million in capital expenditures, including returns and projections, falls short of the disclosure standards typically expected from publicly traded entities or partnerships where investors have a direct financial stake in development activities.

Corporate Governance

Stakeholder Impact

• Shareholders (Unitholders): Currently experiencing limited or no distributions due to the sub-optimal royalty structure and high Production Costs. The proposed conversion and strategic transactions aim to significantly increase distributable cash flow, enhance transparency, and unlock value.
• Blackbeard Operating, LLC (Operator): The filing suggests Blackbeard may be incentivized to exchange the current royalty for a more industry-standard structure. Potential partnership opportunities are also mentioned.
• Trustee (Argent Trust Company): The Indenture Reformation would give the Trustee more flexibility to approve strategic transactions.

Next Steps

• Hold a Special Meeting of Unitholders to consider the proposed conversion or Indenture Reformation.
• If the Proposed Conversion is effected, Eric L. Oliver may stand for election to Newco's board of directors.
• If the Proposed Conversion is completed, Newco's governing body could explore potential strategic transactions, including royalty restructuring, new investments, partnerships, and hedging strategies.
• If the Indenture Reformation is approved, the Trustee and Unitholders would gain flexibility to approve other strategic transactions that would otherwise require super-majority voting.

Key Dates

Recommendation

The filing details significant structural issues within Permian Basin Royalty Trust that have led to sub-optimal unitholder distributions and a current deficit. While the proposed conversion and strategic transactions offer a clear path to unlock substantial value by moving to a more industry-standard, unburdened royalty structure and modern corporate governance, the success of these initiatives is not guaranteed. The challenges of securing unitholder approval for the Indenture Reformation and Blackbeard's cooperation introduce considerable uncertainty. Therefore, a "hold" recommendation is appropriate, acknowledging the potential for significant upside if the proposed changes are successfully implemented, but also recognizing the current operational and governance hurdles that must be overcome. Investors should monitor the progress of the proxy solicitation and the feasibility of the proposed conversion.

Keywords

Permian Basin Royalty Trust, Royalty Trust, SEC Filing, Schedule 13D, SoftVest Advisors, Proxy Statement, Corporate Conversion, Waddell Ranch, Oil and Gas Royalties, Production Costs, Unitholder Activism, Corporate Governance, Energy Sector, Oil & Gas