SCHEDULE: SoftVest Sues to Modernize Permian Basin Royalty Trust

SoftVest, L.P., a major beneficiary, has filed a lawsuit to modify the Permian Basin Royalty Trust's indenture, citing outdated terms that hinder distributions.

Summary

• SoftVest, L.P., holding 13.3% of Permian Basin Royalty Trust (PBT) units, has filed an Original Petition for Modification of Trust in Tarrant County, Texas.
• The petition seeks to amend the Trust Indenture to address an 'untenable' payment structure for Waddell Ranch Royalties, which burdens beneficiaries with production costs and accrued interest.
• This structure, unusual for royalty owners, has led to no distributions from Waddell Ranch since October 2024, despite gross proceeds increasing from $35.9 million in 2020 to $242.1 million in 2024.
• Production costs for Waddell Ranch properties surged from $28.4 million in 2019 to $224.9 million in 2024, significantly reducing distributable cash flow.
• The Trust's investment profile has shifted from a stable cash flow vehicle to a high-risk, capital-intensive growth vehicle due to modern drilling technologies like horizontal drilling and hydraulic fracturing.
• SoftVest proposes restructuring the Waddell Ranch royalty interest into a traditional mineral royalty, exploring new investments, partnering with operators, implementing hedging, and converting the Trust to a traditional business entity.
• Current Trust Indenture provisions, particularly a 75% super-majority vote requirement for amendments, make practical modification impossible due to dispersed ownership and low historical Unit Holder participation.
• A non-binding proposal supporting the petition received over 98.5% approval from votes cast at a December 16, 2025, special meeting, with proxy advisory firms ISS and Glass Lewis also endorsing the changes.
• The legal basis for modification is Texas Property Code section 112.054(a)(2) and (a)(3), citing unforeseen circumstances and the need to prevent waste or impairment of administration.
• Precedent for judicial modification of similar trusts managed by Argent Trust Company exists in Dallas and Tarrant County courts.

Sentiment

Score: 3

Explanation: The filing details severe negative impacts on Unit Holder distributions and the Trust's investment profile due to an outdated and 'untenable' structure. While a legal remedy is being pursued, the current situation is highly unfavorable, indicating significant operational and financial challenges.

Positives

• Over 98.5% of Unit Holders who voted at a special meeting on December 16, 2025, supported SoftVest's non-binding proposal for trust modification, indicating strong beneficiary alignment.
• Leading proxy advisory firms, ISS and Glass Lewis, have publicly supported the proposed modifications, lending credibility and institutional backing to the initiative.
• The legal petition aims to address a fundamental flaw in the Trust's structure, potentially unlocking future value and more consistent cash flow for Unit Holders.
• The proposed changes, if successful, could transform the Trust into a more actively managed entity capable of adapting to modern industry realities and maximizing Unit Holder returns.

Negatives

• Unit Holders have not received a distribution on the Waddell Ranch Properties since October 2024, despite significant increases in gross proceeds.
• The Trust's payment structure burdens Waddell Ranch Royalties with production costs and accrued interest, which is highly unusual for royalty owners and severely limits distributions.
• Production Costs for Waddell Ranch properties have dramatically increased from $28.4 million in 2019 to $224.9 million in 2024, consuming a large portion of gross proceeds.
• The Trust's investment profile has transformed from a stable, long-term cash flow vehicle into a high-risk asset, heavily dependent on volatile commodity prices and drilling costs.
• The current Trust Indenture's super-majority vote requirements (75% of all outstanding Units) make it practically impossible for Unit Holders to effect necessary changes through traditional means.
• The Trust is forced to effectively borrow money from the operator at prevailing short-term Treasury rates during deficit periods, with accrued interest adding to unrecovered costs.

Risks

• The current structure creates a potential misalignment of incentives between third-party property operators and Unit Holders, increasing the risk of inadequate or negative returns for beneficiaries.
• The return on horizontally fractured wells is highly dependent on crude oil prices in the first months of production, a risk the Trust is not currently permitted to hedge.
• The accumulation of unrecovered Production Costs, subject to compound interest, exacerbates the negative financial impact on the Trust.
• The legal proceedings introduce uncertainty and potential costs, with no guarantee of a favorable outcome for the proposed modifications.

Future Outlook

Petitioner believes that Production Costs will continue to rise, leading to limited, if any, distributions under the current Trust structure. The new oil and gas landscape has fundamentally changed the Trust's investment profile from a potentially long-term, stable investment into a high-risk asset, almost entirely dependent on commodity prices, drilling costs, and other factors beyond the control of Unit Holders.

Management Comments

• Glass Lewis: 'Restrictive governance architecture—including, in this case, supermajority vote requirements codified within the Trust's indenture—impede shareholders' ability to advance potentially superior alternatives which may otherwise contribute to enhanced shareholder value.'
• ISS: 'A vote FOR [the Reformation Proposal] is warranted, as eliminating the supermajority vote requirements is likely to facilitate actions supported by a majority of unitholders.'
• SoftVest: 'Petitioner believes that these Production Costs will continue to rise, and under the current structure there will continue to be limited, if any, distributions to the Trust.'

Industry Context

The Permian Basin, once considered a mature oil field, has been fundamentally transformed by technological advancements such as horizontal drilling, hydraulic fracturing (fracking), and pad drilling. These innovations have dramatically increased oil production by accessing previously inaccessible hydrocarbons. However, these new technologies also bring significant increases in the cost and complexity of drilling new wells, which, under the Trust's unusual royalty structure, negatively impact distributions to beneficiaries.

Comparison to Industry Standards

• The Trust's structure, burdening Waddell Ranch Royalties with production costs (drilling, completion, abandonment), is highly unusual for royalty owners.
• The Texas Supreme Court has recognized that gas royalties are generally free of the expenses incurred to extract raw gas from the land (production costs).
• Unlike typical royalty interests, the Trust's net overriding royalty is similar to a net profits interest, where a share of production is measured by net profits after deducting operational costs, rather than a share of gross production.

Corporate Governance

Legal Proceedings

• SoftVest, L.P. has filed an 'Original Petition for Modification of Trust' (Cause No. 096-373245-25) in the 96th District Court of Tarrant County, Texas, against Argent Trust Company, as Trustee, and the Unit Holders.

Stakeholder Impact

• Shareholders (Unit Holders): Currently experiencing limited or no distributions from Waddell Ranch, increased investment risk, and an inability to influence Trust operations due to restrictive governance. The petition aims to empower them and restore consistent cash flow.
• Trustee (Argent Trust Company): Named as a respondent in the legal proceeding, its role and responsibilities may be altered if the Trust Indenture is modified.
• Property Operators: The petition proposes changes like implementing hedging strategies and seeking partnership opportunities, which could alter their relationship and economic incentives with the Trust.

Next Steps

• The District Court of Tarrant County, Texas, will proceed with the legal petition for modification of the Trust Indenture.
• A separate motion will be filed to address notice to the beneficiaries (Unit Holders) under the unique circumstances of publicly traded units.
• SoftVest seeks a court order to modify the Trust Indenture to allow a majority of Units cast at a special meeting (with a quorum) to amend the Indenture.

Key Dates

Recommendation

The filing reveals a fundamentally flawed and 'untenable' trust structure that has led to a cessation of distributions from a key asset (Waddell Ranch) and transformed the Trust into a high-risk investment. While a legal petition is underway to rectify these issues, the current state of affairs is highly detrimental to Unit Holders. The uncertainty and duration of legal proceedings, coupled with the severe financial impact already experienced, suggest that investors should consider exiting their position until a clear and favorable resolution is achieved and the Trust's financial health and governance are demonstrably improved.

Keywords

Permian Basin Royalty Trust, PBT, Trust Modification, Royalty Interests, Oil and Gas, Production Costs, Unit Holders, Corporate Governance, SEC Filing, SoftVest, Waddell Ranch, Hydraulic Fracturing, Horizontal Drilling