PERMIAN BASIN ROYALTY TRUST 10-Q

Item 1. Financial Statements The condensed financial statements included herein have been prepared by Simmons Bank as Trustee for the Permian Basin Royalty Trust (the “Trust”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Effective February 20, 2018, Simmons Bank (the “Trustee”) became the new trustee for the Trust. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed interim financial statements and notes thereto be read in conjunction with the financial statements and the notes thereto included in the Trust’s latest annual report on Form 10-K. In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus of the Permian Basin Royalty Trust as of September 30, 2020, the distributable income and the changes in trust corpus for the three-month and nine-month periods ended September 30, 2020 and 2019, have been included. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. The condensed interim financial statements as of September 30, 2020 and for the three-month and nine-month periods ended September 30, 2020 and 2019, included herein, have been reviewed by Weaver and Tidwell, L.L.P., an independent registered public accounting firm, as stated in their report appearing herein. . 2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Unit Holders of Permian Basin Royalty Trust and Simmons Bank, Trustee Dallas, Texas Results of Review of Interim Financial Statements We have reviewed the accompanying condensed statements of assets, liabilities and trust corpus of Permian Basin Royalty Trust (the “Trust”) as of September 30, 2020 and the related condensed statements of distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively referred to as the “condensed interim financial statements or interim financial information”). Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed interim financial statements for them to be in conformity with the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. As described in Note 2 to the condensed interim financial statements, these condensed interim financial statements were prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the statement of assets, liabilities, and trust corpus as of December 31, 2019, and the related statements of distributable income and changes in trust corpus for the year then ended (not presented herein); and in our report dated March 16, 2020 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2019, is fairly stated, in all material respects, in relation to the statement of assets, liabilities, and trust corpus from which it has been derived. Basis for Review Results These condensed interim financial statements are the responsibility of the Trustee. We conducted our review in accordance with the standards of the PCAOB. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. /s/ WEAVER AND TIDWELL, L.L.P. Dallas, TX November 9, 2020 3 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS September 30, 2020 (Unaudited) December 31, 2019 ASSETS Cash and short-term investments $ 1,675,819 $ 2,862,570 Net overriding royalty interests in producing oil and gas properties (net of accumulated amortization of $10,585,776 and $10,550,709 at September 30, 2020 and December 31, 2019, respectively) 389,440 424,507 TOTAL ASSETS $ 2,065,259 $ 3,287,077 LIABILITIES AND TRUST CORPUS Distribution payable to Unit holders $ 576,819 $ 1,812,570 Commitments and reserves for contingencies (Note 6) 1,100,000 1,050,000 Trust corpus – 46,608,796 Units of beneficial interest authorized and outstanding 389,440 424,507 TOTAL LIABILITIES AND TRUST CORPUS $ 2,065,259 $ 3,287,077 The accompanying notes are an integral part of these condensed financial statements. 4 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED) THREE MONTHS ENDED September 30, 2020 THREE MONTHS ENDED September 30, 2019 Royalty income $ 1,358,890 $ 6,060,272 Interest income 1,280 6,753 1,360,120 6,067,025 General and administrative expenditures (105,830 ) (118,549 ) Distributable income $ 1,254,340 $ 5,948,476 Distributable income per Unit (46,608,796 Units) $ .03 $ .13 The accompanying notes are an integral part of these condensed financial statements. 5 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED) NINE MONTHS ENDED September 30, 2020 NINE MONTHS ENDED September 30, 2019 Royalty income $ 10,059,901 $ 15,357,784 Interest income 8,064 18,174 10,067,965 15,375,958 Reserve for expenses 50,000 — General and administrative expenditures (905,281 ) (876,098 ) Distributable income $ 9,112,684 $ 14,499,860 Distributable income per Unit (46,608,796 Units) $ .20 $ .31 The accompanying notes are an integral part of these condensed financial statements. 6 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED) THREE MONTHS ENDED September 30, 2020 THREE MONTHS ENDED September 30, 2019 Trust corpus, beginning of period $ 402,180 $ 448,358 Amortization of net overriding royalty interests (12,740 ) (13,071 ) Distributable income 1,254,340 5,948,476 Distributions declared (1,254,340 ) (5,948,476 ) Total Trust Corpus, end of period $ 389,440 $ 435,287 Distributions per Unit $ .03 $ .13 The accompanying notes are an integral part of these condensed financial statements. 7 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED) NINE MONTHS ENDED September 30, 2020 NINE MONTHS ENDED September 30, 2019 Trust corpus, beginning of period $ 424,507 $ 467,580 Amortization of net overriding royalty interests (35,067 ) (32,293 ) Distributable income 9,122,684 14,499,959 Distributions declared (9,122,684 ) (14,499,959 ) Total Trust Corpus, end of period $ 389,440 $ 435,287 Distributions per Unit $ .20 $ .31 The accompanying notes are an integral part of these condensed financial statements. 8 PERMIAN BASIN ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. TRUST ORGANIZATION AND PROVISIONS The Permian Basin Royalty Trust (“Trust”) was established as of November 1, 1980. Simmons Bank (“Trustee”) is Trustee for the Trust. The net overriding royalties conveyed to the Trust include (1) a 75% net overriding royalty in Southland Royalty Company’s fee mineral interest in the Waddell Ranch in Crane County, Texas (the “Waddell Ranch properties”) and (2) a 95% net overriding royalty carved out of Southland Royalty Company’s major producing royalty properties in Texas (the “Texas Royalty properties”). The net overriding royalty for the Texas Royalty properties is subject to the provisions of the lease agreements under which such royalties were created. The net overriding royalties above are collectively referred to as the “Royalties.” On November 3, 1980, Units of Beneficial Interest (“Units”) in the Trust were distributed to the Trustee for the benefit of Southland Royalty Company’s shareholders of record as of November 3, 1980, who received one Unit in the Trust for each share of Southland Royalty Company common stock held. The Units are traded on the New York Stock Exchange. Burlington Resources Oil & Gas Company LP (“BROG”), a subsidiary of ConocoPhillips, is the interest owner for the Waddell Ranch properties and Riverhill Energy Corporation (“Riverhill Energy”), formerly a wholly owned subsidiary of Riverhill Capital Corporation (“Riverhill Capital”) and formerly an affiliate of Coastal Management Corporation (“CMC”), is the interest owner for the Texas Royalty properties. BROG currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. BROG notified the Trust that on November 1, 2019, the Waddell Ranch properties that are subject to the Net Overriding Royalty Conveyance (Permian Basin Royalty Trust-Waddell Ranch) dated November 1, 1980, were sold to Blackbeard Operating, LLC (“Blackbeard”) of Fort Worth, Texas. Blackbeard became the operator effective as of April 1, 2020. Riverhill Energy currently conducts the accounting operations for the Texas Royalty properties. In February 1997, BROG sold its interest in the Texas Royalty properties to Riverhill Energy. The Trustee was advised that in the first quarter of 1998, Schlumberger Technology Corporation (“STC”) acquired all of the shares of stock of Riverhill Capital. Prior to such acquisition by STC, CMC and Riverhill Energy were wholly owned subsidiaries of Riverhill Capital. The Trustee was further advised that in connection with STC’s acquisition of Riverhill Capital, the shareholders of 9 Riverhill Capital acquired ownership of all of the shares of stock of Riverhill Energy. Thus, the ownership in the Texas Royalty properties referenced above remained in Riverhill Energy, the stock ownership of which was acquired by the former shareholders of Riverhill Capital. On January 9, 2014, Bank of America N.A. (as successor to The First National Bank of Fort Worth) gave notice to Unit holders that it would be resigning as trustee of the Trust subject to certain conditions that included the appointment of Southwest Bank as successor trustee. At a Special Meeting of Trust Unit holders, the Unit holders approved the appointment of Southwest Bank as successor trustee of the Trust once the resignation of Bank of America N.A. took effect and also approved certain amendments to the Trust Indenture. The effective date of Bank of America N.A.’s resignation and the effective date of Southwest Bank’s appointment as successor trustee was August 29, 2014. Effective October 19, 2017, Simmons First National Corporation (“SFNC”) completed its acquisition of First Texas BHC, Inc., the parent company of Southwest Bank. SFNC is the parent company of Simmons Bank. SFNC merged Southwest Bank with Simmons Bank effective February 20, 2018. The defined term “Trustee” as used herein shall refer to Bank of America N.A. for periods prior to August 29, 2014, and shall refer to Southwest Bank for periods from August 29, 2014 through February 19, 2018 and shall refer to Simmons Bank for periods on and after February 20, 2018. The terms of the Trust Indenture provide, among other things, that: • the Trust shall not engage in any business or commercial activity of any kind or acquire any assets other than those initially conveyed to the Trust; • the Trustee may not sell all or any part of the Royalties unless approved by holders of 75% of all Units outstanding in which case the sale must be for cash and the proceeds promptly distributed; • the Trustee may establish a cash reserve for the payment of any liability which is contingent or uncertain in amount; • the Trustee is authorized to borrow funds to pay liabilities of the Trust; and • the Trustee will make monthly cash distributions to Unit holders (see Note 3). 10 2. ACCOUNTING POLICIES Basis of Accounting The financial statements of the Trust are prepared on the following basis: • Royalty income recorded for a month is the amount computed and paid to the Trustee on behalf of the Trust by the interest owners. Royalty income consists of the amounts received by the owners of the interest burdened by the Royalties from the sale of production less accrued production costs, development and drilling costs, applicable taxes, operating charges and other costs and deductions multiplied by 75% in the case of the Waddell Ranch properties and 95% in the case of the Texas Royalty properties. • Trust expenses, consisting principally of routine general and administrative costs, recorded are based on liabilities paid and cash reserves established out of cash received or borrowed funds for liabilities and contingencies. • Distributions to Unit holders are recorded when declared by the Trustee. The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) because revenues are not accrued in the month of production, expenses are recorded when paid and certain cash reserves may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP. Amortization of the Royalties calculated on a unit-of-production basis is charged directly to trust corpus. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts . Use of Estimates The preparation of financial statements in conformity with the basis of accounting described above requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates. Contingencies Contingencies related to the underlying properties that are unfavorably resolved would generally be reflected by the Trust as reductions to future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders. 11 Distributable Income Per Unit Basic distributable income per Unit is computed by dividing distributable income by the weighted average of Units outstanding. Distributable income per Unit assuming dilution is computed by dividing distributable income by the weighted average number of Units and equivalent Units outstanding. The Trust had no equivalent Units outstanding for any period presented. Therefore, basic distributable income per Unit and distributable income per Unit assuming dilution are the same. New Accounting Pronouncements There are no new accounting pronouncements that are expected to have significant impact on the Trust’s financial statements. 3. NET OVERRIDING ROYALTY INTERESTS AND DISTRIBUTION TO UNIT HOLDERS The amounts to be distributed to Unit holders (“Monthly Distribution Amounts”) are determined on a monthly basis. The Monthly Distribution Amount is an amount equal to the sum of cash received by the Trustee during a calendar month attributable to the Royalties, any reduction in cash reserves and any other cash receipts of the Trust, including interest, reduced by the sum of liabilities paid and any increase in cash reserves. If the Monthly Distribution Amount for any monthly period is a negative number, then the distribution will be zero for such month. To the extent the distribution amount is a negative number, that amount will be carried forward and deducted from future monthly distributions until the cumulative distribution calculation becomes a positive number, at which time a distribution will be made. Unit holders of record will be entitled to receive the calculated Monthly Distribution Amount for each month on or before 10 business days after the monthly record date, which is generally the last business day of each calendar month. The cash received by the Trustee consists of the amounts received by owners of the interest burdened by the Royalties from the sale of production less the sum of applicable taxes, accrued production costs, development and drilling costs, operating charges and other costs and deductions, multiplied by 75% in the case of the Waddell Ranch properties and 95% in the case of the Texas Royalty properties. 4. FEDERAL INCOME TAXES For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to federal income tax at the trust level. The Unit 12 holders are considered for federal tax purposes to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit holder at the time such income is received or accrued by the Trust and not when distributed by the Trust. If the Trust borrows funds to pay liabilities of the Trust, as contemplated in the Trust Indenture, tax-exempt Unit holders could be required to recognize unrelated business taxable income. 5. STATE TAX CONSIDERATIONS All revenues from the Trust are from sources within Texas, which does not impose an individual income tax. Texas imposes a franchise tax at a rate of 0.75% on gross revenues less certain deductions, as specifically set forth in the Texas franchise tax statutes. Entities subject to the Texas franchise tax generally include trusts and most other types of entities that provide limited liability protection, unless otherwise exempt. Trusts that receive at least 90% of their federal gross income from certain passive sources, including royalties from mineral properties and other non-operated mineral interest income, and do not receive more than 10% of their income from operating an active trade or business, generally are exempt from the Texas franchise tax as “passive entities.” The Trust has been and expects to continue to be exempt from Texas franchise tax as a passive entity. Because the Trust should be exempt from Texas franchise tax at the Trust level as a passive entity, each Unit holder that is a taxable entity under the Texas franchise tax generally will be required to include its portion of Trust revenues in its own Texas franchise tax computation. This revenue is sourced to Texas under provisions of the Texas Administrative Code providing that such income is sourced according to the principal place of business of the Trust, which is Texas. Unit holders should consult their tax advisors regarding state tax requirements, if any, applicable to such Unit holder’s ownership of Trust units. 6. COMMITMENTS AND CONTINGENCIES Contingencies related to the Underlying Properties that are unfavorably resolved would generally be reflected by the Trust as reductions to future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders. 13 7. SUBSEQUENT EVENTS Subsequent to September 30, 2020, the Trust declared a distribution on October 20, 2020 of $0.012620 per Unit payable on November 16, 2020 to Unit holders of record on October 30, 2020. * * * * * 14 Item 2. Trustee’s Discussion and Analysis Forward Looking Information Certain information included in this report contains, and other materials filed or to be filed by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, production efforts and volumes, hydrocarbon prices and the results thereof, and regulatory matters. Although 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. There are many factors, none of which are within the Trustee’s control, that may cause such expectations not to be realized, including, among other things, factors such as actual oil and gas prices and the recoverability of reserves, capital expenditures, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets. Such forward looking statements generally are accompanied by words such as “estimate,” “expect,” “predict,” “anticipate,” “goal,” “should,” “assume,” “believe,” or other words that convey the uncertainty of future events or outcomes. Commodity Prices The Trust’s income and monthly distributions are heavily influenced by commodity prices. Commodity prices may fluctuate widely in response to (i) relatively minor changes in the supply of and demand for oil and natural gas, (ii) market uncertainty and (iii) a variety of additional factors that are beyond the Trustee’s control. Recently, there has been a substantial decrease in oil and natural gas prices due in part to significantly decreased demand as a result of the novel coronavirus (“COVID-19”) pandemic, which is discussed below under “Item 1A- Risk Factors”. A combination of these factors resulted in the price of oil falling below zero to $(37.63) per barrel of oil on April 20, 2020, recovering the following day to $10.01 per barrel of oil. As of October 30, 2020, the price of oil was $35.56. Factors that may impact future commodity prices, including the price of oil and natural gas, include but are not limited to: • political conditions in major oil producing regions, especially in the Middle East; • worldwide economic conditions; • weather conditions; 15 • trade barriers; • public health concerns; • the supply and price of domestic and foreign crude oil or natural gas; • the level of consumer demand; • the price and availability of alternative fuels; • the proximity to, and capacity of, transportation facilities; • the effect of worldwide energy conservation measures; and • the nature and extent of governmental regulation and taxation. Although the Trustee cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, gas royalty income for a given period generally relates to production three months prior to the period and crude oil royalty income for a given period generally relates to production two months prior to the period and will generally approximate current market prices in the geographic region of the production at the time of production. When crude oil and natural gas prices decline, the Trust is affected in two ways. First, distributable income from the Royalty Properties is reduced. Second, exploration and development activity by operators on the Royalty Properties may decline as some projects may become uneconomic and are either delayed or eliminated. It is impossible to predict future crude oil and natural gas price movements, and this reduces the predictability of future cash distributions to Unit holders. Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 For the quarter ended September 30, 2020, royalty income received by the Trust amounted to $1,358,890 compared to royalty income of $6,060,272 during the third quarter of 2019. The decrease in royalty income is primarily attributable to a severe decrease in oil and gas pricing worldwide, a decrease in oil and gas production due to Blackbeard, after assuming the role of operator of the Waddell Ranch properties, immediately instituting a workover of specific wells, which caused the Trust not to receive any royalty income from the Waddell Ranch properties in the quarter ended September 2020, as compared to the quarter ended September 30, 2019. Average oil and gas prices were $28.55 and $1.74, respectively, for the quarter ended September 30, 2020 compared to $54.30 and $1.82 for the quarter ended September 30, 2019. 16 Interest income for the quarter ended September 30, 2020 was $1,280 compared to $6,753 during the third quarter of 2019. The decrease in interest income is primarily attributable to substantially decreased amounts of funds available for investment. Total expenses during the third quarter of 2020 amounted to $105,830 compared to $118,549 during the third quarter of 2019. The decrease in total expenses can be primarily attributed to the timing of payment of expenses. These transactions resulted in distributable income for the quarter ended September 30, 2020 of $1,254,340 or $0.03 per Unit of beneficial interest. Distributions of $0.005702, $0.008863 and $0.012354 per Unit were made to Unit holders of record as of July 31, 2020, August 31, 2020, and September 30, 2020, respectively. For the third quarter of 2019, distributable income was $5,948,476 or $0.13 per Unit of beneficial interest. 17 Royalty income for the Trust for the third quarter of the calendar year is associated with actual oil and gas production for the period of May, June and July 2020 from the properties from which the Trust’s net overriding royalty interests (“Royalties”) were carved. Oil and gas sales attributable to the Royalties and the properties from which the Royalties were carved are as follows: Three Months Ended September 30, 2020 2019 Royalties: Oil sales (Bbls) 90,097 104,258 Gas sales (Mcf) 266,443 310,106 Properties From Which The Royalties Were Carved: Oil: Total oil sales (Bbls) 200,549 228,405 Average per day (Bbls) 2,204 2,510 Average price per Bbl $ 28.55 $ 54.30 Gas: Total gas sales (Mcf) 775,713 893,060 Average per day (Mcf) 8,524 9,814 Average price per Mcf $ 1.74 $ 1.82 The average received price of oil decreased to an average price per barrel of $28.55 per Bbl in the third quarter of 2020, compared to $54.30 per Bbl in the third quarter of 2019 due to worldwide market variables. The Trustee has been advised by the operator of the Waddell Ranch properties that for the period of August 1, 1993, through September 30, 2020, the oil from the Waddell Ranch properties was being sold under a competitive bid to a third party. The average price of gas (including natural gas liquids) decreased from $1.82 per Mcf in the third quarter of 2019 to $1.74 per Mcf in the third quarter of 2020 due to change in overall market variables. Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Both oil and gas sales volumes decreased from the Underlying Properties (as defined in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019) for the applicable period in 2020 compared to 2019. Capital expenditures for drilling, remedial and maintenance activities on the Waddell Ranch properties during the third quarter of 2020 totaled $2.8 million as compared to $351,706 for the third quarter of 2019. ConocoPhillips has previously informed the Trustee that the 2020 capital expenditures budget has 18 been approved at $1.35 million (gross) for the Waddell Ranch properties. The foregoing capital expenditures budget has been revised since Blackbeard assumed the role of operator of the Waddell Ranch properties on April 1, 2020. Blackbeard’s 2020 budget for the remainder of the year will be approximately $7 million for drilling and completion, $3 million for recompletions, plug and abandonments, and infrastructure of facilities. The additional expenditures should occur later in the year 2020. The total amount of capital expenditures for 2019 with regard to the Waddell Ranch properties totaled $1.35 million (gross). The Trustee has been advised that there were 5 vertical drill wells started and 3 were completed, 2 new wells in progress and 5 workover wells in progress during the three months ended September 30, 2020, as compared to 0 workover wells completed, 0 new wells completed, 0 new wells in progress and 0 workover wells in progress for the three months ended September 30, 2019, on the Waddell Ranch properties. There were various facility projects in progress for the third quarter of 2020. Lease operating expenses and property taxes totaled $5.197 million (gross) for the third quarter of 2020, compared to $5.538 million (gross) for the same period in 2019 on the Waddell Ranch properties due to increased maintenance work. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 For the nine months ended September 30, 2020, royalty income received by the Trust amounted to $10,059,901 compared to royalty income of $15,357,784 for the nine months ended September 30, 2019. The decrease in royalty income is primarily attributable to a decrease in oil pricing, a decrease in oil and gas production, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. Average oil and gas prices were $40.05 and $1.38 for the nine months ended September 30, 2020 compared to $51.25 and $2.68 for the nine months ended September 30, 2019. Interest income for the nine months ended September 30, 2020, was $8,064 compared to $18,174 during the nine months ended September 30, 2019. The decrease in interest income is primarily attributable to substantially decreased amounts of funds available for investment. Total expenses during the nine months ended September 30, 2020, amounted to $955,281 compared to $876,098 during the nine months ended September 30, 2019. The increase in total expenses can be primarily attributed to increased expense for professional services, the timing of expense, and increase in reserve for expenses of $50,000. These transactions resulted in distributable income for the nine months ended September 30, 2020 of $9,112,684, or $0.20 per Unit. For the nine months ended September 30, 2019, distributable income was $14,499,860, or $0.31 per Unit. 19 Royalty income for the Trust for the nine months ended September 30, 2020, is associated with actual oil and gas production for the period November 2019 through July 2020 from the properties from which the Royalties were carved. Oil and gas sales attributable to the Royalties and the properties from which the Royalties were carved are as follows: Nine Months Ended September 30, 2020 2019 Royalties: Oil sales (Bbls) 272,850 296,923 Gas sales (Mcf) 724,739 723,334 Properties From Which The Royalties Were Carved: Oil: Total oil sales (Bbls) 622,405 652,868 Average per day (Bbls) 2,626 2,400 Average price per Bbl $ 40.05 $ 51.25 Gas: Total gas sales (Mcf) 2,576,279 2,783,177 Average per day (Mcf) 10,870 10,232 Average price per Mcf $ 1.38 $ 2.68 The average received price of oil decreased during the nine months ended September 30, 2020 to $40.05 per barrel compared to $51.25 per barrel for the same period in 2019 due to worldwide market variables. The decrease in the average price of gas (including natural gas liquids) from $2.68 per Mcf for the nine months ended September 30, 2019, to $1.38 per Mcf for the nine months ended September 30, 2020 due to change in overall market variables. Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Both Oil gas sales volumes decreased from the properties from which the Royalties are carved for the applicable period of 2020 compared to 2019. Capital expenditures for drilling, remedial and maintenance activities on the Waddell Ranch properties for the nine months ended September 30, 2020 totaled $3.8 million (gross) compared to $2.9 million (gross) 20 to the Trust for the same period in 2019. ConocoPhillips has previously advised the Trust that the 2020 capital expenditures budget for the Waddell Ranch properties is $1.35 million (gross). The foregoing capital expenditures budget has been revised since Blackbeard assumed the role of operator of the Waddell Ranch properties on April 1, 2020. Blackbeard’s 2020 budget for the remainder of the year will be approximately $0 million for drilling and completion, $3 million for recompletions, plug and abandonments, and infrastructure of facilities. The additional expenditures should occur later in the year. The foregoing capital expenditures budget may be subject to revision since Blackbeard assumed the role of operator of the Waddell Ranch properties on April 1, 2020. Blackbeard, after assuming the role of operator of the Waddell Ranch properties, instituted a workover well capital budget for the immediate future. The Trustee has been advised that 5 vertical drill wells were started and 3 were completed and 5 workover wells were in progress on the Waddell Ranch properties during the nine months ended September 30, 2020, as compared to 1 workover well completed and 2 new drill wells (2 vertical) completed on the Waddell Ranch properties during the nine months ended September 30, 2019. There were various facility projects in progress for the third quarter of 2020. Lease operating expenses and property taxes totaled $15.7 million for the nine months ended September 30, 2020, compared to $17.6 million for the same period in 2019. The decrease in lease operating expense is primarily attributable to decreased spending on facilities and maintenance. 21 Calculation of Royalty Income The Trust’s royalty income is computed as a percentage of the net profit from the operation of the properties in which the Trust owns net overriding royalty interests. The royalty income received and recorded by the Trust was determined by the operator as noted below. These percentages of net profits are 75% and 95% in the case of the Waddell Ranch properties and the Texas Royalty properties, respectively. Royalty income received by the Trust for the three months ended September 30, 2020 and 2019, respectively, were computed as shown in the table below: THREE MONTHS ENDED SEPTEMBER 30, 2020 2019 WADDELL RANCH PROPERTIES TEXAS ROYALTY PROPERTIES WADDELL RANCH PROPERTIES TEXAS ROYALTY PROPERTIES Gross proceeds of sales from the Underlying Properties Oil proceeds $ 4,198,725 $ 1,527,614 $ 8,851,639 $ 3,549,758 Gas proceeds 1,250,926 99,930 1,375,269 269,135 Other (adjustment) 2,827,125 (1) — — — Total 8,276,776 1,627,544 10,226,908 3,818,893 Less: Severance tax: Oil 208,803 62,844 407,389 130,566 Gas 7,132 4,290 53,067 9,878 Lease operating expense and property tax: Oil and gas 5,197,997 130,000 5,537,750 360,000 Capital expenditures 2,862,844 — 351,707 — Total 8,276,776 197,134 6,349,913 500,444 Net profits — 1,430,410 3,876,995 3,318,449 Net overriding royalty interests 75 % 95 % 75 % 95 % Royalty income $ — 1,358,890 $ 2,907,746 3,152,526 (1) Due to the NPI deficit, the Waddell Ranch properties did not contribute to Royalty income for the three months ended September 30, 2020. As of September 30, 2020, the cumulative NPI deficit is $3,374,635 for the underlying property (at 75%). The NPI deficit must be recovered from future proceeds of the Waddell Ranch properties prior to any other proceeds being paid to the Trust. 22 Critical Accounting Policies and Estimates A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust’s financial statements is included in Item 7 of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to the critical accounting policies during the nine months ended September 30, 2020. Distributable Income Per Unit Basic distributable income per Unit is computed by dividing distributable income by the weighted average of Units outstanding. Distributable income per Unit assuming dilution is computed by dividing distributable income by the weighted average number of Units and equivalent Units outstanding. The Trust had no equivalent Units outstanding for any period presented. Therefore, basic distributable income per Unit and distributable income per Unit assuming dilution are the same. New Accounting Pronouncements There are no new accounting pronouncements that are expected to have significant impact on the Trust’s financial statements. Item 3. Qualitative and Quantitative Disclosures About Market Risk Not applicable due to the Trust’s status as a smaller reporting company.