PERMIAN BASIN ROYALTY TRUST 10-K

Item 5. Market for Units of the Trust, Related Security Holder Matters and Trust Purchases of Units Units of Beneficial Interest Units of Beneficial Interest (“Units”) of the Trust are traded on the New York Stock Exchange with the symbol PBT. Approximately 828 Unit holders of record held the 46,608,796 Units of the Trust at March 9, 2021. The Trust has no equity compensation plans and has not repurchased any Units during the period covered by this report. Item 6. Selected Financial Data REMOVED AND RESERVED. 24 Table of Contents Computation of Royalty Income Received by the Trust 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 percentages of net profits are 75% and 95% in the cases of the Waddell Ranch properties and the Texas Royalty properties, respectively. Royalty income received by the Trust for the five years ended December 31, 2020, was computed as shown in the table on the next page. Year Ended December 31, 2020 2019 2018 2017 2016 Gross Proceeds of Sales From the Underlying Properties: Waddell Ranch Properties Texas Royalty Properties Waddell Ranch Properties Texas Royalty Properties Waddell Ranch Properties Texas Royalty Properties Waddell Ranch Properties Texas Royalty Properties Waddell Ranch Properties Texas Royalty Properties Oil Proceeds $ 22,745,332 $ 10,093,604 $ 31,769,427 $ 13,325,221 $ 36,421,905 $ 15,564,348 $ 31,631,883 $ 12,932,547 $ 23,228,208 $ 11,392,255 Gas Proceeds 4,584,768 595,961 7,655,763 1,169,754 12,159,109 1,851,602 12,007,971 1,644,306 7,317,646 1,334,290 Other (adjustment)(1) 8,583,304 — — — 119,048 — 56,767 — — — Total 35,913,404 10,689,565 39,425,195 14,494,975 48,700,056 17,416,030 43,696,621 14,576,853 30,545,854 12,726,645 Less: Severance Tax Oil 1,056,855 414,326 1,457,033 489,096 1,625,842 567,246 1,409,979 452,689 1,030,578 370,941 Gas 164,243 32,666 269,932 36,693 442,098 88,054 273,048 75,623 338,599 61,814 Other 726,596 — — — — — — — (349,817 ) — Lease Operating Expense and Property Tax Oil and Gas 19,635,387 738,915 23,371,924 1,103,052 23,134,903 962,575 16,402,257 639,920 12,980,419 1,451,483 Capital Expenditures 10,314,532 — 3,306,832 — 729,665 1,617,536 1,849,553 — 2,162,579 — Total $ 31,897,613 $ 1,185,907 $ 28,405,719 $ 1,628,841 $ 25,932,508 $ 1,613,275 $ 19,934,837 $ 1,168,232 $ 16,162,358 $ 1,884,238 Net Profits $ 4,015,791 $ 9,503,658 $ 11,019,476 $ 12,866,134 $ 22,767,854 $ 15,820,755 $ 23,761,784 $ 13,408,621 $ 14,383,496 $ 10,842,407 Net Overriding Royalty Interest 75 % 95 % 75 % 95 % 75 % 95 % 75 % 95 % 75 % 95 % Total Royalty Income for Distribution $ 3,011,843 $ 9,028,475 $ 8,264,606 $ 12,222,827 $ 17,075,666 $ 15,012,624 $ 17,821,338 $ 12,738,189 $ 10,787,622 $ 10,300,286 (1) Due to the NPI deficit, the Waddell Ranch properties did not contribute Royalty income from June 1, 2020 through December 31, 2020. As of December 31, 2020, the cumulative NPI deficit is $6,437,477 for the underlying property (at 75%). The NPI deficit must be recovered from future proceeds of the Waddell properties prior to any other proceeds being paid to the Trust. 25 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation Trustee’s Discussion and Analysis for the Three-Year Period Ended December 31, 2020 Liquidity and Capital Resources As stipulated in the Trust Agreement, the Trust is intended to be passive in nature and the Trustee does not have any control over or any responsibility relating to the operation of the Underlying Properties. 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 the Trust’s ability to periodically borrow money as necessary to pay expenses, liabilities and obligations of the Trust that cannot be paid out of cash held by the Trust, the Trust is prohibited from engaging in borrowing transactions. As a result, other than such borrowings, if any, the Trust has no source of liquidity or capital resources other than the Royalties. Results of Operations Royalty income received by the Trust for the three-year period ended December 31, 2020, is reported in the following table: Year Ended December 31, Royalties 2020 2019 2018 Total Revenue $ 12,040,318 100 % $ 20,487,433 100 % $ 32,088,282 100 % Oil Revenue 10,354,672 86 % 17,209,443 84 % 25,349,742 75 % Gas Revenue 1,685,646 14 % 3,277,990 16 % 6,738,540 21 % Total Revenue/Unit $ .258327 $ .439562 $ .688460 Royalty income of the Trust for the calendar year is associated with actual oil and gas production for the period November of the prior year through October of the current year. Oil and gas production for 2020, 2019 and 2018 generated by the Royalties and the Underlying Properties, excluding portions attributable to the adjustments discussed hereafter, are presented in the following table: Year Ended December 31, Royalties 2020 2019 2018 Oil Sales (Bbls) 435,319 360,606 467,473 Gas Sales (Mcf) 1,437,362 858,009 1,595,999 Underlying Properties Oil Total Oil Sales (Bbls) 831,141 871,513 894,552 Average Per Day (Bbls) 2,277 2,388 2,451 Average Price/Bbl $ 39.51 $ 51.74 $ 58.11 Gas Total Gas Sales (Mcf) 3,520,515 3,346,916 3,960,107 Average Per Day (Mcf) 9,645 9,170 10,850 Average Price/Mcf $ 1.47 $ 2.64 $ 3.55 The average price of oil decreased to $39.51 per barrel in 2020, down from $51.74 per barrel in 2019. The average price of oil in 2018 was $58.11 per barrel. In addition, the average price of gas decreased from $2.64 per Mcf in 2019 to $1.47 per Mcf in 2020. The average price of gas in 2018 was $3.55 per Mcf. Oil prices have decreased primarily because of world market conditions and the negative impact of the COVID-19 pandemic on economic activity. Oil prices are expected to remain volatile. Gas liquids values remain weaker and keep the prices of gas weaker in addition to not receiving revenue from Blackbeard on the Waddell NPI due to excess costs of new drilling. 26 Table of Contents Subsequent to December 31, 2020, the price of both oil and gas continued to fluctuate, giving rise to a correlating adjustment of the respective standardized measure of discounted future net cash flows. As of March 10, 2021, NYMEX posted oil prices were approximately $64.75 per barrel, which compared to the posted price of $39.57 per barrel, used to calculate the worth of future net revenue of the Trust’s proved developed reserves, would result in a smaller standardized measure of discounted future net cash flows for oil. As of March 10, 2021, NYMEX posted gas prices were $2.69 per million British thermal units. The use of such price, as compared to the posted price of $2.00 per million British thermal units, used to calculate the future net revenue of the Trust’s proved developed reserves would result in a smaller standardized measure of discounted future net cash flows for gas. 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), production amounts do not necessarily provide a meaningful comparison. For the underlying properties total oil production decreased by approximately 5% from 2019 to 2020 primarily due to the natural decline of production. For the underlying properties total gas production increased approximately 5% from 2019 to 2020 primarily due to additional production on Waddell due to new drilling. Total capital expenditures in 2020 used in the net overriding royalty calculation were approximately $10.3 million (gross) compared to $3.3 million (gross) in 2019 and $730,000 (gross) in 2018. The operator of the Waddell Ranch properties has informed the Trustee that, in order to halt the production decline curve and to exploit the remaining potential of the Trust’s assets more fully, a more aggressive, robust capital expenditure budget will be necessary in the future and is being pursued. In 2019, there were 0 recompletion wells completed and 0 wells permanently plugged on the Waddell Ranch properties. Actual costs for this program in 2019 approximated $3.3 million (gross). This cost is for the development program and base facilities. In 2020, there were 16 new drill wells and 3 recompletion. Texas law requires all temporarily abandoned wells to be either worked over and recompleted to functional status or permanently plugged and abandoned within a five year time frame. The Waddell Ranch properties contain over 700 such temporarily abandoned wells. In 2020, there were 3 recompletion wells completed and 21 wells permanently plugged on the Waddell Ranch properties. There were 20 gross (10 net) drill wells completed on the Waddell Ranch properties during 2020. At December 31, 2019, there was 2 drill wells and 0 workover in progress on the Waddell Ranch properties. Blackbeard has advised the Trustee that the proposed budget for 2021 will be $86.7 million (gross) and $32.5 (net). The 2021 budget will not include amounts to be spent on vertical wells, or wells to be worked over and completed, but will be spent on additional facilities and infrastructure improvements and the completion of projects begun in 2020. In 2020, lease operating expense and property taxes on the Waddell Ranch properties amounted to approximately $19.6 million. In 2019, lease operating expense and property taxes on the Waddell Ranch properties amounted to approximately $23.4 million. In 2018, lease operating expense and property taxes on the Waddell Ranch properties amounted to approximately $23.1 million. The Trustee has been advised by the operator that since June 2006, the oil from the Waddell Ranch has been marketed by the operator by soliciting bids from third parties on an outright sale basis of production listed in bid packages. During 2020, the monthly royalty receipts were invested by the Trustee in cash and cash equivalents until the monthly distribution date, and earned interest totaled $9,603. Interest income for 2019 and 2018 was $23,000 and $26,006, respectively. General and administrative expenses in 2020 were $1,041,303 compared to $1,089,302 in 2019 and $1,324,828 in 2018, decrease due primarily to audit of properties and other professional services in the prior years. The reserve for 27 Table of Contents administrative expenses for any potentially extraordinary events and/or expenses was $1,100,000 as of December 31, 2020. Total reserves for expenses for the years ended December 31, 2020, 2019 and 2018 was $50,000, $0 and $0, respectively. Distributable income for 2020 was $10,958,618 or $0.24 per Unit. Distributable income for 2019 was $19,421,131 or $0.42 per Unit. Distributable income for 2018 was $30,789,460 or $.66 per Unit. Results of the Fourth Quarters of 2020 and 2019 Royalty income received by the Trust for the fourth quarter of 2020 amounted to $1,980,417 or $0.04 per Unit. For the fourth quarter of 2019, the Trust received royalty income of $5,129,649 or $0.11 per Unit. Interest income for the fourth quarter of 2020 amounted to $1,539 compared to $4,826 for the fourth quarter of 2019. The decrease in interest income can be attributed primarily to a decrease of funds available. Total general and administrative expenses was $135,434 for the fourth quarter of 2020 compared to $213,203 for the fourth quarter of 2019. The decrease in expenses primarily related to timing of payments of legal and auditor expenses. Royalty income for the Trust for the fourth quarter is associated with actual oil and gas production during August through October from the Underlying Properties. Oil and gas production attributable to the Underlying Properties for the quarter and the comparable period for 2019 are as follows: Fourth Quarter 2020 2019 Royalties Oil Sales (Bbls) 162,468 90,683 Gas Sales (Mcf) 712,623 134,675 Underlying Properties Total Oil Sales (Bbls) 208,736 218,645 Average Per Day (Bbls) 2,269 2,377 Average Price/Bbls $ 37.91 $ 53.22 Total Gas Sales (Mcf) 944,236 563,739 Average Per Day (Mcf) 10,263 6,128 Average Price/Mcf $ 2.14 $ 2.70 The posted price of oil decreased for the fourth quarter of 2020 compared to the fourth quarter of 2019, resulting in an average price per barrel of $37.91 compared to $53.22 in the same period of 2019. The average price of gas decreased for the fourth quarter of 2020 compared to the same period in 2019, resulting in an average price per Mcf of $2.14 compared to $2.70 in the fourth quarter of 2019. The Trustee has been advised that oil production decreased in the fourth quarter of 2020 compared to the same period in 2019 primarily due to natural decline. Gas production increased in the fourth quarter of 2020 compared to the same period in 2019 due to additional wells producing later in the year due to new drilling. The Trust has been advised that 6 wells were drilled and completed during the three months ended December 31, 2020, and there were 7 wells in progress. 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. 28 Table of Contents Impairment The Trustee routinely reviews its royalty interests in oil and gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows. There was no impairment of the assets as of December 31, 2020. Critical Accounting Policies and Estimates The Trust’s financial statements reflect the selection and application of accounting policies that require the Trust to make significant estimates and assumptions. The following are some of the more critical judgment areas in the application of accounting policies that currently affect the Trust’s financial condition and results of operations. 1. 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. • Royalty income is computed separately for each of the conveyances under which the Royalties were conveyed to the Trust. If monthly costs exceed revenues for any conveyance (“excess costs”), such excess costs cannot reduce royalty income from other conveyances, but is carried forward with accrued interest to be recovered from future net proceeds of that conveyance. 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 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 SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts. 2. Royalty Income Revenues from Royalty Interests are recognized in the period in which amounts are received by the Trust. Royalty income received by the Trust in a given calendar year will generally reflect the proceeds from crude oil and natural gas produced for the twelve-month period ended October 31 st in that calendar year. 3. Reserve Disclosure Independent petroleum engineers estimate the net proved reserves attributable to the Royalty Interests. Estimates of future net revenues from proved reserves have been prepared using average 12-month oil and gas prices, determined 29 Table of Contents as an unweighted arithmetic average of the first-day-of-the-month benchmark price for each month within the 12-month period preceding the end of the most recent fiscal year, unless prices are defined by contractual arrangements. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and gas reserves. The reserves actually recovered and the timing of production may be substantially different from the reserve estimates and related costs. Numerous uncertainties are inherent in estimating volumes and the value of proved reserves and in projecting future production rates and the timing of development of non-producing reserves. Such reserve estimates are subject to change as market conditions change. Detailed information concerning the number of wells on royalty properties is not generally available to the owner of royalty interests. Consequently, the Registrant does not have information that would be disclosed by a company with oil and gas operations, such as an accurate account of the number of wells located on its royalty properties, the number of exploratory or development wells drilled on its royalty properties during the periods presented by this report, or the number of wells in process or other present activities on its royalty properties, and the Registrant cannot readily obtain such information. 4. 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. New Accounting Pronouncements There are no new pronouncements that are expected to have a significant impact on the Trust’s financial statements. Off-Balance Sheet Arrangements. As stipulated in the Trust Agreement, the Trust is intended to be passive in nature and the Trustee does not have any control over or any responsibility relating to the operation of the Underlying Properties. 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. Therefore, the Trust has not engaged in any off-balance sheet arrangements. Tabular Disclosure of Contractual Obligations. Less than 1 Year Payments Due by Period More than 5 Years Contractual Obligations Total 1 - 3 Years 3 - 5 Years Distribution payable to Unit holders $ 625,449 $ 625,449 $ 0 $ 0 $ 0 Total $ 625,449 $ 625,449 $ 0 $ 0 $ 0