Permian Basin Royalty Trust 10-Q, filed Nov 8, 2023
Permian Basin Royalty Trust (PBT)
About this 10-Q
Permian Basin Royalty Trust filed this 10-Q on November 8, 2023, covering the quarter ended September 30, 2023.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period ended September 30, 2023
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _________ to ________
Commission file number 1-8033
PERMIAN BASIN ROYALTY TRUST
(Exact Name of Registrant as Specified in the Permian Basin Royalty Trust Indenture)
| Texas | 75-6280532 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
Argent Trust Company
3838 Oak Lawn Avenue
Suite 1720
Dallas, Texas 75219
(Address of Principal Executive Offices; Zip Code)
(855) 588-7839
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered | ||
| Units of Beneficial Interest | PBT | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of Units of beneficial interest of the Trust outstanding at November 8, 2023: 46,608,796.
PERMIAN BASIN ROYALTY TRUST
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
The condensed financial statements included herein have been prepared by Argent Trust Company 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 December 30, 2022, Argent Trust Company (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 Trust as of September 30, 2023, and the distributable income and the changes in trust corpus for the three-month and nine-month periods ended September 30, 2023 and 2022, have been included. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. Unless specified otherwise, all amounts included herein are presented in US dollars.
The condensed interim financial statements as of September 30, 2023 and for the three-month and nine-month periods ended September 30, 2023 and 2022, 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.
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| Report of Independent Registered Public Accounting Firm (PCAOB ID Number 410) |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unit Holders of Permian Basin Royalty Trust and
Argent Trust Company, 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, 2023, and the related condensed statements of distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2023 and 2022, and the related notes (collectively referred to as the “condensed interim financial statements or interim financial information”). Based on our reviews, 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, 2022, 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 1, 2023 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, 2022, 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 reviews 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.
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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, Texas
November 8, 2023
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PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
| September 30, 2023 (Unaudited) |
December 31, 2022 |
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| ASSETS |
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| Cash and short-term investments |
$ | 2,146,065 | $ | 2,855,444 | ||||
| Net overriding royalty interests in producing oil and gas properties (net of accumulated amortization of $10,815,783 and $10,695,783 at September 30, 2023 and December 31, 2022, respectively) |
$ | 159,433 | 279,433 | |||||
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| TOTAL ASSETS |
$ | 2,305,498 | $ | 3,134,877 | ||||
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| LIABILITIES AND TRUST CORPUS |
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| Distribution payable to Unit holders |
$ |
1,046,065 |
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$ | 1,755,444 | |||
| Commitments and reserves for contingencies (Note 6) |
1,100,000 | 1,100,000 | ||||||
| Trust corpus – 46,608,796 Units of beneficial interest authorized and outstanding |
159,433 | 279,433 | ||||||
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| TOTAL LIABILITIES AND TRUST CORPUS |
$ | 2,305,498 | $ | 3,134,877 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
| THREE MONTHS ENDED September 30, 2023 |
THREE MONTHS ENDED September 30, 2022 |
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| Royalty income |
$ | 3,317,431 | $ | 27,323,759 | ||||
| Interest income |
24,119 | 11,452 | ||||||
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| 3,341,550 | 27,335,211 | |||||||
| General and administrative expenditures |
(139,520 | ) | (136,712 | ) | ||||
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| Distributable income |
$ | 3,202,030 | $ | 27,198,499 | ||||
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| Distributable income per Unit (46,608,796 Units) |
$ | .07 | $ | .58 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
| NINE MONTHS ENDED September 30, 2023 |
NINE MONTHS ENDED September 30, 2022 |
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| Royalty income |
$ | 14,598,202 | $ | 39,032,624 | ||||
| Interest income |
61,191 | 14,470 | ||||||
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| 14,659,393 | 39,047,094 | |||||||
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| Reserved for Expenses |
— | — | ||||||
| General and administrative expenditures |
(955,607 | ) | (755,594 | ) | ||||
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| Distributable income |
$ | 13,703,786 | $ | 38,291,500 | ||||
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| Distributable income per Unit (46,608,796 Units) |
$ | .29 | $ | .82 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
| THREE MONTHS ENDED September 30, 2023 |
THREE MONTHS ENDED September 30, 2022 |
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| Trust corpus, beginning of period |
$ | 199,433 | $ | 326,085 | ||||
| Amortization of net overriding royalty interests |
(40,000 | ) | (15,946 | ) | ||||
| Distributable income |
3,202,030 | 27,198,499 | ||||||
| Distributions declared |
(3,202,030 | ) | (27,198,499 | ) | ||||
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| Total Trust Corpus, end of period |
$ | 159,433 | $ | 310,139 | ||||
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| Distributions per Unit |
$ | .07 | $ | .58 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
| NINE MONTHS ENDED September 30, 2023 |
NINE MONTHS ENDED September 30, 2022 |
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| Trust corpus, beginning of period |
$ | 279,433 | $ | 352,688 | ||||
| Amortization of net overriding royalty interests |
(120,000 | ) | (42,549 | ) | ||||
| Distributable income |
13,703,786 | 38,291,500 | ||||||
| Distributions declared |
(13,703,786 | ) | (38,291,500 | ) | ||||
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| Total Trust Corpus, end of period |
$ | 159,433 | $ | 310,139 | ||||
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| Distributions per Unit |
$ | .29 | $ | .82 | ||||
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The accompanying notes are an integral part of these condensed financial statements.
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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. Argent Trust Company (“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, was 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”), was the interest owner for the Texas Royalty properties. In February 1997, BROG sold its interest in the Texas Royalty properties to Riverhill Energy. Riverhill Energy currently conducts all field, technical and accounting operations for the Texas Royalty 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.
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 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.
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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.
On November 4, 2021, the Trustee announced that it had entered into an agreement with Argent Trust Company, a Tennessee chartered trust company (“Argent”), pursuant to which the Trustee would be resigning as trustee of the Trust and would nominate Argent as successor trustee of the Trust. The effective date of Simmons Bank’s resignation and Argent’s appointment as successor trustee was December 30, 2022. The defined term “Trustee” as used herein shall refer to Bank of America N.A. for periods prior to August 29, 2014, shall refer to Southwest Bank for periods from August 29, 2014 through February 19, 2018, shall refer to Simmons Bank for periods from February 20, 2018 through December 29, 2022, and shall refer to Argent for periods on and after December 30, 2022.
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). |
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| 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.
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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.
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.
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| 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 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.
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| 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.
| 7. | SUBSEQUENT EVENTS |
Subsequent to September 30, 2023, the Trust declared a distribution on October 20, 2023, of $0.042862 per Unit payable on November 14, 2023 to unitholders of record on October 31, 2023.
* * * * *
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| 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 volatility in oil and natural gas prices due in part to significantly decreased demand as a result of the novel coronavirus (“COVID-19”) pandemic beginning in 2020, followed by increasing prices in 2021, and the first half of 2022. 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, 2023, the price of oil was $83.03 per barrel. It is uncertain how the war in Ukraine, resulting sanctions against Russia, conflict between Israel and Hamas, and OPEC production will affect oil prices in the coming months. 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 and Russia; |
| • | worldwide economic conditions; |
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| • | weather conditions; |
| • | trade barriers; |
| • | public health concerns, including the COVID 19 pandemic; |
| • | 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, 2023 Compared to Three Months Ended September 30, 2022
For the quarter ended September 30, 2023, royalty income received by the Trust amounted to $3,317,431 compared to royalty income of $27,323,759 during the third quarter of 2022. The decrease in royalty income is primarily attributable to no net profits interest income being received from the Waddell Ranch properties due to an excess in working interest costs. Additionally, a decrease in oil and gas pricing, somewhat offset by an increase in oil and gas production for the quarter ended September 30, 2023 contributed to the decrease in royalty income. Average oil and gas prices were $70.82 and $2.06, respectively, for the quarter ending September 30, 2023 compared to $108.75 and $6.60 for the quarter ended September 30, 2022.
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Interest income for the quarter ended September 30, 2023 was $24,119 compared to $11,452 during the third quarter of 2022. The increase in interest income is primarily attributable to increased amounts of funds available for investment. Total expenses during the third quarter of 2023 amounted to $139,520 compared to $136,712 during the third quarter of 2022. The slight increase in total exenses can be primarily attributed to increased expense for professional services, printing expenses and the timing of payment of expenses.
These transactions resulted in distributable income for the quarter ended September 30, 2023 of $3,202,030 or $0.07 per Unit of beneficial interest. Distributions of $0.021749, $0.024535 and $0.022414 per Unit were made to Unit holders of record as of July 31, 2023, August 31, 2023, and September 29, 2023, respectively. For the third quarter of 2022, distributable income was $27,198,499 or $0.58 per Unit of beneficial interest.
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 2023 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:
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| Three Months Ended September 30, |
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| 2023 | 2022 | |||||||
| Royalties: |
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| Oil sales (Bbls) |
588,470 | 468,501 | ||||||
| Gas sales (Mcf) |
3,218,907 | 2,580,493 | ||||||
| Properties From Which The Royalties Were Carved: |
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| Oil: |
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| Total oil sales (Bbls) |
775,044 | 612,050 | ||||||
| Average per day (Bbls) |
8,424 | 6,801 | ||||||
| Average price per Bbl |
$ | 70.82 | $ | 108.75 | ||||
| Gas: |
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| Total gas sales (Mcf) |
4,281,577 | 3,434,117 | ||||||
| Average per day (Mcf) |
46,538 | 38,157 | ||||||
| Average price per Mcf |
$ | 2.06 | $ | 6.60 | ||||
The average received price of oil decreased to an average price of $70.82 per Bbl in the third quarter of 2023, compared to $108.75 per Bbl in the third quarter of 2022 due to worldwide market variables. The average price of gas (including natural gas liquids) decreased from $6.60 per Mcf in the third quarter of 2022 to $2.06 (including pricing for gas liquids) per Mcf in the third quarter of 2023 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. Oil sales volumes increased and gas sales volumes increased from the Underlying Properties (as defined in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2022) for the applicable period in 2023 compared to 2022.
Capital expenditures for drilling, remedial and maintenance activities on the Waddell Ranch properties during the third quarter of 2023 totaled $31.8 million (gross) as compared to $34.7 million (gross) for the third quarter of 2022. Blackbeard has previously informed the Trustee that the 2023 capital expenditures budget has been approved at $96.8 million (gross) for the Waddell Ranch properties. The total amount of capital expenditures for 2022 with regard to the Waddell Ranch Properties totaled $124 million (gross).
19
The Trustee has been advised that there were 13.6 workover wells completed, 7.9 new wells completed, 7.2 new wells in progress and 15.4 workover wells in progress during the three months ended September 30, 2023, as compared to 10.1 (net to the Trust) workover wells completed and 12.4 (net to the Trust) new wells completed, 4.5 (net to the Trust) new wells in progress, and 2.6 (net to the Trust) workover wells in progress for the three months ended September 30, 2022, on the Waddell Ranch properties.
Lease operating expenses and property taxes totaled $20.2 million (gross) for the third quarter of 2023, compared to $11.5 million (gross) for the same period in 2022 on the Waddell Ranch properties due to increased maintenance work.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022
For the nine months ended September 30, 2023, royalty income received by the Trust amounted to $14,598,202 compared to royalty income of $39,032,624 for the nine months ended September 30, 2022. The decrease in royalty income is primarily attributable to increased capital expenditures for the Waddell Ranch properties resulting in net profits interest income not being received in March 2023 through April 2023 and from July 2023 through the end of the nine month period in addition to a decrease in oil and gas pricing as compared to the nine months ended September 30, 2022. Average oil and gas prices were $74.06 and $2.45 for the nine months ended September 30, 2023 compared to $96.49 and $5.56 for the nine months ended September 30, 2022.
Interest income for the nine months ended September 30, 2023, was $61,191 compared to $14,470 during the nine months ended September 30, 2022. The increase in interest income is primarily attributable to a substantial increase in the amount of funds available for investment. Total expenses during the nine months ended September 30, 2023, amounted to $955,607 compared to $755,594 during the nine months ended September 30, 2022. The increase in total expenses can be primarily attributed to increased expenses for professional services, printing expenses and the timing expenses.
These transactions resulted in distributable income for the nine months ended September 30, 2022 of $13,703,786 or $0.29 per Unit. For the nine months ended September 30, 2022, distributable income was $38,291,500, or $0.82 per Unit.
Royalty income for the Trust for the nine months ended September 30, 2023, is associated with actual oil and gas production for the period November 2022 through July 2023 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:
20
| Nine Months Ended | ||||||||
| 2023 | 2022 | |||||||
| Royalties: |
||||||||
| Oil sales (Bbls) |
1,660,384 | 1,254,088 | ||||||
| Gas sales (Mcf) |
8,867,208 | 6,653,864 | ||||||
| Properties From Which The Royalties Were Carved: |
||||||||
| Oil: |
||||||||
| Total oil sales (Bbls) |
2,177,868 | 1,634,583 | ||||||
| Average per day (Bbls) |
7,798 | 9,031 | ||||||
| Average price per Bbl |
$ | 74.06 | $ | 96.49 | ||||
| Gas: |
||||||||
| Total gas sales (Mcf) |
11,781,576 | 8,849,731 | ||||||
| Average per day (Mcf) |
43,156 | 48,894 | ||||||
| Average price per Mcf |
$ | 2.45 | $ | 5.56 | ||||
The average received price of oil decreased during the nine months ended September 30, 2023 to $74.06 per barrel compared to $96.49 per barrel for the same period in 2022 due to worldwide market variables. The decrease in the average price of gas (including natural gas liquids) from $5.56 per Mcf for the nine months ended September 30, 2022, to $2.45 per Mcf for the nine months ended September 30, 2023 was 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. Oil volumes increased and gas sales volumes increased from the properties from which the Royalties are carved for the applicable period of 2023 compared to 2022.
Capital expenditures for drilling, remedial and maintenance activities on the Waddell Ranch properties for the nine months ended September 30, 2023 totaled $96.7 million (gross) compared to $87.3 million (gross) to the Trust for the same period in 2022. Blackbeard has previously advised the Trust that the 2023 capital expenditures budget for the Waddell Ranch properties is $96.8 million (gross).
21
The Trustee has been advised that 35.8 (net to the Trust) workover wells were completed and 38.3 (net to the Trust) workover wells were in progress, along with 21.1 (net to the Trust) new drill wells completed and 28.2 (net to the Trust) waiting on completion on the Waddell Ranch properties during the nine months ended September 30, 2023, as compared to 30.4 (net to the Trust) workover wells completed and 2.6 (net to the Trust) workover wells in progress, along with 30 (net to the Trust) new wells completed and 4.5 (net to the Trust) waiting on completion, on the Waddell Ranch properties during the nine months ended September 30, 2022.
Lease operating expenses and property taxes totaled $53.0 million for the nine months ended September 30, 2023, compared to $31.3 million for the same period in 2022. The increase in lease operating expense is primarily attributable to increased spending on facilities and maintenance.
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, 2023 and 2022, respectively, were computed as shown in the table below:
22
| THREE MONTHS ENDED SEPTEMBER 30 | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| WADDELL RANCH PROPERTIES |
TEXAS ROYALTY PROPERTIES |
WADDELL RANCH PROPERTIES |
TEXAS ROYALTY PROPERTIES |
|||||||||||||
| Gross proceeds of sales from the Underlying Properties |
||||||||||||||||
| Oil proceeds |
$ | 51,209,934 | $ | 3,682,551 | $ | 60,385,100 | $ | 6,174,254 | ||||||||
| Gas proceeds |
8,576,111 | 228,468 | 22,274,172 | 385,270 | ||||||||||||
| Other (adjustment) |
284,301 | (1) | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
60,070,346 | 3,911,019 | 82,659,272 | 6,559,524 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Less: |
||||||||||||||||
| Severance tax: |
||||||||||||||||
| Oil |
2,299,547 | 142,516 | 2,714,747 | 230,721 | ||||||||||||
| Gas |
262,467 | 3,769 | 1,391,246 | 22,867 | ||||||||||||
| Other |
5,699,654 | 32,701 | 3,824,716 | — | ||||||||||||
| Lease operating expense and property tax: |
||||||||||||||||
| Oil and gas |
19,967,274 | 240,000 | 11,236,250 | 240,000 | ||||||||||||
| Capital expenditures |
31,841,404 | 37,744,153 | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
60,070,346 | 418,986 | 53,911,112 | 493,588 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net profits |
0 | 3,492,033 | 28,748,160 | 6,065,936 | ||||||||||||
| Net overriding royalty interests |
75 | % | 95 | % | 75 | % | 95 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Royalty income |
$ | 0 | 3,317,431 | $ | 21,561,120 | 5,762,639 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Due to the NPI deficit, the Waddell Ranch properties did not contribute to royalty income for the three months ended September 30, 2023. As of September 3, 2023, the cumulative NPI deficit is $213,227 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. |
23
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, 2022. There have been no significant changes to the critical accounting policies during the nine months ended September 30, 2023.
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 |
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. The amount of any such borrowings is unlikely to be material to the Trust. The Trust periodically holds short-term investments acquired with funds held by the Trust pending distribution to Unit holders and funds held in reserve for the payment of Trust expenses and liabilities. Because of the short-term nature of these borrowings and investments and certain limitations upon the types of such investments which may be held by the Trust, the Trustee believes that the Trust is not subject to any material interest rate risk. The Trust does not engage in transactions in foreign currencies which could expose the Trust or Unit holders to any foreign currency related market risk. The Trust invests in no derivative financial instruments and has no foreign operations or long-term debt instruments.
24
| Item 4. | Controls and Procedures |
On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission issued an updated version of its Internal Control – Integrated Framework (the “2013 Framework”) which helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application. As of the end of the period covered by this report, the Trustee carried out an evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 based on the criteria established in the 2013 Framework. Based upon that evaluation, the Trustee concluded that the Trust’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 and are effective in ensuring that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Trustee to allow timely decisions regarding required disclosure. In its evaluation of disclosure controls and procedures, 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. There has not been any change in the Trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
25
PART II - OTHER INFORMATION
| Item 1A. | Risk Factors |
Risk factors relating to the Trust are contained in Item 1A of the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Except as set forth in such filing, no material change to such risk factors has occurred during the nine months ended September 30, 2023.
Items 2 through 4.
Not applicable.
| Item 5. | Other Information |
The Trust does not have any directors or officers, and as a result, no such persons adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement, as defined in Item 408(a) of Regulation S-K.
| Item 6. | Exhibits |
| 4.1 |
| 4.2 |
| 4.3 | Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) to The First National Bank of Fort Worth (now Argent Trust Company), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trust’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference. * (P) |
26
| 4.4 | Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) to The First National Bank of Fort Worth (now Argent Trust Company), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trust’s Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference. * (P) |
| 10.1 |
| 10.2 |
| 10.3 |
| 10.4 |
27
| 31.1 |
| 32.1 |
| * | A copy of this Exhibit is available to any Unit holder, at the actual cost of reproduction, upon written request to the Trustee, Argent Trust Company, 3838 Oak Lawn Avenue, Suite 1720, Dallas, Texas 75219. |
| (P) | Paper exhibits. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| ARGENT TRUST COMPANY, | ||
| TRUSTEE FOR THE | ||
| PERMIAN BASIN ROYALTY TRUST | ||
| By: | /s/ GLYNNIS ELO | |
| Glynnis Elo | ||
| Assistant Vice President | ||
Date: November 8, 2023
(The Trust has no directors or executive officers.)
29
EXHIBIT 31.1
Certification Required by Rule 13a-14(a) or Rule 15d-14(a)
I, Glynnis Elo, certify that:
| 1. | I have reviewed this report on Form 10-Q of Permian Basin Royalty Trust, for which Argent Trust Company, acts as Trustee; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the periods presented in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), or for causing such controls and procedures to be established and maintained, for the registrant and I have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors: |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
In giving the certifications in paragraphs 4 and 5 above, I have relied to the extent I consider reasonable on information provided to me by Blackbeard Operating LLC and Riverhill Energy Corporation.
| Date: November 8, 2023 | By: | /s/ GLYNNIS ELO | ||||
| Glynnis Elo, | ||||||
| Assistant Vice President | ||||||
| Argent Trust Company |
EXHIBIT 32.1
Certification Required by Rule 13a-14(b) or
Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Permian Basin Royalty Trust (the “Trust”) on Form 10-Q for the quarterly period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, not in its individual capacity but solely as the trustee of the Trust, certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to its knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust.
| ARGENT TRUST COMPANY, TRUSTEE FOR PERMIAN BASIN ROYALTY TRUST | ||||||
| Date: November 8, 2023 | By: | /s/ GLYNNIS ELO | ||||
| Glynnis Elo, | ||||||
| Assistant Vice President | ||||||
| Argent Trust Company | ||||||
A signed original of this written statement required by Section 906 has been provided to Permian Basin Royalty Trust and will be retained by Permian Basin Royalty Trust and furnished to the Securities and Exchange Commission or its staff upon request.