Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2021
Trustee: Simmons Bank
Business Overview: PRT is a Delaware statutory trust holding an 80% Net Profits Interest in oil and natural gas properties (Underlying Properties) located in the Permian Basin, Texas. The Trust is a passive entity; it receives 80% of net profits from production sold by Boaz Energy and distributes substantially all cash receipts to unitholders. As of March 31, 2021, there were 12,165,732 trust units outstanding.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net Profits Income | $1,289,640 | $1,754,255 |
| Total Revenue | $1,289,702 | $1,757,328 |
| Distributable Income | $1,048,425 | $1,195,064 |
| Distributable Income Per Unit | $0.086177 | $0.098230 |
| General & Administrative Expenses | $(241,274) | $(262,264) |
| Cash and Short-Term Investments | $1,566,254 | $1,181,449 |
| Cash Reserves | $1,000,000 | $900,000 |
| Net Profits Interest (Asset Value) | $87,034,503 | $87,916,384 |
Production Volumes (Q1 2021 vs Q1 2020):
- Oil: 106,328 Bbls (vs 135,492 Bbls)
- Natural Gas: 146,489 Mcf (vs 150,394 Mcf)
- Total Sales (Boe): 130,743 (vs 160,558)
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by approximately 26.5% ($464,615) compared to Q1 2020. This was primarily driven by lower production volumes and lower realized oil prices.
- Volume Reductions: Oil sales volumes dropped 22% (29,164 Bbls) due to natural decline and reduced demand. Natural gas volumes decreased 3% (3,905 Mcf) due to pandemic-related demand reductions.
- Price Fluctuations: Average realized oil price decreased to $44.03/Bbl from $56.39/Bbl. Conversely, natural gas prices increased to $2.93/Mcf from $2.00/Mcf.
- Expense Changes: Development expenses decreased significantly ($1.2 million reduction) due to reduced drilling activity. Other expenses increased by $90,973 due to annual overhead rate adjustments.
- Amortization: Amortization of the Net Profits Interest increased to $881,856 from $465,048, reflecting the unit-of-production method based on current production levels.
Outlook, Risks, and Contingencies
Capital Budget: Boaz Energy estimates a 2021 capital budget of $5.5 million for the Underlying Properties. Approximately $0.9 million was expended as of March 31, 2021. Plans include non-operated drilling in Crane and Terry counties and two operated wells in Crane County.
Risks and Uncertainties:
- Commodity Prices: Revenue is highly sensitive to oil and natural gas prices, which remain volatile due to the ongoing impact of the COVID-19 pandemic and global economic conditions.
- Production Disruptions: Temporary shut-downs occurred during extraordinary winter storms in February 2021, impacting volumes.
- Passive Nature: The Trust has no control over operations, costs, or development decisions, relying entirely on Boaz Energy.
Legal Proceedings:
- Marston Litigation: A lawsuit filed in 2018 alleges surface use damages and lease violations. While plaintiffs conceded some points regarding the Trust's rights during discovery, no settlement was reached. A trial date was vacated in May 2021 to allow plaintiffs to retain new counsel. Boaz Energy does not anticipate a material impact on the Trust.
Subsequent Events: On April 20, 2021, a distribution of $0.044638 per unit was declared based on February 2021 production, paid on May 14, 2021.
Investor Verification Checklist
- Production Volumes: Verify the 22% decline in oil volumes and the impact of natural decline versus operational decisions.
- Price Realization: Confirm the realized oil price of $44.03/Bbl and the differential from benchmark prices.
- Capital Expenditures: Monitor Boaz Energy's execution of the $5.5 million 2021 capital budget and its impact on future net profits.
- Legal Status: Track the status of the Marston litigation and any potential for summary judgment or settlement.
- Reserve Estimates: Review independent reserve engineer reports for updates on the Underlying Properties' estimated future cash flows.