Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2020
Structure: 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 passive; Boaz Energy II, LLC operates the properties and remits 80% of net profits to the Trust.
Units Outstanding: 12,165,732 (as of March 31, 2021).
Key Financial Metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net Profits Income | $3,183,622 | $10,439,020 |
| Total Revenue | $3,188,156 | $10,449,660 |
| Distributable Income | $1,910,204 | $8,838,371 |
| Distributions per Unit | $0.157014 | $0.726501 |
| Cash and Short-Term Investments | $1,181,449 | $1,215,386 |
| Cash Reserves | $1,000,000 | $600,000 |
| Trust Corpus | $87,916,359 | $89,043,803 |
Production & Pricing (2020):
- Total Production: 557.0 MBoe (461.6 MBbls Oil, 572.5 MMcf Gas).
- Average Realized Price: $35.24/Boe (Oil: $40.56/Bbl; Gas: $1.59/Mcf).
- Average Expenses per Boe: $11.60.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by approximately 69% from 2019 to 2020. This was primarily driven by significantly lower realized oil and natural gas prices and reduced production volumes due to well shut-ins during the early months of the COVID-19 pandemic.
- Production Volumes: Total production dropped from 658.4 MBoe in 2019 to 557.0 MBoe in 2020.
- Reserve Revisions: Proved reserves decreased significantly due to negative price revisions. The average oil price used for reserve estimation dropped 29% year-over-year (from $55.69 to $39.57 per Bbl).
- Zero Distributions: The Trust made zero distributions for five consecutive months (April through August 2020) due to depressed commodity prices and capital reserves held by the operator.
- Costs: Development expenses decreased from $6.84 million in 2019 to $4.24 million in 2020 due to reduced drilling activity.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance
Boaz Energy plans to expand waterflood operations in the Permian Platform, Clearfork, and Abo areas in 2021. The estimated capital budget for 2021 is $5.5 million. No specific financial guidance was provided, but management noted that oil prices increased in Q1 2021 following the 2020 decline.
Risks and Contingencies
- Commodity Price Volatility: The Trust has no hedging contracts in place (all expired Dec 31, 2019), leaving distributions fully exposed to market price fluctuations.
- COVID-19 Impact: Ongoing pandemic effects continue to create uncertainty regarding production levels and commodity prices.
- Reserve Depletion: The Underlying Properties are depleting assets; production and distributions will naturally decline over time without significant new development.
- Operator Bankruptcy: The Trust relies entirely on Boaz Energy's financial health. A bankruptcy of Boaz Energy could interrupt distributions or result in the Trust becoming a general unsecured creditor.
- Legal Proceedings: The Trust is a defendant in Marston v. Blackbeard Operating, LLC regarding surface use damages. Boaz Energy does not anticipate a material impact, but the case remains pending.
Investor Verification Checklist
- Operator Financial Health: Verify Boaz Energy's current liquidity and debt status, as the Trust has no control over operations and relies on Boaz Energy to fund development and pay the Net Profits Interest.
- Reserve Revisions: Review the impact of current oil prices on the Trust's proved reserve estimates, as price drops have historically led to significant downward revisions.
- Capital Expenditure Execution: Monitor whether Boaz Energy meets its $5.5 million 2021 capital budget, as under-investment could accelerate production decline.
- Legal Status: Track the outcome of the Marston litigation to ensure no unexpected liabilities arise.
- Distribution Consistency: Note the history of zero distributions in 2020; assess the sustainability of monthly distributions given the lack of hedging.