Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2019
Business Overview: The Trust is a Delaware statutory trust holding an 80% Net Profits Interest in oil and natural gas properties (the "Underlying Properties") located in the Permian Basin, Texas. The Trust is passive; it has no employees and relies entirely on Boaz Energy II, LLC ("Boaz Energy") to operate the properties. The Trust distributes substantially all cash receipts to unitholders monthly.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net Profits Income | $10,439,020 | $16,229,480 |
| Total Revenue | $10,449,660 | $16,238,785 |
| Distributable Income | $8,838,371 | $15,589,855 |
| Distributable Income Per Unit | $0.726501 | $1.281456 |
| General & Administrative Expenses | $1,011,289 | $648,930 |
| Cash Reserves (Retained) | $600,000 | $0 |
| Total Assets | $90,259,189 | $93,580,304 |
| Proved Reserves (MBoe) | 5,060.2 | 6,318.0 |
| PV-10 (in thousands) | $114,552 | $165,795 |
Note: The Trust operates on a modified cash basis of accounting. There is no debt or traditional liquidity metrics as the Trust does not borrow for operations, though it maintains cash reserves for administrative expenses.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by approximately 36% ($5.79 million) compared to 2018. This was primarily driven by lower realized oil and natural gas prices and a significant increase in development expenses.
- Price Realization: Average realized oil price dropped from $58.91/Bbl in 2018 to $51.06/Bbl in 2019. Natural gas prices fell from $4.27/Mcf to $2.14/Mcf.
- Cost Increases: Development expenses rose from $2.78 million in 2018 to $6.84 million in 2019 due to increased drilling activity (two new wells) and waterflood conformance work. Lease operating expenses also increased due to higher workover activity.
- Reserve Revisions: Total proved reserves decreased by 1,258 MBoe (20%) due to production and negative price revisions. The average NYMEX oil price used for reserve estimation dropped 15% year-over-year.
- Cash Reserves: Beginning in May 2019, the Trustee began retaining cash reserves for administrative expenses, resulting in a $600,000 reserve balance at year-end, compared to zero in 2018.
Guidance, Outlook, and Risks
- 2020 Outlook: Boaz Energy plans to implement a new waterflood in the Permian Platform area and optimize revenue. The estimated 2020 capital budget is $2 million, with approximately $800,000 expended as of March 30, 2020. No significant capital projects are planned for the remainder of 2020 based on current prices.
- Hedging Status: All derivative put option contracts expired on December 31, 2019. Boaz Energy is prohibited from entering new hedging arrangements burdening the Trust, leaving future distributions fully exposed to commodity price volatility.
- Market Risks: The filing highlights severe risks from the "price war" between Saudi Arabia and Russia and the COVID-19 pandemic, which caused a sharp decline in oil prices in Q1 2020. This could materially reduce or eliminate cash distributions.
- Operational Risks: A significant portion of future production relies on secondary recovery (waterflood) techniques, which carry uncertainties regarding costs and production levels. The Trust is also subject to environmental regulations and potential title deficiencies.
- Legal Proceedings: The Trust is named as a defendant in litigation regarding surface use damages (Marston v. Blackbeard Operating). Boaz Energy does not anticipate a material impact, and a motion for summary judgment was filed to dismiss claims against the Trust.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and natural gas prices against the Trust's break-even costs, given the lack of hedging protection post-2019.
- Development Cost Recoupment: Monitor the recoupment of the $822,000 operator advance made by Boaz Energy in 2019, which reduces current net profits until recovered.
- Waterflood Performance: Assess the success of waterflood conformance work and new waterflood projects, as these are critical to maintaining production volumes in mature fields.
- Reserve Revisions: Review future reserve reports for further negative revisions driven by price declines or increased capital cost assumptions.
- Boaz Energy Financial Health: Since the Trust relies on Boaz Energy for operations, monitor Boaz Energy's liquidity and capital expenditure plans, as their financial distress could impact the Underlying Properties.