Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Structure: A Delaware statutory trust formed in November 2017. The Trust holds an 80% Net Profits Interest in the "Underlying Properties," which are oil and natural gas assets located in the Permian Basin, Texas, operated primarily by Boaz Energy II, LLC ("Boaz Energy"). The Trust is passive; it has no control over operations or costs and distributes substantially all cash receipts monthly to unitholders.
Key Financial Metrics
| Metric | 2018 Value |
|---|---|
| Net Profits Income | $16,229,480 |
| Total Distributable Income | $15,589,855 |
| Distributions per Unit (Total) | $1.281452 |
| General & Administrative Expenses | $648,930 |
| Trust Corpus (End of Period) | $92,186,166 |
| Cash and Short-Term Investments | $1,394,128 |
| Proved Reserves (Trust Interest) | 6,317.5 MBoe |
| PV-10 (Standardized Measure) | $165,795,349 |
Note: The Trust uses a modified cash basis of accounting. Net Profits Income represents 80% of the net profits from the Underlying Properties plus derivative settlements.
Material Changes and Operational Highlights
- Production Volumes: Total sales volumes for 2018 were 600,719 MBoe (506,926 MBbl oil; 562,757 MMcf natural gas). Average net daily production was 1,645.8 Boe/d.
- Pricing: Average realized sales prices increased significantly compared to prior years, with oil at $58.91/Bbl and natural gas at $4.27/Mcf.
- Reserve Revisions: Total proved reserves decreased from 7,381 MBoe (2017) to 6,318 MBoe (2018). This decline was driven by a negative revision of 1,830 MBoe in the Permian Clearfork area due to waterflood operational issues and the reclassification of 816 MBoe from proved developed to proved undeveloped reserves pending capital investment.
- Derivative Settlements: The Trust received $206,688 from the settlement of derivative put option contracts, which provided downside price protection for 2018 production.
- Divestiture: Boaz Energy executed a "Qualified De Minimis Sale" of certain leases in Ward County, Texas, generating $234,341 in proceeds included in gross profits.
Outlook, Risks, and Management Commentary
- 2019 Outlook: Boaz Energy plans to streamline waterflood operations, convert additional wells to injection wells, and drill one to two new operated wells. Capital expenditures for 2019 are estimated at $4 million.
- Hedging Expiration: Derivative put option contracts covered approximately 100% of expected oil production for 2018 and 76% for 2019. No hedging is in place for production after December 31, 2019, exposing future distributions to greater commodity price volatility.
- Liquidity: The Trust maintains a $1.0 million Letter of Credit from Boaz Energy to cover administrative expenses. The Trustee is authorized to retain up to $1.0 million in cash reserves starting May 2019.
- Key Risks:
- Commodity Prices: Distributions are highly sensitive to oil and natural gas prices.
- Depleting Assets: Reserves are depleting, and the Trust cannot acquire new properties to replace them.
- Secondary Recovery: A significant portion of production relies on waterflood operations, which carry technical and cost risks.
- Counterparty Risk: Reliance on Boaz Energy for operations and derivative counterparties for price protection.
Investor Verification Checklist
- Verify the accuracy of the 1,830 MBoe negative reserve revision in the Permian Clearfork area and the status of the required waterflood conformance work.
- Confirm the extent of Boaz Energy's 2019 capital budget ($4 million estimate) and its sufficiency to maintain production levels without further reserve downgrades.
- Monitor the expiration of derivative hedges in late 2019 and the resulting exposure to spot price fluctuations.
- Review the status of the pending litigation (Thaleia L. Marston v. Blackbeard Operating, LLC) to ensure no material impact on surface use or lease terms.
- Assess the concentration risk of the Underlying Properties being located entirely within the Permian Basin.