Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2024
Business Model: 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 passive; Boaz Energy operates the properties. The Trust distributes substantially all cash receipts to unitholders monthly.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2024 | Nine Months Ended Sept 30, 2024 |
|---|---|---|
| Net Profits Income | $1,548,855 | $4,503,683 |
| Total Revenue (Net Profits + Interest) | $1,564,340 | $4,548,739 |
| Distributable Income | $1,340,784 | $3,813,324 |
| Distributable Income Per Unit | $0.110208 | $0.313443 |
| Cash and Short-Term Investments | $1,365,300 | $1,365,300 (as of Sept 30) |
| Cash Reserves | $1,000,000 | $1,000,000 |
| Trust Corpus | $73,173,666 | $73,173,666 |
Production Volumes (Underlying Properties):
- Three Months: 70,584 Bbls Oil; 90,213 Mcf Gas.
- Nine Months: 217,572 Bbls Oil; 255,462 Mcf Gas.
Average Realized Prices:
- Three Months: Oil $78.07/Bbl; Gas $2.07/Mcf.
- Nine Months: Oil $76.63/Bbl; Gas $2.71/Mcf.
Material Changes vs. Prior Period
Revenue and Income Decline: Net profits income decreased by 8.4% for the three months and 20.0% for the nine months compared to the prior year periods. Distributable income per unit declined from $0.120516 to $0.110208 (Q3) and from $0.403307 to $0.313443 (YTD).
Drivers of Change:
- Production Volumes: Oil sales volumes decreased 8.1% (Q3) and 10.1% (YTD); Natural gas volumes decreased 8.0% (Q3) and 13.2% (YTD). Attributed to natural decline and decreased demand.
- Commodity Prices: Average realized oil prices increased (Q3: +10.8%; YTD: +3.8%), partially offsetting volume declines. Average realized natural gas prices decreased significantly (Q3: -22.8%; YTD: -28.7%).
- Costs: Development expenses increased in Q3 due to well stimulation but decreased YTD due to fewer capital projects. Lease operating expenses decreased due to reduced activity on marginal wells.
Outlook, Risks, and Unusual Items
Capital Expenditures: Boaz Energy's estimated 2024 capital budget is $4.5 million. Approximately $2.6 million has been expended as of September 30, 2024. Planned activities include non-operated drilling, waterflood conformance, and one new operated well in Crane County.
Recent Distributions: On October 21, 2024, a distribution of $0.030219 per unit was declared based on August 2024 production.
Litigation: The Trust is a defendant in the "2018 Litigation" (Marston v. Blackbeard Operating). While summary judgment was granted in favor of the defendants in 2022 and 2023, the plaintiff appealed. The parties are currently awaiting an opinion from the Eighth Court of Appeals. Unfavorable resolution could reduce cash receipts.
Risks: The Trust is highly dependent on oil and natural gas prices, which are volatile. It has no control over operations or costs of the Underlying Properties. Future distributions depend on Boaz Energy's ability to maintain production and manage costs.
Investor Verification Checklist
- Production Decline Rate: Verify the sustainability of the 8-13% volume decline and the impact of natural depletion on future distributions.
- Gas Price Sensitivity: Assess the impact of the significant drop in realized natural gas prices on net profits, given the Trust's exposure to gas sales.
- Capital Reserve Status: Confirm the balance of funds held back by Boaz Energy for future capital expenses ($826,909 net to Trust as of Sept 30, 2024) and its effect on immediate cash flow.
- Litigation Outcome: Monitor the status of the Marston appeal, as an adverse ruling could result in surface use damages or lease violations affecting net profits.
- Boaz Energy Capital Plan: Review the execution of the remaining $1.9 million of the 2024 capital budget and its potential to offset production declines.