Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2020
Trustee: Simmons Bank
Structure: Delaware statutory trust holding an 80% Net Profits Interest in oil and natural gas properties (Underlying Properties) in the Permian Basin, Texas, conveyed by Boaz Energy II, LLC. The Trust is a passive entity with no control over operations.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net Profits Income | $1,754,255 | $2,323,209 |
| Total Revenue | $1,757,328 | $2,326,326 |
| Distributable Income | $1,195,064 | $2,070,802 |
| Distributable Income Per Unit | $0.098230 | $0.170215 |
| Cash and Short-Term Investments | $1,081,905 | $1,215,386 |
| Cash Reserves | $900,000 | $0 |
| Net Profits Interest (Asset) | $88,578,755 | $89,043,803 |
Production Volumes (Nov 2019 - Jan 2020): Oil: 135,492 Bbl; Natural Gas: 150,394 Mcf.
Average Realized Prices: Oil: $56.39/Bbl; Natural Gas: $2.00/Mcf.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by approximately 24.5% compared to Q1 2019. This was driven by decreased oil and natural gas prices and increased capital costs.
- Loss of Hedging: Derivative put option contracts that provided downside price protection expired on December 31, 2019. Consequently, there were $0 in derivative settlement proceeds in Q1 2020, compared to $688,562 in Q1 2019.
- Capital Recoupment: Boaz Energy recouped $742,000 of previously advanced funds from the Trust in Q1 2020, reducing net profits income received.
- Cash Reserves: The Trustee retained $300,000 in cash reserves during the quarter (totaling $900,000 at period end) to cover future administrative expenses, a practice not present in Q1 2019.
- Production Volumes: Oil sales volumes decreased by 5% and natural gas sales volumes decreased by 6% year-over-year due to capital diversion to non-operated properties and a processing plant shut-in.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Boaz Energy's estimated 2020 capital budget is $2 million. Due to low commodity prices, no new wells or significant capital projects are planned for the remainder of 2020, limited to waterflood projects and workovers.
- Distribution Suspension: On April 20, 2020, the Trust declared no cash distribution for the record date of April 30, 2020. Management anticipates additional months in 2020 with no distributions due to the unfavorable price environment.
- COVID-19 Impact: The pandemic has caused a sharp decline in oil and gas prices and curtailed economic activity. Operators may shut in wells or plug marginal wells without Trust consent, further reducing income.
- Price Volatility: Oil prices reached negative territory in April 2020. The Trust has no hedging in place for 2020 production, leaving it fully exposed to spot price fluctuations.
- Litigation: Pending litigation regarding surface use damages (Marston v. Blackbeard Operating) continues. While Boaz Energy does not anticipate a material effect, a hearing on a summary judgment motion was cancelled due to COVID-19 closures.
Investor Verification Checklist
- Distribution Viability: Verify the likelihood of future distributions given the April 2020 suspension and the lack of hedging.
- Operator Solvency: Assess the financial health of Boaz Energy and third-party operators, as the Trust's income depends entirely on their ability to generate net profits.
- Capital Holdbacks: Monitor future capital reserves held back by Boaz Energy (up to $3 million allowed) which directly reduce cash flow to the Trust.
- Production Decline: Confirm if the reduction in waterflood projects will accelerate the natural decline of production volumes.
- Litigation Status: Track the resolution of the Marston litigation to ensure no unexpected liabilities impact the Net Profits Interest.