Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2019
Trustee: Simmons Bank
Business Overview: The Trust is 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; it has no control over operations or costs, which are managed by Boaz Energy. Income is derived from 80% of the net profits from the sale of production.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2019 | Three Months Ended Mar 31, 2018 |
|---|---|---|
| Net Profits Income | $2,323,209 | $0 |
| Total Revenue | $2,326,326 | $0 |
| Distributable Income | $2,070,802 | $0 |
| Distributable Income Per Unit | $0.170215 | $0 |
| Cash and Short-term Investments | $505,844 | $1,394,128 |
| Net Profits Interest (Asset Value) | $91,528,632 | $92,186,166 |
| Trust Corpus | $91,528,622 | $92,186,176 |
Production Volumes (Underlying Properties): Oil: 143,863 MBbl; Natural Gas: 159,832 MMcf.
Average Realized Prices: Oil: $44.01/Bbl; Natural Gas: $2.38/Mcf.
Derivative Settlements: $688,562 included in net profits calculation.
Material Changes vs. Prior Period
- Revenue Recognition: The Trust reported $2.33 million in net profits income for Q1 2019, compared to $0 in Q1 2018. The Trust was formed in late 2017 but did not receive proceeds or make distributions until May 2018; therefore, Q1 2018 reflects no activity.
- Asset Amortization: The Net Profits Interest asset decreased by approximately $657,554 due to unit-of-production amortization charged directly to Trust corpus.
- Liquidity: Cash and short-term investments decreased from $1.39 million to $0.51 million, primarily due to distributions paid to unitholders.
- Derivative Impact: Revenue from derivative contracts ($550,000) was included in the January 2019 distribution, providing downside protection against oil price declines.
Outlook, Risks, and Management Commentary
Capital Expenditures: Boaz Energy estimates a 2019 capital budget of $4 million for the Underlying Properties. Plans include drilling one to two new operated wells and streamlining waterflood operations.
Hedging Strategy: Boaz Energy has put option contracts covering 76% of expected oil production for 2019 with a strike price of $50 per barrel. No production will be hedged after December 31, 2019.
Liquidity and Reserves: The Trust relies on a $1.0 million Letter of Credit from Boaz Energy to cover administrative expenses until May 31, 2019. After this date, the Trustee will begin retaining cash from distributions to build an expense reserve.
Risks and Contingencies:
- Commodity Prices: Revenue is highly dependent on volatile oil and natural gas prices.
- Litigation: A lawsuit filed in October 2018 (Marston v. Blackbeard Operating) involves the Underlying Properties. Boaz Energy does not anticipate a material effect on the Trust.
- Passive Nature: The Trust has no control over operational costs or development decisions made by Boaz Energy.
Investor Verification Checklist
- Production Lag: Verify that Q1 2019 income reflects production from November 2018 through January 2019 due to payment intervals.
- Hedging Expiration: Confirm the impact on future distributions once the 2019 hedging contracts expire on December 31, 2019.
- Capital Spend Impact: Monitor Boaz Energy's actual capital expenditures against the $4 million budget, as development expenses reduce net profits income.
- Expense Reserve: Track the establishment of the cash reserve commencing May 31, 2019, which will reduce monthly distributions until the reserve reaches $1.0 million.
- Related Party Ownership: Note that Boaz Energy owns approximately 48% of the outstanding Trust units (5,878,332 of 12,165,732).