Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2021
Trustee: Simmons Bank (resigning, with Argent Trust Company nominated as successor)
Business Model: A Delaware statutory trust holding an 80% Net Profits Interest in oil and natural gas properties (Underlying Properties) in the Permian Basin, Texas, operated by Boaz Energy. The Trust is passive and distributes substantially all cash receipts to unitholders.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 |
|---|---|---|
| Net Profits Income | $2,273,583 | $5,738,514 |
| Total Revenue | $2,273,616 | $5,738,644 |
| Distributable Income | $2,101,348 | $5,109,987 |
| Distributable Income Per Unit | $0.172726 | $0.420032 |
| General & Administrative Expenses | $(172,268) | $(628,657) |
| Cash and Short-Term Investments | $1,609,640 | (Balance Sheet Item) |
| Cash Reserves | $1,000,000 | (Balance Sheet Item) |
| Net Profits Interest (Asset) | $84,839,039 | (Balance Sheet Item) |
Material Changes vs. Prior Period
- Revenue Surge: Net profits income increased significantly compared to the prior year periods. For the three months ended September 30, 2021, income rose to $2.27 million from $326,946 in 2020. For the nine-month period, income rose to $5.74 million from $2.46 million in 2020.
- Price Drivers: The increase is primarily attributed to higher realized oil and natural gas prices as COVID-19 restrictions loosened. Average realized oil prices increased from $35.84/Bbl (3-month 2020) to $67.82/Bbl (3-month 2021). Natural gas prices rose from $1.72/Mcf to $4.29/Mcf over the same periods.
- Volume Trends: Despite price increases, sales volumes declined slightly. Oil volumes decreased 0.01% (3-month) and 17.32% (9-month) year-over-year due to natural decline and slow returns of low-margin wells. Natural gas volumes decreased 12.13% (3-month) and 7.40% (9-month) due to natural decline.
- Expense Fluctuations: Development expenses increased significantly in the 3-month period ($1.47M vs $204K) due to drilling activity in Crane County. Lease operating expenses increased in the 9-month period due to cost inflation and supply chain issues.
Outlook, Risks, and Unusual Items
- Capital Expenditures: Boaz Energy's 2021 capital budget for the Underlying Properties is estimated at $5.5 million. Approximately $3.3 million had been expended as of September 30, 2021. Future spending depends on commodity prices and regulatory approvals.
- Trustee Change: On November 4, 2021, Simmons Bank announced its resignation as Trustee, nominating Argent Trust Company as the successor. This requires unitholder approval.
- Litigation: The Trust is a defendant in the "2018 Litigation" (Marston v. Blackbeard Operating) regarding surface use damages and lease violations. A trial is set for the week beginning December 13, 2021. Boaz Energy does not anticipate a material impact, but no loss estimate is possible.
- Market Risk: Revenue and distributions are highly sensitive to volatile oil and natural gas prices, which are influenced by global economic conditions, OPEC actions, and the ongoing impact of the COVID-19 pandemic.
- Subsequent Event: A distribution of $0.053450 per unit was declared on October 19, 2021, based on August 2021 production.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current NYMEX oil and natural gas prices against the Trust's realized prices to assess future distribution potential.
- Production Decline: Monitor Boaz Energy's reports on the natural decline of the Underlying Properties and the success of new drilling/waterflood projects in offsetting volume losses.
- Litigation Outcome: Track the December 2021 trial date for the Marston litigation to determine if surface damage claims could reduce net profits.
- Trustee Transition: Confirm the status of the unitholder vote regarding the appointment of Argent Trust Company as the new Trustee.
- Capital Reserve Status: Note that Boaz Energy has reserved $142,157 net to the Trust for future capital expenses, which reduces immediate cash flow.