Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2021
Trustee: Simmons Bank
Structure: 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 a passive entity with no control over operations, which are managed by Boaz Energy. As of August 16, 2021, 12,165,732 trust units were outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 |
Six Months Ended June 30, 2021 |
|---|---|---|
| Net Profits Income | $2,175,292 | $3,464,931 |
| Total Revenue | $2,175,323 | $3,465,028 |
| Distributable Income | $1,960,229 | $3,008,639 |
| Distributable Income Per Unit | $0.161129 | $0.247304 |
| General & Administrative Expenses | $(215,094) | $(456,389) |
| Cash and Short-Term Investments | $1,738,345 (as of June 30, 2021) | |
| Cash Reserves | ||
| Net Profits Interest (Asset Value) | $85,889,411 (as of June 30, 2021) |
Material Changes vs. Prior Period
- Revenue Surge: Net profits income increased significantly compared to the prior year. For the three months ended June 30, 2021, income was $2.18 million versus $377,000 in the same period of 2020. For the six-month period, income rose to $3.46 million from $2.13 million.
- Price vs. Volume: The increase in income was driven primarily by higher realized commodity prices, which offset a decline in production volumes.
- Oil Prices: Average realized price increased to $59.67/Bbl (3-month) and $51.41/Bbl (6-month) compared to $31.81/Bbl and $44.50/Bbl in 2020, respectively.
- Gas Prices: Average realized price increased to $4.01/Mcf (3-month) and $3.43/Mcf (6-month) compared to $0.79/Mcf and $1.42/Mcf in 2020, respectively.
- Volumes: Oil sales volumes decreased by 25% (3-month) and 23% (6-month) year-over-year due to natural decline and lingering pandemic effects, though some marginal wells were brought back online.
- Expense Trends: General and administrative expenses decreased slightly year-over-year due to timing of payments. Direct operating expenses increased due to gas marketing fees and well workovers. Severance and ad valorem taxes decreased due to a distribution by Boaz Energy of previously accrued 2020 taxes.
- Cash Reserves: The Trustee did not retain additional cash reserves during the current quarter or six-month period, maintaining the reserve at the authorized maximum of $1.0 million. In the prior year comparable periods, reserves were increased by $100,000 and $400,000, respectively.
Outlook, Risks, and Contingencies
- Capital Budget: Boaz Energy estimates a 2021 capital budget of $5.5 million for the Underlying Properties. Approximately $1.9 million had been expended as of June 30, 2021. Plans include non-operated drilling in Crane and Terry counties and two operated wells in Crane County.
- Commodity Price Risk: Revenue and distributions remain highly dependent on volatile oil and natural gas prices. While prices have recovered in 2021, the Trust notes that fluctuations could continue due to economic conditions and the ongoing impact of the COVID-19 pandemic.
- Legal Proceedings: The Trust is a defendant in the "2018 Litigation" (Marston v. Blackbeard Operating, LLC), involving surface use damages and lease violations. A trial is set for November 8, 2021. Boaz Energy does not anticipate the litigation will materially affect the Trust, and plaintiffs have conceded certain points regarding the Trust's rights during discovery.
- Subsequent Event: On July 21, 2021, the Trust declared a distribution of $0.060425 per unit based on May 2021 production, paid on August 13, 2021.
Investor Verification Checklist
- Production Volumes: Verify the continued decline in oil and gas sales volumes and the extent to which new drilling or workovers can offset natural decline.
- Commodity Prices: Monitor realized oil and gas prices against NYMEX benchmarks to assess the impact of price differentials on net profits.
- Capital Expenditures: Track Boaz Energy's actual capital spending against the $5.5 million budget, as development expenses directly reduce net profits income.
- Litigation Status: Monitor the outcome of the Marston litigation scheduled for November 2021 to ensure no unexpected liabilities arise.
- Boaz Energy Ownership: Note that Boaz Energy retains ownership of approximately 48% of the Trust units (5.88 million of 12.17 million), creating a significant related-party dynamic.