Business Context and Reporting Period
Company: Enduro Royalty Trust (Note: Input metadata referenced "Permianville," but the filing text identifies the registrant as Enduro Royalty Trust).
Reporting Period: Quarterly report (Form 10-Q) for the period ended June 30, 2018.
Business Overview: The Trust is a Delaware statutory trust holding a Net Profits Interest (NPI) entitling it to 80% of the net profits from oil and natural gas production from underlying properties in Texas, Louisiana, and New Mexico. The Trust is passive; it has no management control over operations. As of June 30, 2018, there were 33,000,000 units outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
|---|---|---|
| Income from Net Profits Interest | $4,583,033 | $7,106,280 |
| Distributable Income | $4,432,989 | $6,806,250 |
| Distributable Income Per Unit | $0.134333 | $0.206250 |
| General & Administrative Expenses | $(255,286) | $(611,517) |
| Cash and Cash Equivalents (Balance) | $59,120 | $59,120 |
| Trust Corpus (Total Assets) | $87,295,654 | $87,295,654 |
Production Volumes (Six Months Ended June 30, 2018): Oil: 466,775 Bbls; Natural Gas: 2,878,200 Mcf; Combined: 946,476 Boe.
Debt and Liquidity: The Trust has no debt. It holds a $1 million letter of credit provided by Enduro Resource Partners LLC for administrative expenses, which has not been drawn. Cash reserves are minimal ($59,120 as of June 30, 2018).
Material Changes vs. Prior Period
- Revenue Growth: Distributable income increased 36% for the three months ended June 30, 2018, compared to the same period in 2017 ($4.43M vs. $3.27M). For the six-month period, income increased 24% ($6.81M vs. $5.50M).
- Price and Volume Drivers:
- Oil: Realized oil prices increased 18% (Q3) and 10% (YTD) due to higher NYMEX prices. However, oil sales volumes decreased 13% in Q3 due to natural declines, though YTD volumes increased 22% due to the inclusion of two additional months of production in the 2018 calculation (see below).
- Natural Gas: Sales volumes increased significantly (34% in Q3, 51% YTD) driven by new development in the Elm Grove field (North Louisiana).
- Accounting Timing Adjustment: The 2018 results include revenues and expenses from November and December 2017. In those months, expenses exceeded revenues, resulting in no distributions. Under the modified cash basis, these amounts were carried forward and netted against 2018 profits, effectively making the 2018 six-month period an eight-month operational comparison.
- Expense Trends: Lease operating expenses increased due to workover activity in mature Permian Basin fields. Development expenses decreased in Q3 but increased YTD due to capital projects in North Louisiana.
Outlook, Risks, and Unusual Items
Enduro Bankruptcy and Asset Sale
On May 15, 2018, Enduro Resource Partners LLC (the sponsor) filed for Chapter 11 bankruptcy. On July 19, 2018, Enduro signed a Purchase and Sale Agreement with COERT Holdings 1 LLC ("COERT") to sell the underlying properties and Enduro's Trust Units for $35.75 million. The Court authorized the sale on July 23, 2018, with closing anticipated in late August 2018. COERT is expected to assume Enduro's obligations as the Trust sponsor. The Trust states this will not disrupt operations or cash flows.
Permian Basin Operator Adjustment
An operator in the Permian Basin had previously overpaid Enduro for natural gas production. A recoupment process was underway where revenues were withheld. As of June 30, 2018, $1.1 million had been withheld, leaving a minimal balance. Subsequent to the quarter end (July 2018), the operator repaid the remaining balance in full.
Outlook
Management anticipates 2018 capital expenditures net to the Trust to range from $3 million to $5 million. New horizontal wells in the Permian Basin (Wolfcamp B) were spud in July 2018, with first production expected in Q1 2019. The Trust remains exposed to commodity price fluctuations as it is prohibited from hedging.
Investor Verification Checklist
- Closing of Asset Sale: Verify the successful closing of the Enduro to COERT transaction and the assumption of sponsor obligations by COERT.
- Production Volumes: Monitor actual production volumes from the new Elm Grove field wells and the Permian Basin horizontal wells to ensure they meet the capital expenditure assumptions.
- Commodity Prices: Track NYMEX oil and natural gas prices, as the Trust has no hedging protection and distributions are directly correlated to spot prices.
- Amortization Rate: Review future reserve reports; downward revisions in proved reserves will increase the amortization rate charged directly to the Trust Corpus, reducing the asset base.
- Administrative Expenses: Confirm that the Trust's cash reserves remain sufficient to cover administrative fees without needing to draw on the letter of credit or borrow funds.