Business Context and Reporting Period
Company: Enduro Royalty Trust (Note: Request metadata listed "Permianville," but filing is for Enduro Royalty Trust).
Reporting Period: Quarterly period ended September 30, 2017.
Structure: A Delaware statutory trust holding an 80% net profits interest in oil and natural gas properties in Texas, Louisiana, and New Mexico. The Trust is passive; Enduro Resource Partners LLC (Enduro) operates the underlying properties.
Outstanding Units: 33,000,000 units as of October 25, 2017.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 |
|---|---|---|
| Income from Net Profits Interest | $1,549,611 | $7,473,700 |
| Distributable Income | $1,174,602 | $6,673,656 |
| Distributable Income Per Unit | $0.035594 | $0.202232 |
| Cash and Cash Equivalents | $447,261 | $447,261 (as of Sep 30) |
| Net Profits Interest (Asset Value) | $96,146,123 | $96,146,123 (as of Sep 30) |
| General & Administrative Expenses | $(138,691) | $(538,740) |
Liquidity: The Trust holds cash reserves for future liabilities. Enduro has provided a $1 million letter of credit to cover administrative expenses if cash on hand is insufficient. No borrowings have occurred to date.
Material Changes vs. Prior Period
- Revenue Drivers: For the nine months ended September 30, 2017, total gross profits increased 16% to $34.2 million compared to $29.5 million in the prior year. This was driven by a 26% increase in realized oil prices and a 35% increase in realized natural gas prices, partially offset by a 7% decline in oil volumes and a 16% decline in natural gas volumes due to natural production declines.
- Development Expenses: Development expenses surged 1,189% year-over-year for the nine-month period (from a net release of $296,000 in 2016 to $3.2 million in 2017). This increase is attributed to capital development projects in the Elm Grove field (North Louisiana) and the Permian Basin.
- Distributable Income: Distributable income for the nine months ended September 30, 2017, increased 26% to $6.7 million from $5.3 million in the prior year, despite higher development costs, due to significantly higher commodity prices.
- Trust Corpus: The Trust corpus decreased from $107.3 million at December 31, 2016, to $96.6 million at September 30, 2017, primarily due to amortization of the net profits interest ($11.0 million for the nine months) and distributions paid.
Guidance, Outlook, and Risks
- Subsequent Events (Special Distribution): Following the sale of certain Permian Basin properties (Divestiture Properties) in September 2017, a special cash distribution of $1.150005 per unit was paid on October 20, 2017. This represented $38.0 million in total proceeds allocable to the Trust.
- November 2017 Distribution: The Trust announced on October 20, 2017, that no distribution would be paid in November 2017. Increased capital development expenditures in North Louisiana caused direct operating and development expenses to exceed cash receipts for the period, resulting in a shortfall of $15,300.
- Outlook: Commodity prices remain a primary driver. While prices have improved from 2016 lows, production volumes continue to decline naturally. Development activity in 2017 is focused on East Texas/North Louisiana. Enduro anticipates 2017 capital expenditures attributable to the Trust to range between $4 million and $6.4 million.
- Risks:
- Market Risk: The Trust is unhedged and fully exposed to fluctuations in oil and natural gas prices.
- Enduro Solvency: Enduro's ability to fulfill obligations is subject to its debt covenants. Enduro's 2016 financial statements included a "going concern" emphasis of matter.
- Production Decline: Without significant capital investment, natural production declines will reduce distributable income.
Investor Verification Checklist
- Special Distribution Receipt: Verify receipt of the $1.150005 per unit special distribution paid in October 2017.
- November 2017 Shortfall: Confirm the impact of the $15,300 shortfall on future distributions and the timeline for recovery.
- Permian Divestiture Impact: Assess the long-term impact of selling the Divestiture Properties on future recurring cash flows versus the one-time special distribution.
- Enduro Financial Health: Monitor Enduro Resource Partners LLC's debt compliance and liquidity, as the Trust relies on Enduro for operational data and timely remittance.
- Production Volumes: Track monthly production volumes to gauge the rate of natural decline versus new development in North Louisiana.