Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2023
Trustee: Argent Trust Company
Outstanding Units: 12,165,732 (as of August 14, 2023)
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, which are managed by Boaz Energy. Income is derived from net profits of production, and the Trust distributes substantially all cash receipts monthly.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 |
Six Months Ended June 30, 2023 |
|---|---|---|
| Net Profits Income | $1,573,745 | $3,940,422 |
| Total Revenue (incl. interest) | $1,588,518 | $3,968,922 |
| Distributable Income | $1,237,091 | $3,440,377 |
| Distributable Income Per Unit | $0.101686 | $0.282792 |
| General & Administrative Expenses | $(351,427) | $(528,545) |
| Cash and Short-term Investments | $1,496,158 (as of June 30, 2023) | |
| Cash Reserves | $1,000,000 (as of June 30, 2023) | |
| Net Profits Interest Asset | $78,689,996 (as of June 30, 2023) |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased significantly compared to the prior year. For the three months ended June 30, 2023, income was $1.57 million versus $3.50 million in 2022. For the six-month period, income was $3.94 million versus $6.28 million in 2022.
- Drivers of Decline: The decrease is attributed to lower sales volumes and lower realized commodity prices.
- Oil Volumes: Decreased 10.7% (QoQ) and 7.9% (YoY six-month) due to natural decline and decreased demand.
- Gas Volumes: Decreased 11.9% (QoQ) and 5.5% (YoY six-month) due to natural decline and decreased demand.
- Prices: Average realized oil price dropped to $73.80/Bbl (3-month) from $100.34/Bbl in 2022. Average realized gas price dropped to $3.69/Mcf (3-month) from $7.42/Mcf in 2022.
- Expense Trends: General and administrative expenses increased slightly for the quarter ($57k increase) due to timing but decreased for the six-month period ($26k decrease). Direct operating and development expenses decreased due to fewer capital projects.
- Interest Income: Increased due to higher prevailing interest rates ($14,773 for the quarter vs. $960 in 2022).
Outlook, Risks, and Management Commentary
- Capital Budget: Boaz Energy estimates a 2023 capital budget of $5.2 million for the Underlying Properties. Approximately $2.8 million had been expended as of June 30, 2023. Planned activities include non-operated drilling, waterflood conformance work, and one new operated well in each of Crane and Coke counties.
- Capital Reserves: Boaz Energy is entitled to reserve up to $3.0 million for future taxes and expenses. As of June 30, 2023, the balance held back was $446,157 net to the Trust.
- Litigation: The "2018 Litigation" (Marston v. Blackbeard Operating) resulted in a final judgment in favor of the defendants on May 12, 2023. The plaintiff filed a notice of appeal on June 12, 2023. Unfavorable resolution of contingencies could reduce cash receipts.
- Risks: The Trust's revenue is highly dependent on volatile oil and natural gas prices, production volumes, and the ability of Boaz Energy to manage operations and capital expenditures. The Trust has no control over these factors.
- Subsequent Event: On July 21, 2023, the Trust declared a distribution of $0.039689 per unit based on May 2023 production.
Investor Verification Checklist
- Production Volumes: Verify the reported decline in oil and gas sales volumes against Boaz Energy's operational reports to confirm natural decline rates.
- Price Realization: Confirm the realized prices per barrel and Mcf against NYMEX benchmarks to understand the impact of price differentials.
- Capital Expenditure Execution: Monitor Boaz Energy's progress against the $5.2 million 2023 capital budget, specifically the timing of the new operated wells in Crane and Coke counties.
- Litigation Status: Track the appeal of the Marston v. Blackbeard Operating judgment for potential impacts on future cash flows or legal costs.
- Capital Reserve Utilization: Review future filings to see if the $446,157 capital reserve held by Boaz Energy is utilized or released to the Trust.