Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2019
Trustee: Simmons Bank
Business Overview: The Trust holds an 80% Net Profits Interest in oil and natural gas properties (Underlying Properties) located in the Permian Basin, Texas, conveyed by Boaz Energy. The Trust is a passive entity with no control over operations or costs. It distributes substantially all cash receipts to unitholders monthly.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 |
|---|---|---|
| Net Profits Income | $2,950,430 | $8,414,422 |
| Total Revenue | $2,953,437 | $8,422,085 |
| Distributable Income | $2,556,326 | $7,272,839 |
| Distributable Income Per Unit | $0.210124 | $0.597812 |
| Cash and Short-Term Investments | $1,151,786 | (Balance Sheet Item) |
| Cash Reserves | $300,000 | (Balance Sheet Item) |
| Net Profits Interest (Asset) | $89,679,296 | (Balance Sheet Item) |
| Trust Corpus | $89,679,296 | (Balance Sheet Item) |
Liquidity: The Trust maintains a $1.0 million Letter of Credit from Boaz Energy to cover administrative expenses if cash on hand is insufficient. As of September 30, 2019, cash reserves totaled $300,000.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 34% for the three months ended September 30, 2019 ($2.95M vs. $4.50M in 2018) and 32% for the nine-month period ($8.41M vs. $12.43M in 2018).
- Price Impact: The decline is primarily attributed to lower realized oil and natural gas prices. Average realized oil prices dropped to $53.62/Bbl (3-month) and $50.55/Bbl (9-month) compared to $59.99/Bbl and $53.02/Bbl in the prior year periods, respectively.
- Cost Increases: Development expenses increased significantly due to a new well drilled in the third quarter of 2019 and increased waterflood optimization activities. Direct operating expenses also rose due to conformance work and marketing costs for natural gas liquids.
- Production Volumes: Oil sales volumes decreased slightly in the three-month period due to a strategic slowdown in waterflood development but increased in the nine-month period due to a longer reporting window (9 months vs. 7 months in 2018).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capital Expenditures
Boaz Energy increased its 2019 capital budget estimate from $5.0 million to $7.0 million to fund a new operated well in the Permian Clearfork area and increased drilling in Crane County. Boaz Energy expects to complete an additional Permian Clearfork well by the end of November 2019.
Hedging
Boaz Energy maintains put option contracts covering 76% of expected oil production for 2019 with a strike price of $50 per barrel. No production will be hedged after December 31, 2019. No cash proceeds were received from derivative settlements in the current period.
Risks and Contingencies
- Severance Tax Dispute: A previously reported $0.29 million severance tax refund was denied by the Texas Comptroller. Plains Pipeline offset this amount against June 2019 payments. Boaz Energy is currently bearing this cost pending an administrative hearing expected within 60-90 days. There is uncertainty regarding the continuation of a 50% severance tax reduction for secondary recovery efforts.
- Litigation: The Trust is named as a defendant in Marston v. Blackbeard Operating, LLC, alleging lease violations and seeking surface use damages. Boaz Energy does not anticipate a material impact on the Trust.
- Commodity Price Volatility: Distributions are highly sensitive to oil and natural gas prices, which remain volatile.
Investor Verification Checklist
- Severance Tax Outcome: Verify the result of the administrative hearing regarding the denied $0.29 million tax refund and the status of the 50% tax reduction for secondary recovery.
- Capital Expenditure Timing: Monitor the timing of capital cost deductions for the new Terry County well and the recoupment of the $320,000 operator advance, which will impact near-term distributable income.
- Production Volumes vs. Prices: Track realized oil and gas prices against NYMEX benchmarks to assess the impact of price differentials and NGL oversupply in the Permian Basin.
- Litigation Status: Review updates on the Marston lawsuit to ensure no unexpected liabilities arise.
- Hedging Expiration: Note that price protection via put options expires December 31, 2019, increasing exposure to price declines in 2020.