Business Context and Reporting Period
Company: Permianville Royalty Trust (PVL)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2019
Outstanding Units: 33,000,000
The Trust is a Delaware statutory trust holding a net profits interest representing the right to receive 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 or costs. COERT Holdings 1 LLC (the Sponsor) owns approximately 26% of the outstanding units.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 |
|---|---|---|
| Income from Net Profits Interest | $2,955,216 | $7,526,927 |
| Distributable Income | $2,759,856 | $7,110,246 |
| Distributable Income Per Unit | $0.083632 | $0.215462 |
| Total Assets | $79,463,701 | (Balance Sheet Item) |
| Cash and Cash Equivalents | $839,818 | (Balance Sheet Item) |
| Net Profits Interest (Net) | $78,623,883 | (Balance Sheet Item) |
| Advances to Trust (Liability) | $159,818 | (Balance Sheet Item) |
Material Changes vs. Prior Period
Three Months Ended September 30, 2019 vs. 2018:
- Distributable Income: Decreased 42% to $2.76 million from $4.79 million.
- Net Profits Interest Income: Decreased 40% to $2.96 million from $4.94 million.
- Production Volumes: Oil volumes increased 1% (175,274 Bbls), while natural gas volumes decreased 24% (907,877 Mcf).
- Realized Prices: Oil prices realized decreased 10% to $55.95/Bbl; natural gas prices realized decreased 11% to $2.41/Mcf.
- Costs: Development expenses increased 216% to $1.18 million due to increased capital projects in the Permian Basin. Lease operating expenses remained flat at $5.55 million.
Nine Months Ended September 30, 2019 vs. 2018:
- Distributable Income: Decreased 39% to $7.11 million from $11.60 million.
- Net Profits Interest Income: Decreased 36% to $7.53 million from $12.05 million.
- Production Volumes: Oil volumes decreased 20% and natural gas volumes decreased 25%. The filing notes that the 2018 period included eleven months of results due to accounting adjustments for prior period shortfalls, whereas 2019 included nine months.
- Realized Prices: Oil prices realized decreased 7% to $50.59/Bbl; natural gas prices realized decreased 1% to $2.77/Mcf.
- Costs: Development expenses increased 63% to $4.72 million. Lease operating expenses decreased 30% to $15.56 million, largely due to the difference in the number of months reported.
Outlook, Risks, and Unusual Items
Outlook and Guidance:
- The outlook for development activity remains uncertain due to commodity price volatility.
- The Sponsor anticipated 2019 capital expenditures of $3 million to $6 million net to the Trust. To date, $4.7 million in development expenses have been incurred for the nine months ended September 30, 2019.
- Capital expenditure activity may pull back for the remainder of the year if oil prices decline further.
Unusual Items and Contingencies:
- Holdback Amount Release: A $750,000 holdback amount from a 2017 divestiture, plus interest (totaling approx. $752,000), was released and included in the distribution paid in October 2019.
- Advances: As of September 30, 2019, the Sponsor advanced $159,818 to the Trust to cover administrative expenses. This is recorded as a liability.
- Accounting Basis: The Trust uses a modified cash basis of accounting. Amortization of the net profits interest is charged directly to the Trust corpus and does not affect distributable income.
Risks:
- Dependence on oil and natural gas prices and production volumes.
- Uncertainty regarding future capital expenditures by the Sponsor.
- Passive nature of the Trust limits control over operating costs and development timing.
Investor Verification Checklist
- Production Volumes: Verify the 24% decline in natural gas volumes and the impact of the 11-month vs. 9-month reporting period comparison on year-over-year metrics.
- Development Expenses: Confirm the $4.7 million in development expenses incurred YTD and the Sponsor's ability to fund future capital projects given price volatility.
- Holdback Distribution: Note that the October 2019 distribution included a one-time release of the $752,000 holdback amount, which may distort cash flow comparisons for that specific month.
- Advances: Monitor the $159,818 outstanding advance from the Sponsor and ensure it is repaid from future proceeds.
- Price Differentials: Review the widening differential between NYMEX prices and realized prices (Oil differential increased to $5.02/Bbl in Q3 2019).