Business Context and Reporting Period
Company: Permianville Royalty Trust (formerly Enduro Royalty Trust)
Filing Type: Form 10-Q
Reporting Period: Quarter and nine months ended September 30, 2018
Outstanding Units: 33,000,000
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 a passive entity with no management control over operations. In August 2018, COERT Holdings 1 LLC (the "Sponsor") acquired the underlying properties and Enduro's units, assuming all obligations under the Trust Agreement.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 |
|---|---|---|
| Distributable Income | $4,789,850 | $11,596,101 |
| Distributable Income Per Unit | $0.145147 | $0.351397 |
| Income from Net Profits Interest | $4,939,863 | $12,046,143 |
| Income from Sale of NPI (Undeveloped Acreage) | $751,732 | $751,732 |
| General & Administrative Expenses | $(173,015) | $(784,532) |
| Cash Reserves Withheld | $(730,500) | $(422,847) |
| Total Assets | $85,472,047 | $85,472,047 |
| Cash and Cash Equivalents | $789,620 | $789,620 |
| Net Profits Interest (Net) | $84,682,427 | $84,682,427 |
Production Volumes (Nine Months 2018): Oil: 640,436 Bbls; Natural Gas: 4,068,842 Mcf; Combined: 1,318,577 Boe.
Average Realized Prices (Nine Months 2018): Oil: $54.35/Bbl; Natural Gas: $2.80/Mcf.
Material Changes vs. Prior Period
- Revenue Growth: Distributable income for the nine months ended September 30, 2018, increased 74% to $11.6 million compared to $6.7 million in the prior year period. Income from the Net Profits Interest increased 61%.
- Price and Volume Drivers: Oil sales increased 32% and natural gas sales increased 44% year-over-year. This was driven by a 16% increase in realized oil prices and a 42% increase in natural gas volumes.
- Expense Variance: Development expenses decreased 10% to $2.9 million due to reduced capital projects. However, lease operating expenses increased 26% and production taxes increased 55%, largely due to the inclusion of two additional months of data in the 2018 period (see below).
- Accounting Basis 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 Trust's modified cash basis, these amounts were carried forward and deducted from 2018 net profits, effectively making the 2018 period an 11-month comparison against the 2017 nine-month period.
- One-Time Items: The Trust recorded $751,732 in income from the sale of the net profits interest on undeveloped acreage in the current period, with no comparable amount in the prior year.
Outlook, Risks, and Contingencies
- Capital Expenditures: The Sponsor anticipates 2018 capital expenditures attributable to the Underlying Properties to range from $4 million to $6 million ($3 million to $5 million net to the Trust). Three new horizontal wells in the Permian Basin were spud in July 2018 with first production expected in Q1 2019.
- Holdback Amount: A $750,000 holdback from a September 2017 property sale was released to the Trustee in September 2018. The Trustee intends to retain this amount as a reserve until the indemnification term ends in October 2019.
- Operator Recoupment: An operator is withholding revenues to recoup a $1.1 million overpayment from 2015. As of September 30, 2018, the full $1.1 million has been withheld. This reduces current cash flow until the recoupment is complete.
- Liquidity: The Trust holds $789,620 in cash. COERT has provided a $1 million letter of credit to cover administrative expenses if cash is insufficient. No distributions will be made if the Trust borrows funds until the debt is repaid.
- Risks: The Trust is exposed to commodity price fluctuations and cannot hedge. It is also subject to production declines and the uncertainty of reserve estimates. The Trust will dissolve if annual cash proceeds fall below $2 million for two consecutive years.
Investor Verification Checklist
- Production Volumes: Verify the 42% increase in natural gas volumes and the 14% increase in oil volumes against independent reserve reports.
- Price Realization: Confirm the realized oil price of $54.35/Bbl and the differential to NYMEX benchmarks.
- Recoupment Status: Monitor the status of the $1.1 million operator recoupment to determine when full revenue flow from those specific properties will resume.
- Holdback Release: Confirm the $750,000 holdback remains reserved and is not distributed until the indemnification period expires in October 2019.
- Capital Spend: Track actual capital expenditures against the Sponsor's guidance of $4M-$6M to assess impact on future net profits.