Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2023
Trustee: Argent Trust Company
Business Model: 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; Boaz Energy II, LLC operates the properties. The Trust distributes substantially all cash receipts to unitholders monthly.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net Profits Income | $2,366,677 | $2,787,336 |
| Total Revenue (Net Profits + Interest) | $2,380,404 | $2,787,373 |
| General & Administrative Expenses | $(177,118) | $(260,483) |
| Distributable Income | $2,203,286 | $2,526,890 |
| Distributable Income Per Unit | $0.181106 | $0.207704 |
| Cash and Short-Term Investments | $1,611,413 | $1,981,938 |
| Cash Reserves | $1,000,000 | $1,000,000 |
| Net Profits Interest (Asset Value) | $79,246,703 | $80,041,113 |
| Trust Corpus | $79,246,703 | $80,041,113 |
Note: The Trust has no debt. Liquidity is derived from cash flow and cash reserves capped at $1.0 million.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by approximately 15.1% ($420,659) compared to Q1 2022. This was driven by a 5.2% decrease in oil production volumes and a significant drop in realized natural gas prices.
- Production Volumes: Oil sales volumes decreased by 4,757 Bbls (to 85,917 Bbls) due to natural decline and decreased demand. Natural gas volumes increased slightly by 1.0% (to 104,286 Mcf) due to well reworking.
- Pricing: Average realized oil price increased to $76.79/Bbl (from $76.02/Bbl). Average realized natural gas price decreased to $4.94/Mcf (from $7.14/Mcf).
- Costs: Total costs increased to $5,191,487 from $4,435,808. Increases were seen in lease operating expenses (due to additional Permian ABO wells) and severance/ad valorem taxes (due to higher property valuation). Direct operating and development expenses decreased.
- Capital Reserve: Boaz Energy reduced the capital reserve held back for future expenses by $812,000 during the quarter, resulting in a lower ending reserve balance of $666,157 net to the Trust.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Boaz Energy's estimated 2023 capital budget for the Underlying Properties is $5.2 million. Approximately $1.3 million was expended as of March 31, 2023. Planned activities include non-operated drilling, waterflood conformance work, and two new operated wells.
- Subsequent Distribution: On April 18, 2023, a distribution of $0.030888 per unit was declared based on February 2023 production. This was paid on May 12, 2023.
- Litigation Resolution: The "2018 Litigation" (Marston v. Blackbeard Operating) was resolved in the Trust's favor. On May 12, 2023, the court entered a Final Judgment granting summary judgment to the defendants and awarding attorneys' fees.
- Risks: The Trust's income is highly sensitive to commodity price volatility, production declines, and the operational decisions of Boaz Energy. The Trust has no control over operating costs or development plans.
Investor Verification Checklist
- Production Trends: Verify the sustainability of the 5.2% decline in oil production volumes and the impact of natural decline on future distributions.
- Commodity Price Exposure: Assess the impact of the significant drop in natural gas prices ($7.14 to $4.94/Mcf) on future net profits, given the Trust's 80% interest in net profits.
- Capital Reserve Utilization: Monitor the $666,157 capital reserve balance held by Boaz Energy; reductions in this reserve increase current distributions but may indicate lower future capital spending.
- Boaz Energy Ownership: Note that Boaz Energy still owns approximately 42.7% of the Trust units (5,194,632 of 12,165,732), creating potential conflicts of interest regarding capital allocation.
- Legal Finality: Confirm that the May 2023 Final Judgment in the Marston litigation fully resolves all potential liabilities related to that specific case.