Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Trustee: Simmons Bank
Business Overview: 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 receives 80% of net profits from production sold by Boaz Energy and distributes cash to unitholders. It has no control over operations or costs.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 |
|---|---|---|
| Net Profits Income | $326,946 | $2,458,193 |
| Total Revenue | $327,073 | $2,462,639 |
| Distributable Income | $121,657 | $1,316,722 |
| Distributable Income Per Unit | $0.010000 | $0.108232 |
| Cash and Short-Term Investments | $1,121,657 | (Balance Sheet Item) |
| Cash Reserves | $1,000,000 | (Balance Sheet Item) |
| Net Profits Interest (Asset) | $88,210,545 | (Balance Sheet Item) |
Production Volumes (Three Months Ended Sep 30, 2020):
- Oil: 94,237 Bbls
- Natural Gas: 131,292 Mcf
- Average Realized Oil Price: $32.85 per Bbl
- Average Realized Gas Price: $1.48 per Mcf
Material Changes vs. Prior Period
- Revenue Decline: Net profits income dropped 89% for the three months ended September 30, 2020 ($326,946) compared to the prior year ($2,950,430). For the nine-month period, income fell 71% ($2,458,193 vs. $8,414,422).
- Price and Volume Impact: The decline is attributed to decreased oil production volumes (down 32% QoQ) and significantly lower realized prices due to the COVID-19 pandemic, global oversupply, and OPEC production disputes.
- Distribution Reduction: Distributable income per unit fell from $0.210124 in Q3 2019 to $0.010000 in Q3 2020. Distributions were $0.00 for July and August 2020.
- Cost Reductions: Direct operating, lease operating, and development expenses decreased due to operational slowdowns and reduced staffing.
- Derivative Contracts: All hedging contracts expired on December 31, 2019. There were no derivative settlements in 2020, whereas the prior year included $688,562 in settlement proceeds.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Boaz Energy increased its 2020 capital budget estimate to $4.2 million (from $2.5 million), primarily for outside operator projects. No new Boaz Energy-operated wells are planned for the remainder of 2020, only waterflood projects and workovers.
- Production Strategy: Boaz Energy is reacting monthly to shut in wells to avoid negative oil prices and has reduced staffing. It intends to continue building reserves for capital costs, which reduces distributions.
- Litigation: The Trust is a defendant in the "2018 Litigation" (Marston v. Blackbeard Operating). A motion for summary judgment was pending as of September 30, 2020. A mediation in November 2020 did not result in a settlement. Boaz Energy does not anticipate a material impact.
- Reserves: Boaz Energy reserved $298,156 net to the Trust as of September 30, 2020, for future taxes and development expenses. The Trustee holds $1.0 million in cash reserves for administrative expenses.
- Risk Factors: Significant risks include continued volatility in oil and gas prices, the duration of the COVID-19 economic impact, and the potential for further production shut-ins by operators.
Investor Verification Checklist
- Production Volumes: Verify the extent of well shut-ins by Boaz Energy and third-party operators in the Permian Basin.
- Commodity Prices: Monitor NYMEX crude oil and natural gas prices, as the Trust has no active hedging protection.
- Capital Reserves: Track the balance of funds reserved by Boaz Energy for taxes and development, as these directly reduce distributable cash.
- Litigation Status: Monitor the outcome of the Marston v. Blackbeard Operating litigation and any potential surface use damages.
- Administrative Expenses: Confirm the Trustee's utilization of the $1.0 million cash reserve and the impact of fixed administrative fees on low-revenue quarters.