Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2020
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 monthly cash receipts, less administrative expenses and reserves, to unitholders.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
|---|---|---|
| Net Profits Income | $376,992 | $2,131,247 |
| Total Revenue | $378,237 | $2,135,565 |
| General & Administrative Expenses | ($278,237) | ($540,501) |
| Cash Reserves Retained | ($100,000) | ($400,000) |
| Distributable Income | $0 | $1,195,064 |
| Distributable Income Per Unit | $0.000000 | $0.098232 |
| Cash and Short-Term Investments (Balance) | $1,000,000 (as of June 30, 2020) | |
| Total Assets | $89,393,841 (as of June 30, 2020) |
Debt and Liquidity: The Trust had no debt as of June 30, 2020. Cash reserves held by the Trustee for administrative expenses totaled $1,000,000, the maximum authorized amount. Boaz Energy reserved $192,721 net to the Trust for future taxes and development expenses.
Material Changes Versus Prior Period
- Revenue Decline: Net profits income for the three months ended June 30, 2020, dropped to $376,992 from $3,140,783 in the prior year period. For the six-month period, income fell to $2,131,247 from $5,463,992.
- Price and Volume Impact: The decline was driven by decreased oil and natural gas prices (average realized oil price dropped to $31.81/Bbl from $54.53/Bbl) and reduced production volumes due to the COVID-19 pandemic, oversupply, and the Russia-OPEC production dispute.
- Distribution Suspension: Distributable income for the quarter was $0, resulting in no cash distributions to unitholders for April, May, or June 2020. This contrasts with $0.217472 per unit distributed in the same quarter of 2019.
- Derivative Contracts: Unlike the prior year, there were no cash proceeds from derivative contracts in 2020 as all hedging contracts expired on December 31, 2019.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Boaz Energy increased its 2020 capital budget estimate to $2.5 million but plans no new operated wells for the remainder of 2020, focusing only on waterflood projects and workovers.
- Production Curtailment: Boaz Energy shut in a material amount of production in May 2020 due to price uncertainties and anticipates reacting monthly to the need to shut in wells to avoid negative pricing.
- Future Distributions: The Trustee warned that the unfavorable price environment may continue, potentially resulting in additional months in 2020 with no distributions. A subsequent event noted no distribution for July 2020 based on May production.
- Litigation: Pending litigation (Marston v. Blackbeard Operating) seeks surface use damages. Boaz Energy does not anticipate a material effect on the Trust, but a summary judgment hearing is scheduled for August 27, 2020.
- Risk Factors: Significant risks include continued volatility in commodity prices, the impact of the COVID-19 pandemic on economic activity, and the lack of hedging protection for current production.
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 contracts.
- Capital Reserves: Track the balance of funds reserved by Boaz Energy (currently $192,721 net to Trust) and the Trustee's cash reserve ($1.0 million), as these directly reduce distributable cash.
- Litigation Status: Review the outcome of the summary judgment hearing scheduled for August 27, 2020, regarding the Marston litigation.
- Boaz Energy Financial Health: Assess the financial stability of Boaz Energy, as the Trust's income is entirely dependent on the operator's ability to generate net profits from the Underlying Properties.