Business Context and Reporting Period
Company: Permianville Royalty Trust (formerly Enduro Royalty Trust)
Reporting Period: Fiscal year ended December 31, 2018
Structure: 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.
Key Event: On August 31, 2018, the original sponsor, Enduro Resource Partners LLC, sold the Underlying Properties and its Trust Units to COERT Holdings 1 LLC ("COERT" or the "Sponsor"). COERT assumed all obligations under the Trust Agreement.
Key Financial Metrics
| Metric | 2018 | 2017 | 2016 |
|---|---|---|---|
| Distributable Income | $14,354,736 | $44,744,073 | $8,486,280 |
| Distributable Income Per Unit | $0.4350 | $1.3559 | $0.2572 |
| Income from Net Profits Interest | $15,186,781 | $7,643,960 | $9,216,320 |
| Trust Corpus (End of Period) | $84,084,189 | $94,099,933 | $107,324,542 |
| Cash and Cash Equivalents | $827,169 | $366,773 | N/A |
| Proved Reserves (Trust NPI) | 6,901 MBoe | 4,269 MBoe | 3,464 MBoe |
| PV-10 (Trust NPI) | $111,009,000 | $66,941,000 | $43,860,000 |
Note: 2017 Distributable Income includes a special distribution of $37,950,165 from the sale of certain Permian Basin properties. 2018 results include 14 months of production data due to negative net profits in Nov/Dec 2017.
Material Changes vs. Prior Period
- Income Volatility: Distributable income decreased significantly from 2017 to 2018 ($44.7M to $14.4M). This is primarily due to the one-time special distribution in 2017 from property divestitures. Excluding the special distribution, core income from the Net Profits Interest increased from $7.6M in 2017 to $15.2M in 2018.
- Production and Prices: Oil sales volumes increased 29% and natural gas volumes increased 57% in 2018 compared to 2017 (adjusted for the 14-month vs. 10-month comparison). Average realized oil prices increased 19% to $55.04/Bbl, and natural gas prices increased 3% to $2.84/Mcf.
- Reserve Growth: Proved reserves attributable to the Trust increased by 62% (from 4,269 MBoe to 6,901 MBoe), driven by extensions and discoveries in the Wolfcamp shale (Permian Basin) and Haynesville shale (Louisiana), as well as higher pricing assumptions.
- Costs: Direct operating expenses increased to $28.1M in 2018 from $19.6M in 2017, reflecting higher production volumes. Development expenses decreased slightly to $3.6M in 2018 from $3.8M in 2017.
Guidance, Outlook, and Risks
- Capital Expenditure Outlook: The Sponsor anticipates 2019 capital expenditures attributable to the Underlying Properties to range from $5 million to $7 million ($4 million to $6 million net to the Trust's 80% interest).
- Liquidity: The Trust holds cash reserves of $827,169. The Sponsor has provided a $1.2 million letter of credit to cover administrative expenses if cash on hand is insufficient. No distributions are made if the Trust borrows funds until the debt is repaid.
- Key Risks:
- Commodity Price Sensitivity: The Trust is unhedged. Lower oil and gas prices directly reduce distributions and reserve values.
- Depleting Assets: The Trust cannot acquire new properties. Distributions will decline over time as reserves deplete.
- Third-Party Operators: Substantially all wells are operated by third parties. The Trust has no control over operational decisions, development timing, or costs.
- Environmental and Regulatory: Operations are subject to stringent environmental laws (e.g., methane emissions, hydraulic fracturing regulations) which could increase costs.
- Bankruptcy Risk: In the event of the Sponsor's bankruptcy, the Net Profits Interest in Louisiana and New Mexico properties could be treated as an asset of the bankruptcy estate, potentially leaving the Trust as an unsecured creditor.
Investor Verification Checklist
- Reserve Estimates: Verify the independent reserve report by Cawley, Gillespie & Associates, Inc., specifically the assumptions regarding future production rates and the 12-month average commodity prices used ($65.56/Bbl oil, $3.10/Mcf gas).
- Operator Performance: Monitor the transition of reporting processes from Enduro to COERT and the performance of third-party operators, as delays can impact cash flow timing.
- Divestiture Recoupment: Track the status of the $1.1 million recoupment from a Permian Basin operator regarding overpaid production, which continues to withhold revenues from distributions.
- Development Activity: Confirm actual capital expenditures in 2019 against the Sponsor's guidance of $5M-$7M to ensure reserves are being maintained.
- Commodity Prices: Monitor NYMEX oil and gas prices, as the Trust's revenue is directly correlated with these benchmarks without hedging.