Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2022
Trustee: Simmons Bank
Business Model: 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 substantially all cash receipts to unitholders monthly.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 |
|---|---|---|
| Net Profits Income | $3,530,590 | $9,815,297 |
| Total Revenue | $3,535,781 | $9,821,485 |
| Distributable Income | $3,355,009 | $9,086,179 |
| Distributable Income Per Unit | $0.275774 | $0.746867 |
| General & Administrative Expenses | $(180,772) | $(735,306) |
| Cash and Short-Term Investments | $2,132,267 | (Balance Sheet Item) |
| Cash Reserves | $1,000,000 | (Balance Sheet Item) |
| Net Profits Interest (Asset Value) | $81,042,172 | (Balance Sheet Item) |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 55.3% for the three months ended September 30, 2022, compared to the prior year ($3.53M vs. $2.27M). For the nine-month period, income increased 71.0% ($9.82M vs. $5.74M).
- Price Drivers: The increase in income was primarily driven by higher realized sales prices for oil and natural gas. Average oil prices rose to $107.75/Bbl (3-month) and $94.74/Bbl (9-month) compared to $67.82/Bbl and $56.62/Bbl in the prior year periods, respectively.
- Volume Decline: Despite price increases, production volumes declined. Oil sales volumes decreased 6.6% (3-month) and 9.5% (9-month). Natural gas sales volumes decreased 12.1% (3-month) and 20.6% (9-month), attributed to natural decline and decreased demand.
- Expense Trends: Direct operating and lease operating expenses increased due to well repairs and material costs. However, development expenses decreased for the quarter due to a refund of previously overcharged capital costs.
Outlook, Risks, and Contingencies
- Capital Expenditures: Boaz Energy's estimated 2022 capital budget for the Underlying Properties is $7.0 million. Approximately $4.4 million had been expended as of September 30, 2022. Future spending depends on commodity prices and regulatory approvals.
- Capital Reserves: Boaz Energy is entitled to reserve up to $3.0 million from net profits for future taxes and expenses. As of September 30, 2022, the balance reserved was $1,918,156 net to the Trust.
- Litigation: The "2018 Litigation" (Marston v. Blackbeard Operating) was effectively disposed of via summary judgment in May 2022. The only remaining issue is the award of attorneys' fees, for which no decision had been rendered as of November 11, 2022.
- Risks: The Trust's revenue is highly sensitive to commodity price volatility. The Trustee relies entirely on Boaz Energy for operational data and has no control over production levels or costs.
- Subsequent Event: On October 21, 2022, the Trust declared a distribution of $0.093361 per unit based on August 2022 production.
Investor Verification Checklist
- Production Volumes: Verify the continued decline in oil and gas sales volumes against the backdrop of rising commodity prices to assess future cash flow sustainability.
- Capital Reserve Utilization: Monitor the $1.9 million capital reserve held by Boaz Energy and the remaining $2.6 million capacity to ensure it does not significantly impact future distributions.
- Development Activity: Confirm Boaz Energy's ability to execute the remaining $2.6 million of its 2022 capital budget to offset natural production decline.
- Litigation Resolution: Track the final ruling on attorneys' fees in the Marston litigation to determine if any unexpected liabilities will arise.
- Price Realization: Monitor the realized price differential between benchmark prices (WTI/Henry Hub) and wellhead prices received by the Trust.