Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2019
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 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
|---|---|---|
| Net Profits Income | $3,140,783 | $5,463,992 |
| Total Revenue | $3,142,282 | $5,468,648 |
| Distributable Income | $2,645,711 | $4,716,513 |
| Distributable Income Per Unit | $0.217472 | $0.387688 |
| Cash and Short-Term Investments | $1,020,800 | $1,020,800 (as of June 30) |
| Cash Reserves | $140,000 | $140,000 |
| Net Profits Interest (Asset Value) | $90,613,238 | $90,613,238 |
| Trust Corpus | $90,613,238 | $90,613,238 |
Production Volumes (Underlying Properties):
- Three Months Ended June 30, 2019: 133,676 Bbl Oil; 148,315 Mcf Gas.
- Six Months Ended June 30, 2019: 277,539 Bbl Oil; 308,147 Mcf Gas.
Realized Prices (Six Months Ended June 30, 2019):
- Oil: $49.02 per Bbl (NYMEX Avg: $55.62)
- Natural Gas: $2.91 per Mcf (NYMEX Avg: $3.20)
Material Changes vs. Prior Period
Revenue and Income Decline: Net profits income decreased significantly compared to the prior year periods ($3.14M vs. $7.93M for Q2; $5.46M vs. $7.93M for YTD).
Reasons for Variance:
- Timing of Conveyance: The 2018 periods included four months of production data (Jan-April) due to the Trust's IPO in May 2018, whereas 2019 periods reflect standard three-month or six-month production cycles.
- Commodity Prices: Average realized prices for both oil and natural gas decreased in 2019 compared to 2018.
- Production Volumes: Oil sales volumes decreased in Q2 2019 due to a strategic decision to slow waterflood development; however, YTD volumes increased due to the inclusion of six months of production.
Expenses: General and administrative expenses increased ($356k Q2 2019 vs. $264k Q2 2018) primarily because the 2018 period covered only two months of operations post-IPO, while 2019 covered a full quarter.
Outlook, Risks, and Unusual Items
Capital Expenditures: Boaz Energy increased its 2019 capital budget estimate to $5.0 million (from $4.0 million) to fund a new operated well in the Permian Clearfork area completed in August 2019. Boaz Energy held back $325,000 in May 2019 and $50,000 in July 2019 for future development expenses.
Derivative Contracts: Boaz Energy maintains put option contracts covering 76% of expected 2019 oil production with a strike price of $50 per barrel. These contracts expired after December 31, 2019. Gross cash proceeds from derivative settlements totaled $688,562 for the six months ended June 30, 2019.
Unusual Items and Contingencies:
- Severance Tax Dispute: A previously reported one-time severance tax refund of $0.29 million was denied by the Texas Comptroller. Plains Pipeline offset this amount against June 2019 payments. Boaz Energy is currently bearing this cost pending an administrative hearing, creating uncertainty regarding future tax reductions for secondary recovery efforts.
- Litigation: A lawsuit filed in October 2018 (Marston v. Blackbeard Operating) names the Trust as a defendant regarding surface use damages. Boaz Energy does not anticipate a material impact on the Trust.
Liquidity: The Trust holds a $1.0 million Letter of Credit from Boaz Energy to cover administrative expenses if cash on hand is insufficient. Cash reserves currently stand at $140,000.
Investor Verification Checklist
- Production Timing: Verify that comparisons to 2018 are adjusted for the fact that 2018 Q2 included four months of production data due to the May 2018 IPO.
- Severance Tax Outcome: Monitor the administrative hearing regarding the denied $0.29 million severance tax refund, as the outcome affects future net profits calculations.
- Hedging Expiration: Note that all derivative protection (put options) expires after December 31, 2019, exposing the Trust to full commodity price volatility in 2020.
- Capital Reserve Usage: Track the utilization of the $325,000+ capital reserve held back by Boaz Energy for development expenses.
- Boaz Energy Ownership: Confirm that Boaz Energy remains the operator and holds a significant portion of Trust units (approx. 48% as of June 30, 2019), aligning their interests with unitholders.