Business Context and Reporting Period
Company: PermRock Royalty Trust (a Delaware statutory trust)
Reporting Period: Quarter ended March 31, 2018
Business Overview: The Trust was formed on November 22, 2017, to hold a Net Profits Interest entitling it to 80% of the net profits from oil and natural gas production from specific properties in the Permian Basin, Texas (the "Underlying Properties"). The Trust is a passive entity; it has no control over operations, which are managed by Boaz Energy II, LLC ("Boaz Energy").
Operational Status: Although the Trust was formed in late 2017, the conveyance of the Net Profits Interest from Boaz Energy to the Trust did not occur until May 4, 2018, with an effective date of January 1, 2018. Consequently, the Trust held no assets and recognized no income during the reporting period.
Key Financial Metrics
Revenue and Profit: The filing text does not provide revenue or profit figures for the quarter ended March 31, 2018, as the Trust received no proceeds from Boaz Energy during this period. No income was recognized.
Cash Flow and Distributions: No cash distributions were made to unitholders during the quarter. The Trust's first distribution was declared on May 4, 2018, covering production from January and February 2018.
Assets and Liabilities: As of March 31, 2018, the Trust reported $10 in receivables from Boaz Energy and $10 in Trust Corpus. There were no significant liabilities reported.
Debt and Liquidity: The Trust had no debt as of the reporting date. Liquidity is derived solely from the Net Profits Interest. The Trustee is authorized to retain up to $1.0 million in cash reserves for administrative expenses, though no cash was retained during the quarter.
Capital Structure: As of June 15, 2018, there were 12,165,732 Trust units outstanding. Boaz Energy owned 5,915,732 units following the May 2018 IPO.
Material Changes and Subsequent Events
Initial Public Offering (IPO): In May 2018 (subsequent to the reporting period), the Trust completed an IPO of 6,250,000 units at $17.00 per unit. Net proceeds of approximately $99.6 million were received by Boaz Energy, not the Trust.
First Distributions:
- May 4, 2018 Declaration: $0.350906 per unit based on Jan/Feb 2018 production. Paid May 30, 2018.
- May 18, 2018 Declaration: $0.165942 per unit based on March 2018 production. Paid June 14, 2018.
Production Data (Post-Period):
- January 2018: 61,542 Bbls Oil ($61.57/Bbl); 52,374 Mcf Gas ($4.28/Mcf).
- February 2018: 50,237 Bbls Oil ($60.16/Bbl); 55,690 Mcf Gas ($4.04/Mcf).
- March 2018: 54,962 Bbls Oil ($59.64/Bbl); 60,416 Mcf Gas ($3.78/Mcf).
Outlook, Risks, and Management Commentary
Outlook and Hedging: Boaz Energy has entered into derivative put option contracts covering approximately 100% of expected oil production for the remainder of 2018 (strike price $60/Bbl) and 76% for 2019 (strike price $50/Bbl). No hedging is in place after December 31, 2019.
Key Risks:
- Commodity Price Volatility: Distributions are highly sensitive to oil and natural gas prices.
- Depleting Assets: The Underlying Properties are depleting assets; production is projected to increase through 2022 and decline thereafter. The Trust cannot acquire new properties to replace them.
- Passive Nature: Unitholders have no control over operations, development decisions, or the operator (Boaz Energy).
- Internal Controls: Boaz Energy identified a material weakness in its internal control over financial reporting, which could impact the accuracy of data provided to the Trust.
- Environmental and Regulatory: Operations are subject to stringent environmental laws, including potential methane emission regulations and climate change legislation.
Unusual Items: The Trust operates on a modified cash basis of accounting, which differs from GAAP. Income is recorded only when distributions are received.
Investor Verification Checklist
- Conveyance Timing: Verify that the Net Profits Interest was not active during the Q1 2018 reporting period, explaining the zero revenue.
- Boaz Energy Financial Health: Assess Boaz Energy's ability to fund development expenses, as the Trust bears 80% of these costs indirectly.
- Hedge Coverage: Confirm the extent of hedging protection post-2019, as the Trust will be fully exposed to spot price volatility after December 31, 2019.
- Reserve Estimates: Review the independent reserve report to understand the projected production decline rates and the $25.6 million in anticipated capital expenditures through 2022.
- Internal Control Weakness: Monitor Boaz Energy's remediation of its material weakness in internal controls, as the Trust relies on Boaz Energy for financial data.