Business Context and Reporting Period
Company: PermRock Royalty Trust (PRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2023
Trustee: Argent Trust Company
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 monthly cash receipts to unitholders after administrative expenses and reserves.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 |
|---|---|---|
| Net Profits Income | $1,691,590 | $5,632,011 |
| Total Revenue (Net Profits + Interest) | $1,706,629 | $5,675,550 |
| Distributable Income | $1,466,168 | $4,906,523 |
| Distributable Income Per Unit | $0.120516 | $0.403307 |
| General & Administrative Expenses | $(240,461) | $(769,027) |
| Cash and Short-Term Investments (Sep 30, 2023) | $1,494,250 | |
| Cash Reserves (Sep 30, 2023) | $1,000,000 | |
| Net Profits Interest Asset Value (Sep 30, 2023) | $78,045,467 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased significantly compared to the prior year. For the three months ended September 30, 2023, income was $1.69 million versus $3.53 million in 2022. For the nine-month period, income was $5.63 million versus $9.82 million in 2022.
- Price and Volume Drivers: The decrease in income was primarily driven by lower realized sales prices for oil and natural gas and decreased sales volumes.
- Oil Prices: Average realized price dropped to $70.44/Bbl (3-month) and $73.79/Bbl (9-month) compared to $107.75/Bbl and $94.74/Bbl in the prior year periods.
- Gas Prices: Average realized price dropped to $2.68/Mcf (3-month) and $3.80/Mcf (9-month) compared to $8.95/Mcf and $7.83/Mcf in the prior year periods.
- Volumes: Oil sales volumes decreased by 12.3% (3-month) and 9.4% (9-month). Natural gas volumes decreased by 3.3% (3-month) and 4.8% (9-month).
- Expense Trends: General and administrative expenses increased slightly ($59,689 for the quarter) due to timing of payments. Lease operating expenses increased due to higher material pricing, while direct operating expenses and severance taxes decreased.
- Interest Income: Interest income increased due to higher prevailing interest rates.
Outlook, Risks, and Contingencies
- Capital Expenditures: Boaz Energy estimates a 2023 capital budget of $4.5 million for the Underlying Properties. Approximately $3.5 million had been expended as of September 30, 2023. Planned activities include non-operated drilling, waterflood conformance, and one new operated well in Crane County.
- Capital Reserve: Boaz Energy is entitled to reserve up to $3.0 million for future taxes and expenses. As of September 30, 2023, the balance held back was $98,157 net to the Trust.
- Litigation: The Trust is a defendant in Thaleia L. Marston v. Blackbeard Operating, LLC. While the trial court granted summary judgment in favor of the defendants in May 2023, the plaintiff filed a notice of appeal in June 2023. The appeal brief is due November 24, 2023. Unfavorable resolution could reduce cash receipts.
- Market Risks: The Trust's revenue is highly sensitive to commodity price volatility, global political conditions, and production declines. The Trust has no control over operational costs or production levels.
- Subsequent Event: On October 20, 2023, the Trust declared a distribution of $0.040837 per unit based on August 2023 production.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current WTI and Henry Hub benchmark prices against the Trust's realized prices to assess future distribution potential.
- Production Decline: Confirm the rate of natural decline in the Underlying Properties and the impact of Boaz Energy's capital spending on maintaining volumes.
- Litigation Status: Monitor the outcome of the Marston appeal, as an adverse ruling could impact net profits.
- Capital Reserve Utilization: Track the balance of the capital reserve held by Boaz Energy, as increases in this reserve reduce immediate cash flow to the Trust.
- Boaz Energy Ownership: Note that Boaz Energy retains a significant portion of Trust units (approx. 41.7% as of Sep 30, 2023), creating potential conflicts of interest regarding operational decisions.