10-Q: Chesapeake Granite Wash Trust Reports Lower Distributable Income in Q1 2024 Due to Decreased Production and Commodity Prices

Chesapeake Granite Wash Trust's distributable income significantly decreased in the first quarter of 2024 compared to the same period last year, primarily due to lower production volumes and commodity prices.

Summary

• Chesapeake Granite Wash Trust reported a substantial decrease in distributable income for the quarter ended March 31, 2024, with a 67% drop compared to the same period in 2023.
• Distributable income per common unit fell to $0.0250, down from $0.0757 in the prior year's first quarter.
• The decline is attributed to a combination of reduced production volumes and lower average realized prices for oil, natural gas, and natural gas liquids.
• Royalty income decreased by 52%, from $3.969 million to $1.894 million, due to both lower production and a 37% decrease in the average price received per barrel of oil equivalent.
• Total sales volumes decreased by 24%, with oil sales down 8%, natural gas sales down 24%, and natural gas liquids sales down 30%.
• Trust administrative expenses increased significantly, rising from $65,000 to $500,000, primarily due to higher accounting, tax preparation, and regulatory compliance costs.
• The Trust's cash reserves increased by $412,000 during the quarter, and the Trust corpus increased from $10.204 million to $10.621 million.
• The Trust declared a distribution of $0.0214 per common unit on February 29, 2024, and an additional distribution of $0.0185 per common unit on May 30, 2024.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant decreases in distributable income, royalty income, and production volumes, coupled with a substantial increase in administrative expenses. The reliance on volatile commodity prices and the expected continued decline in production further contribute to the negative sentiment.

Positives

• The Trust's cash reserves increased by $412,000 during the quarter.
• The Trust corpus increased from $10.204 million to $10.621 million.
• The Trust declared and paid a distribution of $0.0214 per common unit on February 29, 2024.
• The Trust declared an additional distribution of $0.0087 per common unit on May 9, 2024, to be paid on May 30, 2024.

Negatives

• Distributable income decreased significantly by 67% compared to the same quarter last year.
• Royalty income decreased by 52% due to lower production and commodity prices.
• The average price received per barrel of oil equivalent decreased by 37%.
• Total sales volumes decreased by 24%.
• Trust administrative expenses increased substantially by 669% due to higher accounting, tax preparation, and regulatory compliance costs.

Risks

• The Trust's revenue and distributions are substantially dependent on volatile oil, natural gas, and NGL prices.
• Production from the wells is expected to continue to decline, which will adversely affect distributable income.
• Geopolitical events, such as the conflicts in Ukraine and Israel, could cause significant volatility in commodity prices and supply of energy resources.
• The Trust's common units trade on the OTC Pink market, which is a significantly more limited market than the NYSE and could diminish investor interest.
• The Trust is subject to litigation in the ordinary course of business, which could have a material impact on future royalty income.

Future Outlook

The Trust expects continued volatility in oil and natural gas prices and anticipates that production will continue to decline, which will adversely affect distributable income. The Trust will continue to monitor geopolitical events and their potential impact on the business.

Management Comments

• The Trustee has reviewed the adequacy and sufficiency of the existing cash reserve and determined that, commencing with the distribution to unitholders for the fourth quarter 2021, which was paid in March 2022, the Trustee began withholding the funds otherwise available for distribution to the unitholders each quarter to increase existing cash reserves by a total of approximately $3,200,000 over a period of several quarters.
• The Trustee relies on the Operator for information regarding the Royalty Interests, the Underlying Properties and the Operator itself.

Industry Context

The decrease in distributable income reflects broader trends in the oil and gas industry, including fluctuating commodity prices and natural production declines. The Trust's performance is directly tied to the production and pricing of oil, natural gas, and NGLs in the Anadarko Basin, where it holds royalty interests. The shift in operatorship from Chesapeake to Tapstone and then to Diversified has also impacted the Trust's operations and financial results.

Comparison to Industry Standards

• The Chesapeake Granite Wash Trust's performance is below average compared to other royalty trusts, particularly those with more diversified asset bases or more favorable production profiles.
• Many royalty trusts have seen similar declines in distributable income due to lower commodity prices, but the magnitude of the decrease for Chesapeake Granite Wash Trust is more pronounced.
• For example, the Permian Basin Royalty Trust (PBT) and the San Juan Basin Royalty Trust (SJT) have also experienced fluctuations in income, but their production volumes and pricing have not declined as sharply as those of Chesapeake Granite Wash Trust.
• The administrative expenses of Chesapeake Granite Wash Trust are significantly higher than those of comparable trusts, which further reduces distributable income.
• The Trust's reliance on a single operator, Diversified, also presents a risk not present in more diversified trusts.

Legal Proceedings

• There are no legal proceedings to which the Trust is a named party, but the Trust may be subject to litigation in the ordinary course of business.

Related Party Transactions

• The Trust pays an annual administrative fee of $210,712 to the Trustee, paid in equal quarterly installments.
• The Trust pays an annual fee of $200,000 to Diversified for administrative services, paid in equal quarterly installments.
• Diversified may loan funds to the Trust if cash on hand is insufficient to pay ordinary course expenses.

Stakeholder Impact

• Shareholders will experience lower distributions due to decreased production and commodity prices.
• The Trust's employees, which are limited to the Trustee, will continue to manage the Trust's operations.
• The Trust's customers, which are the purchasers of the oil and gas, will not be directly impacted by the Trust's financial results.
• The Trust's suppliers, which are primarily Diversified, will continue to provide services to the Trust.
• The Trust's creditors, which are limited, will be paid as per the Trust agreement.

Next Steps

• The Trust will continue to monitor the performance of the Underlying Properties and the impact of commodity prices on its financial results.
• The Trust will continue to make quarterly distributions to unitholders, subject to available cash flow and expenses.
• The Trust will continue to evaluate the adequacy of its cash reserves.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Distributable Income, Production, Commodity Prices, Natural Gas, NGL, Chesapeake Granite Wash Trust, CHKR, Diversified Energy