10-Q: PermRock Royalty Trust Q3: Income Declines, Capital Plan Cut

PermRock Royalty Trust reports a decline in Q3 distributable income and a significant reduction in its 2025 capital expenditure budget by operator T2S Permian Acquisition II LLC due to market pressures.

Summary

• Net profits income for the three months ended September 30, 2025, was $1,246,690, a decrease from $1,548,855 for the same period in 2024.
• Distributable income for the three months ended September 30, 2025, was $1,111,576, or $0.091367 per Trust unit, down from $1,340,784, or $0.110208 per Trust unit, in the prior year period.
• Net profits income for the nine months ended September 30, 2025, was $4,502,918, essentially unchanged from $4,503,683 for the same period in 2024.
• Distributable income for the nine months ended September 30, 2025, was $3,778,289, or $0.310563 per Trust unit, compared to $3,813,324, or $0.313443 per Trust unit, in the prior year period.
• Operator T2S Permian Acquisition II LLC (T2S) revised its 2025 capital and workover budget downward from an initial $4.0 million to approximately $1.0 million.
• Oil sales volumes decreased by 16.2% for the three months and 11.0% for the nine months ended September 30, 2025, compared to the prior year periods.
• The average realized oil price per Bbl decreased for both the three and nine months ended September 30, 2025, primarily due to a decrease in the WTI benchmark oil price.
• The lawsuit styled Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, which named the Trust as a defendant, concluded with the Court of Appeals affirming the trial court's judgment in favor of the defendants on February 5, 2025.

Sentiment

Score: 3

Explanation: The significant reduction in capital expenditures and deferral of drilling projects by the operator, coupled with declining oil production and distributable income in the recent quarter, indicate a challenging operational and financial environment. While cost containment helped stabilize nine-month net profits, the overall outlook for growth and distributions is negatively impacted by reduced investment and market volatility.

Positives

• Net profits income for the nine months ended September 30, 2025, was essentially unchanged year-over-year, reflecting the benefit of cost containment and a modest recovery in natural gas pricing.
• Direct operating expenses, lease operating expenses, and severance and ad valorem taxes decreased for both the three and nine months ended September 30, 2025, primarily due to lower workover activity, reduced third-party service costs, and cost-reduction initiatives.
• The lawsuit styled Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, concluded with a favorable judgment for the defendants, including the Trust, removing a legal overhang.
• T2S successfully drilled and completed a non-operated well in the Permian Shelf Area during the third quarter of 2025.

Negatives

• Distributable income for the three months ended September 30, 2025, decreased by 17% to $1,111,576 ($0.091367 per unit) from $1,340,784 ($0.110208 per unit) in the prior year period.
• Net profits income for the three months ended September 30, 2025, decreased by 19.5% to $1,246,690 from $1,548,855 in the prior year period, primarily due to decreased oil and gas production and lower oil and gas prices.
• Oil sales volumes decreased by 16.2% for the three months and 11.0% for the nine months ended September 30, 2025, primarily due to natural decline, reduced operations, and fewer workover projects.
• Average realized oil price per Bbl decreased for both the three and nine months ended September 30, 2025, due to a decrease in the WTI benchmark.
• Average realized natural gas price per Mcf decreased for the three months ended September 30, 2025, due to lower sales prices of natural gas liquids tied to lower oil prices.
• T2S significantly revised its 2025 capital and workover budget downward from $4.0 million to approximately $1.0 million, indicating reduced investment in the Underlying Properties.
• The decrease in planned expenditures primarily relates to the deferral of two wells (one injector well and one producer well) in Crane County, Texas, to a future, undetermined date.
• General and administrative expenditures increased by $25,996 for the nine months ended September 30, 2025, compared to the prior year, primarily due to an increase in professional expenses.

Risks

• Revenue and distributions are substantially dependent upon the prevailing and future prices for oil and natural gas, which historically have been volatile and may be subject to significant fluctuations.
• Uncertainties exist in estimating production and oil and natural gas reserves of the Underlying Properties.
• Risks are associated with the drilling and operation of oil and natural gas wells.
• The cost of developing the Underlying Properties can fluctuate.
• The ability to maintain anticipated production levels is a key risk.
• The amount of future direct operating expenses, development expenses, and other capital expenditures can impact profitability.
• Availability and terms of capital to fund capital expenditures are uncertain.
• Risks are associated with T2S and its ability to transfer operation of the Underlying Properties to third parties without the approval of Trust unitholders.
• The performance of third parties contracted by T2S may not meet expectations.
• The effect of existing and future laws and regulatory actions, including environmental, health, safety, and tax legislation, could negatively impact operations.
• Actions of the Organizations of Petroleum Exporting Countries (OPEC) can influence commodity prices.
• Conditions in the capital markets can affect funding and investment.
• Competition from others in the energy industry poses a risk.
• Uncertainty exists in whether development projects will be pursued.
• Severe or unseasonable weather may adversely affect production.
• Adequacy of T2S's insurance coverage is a concern.
• Costs to comply with current and future governmental regulation of the oil and natural gas industry, including hydraulic fracturing and produced water disposal, can increase.
• General economic conditions affecting the Permian Basin can impact operations.
• Risks are associated with title deficiencies that may arise with respect to the Underlying Properties.
• Actions by T2S, including those that result in conflicts of interest, could adversely affect the Trust.
• The ability to successfully estimate the impact of litigation matters, and certain accounting and tax matters, is a risk.
• The cost of inflation can impact expenses.

Future Outlook

T2S, the operator of the Underlying Properties, has significantly reduced its 2025 capital and workover budget from $4.0 million to approximately $1.0 million. This reduction is a strategic response to continued commodity price volatility, increased service and labor costs, and tightening capital markets, aimed at preserving liquidity and maintaining financial flexibility. The revised plan includes the deferral of two wells (one injector and one producer) in Crane County, Texas, to an undetermined future date, while focusing on ongoing investment in workovers, waterflood pattern optimization, and the reactivation of certain shut-in wells to sustain production levels. T2S believes this revision balances near-term cash preservation with continued development and may be further adjusted based on market conditions and operating performance.

Management Comments

• The Trustee believes that the disclosures are adequate to make the information presented not misleading.
• In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets, liabilities and Trust corpus... have been included.
• T2S has advised the Trustee that the stable Trust distribution level reflects the benefit of cost containment and the modest recovery in natural gas pricing, offsetting lower crude oil revenues.
• T2S has advised the Trustee that it believes this revision provides an appropriate balance between near-term cash preservation and the continued development of the Underlying Properties.
• T2S has advised the Trustee that the revised Plan reflects T2S's ongoing evaluation of project economics, commodity price forecasts, and regulatory timing, and may be further adjusted based on changes in market conditions, operating performance, and capital requirements.

Industry Context

The oil and gas sector is currently navigating a challenging environment characterized by continued commodity price volatility, increased service and labor costs, and tightening capital markets. PermRock Royalty Trust's operator, T2S, has responded to these industry-wide pressures by significantly cutting its capital expenditure budget and deferring drilling projects. This strategic shift aligns with a broader industry trend of prioritizing liquidity and financial flexibility over aggressive growth in uncertain market conditions. The decline in WTI benchmark oil prices and lower natural gas liquids prices, partially offset by a modest recovery in Henry Hub natural gas prices, reflects the mixed and dynamic commodity market landscape.

Management Changes

Corporate Governance

Legal Proceedings

• The lawsuit styled Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, which named Boaz Energy and the Trust as defendants, concluded with the Court of Appeals affirming the trial court's judgment in favor of the defendant appellees on February 5, 2025.

Related Party Transactions

• The Trust pays an annual administrative fee to Argent Trust Company (Trustee) and Wilmington Trust, National Association (Delaware Trustee). The Trustee's annual fee for 2025 is $205,031, increasing by 1% annually until the 20th anniversary of the Trust's formation.
• Ustx LLC, a wholly-owned subsidiary of T2S Permian Acquisition II LLC, acquired 4,884,861 Trust units from Boaz Energy on March 31, 2025. As of November 13, 2025, Ustx, LLC, owned these units, representing a significant beneficial interest in the Trust.

Stakeholder Impact

• **Shareholders (Unitholders)**: Experienced decreased distributable income per unit for the quarter and nine months. The significant reduction in the operator's capital budget suggests lower future investment in the underlying properties, potentially impacting future distributions and capital appreciation. The favorable conclusion of the Marston Trust lawsuit removes a legal uncertainty.
• **T2S Permian Acquisition II LLC (Operator and Significant Unitholder)**: Assumed operations of the Underlying Properties and holds a substantial beneficial interest in the Trust. The revised capital plan reflects T2S's strategic decisions to preserve liquidity and align spending with market conditions, directly influencing the Trust's financial performance and distributions.
• **Employees (of T2S)**: The reduction in capital expenditures and deferral of drilling projects by T2S may imply potential impacts on staffing levels or future operational activity, though not explicitly detailed in the filing.

Next Steps

• T2S will continue ongoing investment in workovers, waterflood pattern optimization, and the reactivation of certain shut-in wells to sustain production levels.
• T2S's revised capital plan may be further adjusted based on changes in market conditions, operating performance, and capital requirements.
• The deferred wells in Crane County, Texas, will be pursued at a future date to be determined based on improved market visibility and commodity price stability.

Key Dates

Recommendation

While the Q3 results show a decline in distributable income and the operator has significantly cut its capital budget, the nine-month net profits income remained stable due to cost containment and natural gas price recovery. The conclusion of the long-standing litigation is a positive. However, the reduced investment in the underlying properties and continued commodity price volatility present headwinds for future production growth and distributions. Given the passive nature of the Trust and its reliance on the operator's decisions and market conditions, a 'hold' recommendation is appropriate, awaiting clearer signs of sustained commodity price recovery and increased capital deployment by T2S.

Keywords

PermRock Royalty Trust, PRT, 10-Q, Oil and Gas, Royalty Trust, Permian Basin, Distributable Income, Net Profits Interest, T2S Permian Acquisition II LLC, Energy Sector, Commodity Prices, Capital Expenditures, Production Decline, SEC Filing