10-K: PermRock Royalty Trust Reports Decreased Net Profits Income in 2024 Amidst Sale Agreement with T2S Permian Acquisition II LLC

PermRock Royalty Trust's 2024 10-K filing reveals a decrease in net profits income due to lower oil and gas sales volumes and prices, while also announcing a pending sale of Underlying Properties to T2S Permian Acquisition II LLC.

Summary

• PermRock Royalty Trust's net profits income decreased to $5.96 million in 2024 from $7.13 million in 2023 and $13.16 million in 2022, primarily due to lower oil and natural gas sales volumes and prices.
• The Trust's distributable income was $5.16 million, or $0.424259 per unit, compared to $6.26 million, or $0.514745 per unit in the prior year.
• Oil sales volumes decreased to 289.9 MBbls in 2024 from 317.8 MBbls in 2023, and natural gas sales volumes decreased to 341.1 MMcf from 387.6 MMcf.
• The average realized oil price decreased to $75.33 per Bbl in 2024 from $76.24 per Bbl in 2023, and the average realized natural gas price decreased to $2.54 per Mcf from $3.74 per Mcf.
• Boaz Energy's estimated capital expenditure budget for 2025 is $4 million, primarily for new drilling and workovers in Crane County.
• On January 10, 2025, Boaz Energy entered into a Purchase and Sale Agreement with T2S Permian Acquisition II LLC for the sale of the Underlying Properties and Boaz Energy's Trust units, with closing anticipated by the end of March 2025.
• The Trust's proved reserves as of December 31, 2024, were estimated at 1.82 MMBoe, with a PV-10 value of $64.45 million.

Sentiment

Score: 5

Explanation: The sentiment is neutral. While the financial results are worse than previous years, the pending sale to T2S Permian Acquisition II LLC introduces uncertainty but also potential for future operational changes. The document is factual and does not express strong positive or negative opinions.

Positives

• Boaz Energy plans to drill new producing wells and invest in workovers in 2025.
• The Trust's disclosure controls and procedures and internal control over financial reporting were deemed effective as of December 31, 2024.
• The Court of Appeals affirmed the trial court's judgment in favor of the defendant appellees in the Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC litigation.

Negatives

• Net profits income decreased significantly in 2024 compared to previous years.
• Oil and natural gas sales volumes and prices decreased.
• The Trust's geographic concentration in the Permian Basin makes it vulnerable to regional risks.
• The reserves attributable to the Underlying Properties are depleting assets, and production will diminish over time.

Risks

• Oil and natural gas prices are volatile, and lower prices could reduce proceeds to the Trust.
• Actual reserves and future production may be less than current estimates.
• The amount of cash available for distribution depends on access to and operation of gathering, transportation, and processing facilities.
• A bankruptcy of Boaz Energy or any successor could adversely affect operations and distributions.
• The operations of the Underlying Properties are subject to complex environmental laws and regulations.
• Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and operating restrictions.
• The potential physical effects of climate change could disrupt production.
• The business of Boaz Energy or any successor could be negatively affected by cybersecurity threats.
• The Trust has not requested a ruling from the IRS regarding the tax treatment of the Trust.

Future Outlook

Boaz Energy anticipates continuing to participate in Crane and Glasscock Counties non-operated drilling and waterflood conformance and expansion work in Crane & Terry Counties, as well as drilling 1 new operated wells in Crane County sometime in 2025. The majority of capital spent in 2025 to date was spent on non-operated projects in the Permian Shelf Area. The $4 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, Boaz Energys actual capital requirements, the pace of regulatory approvals and the mix of projects. Further, the plans of the potential successor to Boaz Energy following closing of the transaction contemplated by the Purchase and Sale Agreement, as well as the effect of those plans on Boaz Energys estimated capital budget for 2025 for the Underlying Properties, have not yet been provided to the Trust.

Industry Context

The oil and natural gas industry is highly competitive, and Boaz Energy competes with major and independent companies for resources, equipment, and markets. The Trust's performance is indirectly subject to these competitive conditions.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• A comprehensive industry comparison would require detailed benchmarking data on production costs, reserve replacement ratios, and operational efficiency metrics against peer royalty trusts and oil and gas operators in the Permian Basin.
• Comparable companies could include other Permian Basin-focused royalty trusts or E&P companies with similar asset profiles, such as Viper Energy Partners LP or Diamondback Energy, Inc., but direct comparisons are limited by the unique structure of the PermRock Royalty Trust.

Legal Proceedings

• The Court of Appeals affirmed the trial court's judgment in favor of the defendant appellees in the Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC litigation.

Related Party Transactions

• The Trust paid the Trustee $205,033 in administrative fees in 2024.
• The Trust and Boaz Energy are parties to a Registration Rights Agreement.

Stakeholder Impact

• The decreased net profits income and distributable income will negatively impact Trust unitholders.
• The sale of Underlying Properties to T2S Permian Acquisition II LLC could potentially impact future operations and distributions.
• The Trust's performance is dependent on the operations of Boaz Energy (or its successor) and the market conditions in the Permian Basin.

Next Steps

• Closing of the sale of Underlying Properties and Boaz Energy's Trust units to T2S Permian Acquisition II LLC is anticipated by the end of March 2025.
• The Trust will continue to make monthly cash distributions to unitholders.
• The Trust will monitor the operations of the Underlying Properties under the new ownership of T2S Permian Acquisition II LLC.

Key Dates

Keywords

PermRock Royalty Trust, Boaz Energy, Net Profits Interest, Underlying Properties, Oil and Gas, Reserves, Production, Distributions, Permian Basin, T2S Permian Acquisition II LLC