10-Q: PermRock Royalty Trust Reports Lower Distributable Income Due to Decreased Oil and Gas Prices and Sales Volumes

PermRock Royalty Trust's distributable income decreased in the first quarter of 2024 due to lower oil and gas prices and reduced sales volumes.

Summary

• PermRock Royalty Trust reported a decrease in distributable income for the three months ended March 31, 2024, compared to the same period in 2023.
• Net profits income decreased to $1,296,408 from $2,366,677, primarily due to lower oil and gas prices and reduced sales volumes.
• Distributable income per unit was $0.092268, down from $0.181106 in the prior year.
• The Trust's total assets decreased slightly from $77,244,781 at the end of 2023 to $76,329,788 as of March 31, 2024.
• Boaz Energy's estimated capital budget for 2024 is $4.5 million, with $0.9 million spent as of March 31, 2024.
• The Trust relies on Boaz Energy for information regarding the Underlying Properties and their operations.

Sentiment

Score: 3

Explanation: The document indicates a significant decrease in distributable income and revenue due to lower commodity prices and production volumes, which is a negative signal for investors. While the trust maintains cash reserves, the overall financial performance is concerning.

Positives

• Interest income increased due to higher interest rates.
• The Trust maintains a $1,000,000 cash reserve for administrative expenses.
• The Trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time.

Negatives

• Net profits income decreased significantly due to lower oil and gas prices and reduced sales volumes.
• Oil and natural gas sales volumes both decreased compared to the same period last year.
• Average realized prices for both oil and natural gas decreased year-over-year.
• Development expenses decreased due to fewer capital projects.

Risks

• The Trust's revenue and distributions are highly dependent on volatile oil and natural gas prices.
• The Trust relies on Boaz Energy for information and operations of the Underlying Properties.
• Changes in commodity prices, political and economic conditions, and regulatory actions could adversely affect the Trust.
• There is ongoing litigation that could impact the Trust, although a summary judgement was granted in favor of the Trust and Boaz Energy, the plaintiff has appealed.
• Boaz Energy's capital expenditure plans are subject to change based on market conditions and other factors.

Future Outlook

Boaz Energy anticipates continuing to participate in non-operated drilling and waterflood projects and plans to drill one new operated well in 2024, with a total capital budget of $4.5 million for the year. This is subject to change based on market conditions and other factors.

Management Comments

• The Trustee believes that the disclosures are adequate to make the information presented not misleading.
• The Trustee has concluded that the disclosure controls and procedures of the Trust are effective as of March 31, 2024.
• Boaz Energy reports that the decrease in oil and gas sales volumes was primarily due to a natural decline in the producing properties and a decrease in demand.
• Boaz Energy reports that the decrease in average realized oil and natural gas prices was primarily due to a decrease in the WTI benchmark oil price and the Henry Hub benchmark price for natural gas, respectively.

Industry Context

The decrease in PermRock Royalty Trust's income reflects broader trends in the oil and gas industry, including fluctuating commodity prices and natural production declines. The Permian Basin is a key area for oil and gas production, and the Trust's performance is directly tied to the market conditions in this region.

Comparison to Industry Standards

• The decrease in production volumes and prices is consistent with the challenges faced by many oil and gas producers in the current market environment.
• Other royalty trusts and energy companies operating in the Permian Basin are likely experiencing similar pressures on revenue and profitability.
• Companies such as Viper Energy Partners and Texas Pacific Land Corporation, which also have exposure to the Permian Basin, may serve as benchmarks for comparison, although their specific operational structures and strategies may differ.
• The Trust's reliance on a net profits interest model, rather than direct ownership of production, makes it particularly sensitive to changes in operating costs and capital expenditures by Boaz Energy.

Legal Proceedings

• The 2018 litigation is ongoing, with the plaintiff having filed an appeal after the court granted summary judgment in favor of the defendants.

Related Party Transactions

• The Trust pays an annual administrative fee to the Trustee and the Delaware Trustee.
• The Trust has a registration rights agreement with Boaz Energy.

Stakeholder Impact

• Shareholders will receive lower distributions due to decreased net profits income.
• The Trust's performance is directly tied to the operational decisions and financial health of Boaz Energy.
• The ongoing litigation could potentially impact the Trust's financial position and distributions.

Next Steps

• The Trust will continue to monitor the performance of the Underlying Properties and the actions of Boaz Energy.
• The Trust will continue to make monthly cash distributions to unitholders.
• Boaz Energy will continue with its 2024 capital expenditure plan, subject to market conditions and regulatory approvals.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Net Profits Interest, Permian Basin, Distributable Income, Production Volumes, Commodity Prices, Boaz Energy