10-Q: PermRock Royalty Trust Reports Mixed Q2 2025 Results

PermRock Royalty Trust reported a decrease in distributable income for Q2 2025 due to lower oil prices and volumes, though six-month income increased, following the acquisition of its underlying properties by T2S Permian Acquisition II LLC.

Summary

• Distributable income for the three months ended June 30, 2025, was $1,200,518 ($0.098679 per unit), a decrease from $1,350,037 ($0.110969 per unit) for the same period in 2024.
• Distributable income for the six months ended June 30, 2025, was $2,666,713 ($0.219196 per unit), an increase from $2,472,539 ($0.203235 per unit) for the same period in 2024.
• Net profits income for Q2 2025 decreased to $1,545,465 from $1,658,420 in Q2 2024, primarily due to decreased oil prices and volumes.
• Net profits income for H1 2025 increased to $3,256,228 from $2,954,828 in H1 2024, primarily due to increased natural gas prices and a decrease in production and development costs.
• Oil sales volumes decreased by 10.6% for Q2 2025 and 8.5% for H1 2025 compared to prior periods, attributed to natural decline and curtailed operations during the operator transition.
• Natural gas sales volumes increased by 5.3% for Q2 2025 but decreased by 0.3% for H1 2025.
• The average realized oil price decreased to $66.36/Bbl for Q2 2025 and $67.91/Bbl for H1 2025, down from $78.89/Bbl and $75.93/Bbl respectively in 2024.
• The average realized natural gas price increased to $3.24/Mcf for Q2 2025 and $3.21/Mcf for H1 2025, up from $2.98/Mcf and $3.06/Mcf respectively in 2024.
• General and administrative expenditures increased to $357,084 for Q2 2025 and $614,192 for H1 2025 due to the timing of payments.
• T2S Permian Acquisition II LLC acquired the Underlying Properties from Boaz Energy on March 31, 2025, and assumed operations. T2S's subsidiary, Ustx LLC, now owns 4,884,861 Trust units, representing approximately 40.15% of the total 12,165,732 units outstanding.
• T2S's estimated capital and workover budget for 2025 is $4.0 million, with approximately $0.2 million expended as of June 30, 2025.
• A lawsuit from 2018 against Boaz Energy and the Trust concluded on February 5, 2025, with the Court of Appeals affirming judgment in favor of the defendants.

Sentiment

Score: 4

Explanation: While the six-month distributable income showed an increase, the most recent quarter (Q2 2025) saw a decline in distributable income due to lower oil prices and volumes. More critically, the distribution declared for May 2025 production, which reflects the most recent operational period, indicates significantly lower commodity prices for both oil and natural gas, suggesting a negative trend for future distributions. The operator transition also led to curtailed operations and deferred projects, impacting production volumes. The favorable resolution of the 2018 litigation is a positive, but the core business performance shows signs of weakness.

Positives

• Six-month distributable income increased by 7.8% to $2,666,713 ($0.219196 per unit) for H1 2025 compared to H1 2024.
• Net profits income for H1 2025 increased, driven by higher natural gas prices and decreased production and development costs.
• Natural gas prices increased for both the three and six months ended June 30, 2025, compared to the same periods in 2024, due to strong early-year demand and increased industrial usage.
• Direct operating expenses, lease operating expenses, development expenses, and other expenses all decreased for both the three and six months ended June 30, 2025, compared to 2024, primarily due to fewer projects and deferrals during the operator transition.
• The 2018 litigation against the Trust and Boaz Energy concluded favorably on February 5, 2025, with the Court of Appeals affirming the trial court's judgment in favor of the defendants.
• T2S, the new operator, has a 2025 capital budget of $4.0 million, including plans for drilling two new wells and participating in another, along with workovers and waterflood pattern conformance, which could support future production.

Negatives

• Distributable income for the three months ended June 30, 2025, decreased by 11.1% to $1,200,518 ($0.098679 per unit) compared to Q2 2024.
• Net profits income for Q2 2025 decreased primarily due to lower oil prices and volumes.
• Oil sales volumes decreased by 10.6% for Q2 2025 and 8.5% for H1 2025, attributed to natural decline and curtailed operations during the operator transition.
• Average realized oil price decreased significantly for both the three and six months ended June 30, 2025, due to a surge in global supply and weaker demand.
• General and administrative expenditures increased by $34,092 for Q2 2025 and $102,332 for H1 2025 compared to prior periods.
• The distribution declared for May 2025 production (July 21, 2025 payment) was $0.032491 per unit, based on an average oil price of $59.36/Bbl and natural gas price of $1.67/Mcf, indicating a significant drop in gas price compared to the Q2 average.

Risks

• Revenue and distributions are substantially dependent on prevailing and future prices for oil and natural gas, which are volatile and influenced by economic conditions, global political environment, regulatory developments, and competition.
• 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, including the cost of developing the Underlying Properties and the ability to maintain anticipated production levels.
• The amount of future direct operating expenses, development expenses, and other capital expenditures can fluctuate.
• Availability and terms of capital to fund capital expenditures.
• Risks are associated with T2S and its ability to transfer operation of the Underlying Properties to third parties without Trust unitholder approval.
• Performance of third parties contracted by T2S and their ability or willingness to provide sufficient facilities and services on commercially reasonable terms.
• The effect of existing and future laws and regulatory actions, including environmental, health, safety, and tax legislation.
• Severe or unseasonable weather may adversely affect production.
• 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 cost of inflation.
• The Trust relies on information provided by T2S for operational data, which could impact the accuracy of financial reporting.

Future Outlook

T2S, the new operator of the Underlying Properties, plans to continue the previously implemented capital and workover program for 2025 with an estimated budget of $4.0 million. This plan includes drilling two new wells (one injector and one producer in Crane County, Texas), participating in a new non-operated well expected to be completed in Q3 2025, and investing in workovers, waterflood pattern conformance, and returning shut-in wells to production. The majority of capital spent to date in 2025 has been on non-operated projects in the Permian Shelf Area. The budget is subject to change based on T2S's ongoing analysis, commodity prices, actual capital requirements, regulatory approvals, and project mix. The Trust declared a distribution of $0.032491 per unit for May 2025 production, reflecting lower average oil ($59.36/Bbl) and natural gas ($1.67/Mcf) prices for that month, which could indicate lower future distributable income if these price trends persist.

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... have been included.
• Distributable income for such interim periods is not necessarily indicative of distributable income for the full year.
• T2S reports this decrease [in oil sales volumes] was primarily due to a natural decline in the producing properties, as well as lower production volumes due to Boaz Energy's curtailed operations and a reduction in the number of workover projects during the first half of 2025 amid the sales and transition process between Boaz Energy and T2S.
• T2S reports this decrease [in natural gas sales volumes for 6 months] was primarily due to a natural decline in producing properties, as well as lower production volumes due to Boaz Energy's curtailed operations and a reduction in the number of workover projects during second quarter 2025 amid the sale and transition process between Boaz Energy and T2S.
• The decrease [in average realized oil price] was primarily due to a surge in global supply combined with weaker than expected demand amid economic uncertainty and geopolitical tensions, which prompted price drops and negative earnings impacts for oil producers.
• The increase [in natural gas prices] was primarily due to a colder than usual winter, which drove strong early-year demand and triggered significant storage withdrawals. Additionally, increased industrial usage contributed to stronger overall demand versus the previous year, when weather was milder and storage levels were more comfortable.
• Direct operating expenses decreased... primarily due to fewer projects to return wells to production amid the pending sale and transition between Boaz Energy and T2S. Additionally, certain projects were deferred in response to the decline in oil prices during the same period.
• Lease operating expenses decreased... due to deferral of projects until the sale between Boaz Energy and T2S closed in the second quarter of 2025, as well as significant expenses associated with plugging of a well in the Permian Shelf area that were incurred during the first half of 2024.
• Severance and ad valorem taxes increased... primarily because of an increase in the accrual for ad valorem taxes in the quarter ended June 30, 2025, partially offset by the decrease in severance taxes due to the decrease in revenues for the same time period.
• Development expenses related to the Underlying Properties decreased... as a result of fewer capital projects.
• Other expenses decreased... primarily due to adjustments to overhead.
• The Trustee has concluded that the disclosure controls and procedures of the Trust are effective as of June 30, 2025.

Industry Context

The Trust's performance is directly tied to the Permian Basin's oil and natural gas production and commodity prices. While natural gas prices saw an increase in the first half of 2025 due to strong winter demand and industrial usage, oil prices declined due to global supply surges and weaker demand amidst economic uncertainty and geopolitical tensions. The transition of the Underlying Properties' operator from Boaz Energy to T2S Permian Acquisition II LLC reflects ongoing consolidation and strategic shifts within the energy sector, particularly in prolific basins like the Permian. The new operator's capital expenditure plans, including new drilling and workovers, are crucial for offsetting natural production declines common in mature fields and maintaining future cash flows in a volatile commodity market.

Comparison to Industry Standards

• The Trust's passive royalty interest model is common for royalty trusts, providing unitholders with direct exposure to commodity prices and production without operational risk.
• The decline in oil sales volumes (10.6% for Q2 2025, 8.5% for H1 2025) due to natural decline and curtailed operations during a transition period is a common challenge for mature oil and gas assets, similar to what might be observed in other Permian Basin operators managing older wells or undergoing ownership changes. For example, smaller independent operators in the Permian often face similar challenges in maintaining production levels without continuous capital investment.
• The average realized oil price of $66.36/Bbl for Q2 2025 is lower than the WTI crude oil benchmark which generally traded above $70-$80/Bbl during that period, indicating typical regional differentials and quality adjustments for Permian Basin production. For instance, Midland WTI prices often trade at a slight discount or premium to Cushing WTI depending on pipeline capacity and local demand.
• The average realized natural gas price of $3.24/Mcf for Q2 2025 is generally in line with or slightly above Henry Hub spot prices for the period, which saw fluctuations but generally remained in the $2-$3.50/Mcf range, reflecting regional market dynamics and potentially higher realized prices for NGLs included in the gas sales. However, the May 2025 production price of $1.67/Mcf is significantly lower than the Q2 average, suggesting potential localized price weakness or specific contract terms, which could be a concern compared to broader market trends.
• The $4.0 million capital budget for 2025 by T2S, with only $0.2 million expended by mid-year, suggests a slower pace of investment than initially planned or a back-weighted schedule. This could be compared to other Permian operators who might have more aggressive or consistent capital deployment throughout the year to combat decline rates. For example, larger E&P companies like Pioneer Natural Resources or ExxonMobil (post-Pioneer acquisition) typically deploy billions annually to maintain or grow Permian production.

Management Changes

Corporate Governance

Legal Proceedings

• The 2018 litigation, Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, which named Boaz Energy and the Trust as defendants, concluded on February 5, 2025. The Court of Appeals affirmed the trial court's judgment in favor of the defendant appellees, effectively disposing of the plaintiff's claims.

Related Party Transactions

• T2S Permian Acquisition II LLC, through its wholly-owned subsidiary Ustx LLC, now owns 4,884,861 Trust units, representing approximately 40.15% of the total outstanding units, making it a significant unitholder and the operator of the Underlying Properties.
• The Trust pays an annual administrative fee to the Trustee (Argent Trust Company), which is $205,031 for 2025, increasing by 1% annually.

Stakeholder Impact

• Shareholders (Unitholders): Experienced a decrease in distributable income for Q2 2025, but an increase for H1 2025. Future distributions are subject to commodity price volatility and the new operator's capital deployment. The favorable litigation outcome removes a potential liability. The new operator (T2S) is also a major unitholder, aligning interests to some extent.
• Employees: Not directly applicable as the Trust has no employees. Operational employees are under T2S.
• Customers: Not directly applicable as the Trust is a passive royalty interest.
• Suppliers/Creditors: Not directly applicable to the Trust itself, but T2S's operations impact their suppliers. The Trust has no significant creditors other than its distribution payable.

Next Steps

• T2S plans to continue the 2025 capital and workover budget of $4.0 million, including drilling two wells (one injector, one producer in Crane County, Texas).
• T2S plans to participate in a new non-operated well with planned completion during the third quarter of 2025.
• T2S plans to invest in workovers, waterflood pattern conformance, and returning certain shut-in wells to production.
• The Trust will continue to make monthly cash distributions to unitholders.

Key Dates

Recommendation

The Trust presents a mixed financial picture with a decline in Q2 2025 distributable income but an overall increase for the first half of the year. The favorable resolution of the 2018 litigation is a positive, removing a long-standing legal overhang. However, the significant drop in commodity prices for May 2025 production, which will impact future distributions, introduces considerable uncertainty and downside risk. While the new operator, T2S, has outlined a capital plan for 2025, the slow pace of expenditure to date and the impact of the transition on production volumes suggest that immediate improvements may be limited. Given the volatility in commodity prices, the natural decline of mature assets, and the ongoing integration with a new operator, a 'hold' recommendation is appropriate. Investors should monitor T2S's capital deployment effectiveness and future commodity price trends closely before making further investment decisions.

Keywords

Oil & Gas, Royalty Trust, Permian Basin, Energy, Oil Production, Natural Gas Production, SEC Filing, Financial Results, Distributable Income, T2S Permian, Boaz Energy