10-Q: PermRock Royalty Trust Reports Mixed Results for Q2 2024 Amidst Production and Price Volatility

PermRock Royalty Trust's Q2 2024 results show a slight increase in net profits income compared to the same period last year, but a decrease compared to the first six months of 2023, influenced by fluctuating oil and gas prices and production volumes.

Summary

• PermRock Royalty Trust reported a net profits income of $1,658,420 for the three months ended June 30, 2024, compared to $1,573,745 for the same period in 2023.
• Distributable income for the quarter was $1,350,037, or $0.110969 per Trust unit.
• For the six months ended June 30, 2024, net profits income was $2,954,828, a decrease from $3,940,422 in the same period of 2023.
• Distributable income for the first six months of 2024 was $2,472,539, or $0.203235 per Trust unit, down from $3,440,377, or $0.282792 per unit in 2023.
• The decrease in net profits income for the six-month period was primarily due to lower oil and gas prices and higher production costs.
• The Trust's total assets were $75,604,227 as of June 30, 2024, compared to $77,244,781 at the end of 2023.
• The Trust maintains a cash reserve of $1,000,000 for administrative expenses.
• Boaz Energy's estimated capital budget for 2024 is $4.5 million, with $1.5 million spent by June 30, 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to mixed results, with a slight increase in Q2 net profits but a decrease over the six-month period, coupled with production declines and price volatility. The ongoing litigation and reliance on Boaz Energy's operations add to the uncertainty.

Positives

• Net profits income for the three months ended June 30, 2024, increased compared to the same period in 2023.
• General and administrative expenditures decreased for both the three and six month periods ended June 30, 2024, compared to the same periods in 2023.
• The Trust continues to maintain a $1,000,000 cash reserve for administrative expenses.
• Interest income increased for the six months ended June 30, 2024, due to higher interest rates.

Negatives

• Net profits income for the six months ended June 30, 2024, decreased compared to the same period in 2023.
• Oil and natural gas sales volumes decreased for both the three and six months ended June 30, 2024, compared to the same periods in 2023.
• The average realized natural gas price per Mcf decreased for both the three and six months ended June 30, 2024, compared to the same periods in 2023.
• Lease operating expenses increased for the three months ended June 30, 2024, compared to the same period in 2023.

Risks

• The Trust's revenue and distributions are highly dependent on volatile oil and natural gas prices.
• The Trust has no control over the operations of the Underlying Properties, which are managed by Boaz Energy.
• Changes in commodity prices, political and economic conditions, and regulatory actions could negatively impact the Trust's performance.
• The Trust is subject to risks associated with drilling and operating oil and natural gas wells.
• The ongoing litigation could have an impact on the Trust's financial results.
• 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, as well as drilling one new operated well in 2024. The capital budget is subject to change based on oil and gas prices 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 June 30, 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 increase in average realized oil price was primarily due to an increase in the WTI benchmark oil price.
• Boaz Energy reports that the decrease in average realized natural gas price was primarily due to a decrease in the Henry Hub benchmark price for natural gas.

Industry Context

The results reflect the broader volatility in the oil and gas industry, with fluctuating prices and production volumes impacting royalty trusts. The Permian Basin remains a key area for oil and gas production, but is subject to market and operational risks.

Comparison to Industry Standards

• PermRock's performance is comparable to other royalty trusts that are heavily influenced by commodity prices and production volumes.
• Companies such as Viper Energy Partners LP (VNOM) and Texas Pacific Land Corporation (TPL) also experience fluctuations in revenue based on oil and gas prices and production in the Permian Basin.
• The reported production declines are consistent with the natural decline rates seen in mature oil and gas fields, which is a common challenge for royalty trusts.
• The capital expenditure plans of Boaz Energy are similar to those of other operators in the region, focusing on maintaining production and enhancing recovery through waterflood projects.

Legal Proceedings

• The Trust is involved in ongoing litigation related to surface use damages and alleged violations of lease terms.
• The court granted motions for summary judgment in favor of the defendants, but the plaintiff has filed an appeal.
• The parties are awaiting an opinion from the appellate court.

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 monthly distributions based on the Trust's net profits income.
• The Trust's performance is directly linked to the operational decisions and capital expenditures of Boaz Energy.
• The ongoing litigation could potentially impact future distributions to unitholders.
• Employees of Boaz Energy are indirectly impacted by the performance of the Underlying Properties.

Next Steps

• The Trust will continue to make monthly cash distributions to unitholders.
• Boaz Energy will continue to execute its 2024 capital budget, including drilling and waterflood projects.
• The Trust will await the court's opinion on the ongoing litigation.

Key Dates

Keywords

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