10-Q: PermRock Royalty Trust Reports Q3 2024 Results: Production Declines Impact Distributable Income

PermRock Royalty Trust's Q3 2024 distributable income decreased due to lower production volumes and natural gas prices, despite higher oil prices.

Summary

• PermRock Royalty Trust reported a decrease in distributable income for the third quarter of 2024, with $1,340,784, or $0.110208 per unit, compared to $1,466,168, or $0.120516 per unit, for the same period in 2023.
• The decrease in net profits income was primarily due to decreased oil and gas production, lower natural gas prices, and higher development expenses, which were only partially offset by higher oil prices.
• For the nine months ended September 30, 2024, distributable income was $3,813,324, or $0.313443 per unit, compared to $4,906,523, or $0.403307 per unit, for the same period in 2023.
• The Trust's net profits income for the nine months ended September 30, 2024, was $4,503,683, compared to $5,632,011 for the same period in 2023.
• The Trust's total assets were $74,538,966 as of September 30, 2024, compared to $77,244,781 as of December 31, 2023.
• Boaz Energy's estimated capital budget for 2024 is $4.5 million, with approximately $2.6 million spent as of September 30, 2024.
• The Trust's cash reserves remain at $1,000,000 as of September 30, 2024.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to decreased production, lower distributable income, and ongoing litigation. However, there are some positives such as increased oil prices and decreased administrative expenses.

Positives

• The average realized oil price increased for both the three and nine months ended September 30, 2024, compared to the same periods in 2023.
• General and administrative expenditures decreased by $16,883 for the three months ended September 30, 2024, compared to the prior year.
• Interest income was slightly higher for the quarter ended September 30, 2024, as compared to the prior year, due to higher interest rates.
• General and administrative expenditures decreased by $33,612 for the nine months ended September 30, 2024, as compared to the prior year, primarily due to timing of payments and a decrease in legal expenses.

Negatives

• Distributable income decreased for both the three and nine months ended September 30, 2024, compared to the same periods in 2023.
• Net profits income decreased for both the three and nine months ended September 30, 2024, compared to the same periods in 2023.
• Oil and natural gas sales volumes decreased for both the three and nine months ended September 30, 2024, compared to the same periods in 2023.
• The average realized natural gas price decreased for both the three and nine months ended September 30, 2024, compared to the same periods in 2023.
• Development expenses increased for the three months ended September 30, 2024, compared to the same period in 2023.
• Direct operating expenses increased for the three months ended September 30, 2024, as compared to the same period in 2023.

Risks

• The Trust's revenue and distributions are substantially dependent on oil and natural gas prices, which are subject to volatility.
• The Trust relies on Boaz Energy for information regarding the Underlying Properties and their operations.
• The Trust has no control over the operation of the Underlying Properties or the costs associated with them.
• The Trust is subject to risks associated with the drilling and operation of oil and natural gas wells.
• The Trust is subject to the risk of potential litigation, as evidenced by the ongoing appeal in the 2018 Litigation.
• Changes in commodity prices or alternative fuel prices could negatively impact the Trust's performance.
• Political and economic conditions in oil and gas producing regions could affect the Trust's results.
• Uncertainties in estimating production and oil and natural gas reserves of the Underlying Properties could impact the Trust's income.
• The cost of developing the Underlying Properties could impact the Trust's net profits.
• The ability to maintain anticipated production levels is a risk to the Trust's income.
• The amount of future direct operating expenses, development expenses and other capital expenditures could impact the Trust's net profits.
• The availability and terms of capital to fund capital expenditures could impact the Trust's operations.
• The performance of third parties contracted by Boaz Energy could impact the Trust's operations.
• Existing and future laws and regulatory actions could impact the Trust's operations.
• Competition from others in the energy industry could impact the Trust's performance.
• Severe or unseasonable weather may adversely affect production.
• The adequacy of Boaz Energy's insurance coverage is a risk to the Trust.
• Costs to comply with current and future governmental regulation of the oil and natural gas industry could impact the Trust's net profits.
• General economic conditions affecting the Permian Basin could impact the Trust's performance.
• Risks associated with title deficiencies that may arise with respect to the Underlying Properties could impact the Trust's operations.
• Actions by Boaz Energy, including such that result in conflicts of interest, that adversely affect the Trust are a risk.
• The ability to successfully estimate the impact of litigation matters, and certain accounting and tax matters is a risk to the Trust.
• The cost of inflation is a risk to the Trust.

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 $4.5 million capital expenditure estimate is subject to change based on oil and gas prices, Boaz Energy's actual capital requirements, regulatory approvals, and project mix.

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 September 30, 2024.
• Boaz Energy reports that the decrease in oil and gas production was primarily due to a natural decline in the producing properties and a decrease in demand.
• Boaz Energy reports that the increase in the average realized oil price was primarily due to an increase in the WTI benchmark oil price.
• Boaz Energy reports that the decrease in the average realized natural gas price was primarily due to a decrease in the Henry Hub benchmark price for natural gas.
• Boaz reports that the increase in direct operating expenses was primarily due to additional costs to return wells to production.
• Boaz reports that the decrease in lease operating expenses was primarily because of reduced expenses on marginal wells in the Permian Shelf.
• Boaz reports that the decrease in severance and ad valorem taxes was primarily because of lower revenues and decreased valuations of properties resulting from decreased industry prices.
• Boaz reports that the increase in development expenses was due to stimulating and upgrading wells in the Permian Platform.
• Boaz reports that the decrease in other expenses was primarily due to adjustments to overhead.

Industry Context

The report reflects the challenges faced by oil and gas producers in the Permian Basin, including production declines and price volatility. The decrease in natural gas prices and the increase in oil prices are consistent with broader market trends. The ongoing capital expenditure program indicates a continued effort to maintain and enhance production.

Comparison to Industry Standards

• PermRock Royalty Trust's performance is directly tied to the production and pricing of oil and gas in the Permian Basin, similar to other royalty trusts in the region.
• The reported production declines are not uncommon for mature oil and gas fields, and many companies in the Permian Basin are facing similar challenges.
• The Trust's reliance on Boaz Energy for operational information is typical for royalty trusts, which are passive investment vehicles.
• The capital expenditure plans of Boaz Energy are consistent with industry practices of investing in well maintenance, waterflood projects, and new drilling to sustain production.
• The Trust's administrative expenses are in line with other similar trusts, with a focus on minimizing costs to maximize distributions to unitholders.
• The ongoing litigation is a risk factor that is not unique to PermRock, as many oil and gas companies face legal challenges related to lease agreements and operations.
• The Trust's financial performance is comparable to other royalty trusts that are exposed to similar market conditions and operational risks.
• Companies such as Viper Energy Partners LP (VNOM) and Texas Pacific Land Corporation (TPL) are comparable in that they are also exposed to the Permian Basin, but they have different structures and operational models.

Legal Proceedings

• The 2018 Litigation, involving Boaz Energy and the Trust, is still ongoing with an appeal pending before the Eighth Court of Appeals in El Paso County, Texas.

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 experience lower distributions due to decreased net profits income.
• Employees of Boaz Energy may be impacted by changes in capital expenditure plans.
• Customers of Boaz Energy may be impacted by changes in production volumes.
• Suppliers of Boaz Energy may be impacted by changes in capital expenditure plans.
• Creditors of Boaz Energy may be impacted by changes in the company's financial performance.

Next Steps

• The Trust will continue to monitor the performance of the Underlying Properties and the market conditions.
• The Trust will continue to make monthly cash distributions to unitholders.
• The Trust will await an opinion from the court regarding the appeal in the 2018 Litigation.
• Boaz Energy will continue to execute its 2024 capital expenditure plan.

Key Dates

Keywords

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