SCHEDULE 13D: T2S Permian Secures $19 Million Loan to Fund Permian Basin Oil & Gas Acquisition and Strategic Trust Unit Stake

T2S Permian Acquisition II LLC has secured a $19 million term loan from Frost Bank to finance the acquisition of oil and gas properties in the Permian Basin and a significant stake in PermRock Royalty Trust.

Summary

• T2S Permian Acquisition II LLC (Borrower) has entered into a Loan Agreement with Frost Bank (Agent/Bank) for a Term Loan of up to $19,000,000.00.
• The loan proceeds are designated for the acquisition of oil and gas properties (BOAZ Properties) located in multiple Texas counties and related transaction costs, pursuant to a Purchase and Sale Agreement dated January 10, 2025.
• The Term Loan bears interest at Daily Simple SOFR plus 3.0%, with a floor rate of 1.0% per annum.
• Monthly installments of $316,666.67 plus accrued interest commence on April 25, 2025, with the full principal and accrued interest due by the Maturity Date of March 31, 2030.
• The loan is secured by first liens and security interests on the acquired BOAZ Properties, a pledge of 4,884,861 units (approximately 40.2% of outstanding units) in PERMROCK ROYALTY TRUST (NYSE: PRT) held by Ustx LLC, and substantially all personal property of the Borrower and its Guarantors.
• An Origination Fee of $57,000.00 is payable to the Banks.
• The Borrowing Base is initially set at $19,000,000.00 and is subject to periodic redeterminations (March 1 and September 1 annually, starting September 1, 2025) and special redeterminations.
• Guarantors for the loan include Bnktx LLC, Ontx LLC, and Ustx LLC, all Delaware limited liability companies.
• The Borrower and Guarantors are required to maintain financial covenants, including a Debt to EBITDAX Ratio of less than or equal to 2.75 to 1.00 and a Current Ratio greater than or equal to 1.0 to 1.0, commencing June 30, 2025.
• Hedging limitations require that commodity hedge transactions cover at least 65% of anticipated production from proved developed producing Borrowing Base Properties for a minimum of 24 months, not exceeding 85% of production, and are not for speculative purposes.

Sentiment

Score: 7

Explanation: The document outlines a successful debt financing for a strategic acquisition, indicating positive progress for the company. The terms appear standard for the industry, and no immediate negative surprises are evident. The acquisition of a significant royalty trust stake adds a potentially stable income component. However, the inherent risks of oil and gas operations, borrowing base redeterminations, and financial covenants introduce a degree of caution.

Positives

• Successful securing of a $19 million term loan provides necessary capital for strategic oil and gas property acquisitions.
• The acquisition includes a significant stake (40.2%) in PermRock Royalty Trust units, potentially offering stable royalty income.
• The loan structure includes a SOFR floor of 1.0%, providing some protection against extremely low interest rate environments.
• The ability to cure financial covenant breaches with equity contributions (Equity Cure) offers flexibility in managing financial performance.

Negatives

• The loan carries an interest rate of Daily Simple SOFR plus 3.0%, which could increase borrowing costs if SOFR rises significantly.
• Borrowing Base redeterminations could lead to deficiencies requiring immediate prepayment, additional collateral, or increased interest rates (Default Rate).
• Strict hedging requirements (65-85% of production for 24-36 months) may limit flexibility in commodity price exposure.
• The company is subject to various financial covenants (Debt to EBITDAX, Current Ratio) that require ongoing compliance and reporting.

Risks

• Borrowing Base Deficiency: A decrease in the Borrowing Base below the Aggregate Exposure could trigger immediate repayment obligations, additional collateral requirements, or an increased interest rate (Default Rate).
• Interest Rate Fluctuations: While there is a floor, increases in Daily Simple SOFR could lead to higher interest payments on the Term Loans.
• Environmental Liabilities: Buyer assumes all obligations and liabilities related to environmental laws and conditions of the acquired assets, regardless of when they arose, including those from pre-existing conditions or seller's negligence.
• Operational Risks: The company is responsible for all operational aspects of the acquired oil and gas properties, including plugging, abandonment, decommissioning, and compliance with all relevant laws and industry standards.
• Hedging Limitations: Failure to comply with hedging requirements (e.g., minimum/maximum hedged volumes, non-speculative intent) could lead to default or borrowing base redetermination.
• Default Events: Various events, including failure to make payments, breach of covenants, or bankruptcy proceedings, can trigger an Event of Default, leading to acceleration of the loan and enforcement of security interests.
• Title Defects: While remedies are provided, unresolved title defects could impact the value or operational efficiency of the acquired properties.
• Regulatory Compliance: Ongoing compliance with federal, state, and local laws, including environmental and tax regulations, is required, with potential liabilities for non-compliance.

Future Outlook

The document outlines the financing structure for T2S Permian Acquisition II LLC's strategic acquisition of oil and gas properties and a significant stake in PermRock Royalty Trust. This transaction is expected to expand the company's asset base and revenue streams, with future performance tied to the successful operation of these new assets and the stability of the royalty trust distributions. The loan agreement includes provisions for ongoing financial reporting and compliance, indicating a structured approach to managing the new debt and assets.

Management Comments

• Thomas W. Pritchard, Chief Executive Officer of T2S Permian Acquisition II LLC, signed the Loan Agreement and related documents, indicating management's commitment to the transaction.

Industry Context

This transaction represents a typical strategy in the U.S. oil and gas industry, where companies utilize debt financing, often in the form of reserve-based loans, to acquire producing assets and expand their footprint. The focus on the Permian Basin highlights its continued importance as a prolific and attractive region for oil and gas investment. The acquisition of a royalty trust stake suggests a dual strategy of direct operational control over certain assets and passive income generation from a broader production base, common among diversified energy investors.

Comparison to Industry Standards

• The use of a reserve-based lending facility with a borrowing base tied to proved reserves is a standard financing mechanism in the oil and gas exploration and production (E&P) sector, commonly employed by companies like Diamondback Energy, Pioneer Natural Resources, or smaller private E&P firms for acquisitions.
• The interest rate structure (SOFR + 3.0% with a 1.0% floor) is within the typical range for such facilities, reflecting current market conditions and the perceived risk profile of oil and gas assets.
• Financial covenants such as Debt to EBITDAX (2.75x) and Current Ratio (1.0x) are common in E&P credit agreements, designed to ensure the borrower maintains adequate financial health and liquidity. These ratios are generally in line with those seen in similar-sized private and public E&P companies, though specific benchmarks vary by company and market cycle.
• The hedging requirements (65-85% of anticipated production for 24-36 months) are standard for reserve-based loans, aiming to mitigate commodity price volatility and ensure predictable cash flows for debt service, a practice observed across the industry from large independents to smaller operators.
• The acquisition of royalty trust units, while less common for direct E&P companies, is a strategy employed by some investment vehicles or diversified energy firms to gain exposure to production without direct operational responsibilities, similar to how some private equity funds might invest in royalty interests alongside direct asset ownership.

Corporate Governance

Related Party Transactions

• T2S Permian Acquisition II LLC (Borrower) owns 100% of Ustx LLC (Guarantor and holder of Pledged Units).
• Greenway Boaz Investments LLC owns approximately 50.2% of T2S Permian, and Greenway Boaz Management LLC is the sole manager of Greenway Boaz Investments LLC.
• EnRes Capital Fund I, LP (25.1% owner of T2S Permian) and EnRes Capital BZ, LP (22.7% owner of T2S Permian) are managed by EnRes Capital Fund I GP, LLC, which is their general partner.

Stakeholder Impact

• Shareholders: The acquisition and associated financing could lead to increased asset value and potential future returns if the acquired properties perform well and the royalty trust units provide stable income. However, increased debt also introduces higher financial risk.
• Employees: The acquisition of new properties may lead to stable or expanded operational roles, particularly for those involved in the Permian Basin assets.
• Customers/Suppliers: Continued and potentially expanded operations in the Permian Basin may lead to ongoing or new business opportunities for service providers and purchasers of hydrocarbons.
• Creditors (Frost Bank and other Banks): The loan is secured by substantial assets, including oil and gas properties and a significant stake in a royalty trust, providing a strong collateral position. Financial covenants and reporting requirements offer ongoing oversight.
• PermRock Royalty Trust Unitholders: The acquisition of a large block of units by Ustx LLC (an affiliate of T2S Permian) means a significant portion of the trust's beneficial interest is now concentrated under this new ownership group, potentially influencing future trust-related decisions or market dynamics for the units.

Next Steps

• Borrower may request a single advance on the Term Loans through April 4, 2025.
• First monthly loan installment payment is due on April 25, 2025.
• Unaudited quarterly financial statements and Compliance Certificates are due within 60 days of each fiscal quarter-end, commencing June 30, 2025.
• Borrower-prepared reserve reports are due by August 31, 2025, and annually thereafter.
• Periodic Borrowing Base redeterminations will occur on or around March 1 and September 1 of each year, commencing September 1, 2025.
• Annual audited financial statements are due within 120 days of the fiscal year-end, commencing December 31, 2025.
• Independent petroleum engineering firm reserve reports are due by March 31, 2026, and annually thereafter.
• Borrower and Guarantors must ensure compliance with Debt to EBITDAX Ratio (<= 2.75:1.00) and Current Ratio (>= 1.0:1.0) covenants quarterly, starting June 30, 2025.
• Borrower and Guarantors must maintain required hedging positions (at least 65% of anticipated production for 24 months) and provide hedging reports quarterly.

Key Dates

Keywords

Oil and Gas, Permian Basin, Debt Financing, Term Loan, Acquisition, Royalty Trust, PERMROCK ROYALTY TRUST, PRT, Frost Bank, T2S Permian, SEC Schedule 13D, Corporate Debt, Energy Sector, Financial Covenants, Hedging, Borrowing Base, SEC Filing, Corporate Governance