PermRock Royalty Trust 10-Q, filed Aug 14, 2020
PermRock Royalty Trust (PRT)
About this 10-Q
PermRock Royalty Trust filed this 10-Q on August 14, 2020, covering the quarter ended June 30, 2020.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-Q
———————
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2020
Or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________
Commission File Number: 001-38472
———————
PERMROCK ROYALTY TRUST
(Exact name of registrant as specified in the
Amended and Restated Trust Agreement of PermRock Royalty Trust)
———————
Delaware | 82-6725102 |
(State or other jurisdiction | (I.R.S. Employer |
of incorporation or organization) | Identification No.) |
Simmons Bank, Trustee
P.O. Box 470727
Fort Worth, Texas 76147
(Address of Principal Executive Offices) (Zip Code)
(855) 588-7839
(Registrant’s telephone number, including area code)
———————
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Units of Beneficial Interest | PRT | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
| Accelerated filer ¨ |
Non-accelerated filer þ |
| Smaller reporting company þ |
|
| Emerging growth company þ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
As of August 14, 2020, 12,165,732 trust units representing beneficial interests in PermRock Royalty Trust were outstanding.
TABLE OF CONTENTS
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| Page No. |
| ii | |
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| PART I. – FINANCIAL INFORMATION |
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Financial Statements | 1 | |
| CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS | 2 |
| 3 | |
| 4 | |
| 5 | |
|
|
|
Trustee’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
Quantitative and Qualitative Disclosures About Market Risk | 17 | |
Controls and Procedures | 17 | |
|
|
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| PART II. – OTHER INFORMATION |
|
|
|
|
Legal Proceedings | 18 | |
Risk Factors | 18 | |
Exhibits | 19 | |
| 20 |
i
Bbl | Barrel (of oil). |
Boe | One barrel of crude oil equivalent. |
differential | The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil spot, and the wellhead price received. |
distributable income | An amount paid to Trust unitholders equal to the net profits income received by the Trust during a given period plus interest, less the expenses and payment of liabilities of the Trust, adjusted by any changes in cash reserves. |
GAAP | United States generally accepted accounting principles. |
MBbl | One thousand barrels of crude oil or condensate. |
MBoe | One thousand barrels of crude oil equivalent. |
Mcf | One thousand cubic feet (of natural gas). |
MMcf | One million cubic feet (of natural gas). |
natural gas liquids (NGL) | Those hydrocarbons that are separated from the gas as liquids through the process of absorption, condensation, or other methods in gas processing or cycling plants. |
net acres | The sum of the fractional working interests owned by a given operator in gross acres. |
net profits | Gross profits received by Boaz Energy from the sale of production from the Underlying Properties, less applicable costs, as provided in the Conveyance. |
net profits income | Net profits multiplied by the net profits percentage of 80%, which is paid to the Trust by Boaz Energy. “Net profits income” is referred to as “royalty income” for tax reporting purposes. |
Net Profits Interest | An interest in an oil and natural gas property measured by net profits from the sale of production, rather than a specific portion of production. An 80% net profits interest was conveyed to the Trust entitling the Trust to receive 80% of the net profits from the Underlying Properties. |
NYMEX | The New York Mercantile Exchange is a commodity futures exchange that quotes prices for transactions which are the prices paid for various commodities, including oil and natural gas, throughout the world. |
Trust units | Trust units representing beneficial interests in the Trust. |
Underlying Properties | The interest in certain oil and natural gas properties from which the Net Profits Interest was conveyed by Boaz Energy. The Underlying Properties include working interests in oil and natural gas producing properties located in the Permian Basin in Texas. |
working interest | An operating interest in an oil and natural gas property that provides the owner a specified share of production that is subject to all production expense and development costs. |
ii
PART I. – FINANCIAL INFORMATION
ITEM 1.
The condensed financial statements included herein are presented without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, and Simmons Bank, as Trustee (the “Trustee”), believes that the disclosures are adequate to make the information presented not misleading. These condensed interim financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto included in the Trust’s 2019 Annual Report on Form 10-K (“2019 Annual Report”). In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets, liabilities and Trust corpus of PermRock Royalty Trust at June 30, 2020 and December 31, 2019, and the distributable income and changes in Trust corpus for the three- and six-month periods ended June 30, 2020 and June 30, 2019 have been included. Distributable income for such interim periods is not necessarily indicative of distributable income for the full year.
1
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
|
| June 30, 2020 (unaudited) |
|
| December 31, 2019 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Cash and short-term investments |
| $ | 1,000,000 |
|
| $ | 1,215,386 |
|
Net Profits Interest (1) |
|
| 88,393,841 |
|
|
| 89,043,803 |
|
TOTAL ASSETS |
| $ | 89,393,841 |
|
| $ | 90,259,189 |
|
LIABILITIES AND TRUST CORPUS |
|
|
|
|
|
|
|
|
Distribution payable to unitholders |
| $ | 0 |
|
| $ | 615,386 |
|
Cash reserves (2) |
|
| 1,000,000 |
|
|
| 600,000 |
|
Trust corpus |
|
| 88,393,841 |
|
|
| 89,043,803 |
|
TOTAL LIABILITIES AND TRUST CORPUS |
| $ | 89,393,841 |
|
| $ | 90,259,189 |
|
(1) | See Note 2 to condensed financial statements for further discussion of the Net Profits Interest. |
(2) | The Trustee is authorized to retain cash from distributions received by the Trust in an amount not to exceed $1.0 million to be used in the event that cash on hand is not sufficient to pay ordinary course administrative expenses and to provide for future liabilities of the Trust. |
The accompanying notes to condensed financial statements are an integral part of these financial statements.
2
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net profits income |
| $ | 376,992 |
|
| $ | 3,140,783 |
|
| $ | 2,131,247 |
|
| $ | 5,463,992 |
|
Interest income |
|
| 1,245 |
|
|
| 1,499 |
|
|
| 4,318 |
|
|
| 4,656 |
|
Total revenue |
|
| 378,237 |
|
|
| 3,142,282 |
|
|
| 2,135,565 |
|
|
| 5,468,648 |
|
Expenditures – general and administrative |
|
| (278,237 | ) |
|
| (356,571 | ) |
|
| (540,501 | ) |
|
| (612,135 | ) |
Cash reserves (1) |
|
| (100,000 | ) |
|
| (140,000 | ) |
|
| (400,000 | ) |
|
| (140,000 | ) |
Distributable income |
| $ | 0 |
|
| $ | 2,645,711 |
|
| $ | 1,195,064 |
|
| $ | 4,716,513 |
|
Distributable income per unit (2) |
| $ | 0.000000 |
|
| $ | 0.217472 |
|
| $ | 0.098232 |
|
| $ | 0.387688 |
|
(1) | The Trustee is authorized to retain cash from distributions received by the Trust in an amount not to exceed $1.0 million to be used in the event that cash on hand is not sufficient to pay ordinary course administrative expenses and to provide for future liabilities of the Trust. |
(2) | Based on 12,165,732 Trust units issued and outstanding as of March 31, 2020. Based on 12,165,732 Trust units issued and outstanding as of August 14, 2020. |
The accompanying notes to condensed financial statements are an integral part of these financial statements.
3
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Trust corpus, beginning of period |
| $ | 88,578,755 |
|
| $ | 91,528,622 |
|
| $ | 89,043,803 |
|
| $ | 92,186,176 |
|
Amortization of Net Profits Interest |
|
| (184,914 | ) |
|
| (915,384 | ) |
|
| (649,962 | ) |
|
| (1,572,938 | ) |
Distributable income |
| $ | 0 |
|
| $ | 2,645,711 |
|
| $ | 1,195,064 |
|
| $ | 4,716,513 |
|
Distributions declared |
|
| (0 | ) |
|
| (2,645,711 | ) |
|
| (1,195,064 | ) |
|
| (4,716,513 | ) |
Trust corpus, end of period |
| $ | 88,393,841 |
|
| $ | 90,613,238 |
|
| $ | 88,393,841 |
|
| $ | 90,613,238 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. | Organization of Trust |
PermRock Royalty Trust (the “Trust”) is a Delaware statutory trust formed on November 22, 2017 under the Delaware Statutory Trust Act pursuant to a trust agreement dated November 22, 2017, as amended and restated on May 4, 2018, by and among Boaz Energy II, LLC (“Boaz Energy”), as trustor, Simmons Bank, as Trustee (the “Trustee”), and Wilmington Trust, National Association, as Delaware Trustee (the “Delaware Trustee”) (such amended and restated trust agreement, as amended to date, the “Trust Agreement”).
The Trust was created to acquire and hold the Net Profits Interest for the benefit of the Trust unitholders. In connection with the closing of the initial public offering of Trust units, on May 4, 2018, Boaz Energy conveyed the Net Profits Interest to the Trust in exchange for Trust units pursuant to a conveyance agreement between Boaz Energy, the Trustee and the Delaware Trustee (the “Conveyance”). The Net Profits Interest represents an interest in the Underlying Properties.
The Net Profits Interest entitles the Trust to receive 80% of the net profits from the sale of oil and natural gas production from the Underlying Properties. The Net Profits Interest is passive in nature and neither the Trust nor the Trustee has any control over, or responsibility for, costs relating to the operation of the Underlying Properties. The Trust has and will continue to make monthly cash distributions of all of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and any cash reserves, to holders of its Trust units as of the applicable record date on or before the 10th business day after the record date. Distributions generally relate to sales from a one-month period.
The Trustee may deposit funds awaiting distribution in an account with an FDIC-insured or national bank, including the Trustee, if the interest paid to the Trust at least equals amounts paid by the Trustee on similar deposits, and make other short-term investments with the funds distributed to the Trust.
In May 2018, Boaz Energy completed an initial public offering of 6,250,000 of its Trust units.
2. | Trust Significant Accounting Policies |
a. | Basis of Accounting |
The Trust uses the modified cash basis of accounting to report Trust receipts of the Net Profits Interest and payments of expenses incurred. The Net Profits Interest represents the right to receive revenues (primarily oil and natural gas sales), less direct operating expenses, lease operating expenses, severance and ad valorem taxes and development expenses of the Underlying Properties, multiplied by 80%, less any payments made or plus any payments received in connection with the settlement of certain hedge contracts. Cash distributions of the Trust are made based on the amount of cash received by the Trust pursuant to terms of the Conveyance creating the Net Profits Interest.
The financial statements of the Trust, as prepared on a modified cash basis, reflect the Trust’s assets, liabilities, Trust corpus, earnings and distributions as follows:
| · | Income from the Net Profits Interest is recorded when distributions are received by the Trust; |
| · | Distributions to Trust unitholders are recorded when declared by the Trust; |
| · | Trust general and administrative expenses (which includes the Trustee’s fees as well as accounting, printing, engineering, legal, tax advisory and other professional fees) are recorded when paid; cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities under United States generally accepted accounting principles (“GAAP”); |
| · | Amortization of the investment in the Net Profits Interest is calculated on a unit-of-production basis and is charged directly to Trust corpus, and such amortization does not affect distributions from the Trust; and |
| · | The Trust’s investment in the Net Profits Interest is periodically assessed to determine whether its aggregate value has been impaired below its total capitalized cost basis and, if an impairment loss is indicated by the carrying amount of the assets exceeding the sum of the undiscounted expected future net cash flows, then an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value. |
5
PERMROCK ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The financial statements of the Trust are prepared on a modified cash basis of accounting, which is considered to be the most meaningful basis of preparation for a royalty trust because monthly distributions to the Trust unitholders are based on net cash receipts. Although this basis of accounting is permitted for royalty trusts by the SEC, the financial statements of the Trust differ from financial statements prepared in accordance with GAAP because net profits income is not accrued in the month of production, expenses are not recognized when incurred and cash reserves may be established for certain contingencies that would not be recorded in GAAP financial statements. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
b. | Interim Financial Statements. |
The accompanying unaudited financial statements have been prepared by the Trust in accordance with the accounting policies stated in the audited financial statements and notes of the Trust thereto included in the Trust’s 2019 Annual Report and reflect all adjustments that are, in the opinion of the Trustee, necessary to state fairly the information in the Trust’s unaudited interim financial statements.
c. | Use of Estimates. |
The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
d. | Risks and Uncertainties. |
The Trust’s revenue and distributions are substantially dependent upon the prevailing and future prices for oil and natural gas, each of which depends on numerous factors beyond the Trust’s control such as economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future.
Revenue received by the Trust (and its ability to pay distributions) has been and will continue to be directly affected by the volatility in commodity prices, which have declined sharply since the beginning of 2020 in response to the economic effects of the COVID-19 pandemic and the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries. The sharp decline in commodity prices has resulted in an oversupply of crude oil, further exacerbating the decline in crude oil prices, which could remain low for an extended period of time.
e. | Contingencies. |
Contingencies related to the Underlying Properties that are unfavorably resolved would generally be expected to result in reductions to cash receipts to the Trust in respect of the Net Profits Interest with corresponding reductions to cash distributions to Trust unitholders. Please see the discussion of litigation in Note 9 to condensed financial statements.
3. | Income Taxes |
Tax counsel advised the Trust at the time of formation that for U.S. federal income tax purposes, the Trust is treated as a grantor trust and will not be subject to federal income tax at the trust level. Trust unitholders will be treated for such purposes as owning a direct interest in the assets of the Trust, and each Trust unitholder is taxed directly on its pro rata share of the income and any gain, if sold, attributable to the assets of the Trust and is entitled to claim its pro rata share of deductions and expenses attributable to the assets of the Trust. Each Trust unitholder should consult his or her own tax advisor regarding income tax requirements, if any, applicable to such unitholder’s ownership of Trust units.
6
PERMROCK ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. | Cash Reserves |
Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee began retaining cash from the distributions the Trust receives to be used by the Trust in the event that its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses as they become due. The Trustee is authorized to retain cash reserves (i) in an amount not to exceed $1.0 million at any one time and (ii) in such amounts as the Trustee in its discretion deems appropriate to pay for future liabilities of the Trust, but not less than $25,000 per month or more than $100,000 per month. Cash reserves held by the Trustee for administrative expenses totaled $1,000,000 as of June 30, 2020.
Boaz Energy is entitled under the Conveyance to reserve up to $3 million from the net profits for certain taxes and development or operating expenses. In April 2020, Boaz Energy reserved $305,502 net to the Trust, which was applied in part to recoupment of the $80,000 net to the Trust balance of previously advanced funds, and the remaining $225,502 net to the Trust was reserved for certain taxes and future development expenses. In May 2020, Boaz Energy reserved $254,868 net to the Trust for future expenses as well. Then, in June 2020, Boaz Energy applied $287,649 net to the Trust of funds previously reserved in April and May 2020. As of June 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $192,721.
5. | Distributions to Unitholders |
The Trust makes monthly cash distributions of the net amount, if any, of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and cash reserves to holders of its Trust units as of the applicable record date on or before the 10th business day after the record date.
Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the quarter ended June 30, 2020 were as follows:
Record Date |
| Payment Date |
| Distribution per Unit |
April 30, 2020 |
| May 14, 2020 |
| $0.000000 |
May 29, 2020 |
| June 12, 2020 |
| 0.000000 |
June 30, 2020 |
| July 14, 2020 |
| 0.000000 |
|
|
|
| $0.000000 |
6. | Related Party Transactions |
Trustee Administrative Fee. Under the terms of the Trust Agreement, the Trust pays an annual administrative fee to the Trustee and the Delaware Trustee. The Delaware Trustee’s annual fee is $4,000. For 2020, the Trustee’s annual administrative fee is $189,072. The Trustee’s annual administrative fee will increase at a rate of 3% per year for the first three years of the Trust’s existence, increase at a rate of 2% per year for the following two years, then increase at a rate of 1% per year until the 20th anniversary of the Trust’s formation and then remain flat thereafter. These costs of the Trust, which are included in administration expenses, are deducted by the Trust before distributions are made to Trust unitholders.
Agreements with Boaz Energy. On May 4, 2018, the Trust entered into a registration rights agreement for the benefit of Boaz Energy and certain of its affiliates and transferees, pursuant to which the Trust agreed to register the offering of the Trust units held by Boaz Energy and certain of its affiliates and permitted transferees upon request by Boaz Energy. As of June 30, 2020, Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding.
7
PERMROCK ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. | Derivative Contracts |
Income from the Net Profits Interest is exposed to fluctuations in energy prices in the normal scope of business. To mitigate the negative effects of a possible decline in oil prices on distributable income to the Trust, Boaz Energy entered into derivative put option contracts with respect to approximately 100% of expected oil production attributable to the Net Profits Interest during 2018 and 76% of such production during 2019. These derivative contracts consisted of put option contracts with strike prices of $60 per barrel in 2018 and $50 per barrel in 2019. Boaz Energy believed that these put option contracts provided downside protection to the Trust in the event spot prices for crude oil declined below the applicable strike price, while still allowing the Trust to benefit from increasing crude oil prices. If prices for crude oil as quoted on NYMEX declined below the applicable strike prices, Boaz Energy could exercise its put option and receive payment generally equal to the difference between the applicable strike price and the market price for crude oil at the time of exercise, multiplied by the notional quantity of crude oil hedged under the applicable put option contract being exercised. These contracts expired as of December 31, 2019, and after December 31, 2019 none of the production attributable to the Underlying Properties is hedged.
For the six months ended June 30, 2019, there was $688,562 ($550,850 net to the Trust) in cash proceeds from the settlement of derivative contracts. Because the derivative contracts have since expired, there were no cash proceeds from settlement of derivative contracts during the three or six months ended June 30, 2020.
8. | Development Costs |
Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s 2020 capital budget has been increased from $2.0 million to $2.5 million, based principally upon capital projects being implemented by outside operators, of which $1,800,00 has been expended as of June 30, 2020. Based on current oil and gas prices, Boaz Energy has informed the Trustee that it is not planning any new Boaz Energy-operated wells or other significant capital projects for the remainder of 2020, other than waterflood projects and workovers principally in the Permian Platform area, the costs of which are included in the $2.5 million estimate. The estimated 2020 capital budget is subject to change based on, among other things, changes in the price of oil and natural gas, the impact of the COVID-19 pandemic on prices and economic activity, Boaz Energy’s actual capital requirements, capital expenditure requirements of third-party operators, the pace of regulatory approvals and the mix of projects.
9. | Settlements and Litigation |
On October 1, 2018, a lawsuit styled Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, No. 18-10-24761 – CVW in the 143rd District Court in Ward County, Texas (the “2018 Litigation”) was filed, naming, among others, Boaz Energy and the Trust as defendants. The plaintiff is a lessor under two leases operated by Blackbeard Operating LLC. The Underlying Properties include the interests of Boaz Energy in some of the minerals covered by those leases. The litigation seeks surface use damages and alleges violations of the terms of the leases, among other things. While it is not yet possible to estimate any potential loss or range of loss, Boaz Energy has advised the Trustee that it does not anticipate the litigation will materially affect the Trust. On January 3, 2020, Lawrence M. Marston joined the lawsuit as a plaintiff alleging surface damage claims against Blackbeard and Goodnight Midstream Permian, L.L.C., but not against the Trust. On January 17, 2020, the Trust and the other defendants filed a motion for summary judgment, which would dispose of the claims against the Trust if granted. Mediation set for April 2020 did not occur and a hearing on the summary judgment motion was delayed due to closures related to COVID-19. However, all parties have served their expert reports, there have been a series of depositions of parties and experts, and a summary judgment hearing is tentatively scheduled for August 27, 2020.
8
PERMROCK ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. | Subsequent Events |
On July 21, 2020, the Trust declared there would be no cash distribution to record unit holders as of July 31, 2020 based upon production during the month of May 2020.
In July 2020, Boaz Energy applied $192,721 net to the Trust of funds Boaz Energy previously reserved to cover certain taxes and future development expenses, and also advanced $140,606 net to the Trust to cover expenses, including Trust administrative expenses. Boaz Energy reports it anticipates recouping the $140,606 net to the Trust advancement in calculating the Trust’s Net Profits Interest in August 2020.
In July and August of 2020, the unfavorable oil and natural gas price environment continued. The Trustee cannot predict the long-term impact on the Trust, however there may be additional months in 2020 when the Trust will not declare distributions to unitholders.
9
ITEM 2.
TRUSTEE’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion and analysis is intended to help the reader understand the Trust’s financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the Trust’s unaudited condensed financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the Trust’s audited financial statements and the accompanying notes included in the Trust’s 2019 Annual Report.
Cautionary Statement Regarding Forward Looking Statements
Certain information included in this Quarterly Report contains, and other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Such forward-looking statements generally are accompanied by words such as “may,” “will,” “estimate,” “expect,” “predict,” “project,” “anticipate,” “goal,” “should,” “assume,” “believe,” “plan,” “intend,” or other words that convey the uncertainty of future events or outcomes. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements, including without limitation statements under this “Trustee’s Discussion and Analysis of Financial Conditions and Results of Operations” and all statements regarding Boaz Energy and Simmons Bank’s (as Trustee of the Trust) expectations, beliefs and plans regarding the following: (i) Boaz Energy’s capital projects, timing and estimated costs, and the resulting impact of those activities on the computation of the Net Profits Interest; (ii) outside operators’ capital projects and the resulting impact of those activities on the Net Profits Interest; (iii) implementation or continued use of waterflood projects and workovers and the location of waterflood projects and workovers; (iv) Boaz Energy’s estimated capital expenditures; (v) the timing of capital expenditures and capital reserve amounts; (vi) the expected timing of litigation proceedings; (vii) the impact of current litigation matters on the Trust; (viii) Boaz Energy’s staffing levels or future reductions in staffing on the Underlying Properties; (ix) shut in of wells on the Underlying Properties; (x) the effects of COVID-19; and (xi) distributions to Trust unitholders. Such statements are based on certain assumptions of the Trustee, and certain assumptions of information provided to the Trust by Boaz Energy, the owner of the Underlying Properties; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Boaz Energy; and involve risks and uncertainties. Certain factors could affect the future results of the energy industry in general, and Boaz Energy and the Trust in particular, and could cause actual results to differ materially from those projected in such forward-looking statements. Those factors include, without limitation, the following:
| · | the effect of changes in commodity prices or alternative fuel prices; |
| · | uncertainties in estimating production and oil and natural gas reserves of the Underlying Properties; |
| · | risks associated with the drilling and operation of oil and natural gas wells; |
| · | the cost of developing the Underlying Properties; |
| · | the ability to maintain anticipated production levels; |
| · | the amount of future direct operating expenses, development expenses and other capital expenditures; |
| · | availability and terms of capital to fund capital expenditures; |
| · | risks associated with Boaz Energy and its ability to transfer operation of the Underlying Properties to third parties without the approval of Trust unitholders; |
| · | the effect of existing and future laws and regulatory actions; |
| · | risks associated with derivative instruments, such as lower than expected production volumes, default of counterparties, and increases in price differentials; |
| · | conditions in the capital markets; |
| · | competition from others in the energy industry; |
| · | uncertainty in whether development projects will be pursued; |
| · | severe or unseasonable weather that may adversely affect production; |
| · | costs to comply with current and future governmental regulation of the oil and natural gas industry, including environmental, health and safety laws and regulations, and regulations with respect to hydraulic fracturing and the disposal of produced water; |
| · | the effect of existing and future laws and regulatory actions, including real estate, bankruptcy and tax legislation and the ability to accurately interpret the impact of such laws; |
| · | general economic conditions affecting the areas where Boaz Energy operates; |
10
| · | actions by Boaz Energy, including such that result in conflicts of interest, that adversely affect the Trust; |
| · | the outcome of pending litigation matters; |
| · | the cost of inflation; and |
| · | the risk factors discussed in Item 1A of Part II of this Quarterly Report and in Part I of the Trust’s 2019 Annual Report. |
You should not place undue reliance on any forward-looking statements. All forward-looking statements speak as of the date of this Quarterly Report. The Trust does not undertake any obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events, unless required by applicable law.
Boaz Energy Information
As a holder of a net profits interest, the Trust relies on Boaz Energy for information regarding Boaz Energy and its affiliates; the Underlying Properties, including the operations, acreage, well and completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling plans, drilling results and leasehold terms related to the Underlying Properties; and factors and circumstances that have or may affect the foregoing.
Overview
PermRock Royalty Trust, a Delaware statutory trust formed in November 2017 by Boaz Energy, completed its initial public offering in May 2018. The Trust’s main asset and source of income is the Net Profits Interest, which entitles the Trust to receive 80% of the net profits from oil and natural gas production from the Underlying Properties. The Net Profits Interest is passive in nature and neither the Trust nor the Trustee has any management control over or responsibility for costs relating to the operation of the Underlying Properties.
Although the Trust was formed on November 22, 2017, the conveyance of the Net Profits Interest did not occur until May 4, 2018, with an effective date of January 1, 2018, and no proceeds were received by the Trust from Boaz Energy during the three-month period ended June 30, 2018. As a result, the Trust did not recognize any income or make any distributions during the three-month period ended June 30, 2018.
The Trust is required to make monthly cash distributions of substantially all of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and any cash reserves, to holders of its Trust units as of the applicable record date on or before the 10th business day after the record date. The Net Profits Interest is entitled to a share of the profits from and after January 1, 2018 attributable to production occurring on or after such date. 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. The amount of Trust revenues and cash distributions to Trust unitholders depends on, among other things:
| · | volumes produced; |
| · | wellhead prices; |
| · | price differentials; |
| · | production and development costs; |
| · | potential reductions or suspensions of production; and |
| · | the amount and timing of Trust administrative expenses. |
Boaz Energy typically receives payment for oil production 30 to 60 days after it is produced and for natural gas production 60 to 90 days after it is produced.
Properties. The Underlying Properties consist of four operating areas in the Permian Basin in Texas, aggregating 35,390 gross (22,997 net) acres. The Permian Clearfork area consists of 2,434 net acres on the Central Basin Platform of the Permian Basin in Hockley and Terry Counties, Texas. The Permian Abo area consists of 1,667 net acres on the Central Basin Platform of the Permian Basin in Terry and Cochran Counties, Texas. The Permian Shelf area consists of 14,727 net acres on the Eastern Shelf of the Permian Basin in Glasscock, Schleicher, Stonewall and Coke Counties, Texas. The Permian Platform area consists of 4,169 net acres on the Central Basin Platform of the Permian Basin in Ward, Crane, Terry and Ector Counties, Texas.
11
2019 Recap and 2020 Outlook
In 2019, Boaz Energy optimized waterflood operations, converted additional wells to injection wells where prudent and continued to participate in Permian Platform drilling proposed by non-operating partners. Boaz Energy completed two new wells operated by Boaz Energy in the Permian Clearfork area in 2019. The first was completed in August 2019 and came on-line in September 2019. The second new well reached total depth and came on-line in December 2019.
In 2020, Boaz Energy has informed the Trustee that due to current oil and natural gas pricing it is not planning any new Boaz Energy-operated wells or other significant capital projects for the remainder of 2020, other than waterflood projects and workovers, principally in the Permian Platform area. Boaz Energy has implemented reduced staffing measures on the Underlying Properties and anticipates reacting on a monthly basis to the need to shut in wells on the Underlying Property to reduce the risk of a realization of negative oil prices in a production month. Boaz Energy has indicated it currently intends to continue to build a reserve for capital costs and other expenses, as permitted under the Conveyance, which reserves will reduce distributions to the Trust.
RESULTS OF OPERATIONS
Distributable Income
Three Months Ended June 30, 2020
For the three months ended June 30, 2020, net profits income received by the Trust was $376,992 compared to $3,140,783 for the same period of the prior year. This decrease in net profits income was primarily due to decreased oil production and sales, as well as decreased oil prices and oversupply resulting from economic effects of the COVID-19 pandemic and the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries. See “Computation of Income from the Net Profits Interest Received by the Trust” below.
After considering interest income of $1,245, general and administrative expenditures of $278,237 and cash reserves retained by the Trustee of $100,000, distributable income for the three months ended June 30, 2020 was $0, or $0.000000 per Trust unit. For the three months ended June 30, 2019, total distributable income was $2,645,711, or $0.217472 per unit.
Interest income was essentially the same for the three months ended June 30, 2020 as compared to the prior year, due to less investable cash received attributable to the Net Profits Interest and lower interest rates. General and administrative expenditures decreased by $78,334 for the three months ended June 30, 2020 as compared to the prior year, primarily due to timing of payments.
Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee was authorized to begin retaining cash reserves for administrative expenses. The Trustee retained $100,000 in cash reserves during the three months ended June 30, 2020 compared to $140,000 in cash reserves retained in the same period of the prior year. Total cash reserves were $1,000,000 as of June 30, 2020 compared to $140,000 as of June 30, 2019.
Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the three months ended June 30, 2020 were as follows:
Record Date |
| Payment Date |
| Distribution per Unit |
April 30, 2020 |
| May 14, 2020 |
| $0.000000 |
May 29, 2020 |
| June 12, 2020 |
| 0.000000 |
June 30, 2020 |
| July 14, 2020 |
| 0.000000 |
|
|
|
| $0.000000 |
Six Months Ended June 30, 2020
For the six months ended June 30, 2020, net profits income received by the Trust was $2,131,247 compared to $5,463,992 for the same period of the prior year. This decrease in net profits income was primarily due to decreased oil production and sales, as well as decreased oil prices and oversupply resulting from economic effects of the COVID-19 pandemic and the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries. See “Computation of Income from the Net Profits Interest Received by the Trust” below.
12
After considering interest income of $4,318, general and administrative expenditures of $540,501 and cash reserves retained by the Trustee of $400,000, distributable income for the six months ended June 30, 2020 was $1,195,064, or $0.098232 per Trust unit. For the six months ended June 30, 2019, total distributable income was $4,716,513, or $0.387688 per unit.
Interest income decreased for the six months ended June 30, 2020 as compared to the prior year, due to less investable cash received attributable to the Net Profits Interest in 2020 and lower interest rates. General and administrative expenditures decreased by $71,634 for the six months ended June 30, 2020 as compared to the prior year, primarily due to timing of payments and lower legal fees.
The Trustee retained $400,000 in cash reserves during the six months ended June 30, 2020 compared to $140,000 in cash reserves retained in the prior year period. Pursuant the terms of the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses in May of 2019, and therefore, no cash reserves were withheld in the first four months of 2019.
Computation of Income from the Net Profits Interest Received by the Trust
The Net Profits Interest entitles the Trust to receive 80% of the net profits attributable to Boaz Energy’s interest from the sale of oil and natural gas production from the Underlying Properties. The Trust’s income from the Net Profits Interest consists of monthly net profits attributable to income from the Underlying Properties. Because of the interval between the time of production and receipt of net profits income by the Trust, the Trust recognizes production during the month in which the related net profits income is paid to the Trust. Net profits income for the three months ended June 30, 2020, was based on production during the months of February 2020 through April 2020. The table below outlines the computation of income from the Net Profits Interest received by the Trust for the three and six months ended June 30, 2020 and June 30, 2019:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||
Underlying Properties sales volumes(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbl) |
|
| 126,963 |
|
|
| 133,676 |
|
|
| 262,455 |
|
|
| 277,539 |
|
Natural gas (Mcf)(2) |
|
| 138,507 |
|
|
| 148,315 |
|
|
| 288,901 |
|
|
| 308,147 |
|
Total sales (Boe) |
|
| 150,048 |
|
|
| 158,395 |
|
|
| 310,605 |
|
|
| 328,897 |
|
NYMEX price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
| $ | 32.56 |
|
| $ | 59.02 |
|
| $ | 45.37 |
|
| $ | 55.62 |
|
Natural gas (per Mcf) |
| $ | 2.13 |
|
| $ | 2.69 |
|
| $ | 1.85 |
|
| $ | 3.20 |
|
Average realized sales price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl) |
| $ | 31.81 |
|
| $ | 54.53 |
|
| $ | 44.50 |
|
| $ | 49.02 |
|
Natural gas (per Mcf) |
| $ | 0.79 |
|
| $ | 3.46 |
|
| $ | 1.42 |
|
| $ | 2.91 |
|
Calculation of net profits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales |
| $ | 4,038,479 |
|
| $ | 7,289,215 |
|
| $ | 11,678,462 |
|
| $ | 13,605,316 |
|
Natural gas sales |
|
| 108,973 |
|
|
| 513,405 |
|
|
| 409,020 |
|
|
| 897,410 |
|
Other revenue |
|
| 17,783 |
|
|
| 25,929 |
|
|
| 73,973 |
|
|
| 67,950 |
|
Total gross profits |
| $ | 4,165,235 |
|
| $ | 7,828,549 |
|
| $ | 12,161,455 |
|
| $ | 14,570,676 |
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses: |
| $ | 198,105 |
|
| $ | 506,353 |
|
| $ | 612,368 |
|
| $ | 1,263,204 |
|
Lease operating expenses |
|
| 1,194,390 |
|
|
| 1,265,140 |
|
|
| 2,565,646 |
|
|
| 2,626,455 |
|
Severance and ad valorem taxes |
|
| 533,348 |
|
|
| 454,138 |
|
|
| 1,141,729 |
|
|
| 1,202,777 |
|
Development expenses |
|
| 1,007,541 |
|
|
| 872,075 |
|
|
| 3,085,996 |
|
|
| 2,163,699 |
|
Other expenses |
|
| 414,712 |
|
|
| 374,332 |
|
|
| 793,256 |
|
|
| 742,582 |
|
Total costs |
| $ | (3,348,096 | ) |
| $ | (3,472,038 | ) |
| $ | (8,198,995 | ) |
| $ | (7,998,717 | ) |
Settlement of derivative contracts(3) |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 688,562 |
|
Net profits |
| $ | 817,139 |
|
| $ | 4,356,511 |
|
| $ | 3,962,460 |
|
| $ | 7,260,521 |
|
Percentage allocable to Net Profits Interest |
|
| 80 | % |
|
| 80 | % |
|
| 80 | % |
|
| 80 | % |
Net profits income (before capital reserve) |
| $ | 653,713 |
|
| $ | 3,485,208 |
|
| $ | 3,169,968 |
|
| $ | 5,808,417 |
|
Capital reserve activity, net(4) |
| $ | (272,721 | ) |
| $ | (325,000 | ) |
| $ | (1,014,721 | ) |
| $ | (325,000 | ) |
Net Profits Interest audit fee |
| $ | (4,000 | ) |
| $ | (19,425 | ) |
| $ | (24,000 | ) |
| $ | (19,425 | ) |
Net profits income received by the Trust |
| $ | 376,992 |
|
| $ | 3,140,783 |
|
| $ | 2,131,247 |
|
| $ | 5,463,992 |
|
13
Important factors used in calculating the Trust’s net profits income include the volumes of oil and natural gas produced from the Underlying Properties and the realized prices received for the sale of those minerals, including oil and natural gas liquids, as well as direct operating expenses, lease operating expenses, severance and ad valorem taxes, development and other expenses and capital reserves.
Sales Volumes
Oil
Oil sales volumes decreased by 6,753 Bbls (5%) and 15,084 Bbls (5%), respectively, for the three and six months ended June 30, 2020 as compared to the same periods in the prior year. Boaz Energy reports this decrease was primarily due to decreased oil demand as a result of oversupply and economic effects of COVID-19, as well as Boaz Energy’s shut in of a material amount of production in May 2020 due to price uncertainties.
Natural Gas
Natural gas sales volumes decreased by 9,808 Mcf (7%) for the three months ended June 30, 2020 as compared to the prior year period. Boaz Energy reports this decrease was primarily because of decreased natural gas demand as a result of oversupply and economic effects of COVID-19, as well as Boaz Energy’s shut in of a material amount of production in May 2020 due to price uncertainties. Natural gas sales volumes decreased by 19,246 Mcf (6%) for the six months ended June 30, 2020 as compared to the prior year period. Boaz Energy reports this decrease was primarily because of the effects of a shut in at a natural gas processing plant in Crane County during the first quarter of 2020 and Boaz Energy’s shut in of a material amount of production in May 2020 due to price uncertainties, but was also impacted by decreased natural gas demand and sales as a result of oversupply and economic effects of COVID-19.
Sales Prices
Oil
The average realized oil price per Bbl decreased for the three months ended June 30, 2020 as compared to the prior year period primarily related to oversupply, decreased demand and economic effects of COVID-19. The average realized oil price per Bbl for the three months ended June 30, 2020 is primarily related to production from February 2020 through April 2020, when the average NYMEX price was $32.56 per Bbl. The average realized oil price per Bbl also decreased for the six months ended June 30, 2020 due to oversupply, decreased demand and economic effects of COVID-19. The average realized oil price per Bbl for the six months ended June 30, 2020 is primarily related to production from November 2019 through April 2020, when the average NYMEX price was $45.37 per Bbl.
14
Natural Gas
The average realized natural gas price per Mcf decreased for the three and six months ended June 30, 2020 as compared to the prior year period because of oversupply of ethane and other natural gas liquids, decreased demand, depressed pricing and costs to dispose of excess natural gas liquids. The average realized natural gas price per Mcf for the three months ended June 30, 2020 is primarily related to production from February 2020 through April 2020 when the average NYMEX price was $2.13 per Mcf. The decrease in the average realized natural gas price per Mcf for the six months ended June 30, 2020 is primarily related to production from November 2019 through April 2020, when the average NYMEX price was $1.85 per Mcf.
Costs
Direct Operating Expenses
Direct operating expenses decreased for the three and six months ended June 30, 2020 as compared to the prior year periods primarily because of a slowdown in operations in light of current prices for oil and natural gas and economic conditions during the COVID-19 pandemic.
Lease Operating Expenses
Lease operating expenses decreased slightly for the three and six months ended June 30, 2020 as compared to the prior year periods as a result of less operating activity and a decrease in staffing.
Severance and ad Valorem Taxes
Severance and ad valorem taxes increased for the three months ended June 30, 2020 as compared to the prior year period primarily because of a one-time severance tax refund of $0.29 million on Boaz Energy’s Terry County Clearfork waterflood during the three-month period ended June 30, 2019. Severance and ad valorem taxes decreased for the six months ended June 30, 2020 compared to the same period in the prior year as a result of economic uncertainty and decreased sales due to COVID-19 and also because of a credit to the Trust in the first quarter of 2020 when actual ad valorem taxes were less than the accrual amounts.
Development Expenses Related to the Underlying Properties
Development expenses related to the Underlying Properties increased for the three months ended June 30, 2020 as compared to the prior year period because of capital costs relating to properties not operated by Boaz Energy. Development expenses related to the Underlying Properties also increased for the six months ended June 30, 2020 as compared to the prior year period as a result of capital costs relating to properties not operated by Boaz Energy.
Other Expenses
Other expenses increased by $40,380 for the three months ended June 30, 2020 as compared to the prior year period, primarily because of an adjustment to overhead in April 2020 and the timing of the payment for the annual net profits audit. Other expenses increased by $50,674 for the six months ended June 30, 2020 as compared to the prior year period, primarily because of the annual adjustment to overhead in April 2020 and well as the timing of the payment for the annual net profits audit.
Capital Reserve
In April 2020, Boaz Energy reserved $305,502 net to the Trust, which was applied in part to recoupment of the $80,000 net to the Trust balance of previously advanced funds, and the remaining $225,502 net to the Trust was reserved for certain taxes and future development expenses. In May 2020, Boaz Energy reserved $254,868 net to the Trust for future expenses as well. Then, in June 2020, Boaz Energy applied $287,649 net to the Trust of funds previously reserved in April and May 2020. As of June 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $192,721.
15
Derivative Contracts
Income from the Net Profits Interest is exposed to fluctuations in energy prices in the normal scope of business. To mitigate the negative effects of a possible decline in oil prices on distributable income to the Trust, Boaz Energy entered into derivative put option contracts with respect to approximately 100% of expected oil production attributable to the Net Profits Interest during 2018 and 76% of such production during 2019. These derivative contracts consisted of put option contracts with strike prices of $60 per barrel in 2018 and $50 per barrel in 2019. Boaz Energy believed that these put option contracts provided downside protection to the Trust in the event spot prices for crude oil decline below the applicable strike price, while still allowing the Trust to benefit from increasing crude oil prices. If prices for crude oil as quoted on NYMEX declined below the applicable strike prices, Boaz Energy could exercise its put option and receive payment generally equal to the difference between the applicable strike price and the market price for crude oil at the time of exercise, multiplied by the notional quantity of crude oil hedged under the applicable put option contract being exercised. These contracts expired as of December 31, 2019, and after December 31, 2019, none of the production attributable to the Underlying Properties is hedged.
For the three and six months ended June 30, 2019, there was $688,562 ($550,850 net to the Trust) in cash proceeds from the settlement of derivative contracts. Because the derivative contracts have since expired, there were no cash proceeds from settlement of derivative contracts during the three or six months ended June 30, 2020.
LIQUIDITY AND CAPITAL RESOURCES
The Trust’s principal sources of liquidity and capital are cash flow generated from the Net Profits Interest, the amounts held by the Trustee as cash reserves to pay future liabilities, and borrowings, if any to fund administrative expenses. The Trust’s primary uses of cash are distributions to Trust unitholders, payment of Trust administrative expenses, including, if applicable, any reserves established by the Trustee for future liabilities.
Administrative expenses include the Trustee and Delaware Trustee fees, accounting, engineering, legal, tax advisory and other professional fees, and tax reporting and distribution expenses. The Trust is also responsible for paying other expenses incurred as a result of being a publicly traded entity, including costs associated with annual, quarterly and current reports to the SEC, New York Stock Exchange listing fees, independent auditor fees and registrar and transfer agent fees. If the Trustee determines that cash on hand and cash to be received in respect of the Net Profits Interest are, or will be, insufficient to cover the Trust’s liabilities and expenses, the Trustee may cause the Trust to borrow funds to pay liabilities of the Trust.
As authorized under the Trust Agreement, beginning May 31, 2019, the Trustee began retaining cash from the distributions the Trust received (i) in an amount not to exceed $1.0 million at any one time to be used by the Trust in the event that its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses as they become due and (ii) in such amounts as the Trustee in its discretion deems appropriate to pay for future liabilities of the Trust, but not less than $25,000 or more than $100,000 per month. Cash reserves held by the Trustee for administrative expenses totaled $1,000,000 as of June 30, 2020.
Boaz Energy Capital Expenditure Budget
Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s 2020 capital budget has been increased from $2.0 million to $2.5 million, based principally upon capital projects being implemented by outside operators, of which $1,800,000 has been expended as of June 30, 2020. Based on current oil and gas prices, Boaz Energy has informed the Trustee that it is not planning any new Boaz Energy-operated wells or other significant capital projects for the remainder of 2020, other than waterflood projects and workovers principally in the Permian Platform area, the costs of which are included in the $2.5 million estimate. The estimated 2020 capital budget is subject to change based on, among other things, changes in the price of oil and natural gas, the impact of the COVID-19 pandemic on prices and economic activity, Boaz Energy’s actual capital requirements, capital expenditure requirements of third-party operators, the pace of regulatory approvals and the mix of projects.
In April 2020, Boaz Energy reserved $305,502 net to the Trust, which was applied in part to recoupment of the $80,000 net to the Trust balance of previously advanced funds, and the remaining $225,502 net to the Trust was reserved for certain taxes and future development expenses. In May 2020, Boaz Energy reserved $254,868 net to the Trust for future expenses as well. Then, in June 2020, Boaz Energy applied $287,649 net to the Trust of funds previously reserved in April and May 2020. As of June 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $192,721.
16
Distributions Declared After Quarter End
On July 21, 2020, the Trust declared there would be no cash distribution to record unit holders as of July 31, 2020 based upon production during the month of May 2020.
Off-Balance Sheet Arrangements
As of June 30, 2020, the Trust had no off-balance sheet arrangements.
New Accounting Pronouncements
As the Trust’s financial statements are prepared on the modified cash basis, most accounting pronouncements are not applicable to the Trust’s financial statements. No new accounting pronouncements have been adopted or issued that would impact the financial statements of the Trust.
Critical Accounting Policies and Estimates
Refer to Note 2 to the unaudited condensed financial statements contained in this Quarterly Report and the Trust’s 2019 Annual Report on Form 10-K, including the audited financial statements of the Trust and notes thereto included therein, for a description of the Trust’s accounting policies and use of estimates.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this Item.
ITEM 4.
The Trustee conducted an evaluation of the effectiveness of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(a) and 15d-15(a) as of the end of the period covered by this Quarterly Report. Based on this evaluation, the Trustee has concluded that the disclosure controls and procedures of the Trust are effective as of June 30, 2020, that the information required to be disclosed by the Trust in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated, as appropriate to allow timely decisions regarding required disclosure. In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by Boaz Energy.
Due to the nature of the Trust as a passive entity and in light of the contractual arrangements pursuant to which the Trust was created, including the provisions of the Trust Agreement and the Conveyance, the Trustee’s disclosure controls and procedures related to the Trust necessarily rely on (A) information provided by Boaz Energy, including information relating to results of operations, the costs and revenues attributable to the Trust’s interests under the Conveyance and other operating and historical data, plans for future operating and capital expenditures, reserve information, information relating to projected production, and other information relating to the status and results of operations of the Underlying Properties, and (B) conclusions and reports regarding reserves by the Trust’s independent reserve engineers.
During the quarter ended June 30, 2020 there were no changes in the Trust’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Trustee’s internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, has not evaluated and makes no statement concerning, the internal control over financial reporting of Boaz Energy.
17
PART II. – OTHER INFORMATION
ITEM 1.
On October 1, 2018, a lawsuit styled Thaleia L. Marston, Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, No. 18-10-24761 – CVW in the 143rd District Court in Ward County, Texas (the “2018 Litigation”) was filed, naming, among others, Boaz Energy and the Trust as defendants. The plaintiff is a lessor under two leases operated by Blackbeard Operating LLC. The Underlying Properties include the interests of Boaz Energy in some of the minerals covered by those leases. The litigation seeks surface use damages and alleges violations of the terms of the leases, among other things. While it is not yet possible to estimate any potential loss or range of loss, Boaz Energy has advised the Trustee that it does not anticipate the litigation will materially affect the Trust. On January 3, 2020, Lawrence M. Marston joined the lawsuit as a plaintiff alleging surface damage claims against Blackbeard and Goodnight Midstream Permian, L.L.C., but not against the Trust. On January 17, 2020, the Trust and the other defendants filed a motion for summary judgment, which would dispose of the claims against the Trust if granted. Mediation set for April 2020 did not occur and a hearing on the summary judgment motion was delayed due to closures related to COVID-19. However, all parties have served their expert reports, there have been a series of depositions of parties and experts, and a summary judgment hearing is tentatively scheduled for August 27, 2020.
ITEM 1A.
Except as provided below, there have been no material changes to the risk factors contained in Item 1A of the Trust’s 2019 Annual Report on Form 10-K.
The COVID-19 pandemic and efforts to contain the virus could adversely affect the operators of the Underlying Properties, the Net Profits Interest and the cash available for distribution to unitholders.
The effect of the recent outbreak of COVID-19 and response efforts to contain the pandemic are unprecedented and continuously evolving. A rapid and sharp decline in oil and gas prices occurred in the first quarter of 2020, and continued in the second quarter of 2020, including briefly trading negative in April 2020 in response to COVID-19 and the dispute over production levels between Russia and the other members of the Organization of Petroleum Exporting Countries (“OPEC”). The extent and duration of the decline and curtailed economic activity, including business and operational disruptions, closures, limitations and restrictions on travel, and supply chain and workforce disruptions, is unknown and rapidly evolving, and continues to affect the operators of the Underlying Properties and production activity. It is not possible to reliably estimate the impact these developments will have on future periods. The value of the Net Profits Interest and the Trust’s ultimate cash available for distribution is highly dependent on the financial condition of Boaz Energy and other third-party operators, oil and natural gas prices, supply and demand, and other factors, which are being negatively impacted by the COVID-19 pandemic. Boaz Energy shut in production of certain wells during May 2020 and Boaz Energy or any third-party operator of the Underlying Properties could, in future periods, shut in or curtail production from wells on the Underlying Properties or plug and abandon marginal wells that otherwise may have been allowed to continue to produce for a longer period under conditions of higher prices, without the consent of the Trust or the Trust unitholders. Substantial and extended declines in economic activity and oil, natural gas and natural gas liquids prices have resulted and may continue to result in a reduction in the amount of oil and natural gas that is economic to produce from the Underlying Properties, reduced net proceeds to which the Trust is entitled, and elimination of cash available for distribution to Trust unitholders for an unknown period of time.
The ability or willingness of OPEC and other oil exporting nations to set and maintain production levels has a significant impact on oil and natural gas commodity prices, which could reduce the amount of cash available for distribution to Trust unitholders.
OPEC is an intergovernmental organization that seeks to manage the price and supply of oil on the global energy market. Actions taken by OPEC members, including those taken alongside other oil exporting nations, have a significant impact on global oil supply and pricing. The extent and duration of production cuts by OPEC members and other oil exporting nations to support crude oil prices have fluctuated and may continue to do so. When Russia’s agreement to oil production cuts expired, an immediate and steep decrease in oil prices occurred, with prices reaching a closing NYMEX price low of negative $37.63 per Bbl of crude oil in April 2020. There can be no assurance that OPEC members and other oil exporting nations will agree to future production cuts or other actions to support and stabilize oil prices, nor can there be any assurance that they will not further reduce oil prices or increase production. Uncertainty regarding future actions to be taken by OPEC members or other oil exporting countries could lead to increased volatility in the price of oil, which could adversely affect the financial condition and economic performance of the operators of the Underlying Properties and may reduce net profits income and significantly reduce or completely eliminate the amount of cash available for distribution to Trust unitholders for an unknown period of time.
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ITEM 6.
Exhibit No. |
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3.1 |
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31.1 |
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32.1 |
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The exhibits marked with the asterisk symbol (*) are filed or furnished with this Quarterly Report on Form 10-Q.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PERMROCK ROYALTY TRUST | |
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| By: | Simmons Bank, as Trustee |
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| By: | /s/ Lee Ann Anderson |
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| Lee Ann Anderson |
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| Senior Vice President |
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Date: August 14, 2020
The registrant, PermRock Royalty Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available, and none have been provided. In signing the report above, the Trustee does not imply that it has performed any such function or that any such function exists pursuant to the terms of the Trust Agreement under which it serves.
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EXHIBIT 31.1
CERTIFICATION
I, Lee Ann Anderson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PermRock Royalty Trust (the “registrant”), for which Simmons Bank, acts as Trustee;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), or for causing such controls and procedures to be established and maintained, for the registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors:
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
In giving the certifications in paragraphs 4 and 5 above, I have relied to the extent I consider reasonable on information provided to me by Boaz Energy II, LLC.
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Date: August 14, 2020 |
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| By: |
| /s/ LEE ANN ANDERSON |
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| Lee Ann Anderson, |
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| Senior Vice President |
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| Simmons Bank |
EXHIBIT 32.1
CERTIFICATION
In connection with the Quarterly Report of PermRock Royalty Trust (the “Trust”) on Form 10-Q for the quarterly period ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, not in its individual capacity but solely as the trustee of the Trust, certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to its knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust.
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| SIMMONS BANK, TRUSTEE FOR PERMROCK ROYALTY TRUST |
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Date: August 14, 2020 |
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| By: |
| /s/ LEE ANN ANDERSON |
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| Lee Ann Anderson, |
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| Senior Vice President |
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| Simmons Bank |
A signed original of this written statement required by Section 906 has been provided to PermRock Royalty Trust and will be retained by PermRock Royalty Trust and furnished to the Securities and Exchange Commission or its Staff upon request.