PERMROCK ROYALTY TRUST Overview
PermRock Royalty Trust , aDelaware statutory trust formed inNovember 2017 by Boaz Energy, completed its initial public offering inMay 2018 . The Trust's only 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 theUnderlying 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 theUnderlying Properties . 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 attributable to production. 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. The Trust is not subject to 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; 36 · price differentials;
· production and development costs;
· potential reductions or suspensions of production; and
· the amount and timing of Trust administrative expenses.
Oil prices increased in 2021 and the first part of 2022 following an extended period of depressed pricing primarily due to the COVID-19 pandemic. It is unclear whether prices will level out or decline further in 2023. Low oil and gas prices on production from theUnderlying Properties could cause (i) a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders and (ii) a reduction in the amount of oil and natural gas that are economic to produce from theUnderlying Properties .
2022 Recap and 2023 Outlook
In 2022, Boaz Energy participated in non-operated drilling and recompletion projects, waterflood conformance and reactivations inTerry ,Coke , andCrane Counties. Boaz Energy completed reentry projects in the Permian Abo and Permian Platform areas, maintained waterflood operations where prudent, and did necessary repairs to bring wells back to production. Oil prices continued to strengthen during the first eight months of 2022, allowing Boaz Energy to continue to reactivate wells that were previously shut-in due to pandemic pricing conditions. In 2023, Boaz Energy plans to drill new producing wells in the Permian Shelf area and stimulate existing wells to improve production and waterflood operations. In addition, Boaz Energy plans to continue reactivating inactive wells by either returning them to production or recompleting them to new formations to maximize oil and gas production in this high commodity price
environment.
RESULTS OF OPERATIONS
Year Ended December 31,
2022 2021 2020
Net profits income $ 13,160,845 $ 8,144,472 $ 3,183,622 Interest income 16,591 180 4,534 Total revenue 13,177,436 8,144,652 3,188,156
Expenditures - general and administrative (873,480 ) (773,591 ) (877,952 ) Cash reserves (0 ) (0 ) (400,000 ) Distributable income$ 12,303,956 $ 7,371,061 $ 1,910,204 Distributable income per unit (12,165,732 Trust units)$ 1.011357
$ 0.605881 $ 0.157014 37 Distributable Income Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the year endedDecember 31, 2022 , were as follows: Record Date Payment Date Distribution per Unit January 31, 2022 February 14, 2022 $ 0.070575 February 28, 2022 March 14, 2022 0.066141 March 31, 2022 April 14, 2022 0.070988 April 29, 2022 May 13, 2022 0.062193 May 31, 2022 June 14, 2022 0.101081 June 30, 2022 July 15, 2022 0.100110 July 29, 2022 August 12, 2022 0.090702 August 31, 2022 September 15, 2022 0.092003 September 30, 2022 October 17, 2022 0.093069 October 31, 2022 November 15, 2022 0.093361 November 30, 2022 December 14, 2022 0.090418 December 30, 2022 January 17, 2023 0.080716 $ 1.011357
Years Ended
The increase in net profits income was primarily due to increased oil and natural gas prices. See "Computation of Income from the Net Profits Interest Received by the Trust" below.
Interest Income. Interest income increased for the year ended
General and Administrative Expenditures. General and administrative expenditures increased for the year endedDecember 31, 2022 , as compared to the prior year, primarily because of differences in the timing and payment of some expenses. Cash Reserves. Pursuant to the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses beginning inMay 2019 . InApril 2020 , the cash reserves retained reached$1,000,000 and no further cash reserves have been retained by the Trustee sinceApril 2020 . As ofDecember 31, 2022 , the Trustee continued to hold the previously retained$1,000,000 in cash reserves.
Years Ended
The increase in net profits income was primarily due to increased oil and natural gas prices. See "Computation of Income from the Net Profits Interest Received by the Trust" below.
Interest Income. Interest income decreased for the year ended
General and Administrative Expenditures. General and administrative expenditures decreased for the year endedDecember 31, 2021 , as compared to the prior year, primarily because of differences in the timing and payment of some expenses and also lower compliance audit and legal expenses. Cash Reserves. Pursuant to the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses beginning inMay 2019 . InApril 2020 , the cash reserves retained reached$1,000,000 and no further cash reserves have been retained by the Trustee sinceApril 2020 . As ofDecember 31, 2021 , the Trustee continued to hold the previously retained$1,000,000 in cash reserves. 38
Computation of Income from the Net Profits Interest Received by the Trust
The table below outlines the computation of income from the Net Profits Interest received by the Trust for the years endedDecember 31, 2022 , 2021, and 2020: Year Ended December 31, 2022 2021 2020Underlying Properties sales volumes(1): Oil (Bbl) 351,710 385,359 461,558 Natural gas (Mcf)(2) 409,881 501,689 572,552 Average realized sales price: Oil (per Bbl)$ 93.15 $ 60.13 $ 40.56 Natural gas (per Mcf) 7.94 4.31 1.59 Calculation of net profits: Gross profits: Oil sales$ 32,760,196 $ 23,172,855 $ 18,721,958 Natural gas sales 3,254,621 2,162,779 908,162 Other revenue 102,468 99,991 121,531
Divestitures (Qualified De Minimis Sales) 1,090,386 0 0 Total gross profits 37,207,671 25,435,625 19,751,651 Costs: Direct operating expenses: 3,066,774 1,938,378 1,372,366 Lease operating expenses 6,417,318 5,368,937 5,094,138 Severance and ad valorem taxes(3) 2,168,220 1,583,282 2,158,954 Development expenses 5,831,453 4,600,043 4,235,226 Other expenses 1,441,786 1,496,699 2,618,264 Total costs 18,925,550 (14,987,339 ) (15,478,948 ) Net profits 18,282,121 10,448,286 4,272,703
Percentage allocable to Net Profits Interest 80 % 80 % 80 % Net profits income (before capital reserve) 14,625,697 8,358,629 3,418.162 Capital Reserve(5) (1,478,157 ) (214,157 ) (222,157 ) Interest paid to the Trust pursuant to a Compliance audit $ 0 $ 0$ 11,617 Interest income from savings account 13,305 0 0 Net profits interest audit fee 0 (0 ) (24,000 ) Net profits income received by the Trust$ 13,160,845
$ 8,144,472 $ 3,183,622 -------
(1) Annual sales volumes for 2022 reflect production volumes for
through
volumes for
reflect production volumes for
(2) Sales volumes for natural gas include NGLs.
(3) In calculating the previously reported monthly distribution for
Boaz Energy included a one-time severance tax refund of
Terry County Clearfork waterflood. Boaz Energy has advised that the
Comptroller of Public Accounts denied the claim for that severance tax
refund, and that Plains Pipeline, the purchaser of the production subject to
that severance tax, offset the amount of the refunded severance tax against
the payments otherwise due to Boaz Energy for the purchase of oil and gas
during the month of
for the month of June as though Plains Pipeline had made payment in full for
Energy bore the cost of that severance tax pending the outcome of an
administrative hearing on the controversy. On
for the severance tax refund was approved. The reduction in severance tax
attributable to the Terry County Clearfork waterflood will continue to be
applicable.
(5) Boaz Energy is entitled under the Conveyance to reserve up to
the net profits for certain taxes and development expenses. As of December
31, 2022, the balance of funds held back to cover certain future capital
expenses was $1,478,157 net to the Trust.
39
Years Ended
Important factors used in calculating the Trust's net profits income include the volumes of oil and gas produced from theUnderlying Properties and the realized prices received for the sale of those minerals, including natural gas liquids, as well as direct operating and development expenses.
Sales Volumes
Oil. Oil sales volumes decreased for the year ended
Natural Gas. Natural gas sales volumes decreased for the year endedDecember 31, 2022 , as compared to the prior year. This was primarily due to decreased demand and the natural decline in production.
Sales Prices
Oil. The average realized oil price per Bbl increased for the year endedDecember 31, 2022 , as compared to the prior year. The average realized oil price per Bbl for the year endedDecember 31, 2022 , is primarily related to production fromNovember 2021 throughOctober 2022 , when the average NYMEX price was$93.39 per Bbl. Natural Gas. The average realized natural gas price per Mcf increased for the year endedDecember 31, 2022 , as compared to the prior year. The average realized natural gas price per Mcf for the year endedDecember 31, 2022 , is primarily related to production fromNovember 2021 throughOctober 2022 , when the average NYMEX price was$6.03 per Mcf.
Costs
Direct Operating Expenses. Direct operating expenses increased for the year
ended
Lease Operating Expenses. Lease operating expenses increased for the year endedDecember 31, 2022 , as compared to the prior year primarily due to increases in industry pricing for materials and services. Severance and Ad Valorem Taxes. Severance and ad valorem taxes increased for the year endedDecember 31, 2022 , as compared to the prior year primarily due to higher sales valuation due to increased industry prices for oil and natural gas. Development Expenses Related to theUnderlying Properties . Development expenses related to theUnderlying Properties increased for the year endedDecember 31, 2022 , as compared to the prior year primarily due to the potential for capital projects to have a greater economic benefit given higher oil and gas prices. Other Expenses. Other expenses increased for the year endedDecember 31, 2022 , as a result of an increase in the amount of funds reserved by Boaz Energy during 2022 to cover future capital expenses. Capital Reserve and Operator Advance.Boaz Energy is entitled under the Conveyance to reserve up to$3 million from the net profits for certain taxes and development expenses. As ofDecember 31, 2022 , the balance of funds held back to cover certain future capital expenses was$1,478,157 net to the Trust.
Years Ended
Important factors used in calculating the Trust's net profits income include the volumes of oil and gas produced from theUnderlying Properties and the realized prices received for the sale of those minerals, including natural gas liquids, as well as direct operating and development expenses. 40 Sales Volumes
Oil. Oil sales volumes decreased for the year ended
Natural Gas. Natural gas sales volumes decreased for the year endedDecember 31, 2021 , as compared to the prior year. This was primarily due to having to slowly bring on marginal wells after shut-ins during the early months of the COVID-19 pandemic. Sales Prices Oil. The average realized oil price per Bbl increased for the year endedDecember 31, 2021 , as compared to the prior year. The average realized oil price per Bbl for the year endedDecember 31, 2021 , is primarily related to production fromNovember 2020 throughOctober 2021 , when the average NYMEX price was$62.73 per Bbl. Natural Gas. The average realized natural gas price per Mcf increased for the year endedDecember 31, 2021 , as compared to the prior year. The average realized natural gas price per Mcf for the year endedDecember 31, 2021 , is primarily related to production fromNovember 2020 throughOctober 2021 , when the average NYMEX price was$3.43 per Mcf.
Costs
Direct Operating Expenses. Direct operating expenses increased for the year
ended
Lease Operating Expenses. Lease operating expenses increased for the year endedDecember 31, 2021 , as compared to the prior year primarily due to increased cost of materials post-COVID-19 pandemic. Severance and Ad Valorem Taxes. Severance and ad valorem taxes decreased for the year endedDecember 31, 2021 , as compared to the prior year primarily due to lower ad valorem valuations based on lower prior year pricing. Development Expenses Related to theUnderlying Properties . Development expenses related to theUnderlying Properties increased for the year endedDecember 31, 2021 , as compared to the prior year primarily due to increases in oil and natural gas sales prices and increased drilling activity. Other Expenses. Other expenses decreased for the year endedDecember 31, 2021 , due to a decrease in operator holdback amounts for future capital expense as compared to 2020. Capital Reserveand Operator Advance. Boaz Energy is entitled under the Conveyance to reserve up to$3 million from the net profits for certain taxes and development expenses. As ofDecember 31, 2021 , the balance of funds held back to cover certain future capital expenses was$214,157 net to the Trust.
Liquidity and Capital Resources
The Trust's principal sources of liquidity and capital are cash flow generated from the Net Profits Interest 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 theSEC ,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. If the Trustee causes the Trust to borrow funds, the Trust unitholders will not receive distributions until the borrowed funds or the amount drawn, as applicable,
are repaid. 41 Pursuant to the Trust Agreement, the Trustee was authorized beginningMay 2019 to retain cash from the distributions it receives (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. Boaz Energy provided the Trust with a$1.0 million Letter of Credit that could be drawn by the Trust to pay its administrative expenses. The Trustee is permitted to retain cash from distributions in such amount as the Trustee determines but not less than$25,000 per month or more than$100,000 per month until the reserve described in clause (i) equals or exceeds$1.0 million , at which time, the Trustee is required to release the Letter of Credit. The Letter of Credit expiredMay 2, 2020 , as the Trustee had retained a total of$1,000,000 in cash reserves. As ofDecember 31, 2022 , the Trustee continued to hold the previously retained$1,000,000 in cash reserves. OnMay 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 ofMarch 31, 2022 , Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding. The Trust filed a Registration Statement on Form S-3 onApril 28, 2022 (the "Registration Statement") seeking the registration of 5,801,675 Trust units held by Boaz Energy. TheSEC confirmed the effectiveness of the Registration Statement onMay 9, 2022 . The Trust has not and will not receive any of the proceeds received from the sale of the Trust units. The selling unitholder will bear all costs and expenses incidental to the preparation and filing of the Registration Statement, excluding certain internal expenses of the Trust, which will be borne by the Trust, and any underwriting discounts and commissions, which will be borne by the selling unitholder as the seller of the Trust units. As ofMarch 27, 2023 , Boaz Energy owned 5,202,732 Trust units of the 12,165,732 units issued and outstanding.
Boaz Energy Capital Expenditure Budget
Boaz Energy's estimated capital budget for 2023 for theUnderlying Properties is$5.2 million , of which approximately$1.3 million has been expended as ofMarch 28, 2023 . Based on current oil and gas prices, Boaz anticipates continuing to participate inCrane andGlasscock Counties non-operated drilling and waterflood conformance work inCrane ,Terry ,Schleicher andStonewall Counties, as well as drilling 2 new operated wells in Crane & Coke Counties sometime in 2023. The majority of capital spent in 2023 to date has been on a well deepening in the Abo Area. The$5.2 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, including the ongoing impact of the COVID-19 pandemic on such prices, Boaz Energy's actual capital requirements, the pace of regulatory approvals and the mix of projects.
Boaz Energy's capital expenditure by the end of 2022 was
Off-Balance Sheet Arrangements
As of
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
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 (oil and natural gas sales), less direct operating expenses (lease operating expenses and severance and ad valorem taxes) and development expenses of theUnderlying Properties , multiplied by 80%. 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. 42
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, 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 accounting principles generally accepted inthe United States of America ("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.
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 theSEC , 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 theSEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts. 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. Oil and Natural Gas Reserves. The proved oil and natural gas reserves for theUnderlying Properties are estimated by independent petroleum engineers. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof. Estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using prices at the date of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices. Accordingly, oil and natural gas quantities ultimately recovered and the timing of production may be substantially different from original estimates. TheFinancial Accounting Standards Board requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future net cash flows relating to proved oil and natural gas reserve quantities. Under this disclosure, future cash inflows are computed by applying the average prices during the 12-month period prior to fiscal year-end, determined as an unweighted arithmetic average of the first-day-of-the-month benchmark price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. Future price changes are only considered to the extent provided by contractual arrangements in existence at year-end. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and natural gas reserves. Changes in any of these assumptions, including consideration of other factors, could have a significant impact on the standardized measure. The standardized measure does not necessarily result in an estimate of the current fair market value of proved reserves. 43
Amortization of Net Profits Interest. The Trust calculates amortization of the Net Profits Interest in oil and natural gas properties on a unit-of-production basis based on theUnderlying Properties' production and reserves. The reserves upon which the amortization rate is based are quantity estimates which are subject to numerous uncertainties inherent in the estimation of proved reserves. The volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. These estimates are expected to change as additional information becomes available in the future. Downward revisions in proved reserves may result in an increased rate of amortization. Amortization is recorded on sales volumes paid by the Trust during the relevant period and is charged directly to the Trust corpus balance. As a result, amortization does not affect the cash earnings of the Trust. Impairment of Net Profits Interest. The Trustee reviews the Trust's Net Profits Interest in oil and natural gas properties for impairment whenever events or circumstances indicate that the carrying value of the Net Profits Interest may not be recoverable. In general, neither the Trustee nor Boaz Energy view temporarily low prices as an indication of impairment. The markets for crude oil and natural gas have a history of significant price volatility and though prices will occasionally drop significantly, industry prices over the long term will continue to be driven by market supply and demand. If events and circumstances indicate that the carrying value may not be recoverable, the Trustee would use the estimated undiscounted future net cash flows from the Net Profits Interest to evaluate the recoverability of the Trust assets. If the undiscounted future net cash flows from the Net Profits Interest are less than the Net Profits Interest carrying value, the Trust would recognize an impairment loss for the difference between the Net Profits Interest carrying value and the estimated fair value of the Net Profits Interest. The determination as to whether the Net Profits Interest is impaired is based on the best information available to the Trustee at the time of the evaluation, including information provided by Boaz Energy such as estimates of future production and development and operating expenses.
Refer to Note 2 to the financial statements included in Item 8 of this report for the Trust's significant accounting policies.
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