# PermRock Royalty Trust: Form 10-Q for the period ended Aug 9, 2024

- Company: [PermRock Royalty Trust](/companies/prt.md) (CIK 1724009)
- Form: 10-Q
- Filed: 2024-08-09
- Accepted by EDGAR: Aug 9, 2024, 17:26 ET
- Period: 2024-08-09
- Accession: 0000950170-24-094513
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1724009/000095017024094513/prt_10-q_2024-06-30.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1724009/000095017024094513/

## Management's discussion and analysis

As filed, 23,604 characters.

### 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 2023 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 Argent Trust Company’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; and (ix) 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;
- the effects of armed conflict throughout the world on global oil and gas producing regions, countries, thoroughfares and the oil and gas markets;
- political and economic conditions in or affecting other oil and natural gas producing regions or countries;
- 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 performance of such third parties contracted by Boaz Energy and their ability or willingness to provide sufficient facilities and services to Boaz Energy on commercially reasonable terms;
- the effect of existing and future laws and regulatory actions;
- the actions of the Organizations of Petroleum Exporting Countries (“OPEC”);
- 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;
- adequacy of Boaz Energy’s insurance coverage;
- 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 Permian Basin;
- risks associated with title deficiencies that may arise with respect to the Underlying Properties and Boaz Energy’s ability to cure any such defects;
- actions by Boaz Energy, including such that result in conflicts of interest, that adversely affect the Trust;
- the ability to successfully estimate the impact of litigation matters, and certain accounting and tax matters;
- the cost of inflation; and
- the risk factors discussed in Part I, Item 1A of the Trust’s 2023 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.

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 31,354 gross (22,394 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 14,390 net acres on the Eastern Shelf of the Permian Basin in Glasscock, Schleicher, Stonewall and Coke Counties, Texas. The Permian Platform area consists of 3,903 net acres on the Central Basin Platform of the Permian Basin in Ward, Crane, Terry and Ector Counties, Texas.

### Outlook

Boaz Energy’s estimated capital budget for 2024 for the Underlying Properties is $4.5 million, of which approximately $1.5 million has been expended as of June 30, 2024. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock Counties non-operated drilling and waterflood conformance and expansion work in Crane and Terry Counties, as well as drilling one new operated well in Crane County sometime in 2024. The majority of capital spent in 2024 to date was spent on returning a well to production in the Permian Shelf area, a non-operated drill well in the Permian Shelf area, and converting an existing well to an injector well in the Permian Clearfork area. The $4.5 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, Boaz Energy’s actual capital requirements, the pace of regulatory approvals and the mix of projects.

### RESULTS OF OPERATIONS

### Distributable Income

#### Three Months Ended June 30, 2024

For the three months ended June 30, 2024, net profits income received by the Trust was $1,658,420 compared to $1,573,745 for the same period of the prior year. This increase in net profits income was primarily due to increased oil and gas prices and lower development expenses. See “Computation of Income from the Net Profits Interest Received by the Trust” below.

After considering interest income of $14,609 and general and administrative expenditures of $322,992, distributable income for the three months ended June 30, 2024, was $1,350,037, or $0.110969 per Trust unit.

Interest income was slightly lower for the quarter ended June 30, 2024, as compared to the prior year, due to lower interest rates. General and administrative expenditures decreased by $28,435 for the three months ended June 30, 2024, as compared to the prior year, primarily due to the timing of payments.

Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee is authorized to retain cash reserves for administrative expenses. The Trustee did not retain any cash reserves during the three months ended June 30, 2024, or June 30, 2023. Total cash reserves were $1,000,000 as of June 30, 2024, and June 30, 2023.

Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the quarter ended June 30, 2024, were as follows:

| Record Date | Payment Date | Distribution per Unit |
| --- | --- | ---: |
| April 30, 2024 | May 14, 2024 | $0.030674 |
| May 31, 2024 | June 14, 2024 | 0.040295 |
| June 28, 2024 | July 15, 2024 | 0.040000 |
|  |  | $0.110969 |

#### Six Months Ended June 30, 2024

For the six months ended June 30, 2024, net profits income received by the Trust was $2,954,828 compared to $3,940,422 for the same period of the prior year. This decrease in net profits income was primarily due to a decrease in oil and gas prices and higher production costs. See “Computation of Income from the Net Profits Interest Received by the Trust” below.

After considering interest income of $29,571 and general and administrative expenditures of $511,860, distributable income for the six months ended June 30, 2024, was $2,472,539, or $0.203235 per Trust unit. For the six months ended June 30, 2023, total distributable income was $3,440,377, or $0.282792 per Trust unit.

Interest income increased for the six months ended June 30, 2024, as compared to the prior year, due to higher interest rates. General and administrative expenditures decreased by $16,685 for the six months ended June 30, 2024, as compared to the prior year, primarily due to timing of payments and a decrease in legal expenses.

Pursuant the terms of the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses in May of 2019. The Trustee did not retain any cash reserves during the six months ended June 30, 2024, or June 30, 2023. Total cash reserves were $1,000,000 as of June 30, 2024, and December 31, 2023.

### 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, 2024, was based on production during the months of November 2023 through January 2024. 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, 2024, and June 30, 2023.

| Underlying Properties sales volumes(1): | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Oil (Bbl) | 72,477 | 79,231 | 146,988 | 165,148 |
| Natural gas (Mcf)(2) | 81,308 | 91,933 | 165,250 | 196,219 |
| Total sales (Boe) | 86,028 | 94,553 | 174,530 | 197,851 |
| Average realized sales price: |  |  |  |  |
| Oil (per Bbl) | $78.89 | $73.80 | $75.93 | $75.36 |
| Natural gas (per Mcf) | $2.98 | $3.69 | $3.06 | $4.35 |
| Calculation of net profits: |  |  |  |  |
| Gross profits: |  |  |  |  |
| Oil sales | $5,717,553 | $5,847,488 | $11,161,234 | $12,444,930 |
| Natural gas sales | 242,327 | 339,048 | 505,967 | 853,776 |
| Other revenue | 42,947 | 27,002 | 74,545 | 49,665 |
| Total gross profits | $6,002,827 | $6,213,538 | $11,741,746 | $13,348,371 |
| Costs: |  |  |  |  |
| Direct operating expenses: | $476,689 | $479,429 | $946,429 | $1,098,897 |
| Lease operating expenses | 1,730,997 | 1,546,342 | 3,470,589 | 3,678,054 |
| Severance and ad valorem taxes | 379,965 | 461,965 | 715,159 | 991,326 |
| Development expenses | 663,068 | 1,554,391 | 1,518,552 | 2,812,866 |
| Other expenses | 466,643 | 479,230 | 835,042 | 1,131,701 |
| Total costs | $(3,717,362) | $(4,521,357) | $(7,485,771) | $(9,712,844) |
| Net profits | $2,285,465 | $1,692,181 | $4,255,975 | $3,635,527 |
| Percentage allocable to Net Profits Interest | 80% | 80% | 80% | 80% |
| Net profits income (before capital reserve) | $1,828,372 | $1,353,745 | $3,404,780 | $2,908,422 |
| Capital reserve activity (3) | (169,952) | 220,000 | (449,952) | 1,032,000 |
| Net profits income received by the Trust | $1,658,420 | $1,573,745 | $2,954,828 | $3,940,422 |

(1) Quarterly sales volumes are typically reported for a three-month period, and therefore sales volumes for the three months ended June 30, 2024, reflect production volumes for February 2024 through April 2024. Sales volumes for the six months ended June 30, 2024, reflect production volumes for November 2023 through April 2024.

(2) Sales volumes for natural gas include NGLs.

(3) Boaz Energy is entitled under the Conveyance to reserve up to $3.0 million from the net profits for certain future taxes and expenses. As of June 30, 2024, Boaz had reserved $1,100,109 net to the Trust for future capital expenses.

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 6,754 Bbls (8.5%) for the three months ended June 30, 2024, as compared to the same period in 2023, and 18,160 Bbls (11.0%) for the six months ended June 30, 2024, as compared to the same period in 2023. Boaz Energy reports this decrease was primarily due to a natural decline in the producing properties and a decrease in demand.

#### Natural Gas

Natural gas sales volumes decreased by 10,625 Mcf (11.6%) for the three months ended June 30,2024, as compared to the same period in 2023, and 30,969 Mcf (15.8%) for the six months ended June 30, 2024, as compared to the same period in 2023. Boaz Energy reports this decrease was primarily due to a natural decline in the producing properties and a decrease in demand.

### Sales Prices

#### Oil

The average realized oil price per Bbl increased for the three and six months ended June 30, 2024, as compared to the same periods in 2023. Boaz Energy reports this increase was primarily due to an increase in the WTI benchmark oil price.

#### Natural Gas

The average realized natural gas price per Mcf decreased for the three and six months ended June 30, 2024, as compared to the same periods in 2023. Boaz Energy reports this decrease was primarily due to a decrease in the Henry Hub benchmark price for natural gas.

### Costs

#### Direct Operating Expenses

Direct operating expenses decreased for the three and six months ended June 30, 2024, as compared to the same periods in 2023, primarily because of fewer projects to return wells to production.

#### Lease Operating Expenses

Lease operating expenses increased for the three months ended June 30, 2024, as compared to the same period in 2023, primarily because of expenses associated with plugging a well in the Permian Shelf area. Lease operating expenses decreased for the six month period ended June 30, 2024, as compared to the same period in 2023, because of fewer projects to return wells to production.

#### Severance and Ad Valorem Taxes

Severance and ad valorem taxes decreased for the three and six months ended June 30, 2024, as compared to the same periods in 2023, primarily because of lower revenues and decreased valuations of properties resulting from decreased industry prices.

#### Development Expenses Related to the Underlying Properties

Development expenses related to the Underlying Properties decreased for the three and six months ended June 30, 2024, as compared to the same periods in 2023, as a result of fewer capital projects.

#### Other Expenses

Other expenses decreased for the three and six months ended June 30, 2024, as compared to the same periods in 2023, primarily due to adjustments to overhead.

#### Capital Reserve

As of June 30, 2024, Boaz Energy had reserved $1,100,109 net to the Trust for future capital expenses.

### 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, the Trustee is authorized to retain cash from the distributions the Trust 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, but not less than $25,000 or more than $100,000 per month. Cash reserves previously retained and currently held by the Trustee for future administrative expenses total $1,000,000 as of March 31, 2024.

### Boaz Energy Capital Expenditure Budget

Boaz Energy’s estimated capital budget for 2024 for the Underlying Properties is $4.5 million, of which approximately $1.5 million has been expended as of June 30, 2024. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock Counties non-operated drilling and waterflood conformance and expansion work in Crane and Terry Counties, as well as drilling one new operated well in Crane County sometime in 2024. The majority of capital spent in 2024 to date was spent on returning a well to production in the Permian Shelf area, a non-operated drill well in the Permian Shelf area, and converting an existing well to an injector well in the Permian Clearfork area. The $4.5 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, Boaz Energy’s actual capital requirements, the pace of regulatory approvals and the mix of projects.

### Distributions Declared After Quarter End

On July 19, 2024, the Trust declared a cash distribution of $0.040021 per Trust unit based upon production during the month of May 2024.

| Production Month | Underlying Sales Volumes Oil (Bbls) | Gas (Mcf) | Average Price Oil (per Bbl) | Gas (per Mcf) |
| --- | ---: | ---: | ---: | ---: |
| May | 24,389 | 30,833 | $78.30 | $1.88 |

### Off-Balance Sheet Arrangements

As of June 30, 2024, 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 2023 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.

## Market risk

As filed, 158 characters.

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.

## Controls and procedures

As filed, 1,719 characters.

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, 2024, 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.

## Risk factors

As filed, 167 characters.

There have been no material changes in the risk factors disclosed under Part I, Item 1A of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023.

Filed Aug 9, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-094513. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.