Permianville Royalty Trust(PVL) - 2023 Q4 - Annual Report

Trust Structure and Operations - The Trust holds a net profits interest representing the right to receive 80% of the net profits from oil and natural gas production from certain properties in Texas, Louisiana, and New Mexico[45]. - The Trust's business activities are limited to owning the net profits interest and related activities, with no authority to acquire other oil and natural gas properties[52]. - The Trust has no employees, and administrative functions are performed by the Trustee, who is responsible for collecting cash and distributing it to unitholders[53]. - The Trust is not subject to pre-set termination provisions based on production volume or time, and will dissolve upon certain conditions being met[61]. - The Trustee has the authority to create a cash reserve for future liabilities and may borrow money to cover administrative expenses if necessary[57]. - Trust unitholders are entitled to the same limitation of personal liability as stockholders of private corporations under Delaware law[77]. - The Trust unitholders may transfer their Trust Units without a service charge, but must pay any applicable taxes or governmental charges[74]. - The Trust unitholders have no voting rights and cannot influence the operations of the Underlying Properties[193]. - The Sponsor may transfer properties without Trust unitholder consent, potentially affecting the Trust's net profits[194]. - The Trust must dissolve if annual cash proceeds from the Net Profits Interest are less than $2 million for two consecutive years[198]. - Conflicts of interest may arise between the Sponsor and the Trust, affecting decisions on development and operations[200]. Financial Performance and Distributions - As of December 31, 2023, the cash reserve held by the Trust totaled$ 941,386, with a targeted cash reserve of approximately $2.3 million being built gradually[58]. - The Trust's income from net profits interest for 2023 included significant contributions from major purchasers, with Phillips 66 accounting for 23%, Pioneer Natural Resources USA for 18%, and Occidental Petroleum for 11%[64]. - Monthly distributions to Trust unitholders are determined based on available funds, which are the excess cash received from net profits and other sources after liabilities are accounted for[71]. - 80% of the aggregate net profits from oil and natural gas production are paid to the Trust monthly, with payments made on or before the end of the following month[84]. - The Trust uses a modified cash basis of accounting, with cash distributions based on the amount received for the corresponding production month[90]. - Trust distributions are directly impacted by future oil and natural gas prices, with lower prices leading to lower distributions and net revenues[67]. - The Trust's cash distributions are highly dependent on oil and natural gas prices, which can fluctuate widely due to various uncontrollable factors[150]. - The Trust's distributions could be reduced by uninsured claims, as the Sponsor's insurance may not cover all liabilities[186]. - The Trust may be treated as an unsecured creditor in the event of the Sponsor's bankruptcy, risking the loss of the Net Profits Interest[192]. - The Trust's distributions may not equal or exceed the purchase price paid by unitholders due to the depleting nature of its assets[208]. Regulatory and Environmental Considerations - The Sponsor believes it is in substantial compliance with all existing environmental laws and regulations, which will not materially affect cash distributions to Trust unitholders[111]. - The regulatory burden on the oil and natural gas industry increases operational costs, potentially affecting profitability[111]. - The Sponsor is subject to liability under CERCLA for hazardous substance releases, which may include costs for cleanup and damages to natural resources[114]. - The Sponsor generates petroleum hydrocarbon wastes classified as hazardous under RCRA, which imposes strict requirements on waste management[114]. - The EPA's 2023 rule on "waters of the United States" is currently under litigation, affecting the Sponsor's regulatory obligations and permitting costs[119]. - The EPA has established new standards for volatile organic compound and methane emissions, requiring reductions from oil and gas sources constructed or modified after December 2022[126]. - The EPA's recent rule lowers the annual standard for fine particulate matter from 12 micrograms per cubic meter to 9 micrograms per cubic meter, impacting the Sponsor's operations[128]. - The Sponsor has developed SPCC plans to prevent and respond to oil spills as required under the Oil Pollution Act[121]. - The Sponsor's operations may face increased costs due to potential restrictions on hydraulic fracturing waste disposal under the Clean Water Act[116]. - The Sponsor's ability to obtain permits may be delayed or prohibited due to stricter implementation of National Ambient Air Quality Standards[129]. - The EPA's proposed Waste Emissions Charge under the Inflation Reduction Act will impose fees based on methane emissions starting in 2024[130]. - The Sponsor's operations may incur additional capital expenditures for air pollution control equipment due to new regulations[129]. - The EPA's new rule adopted in December 2023 will regulate volatile organic compound and methane emissions from new oil and gas sources, requiring further reductions in emissions through various operational controls[131]. - The Waste Emissions Charge will apply to methane emissions exceeding allowable limits, starting at$ 900 per ton in 2024 and increasing to $1,500 per ton in subsequent years[132]. - More than one-third of states are developing GHG emission inventories and regional cap and trade programs, which could impact smaller sources of emissions in the future[133]. - New regulations may increase operating costs and adversely affect financial conditions for companies involved in oil and natural gas exploration[219]. Market and Economic Factors - The oil and natural gas industry is highly competitive, affecting the Trust's net profits interest indirectly due to market conditions[65]. - The ability of OPEC and other oil-exporting nations to maintain production levels significantly impacts oil and natural gas prices, affecting cash available for distribution[142]. - The economic disruption from the COVID-19 pandemic has led to lingering supply chain issues and higher inflation, affecting oil and natural gas demand[154]. - A prolonged decline in oil or natural gas prices could lead to reduced production viability and cash distributions to Trust unitholders[155]. - The Trust's financial performance is sensitive to operational risks associated with third-party operators managing the Underlying Properties[165]. - Future maintenance projects on the Underlying Properties may impact the quantity of economically producible reserves[177]. - The concentration of operations in Texas, Louisiana, and New Mexico exposes the Trust to regional operational and regulatory risks[174]. - The accuracy of reserve estimates is inherently uncertain, and actual production may vary significantly from estimates[159]. - The Trust's reserves are depleting assets, and production will diminish over time, impacting future cash distributions[145]. - The absence of hedge contracts for oil and natural gas production exposes the Trust to greater fluctuations in cash available for distribution[157]. - The Trust's operations may incur significant costs due to climate change regulations restricting greenhouse gas emissions[151]. - The bankruptcy of the Sponsor or third-party operators could impede the operation of wells and development of reserves, affecting cash distributions[145]. Taxation and Financial Reporting - The Trust is classified as a grantor trust for U.S. federal income tax purposes, meaning it is not subject to tax at the trust level[100]. - The highest marginal U.S. federal income tax rate applicable to ordinary income is 37%, while the rate for long-term capital gains is generally 20%[103]. - The Trust files annual information returns reporting all items of income, gain, loss, deduction, and credit to Trust unitholders based on record ownership[102]. - Trust unitholders are required to pay taxes on their share of the Trust's income, even if no cash distributions are received[241]. - A substantial portion of any recognized gain may be taxed as ordinary income due to potential recapture items, including depletion recapture[243]. - The Trust's financial statements are prepared on a modified cash basis, differing from GAAP, which may affect the comparability of financial results[203]. - The Trust has not requested a ruling from the IRS regarding its tax treatment, which could lead to complex tax reporting requirements if not classified as a "grantor trust"[236]. Cybersecurity and Legislative Risks - Cybersecurity risks pose a significant threat to the Sponsor's operations, potentially leading to data theft and operational disruptions[232]. - Legislative initiatives related to hydraulic fracturing could increase costs and operational restrictions for the Sponsor[228]. - The SEC's new climate-related disclosure rule mandates extensive reporting on climate-related risks and opportunities for certain public companies[226]. - The physical effects of climate change could disrupt production and increase costs for operators in the oil and gas sector[220].