PermRock Royalty Trust(PRT) - 2020 Q2 - Quarterly Report

PART I. – FINANCIAL INFORMATION Financial Statements Unaudited condensed financial statements for Q2 2020, including assets, liabilities, trust corpus, and distributable income, are presented on a modified cash basis Condensed Statements of Assets, Liabilities and Trust Corpus Total assets decreased slightly to $89.4 million as of June 30, 2020, primarily due to Net Profits Interest amortization, while cash reserves increased to $1.0 million Condensed Balance Sheet Data (unaudited) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and short-term investments | $1,000,000 | $1,215,386 | | Net Profits Interest | $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 | $1,000,000 | $600,000 | | Trust corpus | $88,393,841 | $89,043,803 | | Total Liabilities and Trust Corpus | $89,393,841 | $90,259,189 | Condensed Statements of Distributable Income (Unaudited) Distributable income for Q2 2020 was zero, a sharp decline from $2.65 million in Q2 2019, driven by a significant drop in net profits income Distributable Income Comparison (unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net profits income | $376,992 | $3,140,783 | $2,131,247 | $5,463,992 | | Distributable income | $0 | $2,645,711 | $1,195,064 | $4,716,513 | | Distributable income per unit | $0.000000 | $0.217472 | $0.098232 | $0.387688 | Condensed Statements of Changes in Trust Corpus (Unaudited) Trust corpus decreased from $89.0 million to $88.4 million by Q2 2020, primarily due to $649,962 in Net Profits Interest amortization Changes in Trust Corpus for Six Months Ended June 30, 2020 (unaudited) | Description | Amount | | :--- | :--- | | Trust corpus, beginning of period | $89,043,803 | | Amortization of Net Profits Interest | ($649,962) | | Distributable income | $1,195,064 | | Distributions declared | ($1,195,064) | | Trust corpus, end of period | $88,393,841 | Notes to Condensed Financial Statements (Unaudited) Key notes detail the Trust's modified cash basis accounting, reliance on volatile oil and gas prices, $1.0 million cash reserve, expired derivative contracts, and pending litigation - The Trust uses a modified cash basis of accounting, recording income upon receipt and expenses upon payment, which is deemed most meaningful for royalty trust distributions[29][32] - The Trustee maintains a fully funded $1.0 million cash reserve for administrative expenses as of June 30, 2020[41] - Derivative put option contracts providing price protection expired on December 31, 2019, leaving the Trust fully exposed to 2020 commodity price fluctuations[48][49] - Boaz Energy increased its 2020 capital budget to $2.5 million for non-operated projects, with no new Boaz-operated wells planned due to low commodity prices[50] - No cash distributions were made by the Trust during Q2 2020 or declared for July 2020 due to the unfavorable price environment[43][54] Trustee's Discussion and Analysis of Financial Condition and Results of Operations The Trustee's analysis attributes the significant decline in financial performance to decreased oil production and sharply lower commodity prices due to the COVID-19 pandemic and global oil disputes Results of Operations Net profits income for Q2 2020 fell 88% to $376,992, resulting in zero distributable income, driven by decreased oil sales volumes and a 42% drop in average realized oil prices Computation of Net Profits Interest Received by the Trust | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Underlying Properties Sales Volumes | | | | | | Oil (Bbl) | 126,963 | 133,676 | 262,455 | 277,539 | | Natural gas (Mcf) | 138,507 | 148,315 | 288,901 | 308,147 | | 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 | | Financials | | | | | | Total gross profits | $4,165,235 | $7,828,549 | $12,161,455 | $14,570,676 | | Total costs | $(3,348,096) | $(3,472,038) | $(8,198,995) | $(7,998,717) | | Settlement of derivative contracts | $0 | $0 | $0 | $688,562 | | Net profits income received by the Trust | $376,992 | $3,140,783 | $2,131,247 | $5,463,992 | - Oil sales volumes decreased by 5% for both Q2 and H1 2020 due to reduced demand from COVID-19 and production shut-ins by Boaz Energy[82] - The average realized oil price sharply declined to $31.81/Bbl in Q2 2020 from $54.53/Bbl in Q2 2019, reflecting market price collapse due to oversupply and COVID-19[84] Liquidity and Capital Resources The Trust's liquidity relies on Net Profits Interest cash flow and $1.0 million in cash reserves, while Boaz Energy increased its 2020 capital budget to $2.5 million - The Trust's primary liquidity sources are Net Profits Interest cash flow and $1.0 million in Trustee-held cash reserves as of June 30, 2020[94][96] - Boaz Energy's 2020 capital budget increased to $2.5 million, with $1.8 million expended by June 30, 2020, and no new operated wells planned[97] - Boaz Energy held a net balance of $192,721 in reserved funds from net profits for taxes and future expenses as of June 30, 2020[98] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the Trust is exempt from providing quantitative and qualitative disclosures about market risk - The Trust, as a smaller reporting company under Exchange Act Rule 12b-2, is not required to provide quantitative and qualitative market risk disclosures[103] Controls and Procedures The Trustee concluded the Trust's disclosure controls and procedures were effective as of June 30, 2020, relying on information from Boaz Energy - The Trustee concluded the Trust's disclosure controls and procedures were effective as of June 30, 2020[104] - The Trustee's evaluation significantly relies on information provided by Boaz Energy regarding Underlying Properties' operations, costs, and revenues[105] PART II. – OTHER INFORMATION Legal Proceedings The Trust is a defendant in a lawsuit alleging surface use damages and lease violations, which Boaz Energy does not expect to materially affect the Trust - The Trust is a defendant in the "2018 Litigation" regarding surface use damages and lease violations on properties where it holds an interest[108] - Boaz Energy does not anticipate a material effect from the litigation, with a summary judgment hearing tentatively scheduled for August 27, 2020[108] Risk Factors Material risks include adverse effects from the COVID-19 pandemic and oil price volatility due to OPEC actions, potentially impacting cash distributions - The COVID-19 pandemic has caused a sharp decline in oil and gas prices, potentially leading to production shut-ins and elimination of unitholder cash distributions[110] - Uncertainty regarding OPEC's production management significantly impacts commodity prices, potentially increasing volatility and adversely affecting the Trust's income and distributions[111] Exhibits This section lists exhibits filed with the Form 10-Q, including governance documents and required Section 302 and 906 certifications - Exhibits filed include governance documents and required Section 302 and 906 officer certifications[112]