PermRock Royalty Trust(PRT) - 2022 Q4 - Annual Report

Financial Performance - For the year ended December 31, 2022, Boaz Energy reported that Phillips 66, Plains All American Pipeline, Blackbeard Operating LLC, and Energy Transfer Partners accounted for 27.65%, 20.48%, 15.12%, and 12.12% respectively, of its total oil and natural gas revenues[43]. - In 2022, Boaz Energy reported net profits income of $13,160,845, a 62.5% increase from $8,144,472 in 2021[218]. - Total revenue for 2022 was $13,177,436, compared to $8,144,652 in 2021, reflecting a significant growth[218]. - Average realized sales price for oil in 2022 was $93.15 per barrel, up from $60.13 in 2021, representing a 55% increase[218]. - Average realized sales price for natural gas in 2022 was $7.94 per Mcf, compared to $4.31 in 2021, marking an 84% increase[218]. - The Trust distributed $1.011357 per unit for the year ended December 31, 2022, compared to $0.605881 in 2021, an increase of 66.7%[220]. - Total costs for oil and natural gas production in 2022 were $20,773,247, up from $15,255,035 in 2021, indicating a 36.5% increase[195]. - Interest income rose for the year ended December 31, 2022, attributed to higher interest rates[221]. - General and administrative expenditures increased due to timing and payment differences of some expenses[222]. Operational Overview - The Trust receives 80% of the net profits from the sale of oil and natural gas production from the Underlying Properties[29]. - The Underlying Properties consist of 31,783 gross (22,731 net) acres in the Permian Basin[30]. - The Trust has no employees and does not conduct any operations or activities beyond managing the Net Profits Interest[27]. - The Trust's income and cash flow are derived almost entirely from the Net Profits Interest[27]. - The Trust is not liable for any operating, capital, or other costs attributable to the Underlying Properties[35]. - The Trust's assets are located entirely in the United States, with oil and natural gas sold to third-party purchasers domestically[46]. - The company operates a total of 507 gross wells, including 339 operated wells and 168 non-operated wells[188]. - The company drilled 6 gross (0.5 net) productive development wells in 2022, consistent with the previous year, while no exploratory wells were drilled[191]. - Boaz Energy aims to continue reactivating inactive wells to maximize production in a high commodity price environment in 2023[217]. - Boaz Energy plans to drill new producing wells in the Permian Shelf area and stimulate existing wells in 2023[217]. Regulatory and Environmental Risks - Boaz Energy's oil and natural gas production operations are subject to stringent federal, regional, state, and local laws and regulations governing environmental protection[51]. - The U.S. EPA designated two per- and polyfluoroalkyl substances (PFAS) as hazardous substances under CERCLA, increasing potential liabilities for companies historically using these chemicals[54]. - The Resource Conservation and Recovery Act (RCRA) currently exempts certain oil and gas drilling wastes from hazardous waste regulations, but future classifications could increase operational costs for Boaz Energy[55]. - The Clean Water Act (CWA) imposes strict controls on pollutant discharges, with potential delays in oil and gas project developments due to permit requirements[58]. - The U.S. EPA's National Compliance Initiatives for fiscal years 2020-2023 focus on reducing emissions from significant sources of volatile organic compounds (VOC) and hazardous air pollutants (HAPs), which may increase scrutiny on Boaz Energy's operations[59]. - The EPA has adopted regulations requiring monitoring and annual reporting of greenhouse gas (GHG) emissions from certain petroleum and natural gas system sources, impacting Boaz Energy's compliance costs[62]. - The Biden administration's focus on climate change may lead to new regulations on methane emissions, potentially increasing operational costs for Boaz Energy[63]. - The Endangered Species Act (ESA) and Migratory Bird Treaty Act (MBTA) may restrict Boaz Energy's operations in areas with protected species, leading to additional costs and operational delays[70]. - New federal and state regulations regarding hydraulic fracturing could lead to increased costs and operational restrictions for Boaz Energy[140]. - If Boaz Energy cannot comply with environmental laws and regulations, it may incur significant costs that could adversely affect production and cash distributions[137]. Market and Economic Factors - The Trust's cash distributions are highly dependent on oil and natural gas prices, which are volatile and can fluctuate widely, potentially reducing proceeds to the Trust and cash distributions to unitholders[75]. - The ability of OPEC and other oil-exporting nations to maintain production levels significantly impacts oil prices, which could reduce cash available for distribution to Trust unitholders[83]. - The financial condition of Boaz Energy and third-party operators is critical, as their bankruptcy could disrupt operations and decrease distributions to Trust unitholders[99]. - The Trust's financial condition may be adversely affected by geopolitical hostilities, including the ongoing conflict between Russia and Ukraine, impacting oil and gas markets[79]. - The Trust's distributions could be adversely affected by geopolitical hostilities, which may disrupt oil and natural gas supplies and increase market volatility[114]. - The COVID-19 pandemic continues to impact global demand for oil and gas, with potential resurgence of new variants posing risks to production and cash available for distribution[81]. Reserves and Production Estimates - As of December 31, 2022, the Underlying Properties had proved reserves of 6.8 million barrels of oil equivalent (MMBoe), with 67% of the volumes and PV-10 value attributable to proved developed reserves[161]. - The Permian Clearfork area has an estimated 2.3 MMBoe of total proved reserves, with 65% classified as proved developed reserves[162]. - The Permian Abo area has an estimated 1.2 MMBoe of total proved reserves, with 73% classified as proved developed reserves[163]. - The Permian Shelf area has an estimated 2.3 MMBoe of total proved reserves, with 51% classified as proved developed reserves[164]. - The Permian Platform area has an estimated 1.1 MMBoe of total proved reserves, with 100% classified as proved developed reserves[165]. - The estimated proved oil and natural gas reserves and the associated PV-10 calculation may not reflect the current market value of the Trust's interest in these reserves, as actual future prices and costs may differ significantly from estimates[110]. - The Trust's reserves and future production may be less than current estimates, which could lead to reduced cash distributions and lower Trust unit value[75]. - The Trust's cash distributions may decline over time due to the depleting nature of the reserves attributable to the Underlying Properties[101]. - The proved undeveloped reserves decreased from 1,406.7 MBoe in 2021 to 1,232.7 MBoe in 2022, primarily due to positive price revisions[181]. - The average sales price for natural gas was $6.358 per MMBtu and for oil was $93.67 per Bbl in 2022, used for estimating future net revenue[179]. Trust Structure and Governance - The Trust will dissolve if the annual cash proceeds available for distribution to the Trust is less than $2.0 million for each of any two consecutive years[48]. - The Trust's units must maintain an average closing price of at least $1.00 over a consecutive 30 trading day period to avoid delisting from the NYSE[127]. - The Trust unitholders have limited ability to enforce provisions of the Conveyance creating the Net Profits Interest, and Boaz Energy's liability to the Trust is limited[126]. - Trust unitholders will not be able to sue Boaz Energy directly to enforce rights under the Conveyance, limiting their recourse options[126]. - Conflicts of interest may arise between Boaz Energy and the Trust, as Boaz Energy operates substantially all production and may take actions that differ from the interests of the Trust[124]. - Boaz Energy may transfer all or part of the Underlying Properties without Trust unitholder consent, which could impact the Trust's profits and distributions[118]. - The Trust indirectly bears 80% of all costs and expenses paid by Boaz Energy, including those related to environmental compliance and liabilities associated with the Underlying Properties[138]. - The Trust indirectly bears an 80% share of all costs and expenses related to the Underlying Properties, which can decrease cash distributions if production and development costs rise without corresponding revenue increases[106]. - If direct operating expenses and development expenses exceed gross profits from the Underlying Properties, the Trust will not receive net profits until future gross profits exceed the total excess costs plus accrued interest[107]. - The market price for the Trust units may not reflect the value of the Net Profits Interest, as it is influenced by oil and natural gas prices and other external factors[130].