Permianville Royalty Trust(PVL) - 2023 Q1 - Quarterly Report

Glossary of Certain Oil and Natural Gas Terms This glossary defines key oil and natural gas terms, units of measurement, accounting principles, and operational concepts - The glossary defines significant terms used in the report, including units of measurement for oil and natural gas (Bbl, Boe, Mcf, MBbl, MBoe, MMcf, MMBoe), accounting principles (GAAP), and operational terms (Completion, Differential, Field, Net profits interest, Plugging and abandonment, Reservoir, Working interest)[10][11][21] PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section provides the Trust's unaudited financial statements and comprehensive notes for the three months ended March 31, 2023 and 2022 Statements of Assets, Liabilities and Trust Corpus | ASSETS / LIABILITIES AND TRUST CORPUS | March 31, 2023 (unaudited) | December 31, 2022 | | :------------------------------------ | :------------------------- | :------------------ | | Cash and cash equivalents | $958,007 | $922,913 | | Net profits interest in oil and natural gas properties, net | $58,483,473 | $59,641,632 | | Total assets | $59,441,480 | $60,564,545 | | Trust corpus | $59,441,480 | $60,564,545 | | Total liabilities and Trust corpus | $59,441,480 | $60,564,545 | Statements of Distributable Income | Income/Expense Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Income from net profits interest | $4,796,805 | $3,224,801 | | Income from sale of assets | – | $130,030 | | Interest and investment income | $12,428 | $5 | | General and administrative expenses | ($209,719) | ($378,538) | | Cash reserves used (withheld) for Trust expenses | ($35,095) | ($208,117) | | Distributable income | $4,395,600 | $2,937,000 | | Distributable income per unit | $0.133200 | $0.089000 | Statements of Changes in Trust Corpus | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Trust corpus, beginning of period | $60,564,545 | $65,192,767 | | Cash reserves withheld for Trust expenses | $35,095 | $208,117 | | Distributable income | $4,395,600 | $2,937,000 | | Distributions to unitholders | ($4,395,600) | ($2,937,000) | | Amortization of net profits interest | ($1,158,160) | ($1,371,100) | | Trust corpus, end of period | $59,441,480 | $64,029,784 | Notes to Financial Statements 1. Trust Organization and Provisions - Permianville Royalty Trust (formerly Enduro Royalty Trust) is a Delaware statutory trust formed in May 2011 to acquire and hold a Net Profits Interest, representing the right to receive 80% of net profits from oil and natural gas production from certain properties in Texas, Louisiana, and New Mexico[37][38] - The Trust's business activities are limited to owning the Net Profits Interest and related activities; it cannot acquire other properties or engage in activities beyond conservation and protection of the Net Profits Interest[39] - The Trust will dissolve if annual cash proceeds from the Net Profits Interest are less than $2 million for two consecutive years, or upon unitholder approval (75% for asset sale, 50% for Sponsor property sale), or judicial dissolution[39][46] 2. Basis of Presentation - The unaudited interim financial statements are prepared pursuant to SEC rules and regulations, using a modified cash basis of accounting, which differs from GAAP primarily because revenues and certain expenses are recorded when cash is received or paid, and amortization/impairment are charged directly to Trust corpus[41][44][49] - This modified cash basis is considered most meaningful for royalty trusts as monthly distributions to unitholders are based on net cash receipts, aligning with SEC Staff Accounting Bulletin Topic 12:E[49][50] 3. Net Profits Interest in Oil and Natural Gas Properties - The Net Profits Interest is amortized on a unit-of-production basis, charged directly to the Trust corpus, and does not affect distributable income. Accumulated amortization was $298,607,686 as of March 31, 2023, and $297,449,526 as of December 31, 2022[51] - The Net Profits Interest is periodically assessed for impairment, though no impairment was recorded in Q1 2023 or Q1 2022. Future downward revisions in production, higher operating costs, or lower commodity prices could trigger impairment recognition[52] 4. Income Taxes - For federal income tax purposes, the Trust is a grantor trust, meaning it is not taxed at the trust level; unitholders are taxed directly on their pro rata share of income and gains and can claim deductions, including depletion[53][54] - The Trust's income from Louisiana and New Mexico sources may be subject to state corporate income tax for unitholders organized as corporations, while Texas imposes a franchise tax on taxable entities, though the Trust itself is intended to be exempt as a 'passive entity'[58][59] 5. Distributions to Unitholders - The Trustee determines monthly distributions based on excess cash received from the Net Profits Interest and other sources, minus liabilities and adjustments for cash reserves. Distributions are made to unitholders of record by the 10th business day after the record date[61] | Period | Distribution per Unit | | :-------------------------- | :-------------------- | | Year to Date – 2023 | $0.133200 | | Year to Date – 2022 | $0.089000 | 6. Trustee Fees - The Trust pays an annual administrative fee of $200,000 to the Trustee and $2,000 to the Delaware Trustee. For the three months ended March 31, 2023 and 2022, $50,000 was paid to the Trustee[64] 7. Subsequent Events - Post-quarter distributions: $0.019350 per unit paid on April 14, 2023, and $0.030000 per unit declared on April 17, 2023, paid on May 12, 2023[65] - Proposed Property Divestitures: The Sponsor entered an agreement to divest certain Permian Basin acreage for approximately $6.7 million, which constitutes part of the Underlying Properties. A special unitholder meeting will be held to approve the release of the Net Profits Interest related to these properties, with unitholders receiving 80% of the net proceeds[66][67] - The Divestiture Properties historically represented less than 6% of total proved reserves and less than 5% of the PV-10 of the Underlying Properties at December 31, 2022[66] Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations The Trustee analyzes the Trust's financial condition, operational results, and liquidity, including factors affecting distributions and future outlook Forward-Looking Statements - The report contains forward-looking statements subject to risks that could cause actual outcomes to differ materially, including drilling and operational risks, commodity price changes, regulatory actions, and global economic factors like the Russia-Ukraine conflict and the COVID-19 pandemic[72][73] - The Trust does not undertake to publicly revise forward-looking statements unless required by securities laws[74][75] Overview - Permianville Royalty Trust's sole asset and income source is the Net Profits Interest, entitling it to 80% of net profits from oil and natural gas production from Underlying Properties. The Trust is passive and has no management control over operations[76] - Monthly cash distributions are made to unitholders after deducting administrative expenses. The amount of Trust revenues and distributions depends on oil/natural gas sales prices, production volumes, costs, price differentials, and administrative expenses[78][80] Outlook - The outlook for development activity on the Underlying Properties remained stable in Q1 2023 despite a quarter-over-quarter decline in commodity prices, with the Sponsor not expecting a material impact on 2023 development activity[81] | Commodity | Price on Dec 30, 2022 | Price on May 11, 2023 | Change | | :-------- | :-------------------- | :-------------------- | :----- | | WTI Crude | $80.26/barrel | $70.78/barrel | -11.7% | | Henry Hub | $3.52/MMBTU | $2.12/MMBTU | -39.8% | - The Sponsor expects capital spending to remain within $6.0 million to $9.0 million ($4.8 million to $7.2 million net to the Trust's 80% Net Profits Interest) and anticipates moderation in inflationary pressures and supply chain bottlenecks[82] Capex Drilling Activity Update | Operator | Region | Number of Wells | Underlying Properties Working Interest | Cumulative Project (in thousands) | Status | | :-------------- | :---------- | :-------------- | :----------------------------------- | :-------------------------------- | :----------------------------------- | | Large Cap Major | Haynesville | 2 | 2.5% D&C New Drills | $37 | 1 Drilled, Awaiting First Revenues; 1 Pre Drill | | Large Cap E&P 1 | Midland | 10 | 6.9% D&C New Drills | $3,911 | 5 Producing, Awaiting First Revenues; 5 Drilling In-Process/Pre Drill | | Large Cap E&P 2 | Permian | N/A (Field) | 0.8% New Drills / Workovers | $69 | In-process/Continual Program | | PE-Backed Private 1 | Delaware | 4 | 5.4% D&C New Drills | $515 | 4 Drilling In-Process | | PE-Backed Private 2 | Delaware | 9 | 0.9% D&C New Drills | $251 | 3 Producing, Awaiting First Revenues; 6 Pre-Drill | | Large Cap E&P 3 | Midland | 4 | 3.4% D&C New Drills | - | Pre-Drill | | Private E&P 2 | Haynesville | 3 | 3.6% Refrac | $640 | 3 In-Process | - A majority of the identified capital projects that are still in process or awaiting first revenues are expected to be completed and begin producing during 2023[87] Special Meeting of Unitholders to Consider Property Divestitures - A special meeting of unitholders will be held in 2023 to approve the Sponsor's sale of Divestiture Properties, the Trust's release of related Net Profits Interest, and the distribution of net proceeds to unitholders. Amendments to the Trust Agreement and Conveyance to raise voting thresholds for similar future transactions will also be considered[88] - The Trustee makes no recommendation on these proposals and advises unitholders to review the definitive proxy statement[88][69] Results of Operations Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Increase (Decrease) | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------ | | Gross profits: | | | | | Oil sales | $9,729,219 | $9,387,220 | 4% | | Natural gas sales | $4,466,787 | $3,707,288 | 20% | | Total Gross Profits | $14,196,006 | $13,094,508 | 8% | | Costs: | | | | | Lease operating expenses | $5,694,000 | $5,158,000 | 10% | | Compression, gathering and transportation | $238,000 | $809,000 | (71%) | | Production, ad valorem and other taxes | $789,000 | $1,173,000 | (33%) | | Development expenses | $2,604,000 | $1,891,000 | 38% | | Total Costs | $9,325,000 | $9,031,000 | 3% | | Gross proceeds from sale of assets | – | $130,030 | (100%) | | Net profits | $4,871,006 | $4,193,538 | 16% | | Net profits allocable to Net Profits Interest | $3,896,805 | $3,354,831 | 16% | | Plus: Sponsor reserve release for capital expenditures | $900,000 | – | 100% | | Less: Trust general and administrative expenses and cash withheld for expenses | ($401,205) | ($417,831) | (4%) | | Distributable income | $4,395,600 | $2,937,000 | 50% | | Production Volumes / Average Prices | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Increase (Decrease) | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------ | | Underlying Properties Production Volumes: | | | | | Oil (Bbls) | 112,271 | 125,837 | (11%) | | Natural Gas (Mcf) | 690,533 | 820,646 | (16%) | | Combined (Boe) | 227,360 | 262,611 | (13%) | | Average Prices: | | | | | Oil - NYMEX (applicable NPI period) ($/Bbl) | $85.07 | $77.14 | 10% | | Differential | $1.59 | ($2.54) | (162%) | | Oil prices realized ($/Bbl) | $86.66 | $74.60 | 16% | | Natural gas - NYMEX (applicable NPI period) ($/Mcf) | $8.30 | $4.75 | 75% | | Differential | ($1.83) | ($0.23) | 683% | | Natural gas prices realized ($/Mcf) | $6.47 | $4.52 | 43% | - Net profits attributable to the Underlying Properties increased by $0.5 million (16%) from Q1 2022 to Q1 2023, primarily due to higher realized oil and natural gas prices, despite decreased production volumes. Oil sales increased 4% due to higher prices (+16%) offsetting lower volumes (-11%). Natural gas sales increased 20% due to higher prices (+43%) offsetting lower volumes (-16%)[90][91] - Lease operating expenses increased by $0.5 million (10%) due to more producing wells, while compression, gathering, and transportation costs decreased by $0.6 million (71%) due to lower natural gas volumes. Development expenses increased by $0.7 million (38%) for new drilling and completion costs[91] Liquidity and Capital Resources - The Trust's primary liquidity sources are cash flow from the Net Profits Interest and a $1.2 million letter of credit from COERT. Cash on hand was $958,007 as of March 31, 2023, and $922,913 as of December 31, 2022[94][96] - The Trustee is building a cash reserve for future liabilities, withholding $50,000 monthly from distributions starting April 2023, aiming for approximately $2.3 million. As of March 31, 2023, $516,053 had been withheld[95] - If cash is insufficient, the Trustee may authorize borrowing, or COERT has agreed to loan funds. No funds have been borrowed or drawn on the letter of credit since the Trust's formation[96] Off-Balance Sheet Arrangements - The Trust has no off-balance sheet arrangements, has not guaranteed any debt, and has no relationships that could result in unconsolidated debt, losses, or contingent obligations[100] Critical Accounting Policies and Estimates - There were no material changes to the Trust's critical accounting policies or estimates during the three months ended March 31, 2023[101] Subsequent Events - Distributions paid or declared after March 31, 2023: $0.019350 per unit paid on April 14, 2023, and $0.030000 per unit declared on April 17, 2023, paid on May 12, 2023[102] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Permianville Royalty Trust is exempt from providing the quantitative and qualitative disclosures about market risk typically required by this Item - The Trust is not required to provide information on quantitative and qualitative disclosures about market risk as it qualifies as a "smaller reporting company" under SEC regulations[103] Item 4. Controls and Procedures The Trustee affirmed the effectiveness of disclosure controls and procedures, noting no material changes to internal control over financial reporting Evaluation of Disclosure Controls and Procedures - The Trustee concluded that the Trust's disclosure controls and procedures were effective as of March 31, 2023, for ensuring timely and accurate information disclosure[105] - Due to the Trust's passive nature, the Trustee's disclosure controls rely on information provided by the Sponsor (e.g., operational results, costs, development plans, reserve info) and conclusions from independent reserve engineers[106] Changes in Internal Control over Financial Reporting - There were no changes in the Trust's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting during the period[107] PART II — OTHER INFORMATION Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Trust's 2022 Annual Report on Form 10-K - No material changes to the risk factors contained in Item 1A of the Trust's 2022 Annual Report on Form 10-K were reported[110] Item 6. Exhibits This section lists the exhibits filed or furnished as part of this Form 10-Q, including various agreements, certificates, and certifications - The report includes an index to exhibits, listing documents such as the Agreement and Plan of Merger, Certificate of Trust, Amended and Restated Trust Agreement, and certifications pursuant to the Sarbanes-Oxley Act[111][112][113] Signature - The report was signed on May 15, 2023, by Sarah Newell, Vice President and Trust Officer of The Bank of New York Mellon Trust Company, N.A., as Trustee for Permianville Royalty Trust[115][116][117] - The Registrant, Permianville Royalty Trust, has no principal executive officer, principal financial officer, board of directors, or persons performing similar functions[117]