|
Item 1.
|
Financial Statements.
|
PERMIANVILLE ROYALTY TRUST
Statements of Assets, Liabilities and
Trust Corpus
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,598
|
|
|
$
|
90,665
|
|
Net profits interest in oil and natural gas properties, net
|
|
|
73,104,613
|
|
|
|
77,165,956
|
|
Total assets
|
|
$
|
73,168,211
|
|
|
$
|
77,256,621
|
|
LIABILITIES AND TRUST CORPUS
|
|
|
|
|
|
|
|
|
Advances to the Trust
|
|
$
|
159,071
|
|
|
$
|
34,818
|
|
Total liabilities
|
|
|
159,071
|
|
|
|
34,818
|
|
Trust corpus (33,000,000 units issued and outstanding)
|
|
|
73,009,140
|
|
|
|
77,221,803
|
|
Total liabilities and Trust corpus
|
|
$
|
73,168,211
|
|
|
$
|
77,256,621
|
|
The accompanying notes are an integral part
of these financial statements.
PERMIANVILLE ROYALTY TRUST
Statements of Distributable Income
(unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Income from net profits interest
|
|
$
|
172,819
|
|
|
$
|
2,955,216
|
|
|
$
|
5,565,015
|
|
|
$
|
7,526,927
|
|
Income from sale/lease of undeveloped acreage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,292
|
|
Interest and investment income
|
|
|
1
|
|
|
|
4,376
|
|
|
|
445
|
|
|
|
14,263
|
|
General and administrative expenses
|
|
|
(123,887
|
)
|
|
|
(202,204
|
)
|
|
|
(693,190
|
)
|
|
|
(755,405
|
)
|
Cash reserves (withheld) used for Trust expenses
|
|
|
76,467
|
|
|
|
2,468
|
|
|
|
151,320
|
|
|
|
147,169
|
|
Distributable income
|
|
$
|
125,400
|
|
|
$
|
2,759,856
|
|
|
$
|
5,023,590
|
|
|
$
|
7,110,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable income per unit (33,000,000 units)
|
|
$
|
0.003800
|
|
|
$
|
0.083632
|
|
|
$
|
0.152230
|
|
|
$
|
0.215462
|
|
The accompanying notes are an integral part
of these financial statements.
PERMIANVILLE ROYALTY TRUST
Statements of Changes in Trust Corpus
(unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Trust corpus, beginning of period
|
|
$
|
74,344,781
|
|
|
$
|
80,783,360
|
|
|
$
|
77,221,803
|
|
|
$
|
84,084,189
|
|
Cash reserves withheld (used) for Trust expenses
|
|
|
(76,467
|
)
|
|
|
(2,468
|
)
|
|
|
(151,320
|
)
|
|
|
(147,169
|
)
|
Distributable income
|
|
|
125,400
|
|
|
|
2,759,856
|
|
|
|
5,023,590
|
|
|
|
7,110,246
|
|
Distributions to unitholders
|
|
|
(125,400
|
)
|
|
|
(2,759,856
|
)
|
|
|
(5,023,590
|
)
|
|
|
(7,110,246
|
)
|
Amortization of net profits interest
|
|
|
(1,259,174
|
)
|
|
|
(1,477,009
|
)
|
|
|
(4,061,343
|
)
|
|
|
(4,633,137
|
)
|
Trust corpus, end of period
|
|
$
|
73,009,140
|
|
|
$
|
79,303,883
|
|
|
$
|
73,009,140
|
|
|
$
|
79,303,883
|
|
The accompanying notes are an integral
part of these financial statements.
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. TRUST ORGANIZATION
AND PROVISIONS
Permianville Royalty
Trust (the “Trust”), previously known as Enduro Royalty Trust, is a Delaware statutory trust formed in May 2011 pursuant
to a trust agreement (the “Trust Agreement”) among Enduro Resource Partners LLC (“Enduro”), as trustor,
The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee, and Wilmington Trust Company (the “Delaware
Trustee”), as Delaware Trustee.
The Trust was created
to acquire and hold for the benefit of the Trust unitholders a net profits interest representing the right to receive 80% of the
net profits from the sale of oil and natural gas production from certain properties in the states of Texas, Louisiana and New Mexico
held by Enduro as of the date of the conveyance of the net profits interest to the Trust (the “Net Profits Interest”).
The properties in which the Trust holds the Net Profits Interest are referred to as the “Underlying Properties.”
In connection with
the closing of the initial public offering in November 2011, Enduro contributed the Net Profits Interest to the Trust in exchange
for 33,000,000 units of beneficial interest in the Trust (the “Trust Units”). On August 31, 2018, COERT Holdings 1
LLC (“COERT” or the “Sponsor”) acquired from Enduro the Underlying Properties and all of the outstanding
Trust Units owned by Enduro (the “Sale Transaction”). In connection with the Sale Transaction, COERT assumed all of
Enduro’s obligations under the Trust Agreement and other instruments to which Enduro and the Trustee were parties. As of
September 30, 2020, the Sponsor owned 8,600,000 Trust Units, or 26% of the issued and outstanding Trust Units.
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 Amended and Restated Trust Agreement provides, among other provisions, that:
|
·
|
|
the Trust’s business activities are limited to owning the Net Profits Interest and any activity reasonably related to such ownership, including activities required or permitted by the terms of the Conveyance of Net Profits Interest, dated effective as of July 1, 2011 (as supplemented and amended to date, the “Conveyance”). As a result, the Trust is not permitted to acquire other oil and natural gas properties or net profits interests or otherwise to engage in activities beyond those necessary for the conservation and protection of the Net Profits Interest;
|
|
·
|
|
the Trust may dispose of all or any material part of the assets of the Trust (including the sale of the Net Profits Interest) if approved by at least 75% of the outstanding Trust Units;
|
|
·
|
|
the Sponsor may sell a divided or undivided portion of its interests in the Underlying Properties, free from and unburdened by the Net Profits Interest, if approved by at least 50% of the outstanding Trust Units at a meeting of Trust unitholders;
|
|
·
|
|
the Trustee will make monthly cash distributions to unitholders (Note 5);
|
|
·
|
|
the Trustee may create a cash reserve to pay for future liabilities of the Trust;
|
|
·
|
|
the Trustee may authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed its cash on hand and available reserves. No further distributions will be made to Trust unitholders until such amounts borrowed are repaid; and
|
|
·
|
|
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 Trust will dissolve upon the earliest to occur of the following:
|
|
·
|
|
the Trust, upon approval of the holders of at least 75% of the outstanding Trust Units, sells the Net Profits Interest;
|
|
·
|
|
the annual cash proceeds received by the Trust attributable to the Net Profits Interest are less than $2 million for each of any two consecutive years;
|
|
·
|
|
the holders of at least 75% of the outstanding Trust Units vote in favor of dissolution; or
|
|
·
|
|
the Trust is judicially dissolved.
|
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
- Continued
(unaudited)
2. BASIS OF PRESENTATION
The Statement of
Assets, Liabilities and Trust Corpus as of December 31, 2019, which has been derived from audited financial statements, and
the unaudited interim financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020
and 2019 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted
pursuant to those rules and regulations. Therefore, these financial statements should be read in conjunction with the financial
statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019
(the “2019 Annual Report on Form 10-K”).
In the opinion of
the Trustee, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal, recurring accrual
adjustments, that are necessary for a fair presentation of the interim periods presented and include all the disclosures necessary
to make the information presented not misleading. These interim results are not necessarily indicative of results for a full year.
The preparation of
financial statements requires the Trustee to make estimates and assumptions that affect reported amounts of assets and liabilities
and the reported amounts of revenues and expenses during the reporting period. Although the Trustee believes that these estimates
are reasonable, actual results could differ from those estimates.
The Trust uses the
modified cash basis of accounting to report Trust receipts of income from the Net Profits Interest and payments of expenses incurred.
The Net Profits Interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease
operating expenses and production and property taxes) and development expenses of the Underlying Properties, multiplied by 80%.
Cash distributions of the Trust are made based on the amount of cash received by the Trust pursuant to terms of the Conveyance
creating the Net Profits Interest.
Under the terms of
the Conveyance, the monthly Net Profits Interest calculation includes oil and natural gas revenues received during the relevant
month. Monthly operating expenses and capital expenditures represent estimated incurred expenses and, as a result, represent accrued
expenses as well as expenses paid during the period.
The financial statements
of the Trust are prepared on the following basis:
(a) Income from Net
Profits Interest is recorded when distributions are received by the Trust;
(b) Distributions
to Trust unitholders are recorded when paid by the Trust;
(c) Trust general
and administrative expenses (which includes the Trustee’s fees as well as accounting, engineering, legal, and other professional
fees) are recorded when paid;
(d) Cash reserves
for Trust expenses may be established by the Trustee for certain future expenditures that would not be recorded as contingent liabilities
under accounting principles generally accepted in the United States of America (“GAAP”);
(e) Amortization of
the Net Profits Interest in oil and natural gas properties is calculated on a unit-of-production basis and is charged directly
to the Trust corpus; and
(f) The Net Profits
Interest in oil and natural gas properties is periodically assessed whenever events or circumstances indicate that the aggregate
value may have been impaired below its total capitalized cost based on the Underlying Properties. If an impairment loss is indicated
by the carrying amount of the assets exceeding the sum of the undiscounted expected future net cash flows of the Net Profits Interest,
then an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value
determined using discounted cash flows.
The financial statements
of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued; certain cash reserves
may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP; general
and administrative expenses are recorded when paid instead of when incurred; and amortization of the net profits interest calculated
on a unit-of-production basis is charged directly to trust corpus instead of as an expense. While these statements differ from
financial statements prepared in accordance with GAAP, the modified cash basis of reporting is considered to be the most meaningful
because monthly distributions to the Trust unitholders are based on net cash receipts.
This comprehensive
basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff
Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
3. NET PROFITS INTEREST
IN OIL AND NATURAL GAS PROPERTIES
The Net Profits Interest
in oil and natural gas properties was recorded at its fair value on the date of conveyance. Amortization of the Net Profits Interest
in oil and natural gas properties is calculated on a unit-of-production basis based on the Underlying Properties’ production
and reserves. As the Trust uses the modified cash basis of accounting, amortization is recognized only in those months in which
income from net profits interest exceeds capital expenditures. The reserves upon which the amortization rate is based are quantity
estimates that are subject to numerous uncertainties inherent in the estimation of proved reserves. The volumes considered to be
commercially recoverable fluctuate with changes in commodity prices and operating costs. These estimates are expected to change
as additional information becomes available in the future. Downward revisions in proved reserves may result in an increased rate
of amortization. Amortization is charged directly to the Trust corpus balance and does not affect the distributable income of the
Trust. Accumulated amortization as of September 30, 2020 and December 31, 2019 was $283,986,545 and $279,925,202, respectively.
The Net Profits Interest
is periodically assessed for impairment whenever events or circumstances indicate that the current fair value based on expected
future cash flows of the Underlying Properties may be less than the carrying value of the Net Profits Interest. While the Trust
did not record an impairment during the nine months ended September 30, 2020 or 2019, future downward revisions in actual production
volumes relative to current forecasts, higher than expected operating costs, or lower than anticipated commodity prices could result
in recognition of impairment in future periods.
4. INCOME TAXES
Federal Income Taxes
For federal income
tax purposes, the Trust is a grantor trust and therefore is not subject to tax at the trust level. Trust unitholders are treated
as owning a direct interest in the assets of the Trust, and each Trust unitholder is taxed directly on his or her pro rata share
of the income and gain attributable to the assets of the Trust and entitled to claim his or her pro rata share of the deductions
and expenses attributable to the assets of the Trust. The income of the Trust is deemed to have been received or accrued by each
unitholder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.
The deductions of
the Trust consist of severance taxes and administrative expenses. In addition, each unitholder is entitled to depletion deductions
because the Net Profits Interest constitutes “economic interests” in oil and natural gas properties for federal income
tax purposes. Each unitholder is entitled to amortize the cost of the Trust Units through cost depletion over the life of the Net
Profits Interest or, if greater, through percentage depletion. Unlike cost depletion, percentage depletion is not limited to a
unitholder’s depletable tax basis in the Trust Units. Rather, a unitholder could be entitled to percentage depletion as long
as the applicable Underlying Properties generate gross income.
Some Trust Units are
held by a middleman, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint
owners, and brokers holding an interest for a custodian in street name). Therefore, the Trustee considers the Trust to be a non-mortgage
widely held fixed investment trust (“WHFIT”) for U.S. federal income tax purposes. The Bank of New York Mellon Trust
Company, N.A., 601 Travis, 16th Floor, Houston, Texas 77002, telephone number (512) 236-6545, is the representative
of the Trust that will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information
reporting requirements of the Trust as a WHFIT. Tax information is also posted by the Trustee at www.permianvilleroyaltytrust.com.
Notwithstanding the foregoing, the middlemen holding units on behalf of unitholders, and not the Trustee of the Trust, are solely
responsible for complying with the information reporting requirements under the U.S. Treasury Regulations with respect to such
units, including the issuance of IRS Forms 1099 and certain written tax statements. Unitholders whose units are held by middlemen
should consult with such middlemen regarding the information that will be reported to them by the middlemen with respect to the
Trust Units.
The tax consequences
to a unitholder of ownership of Trust Units will depend in part on the unitholder’s tax circumstances. Unitholders should
consult their tax advisors about the federal tax consequences relating to owning the Trust Units.
State Taxes
The Trust’s
revenues are from sources in the states of Louisiana, New Mexico and Texas. Because it distributes all of its net income to unitholders,
the Trust is not taxed at the trust level in Louisiana or New Mexico. Although the Trust does not owe tax, the Trustee is
required to file a return with Louisiana reflecting the income and deductions of the Trust attributable to properties located in
that state. Presently, Louisiana and New Mexico tax nonresident income from real property located within that state. Louisiana
and New Mexico impose a corporate income tax which may apply to unitholders organized as corporations.
Texas does not impose
a state income tax, so the Trust’s income is not subject to income tax at the trust level in Texas. Texas imposes a franchise
tax at a rate of 0.75% on gross revenues less certain deductions for returns originally due on or after January 1, 2016, as specifically
set forth in the Texas franchise tax statutes. Entities subject to tax generally include trusts unless otherwise exempt. Trusts
that receive at least 90% of their federal gross income from designated passive sources, including royalties from mineral properties
and other income from other non-operating mineral interests, and do not receive more than 10% of their income from operating an
active trade or business, generally are exempt from the Texas franchise tax as “passive entities.” Although the Trust
is intended to be exempt from Texas franchise tax at the trust level as a passive entity, each unitholder that is considered a
taxable entity under the Texas franchise tax would generally be required to include its portion of Trust net income in its own
Texas franchise tax computation.
Each unitholder should
consult his or her own tax advisor regarding state tax requirements, if any, applicable to such person’s ownership of Trust
Units.
5. DISTRIBUTIONS
TO UNITHOLDERS
Each month, the Trustee
determines the amount of funds available for distribution to the Trust unitholders. Available funds are the excess cash, if any,
received by the Trust from the Net Profits Interest and other sources (such as interest earned on any amounts reserved by the Trustee)
that month, over the Trust’s liabilities for that month, subject to adjustments for changes made by the Trustee during the
month in any cash reserves established for future liabilities of the Trust. Distributions are made to the holders of Trust Units
as of the applicable record date (generally the last business day of each calendar month) and are payable on or before the 10th
business day after the record date.
The following table
provides information regarding the Trust’s distributions per unit paid during the periods indicated:
|
|
|
|
|
|
Distribution
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
per Unit
|
|
Nine Months Ended September 30, 2020:
|
|
|
|
|
|
|
|
December 16, 2019
|
|
December 31, 2019
|
|
January 15, 2020
|
|
$
|
0.018000
|
|
January 17, 2020
|
|
January 31, 2020
|
|
February 14, 2020
|
|
$
|
0.020630
|
|
February 18, 2020
|
|
February 28, 2020
|
|
March 13, 2020
|
|
$
|
0.024500
|
|
March 16, 2020
|
|
March 31, 2020
|
|
April 14, 2020
|
|
$
|
0.041000
|
|
April 17, 2020
|
|
April 30, 2020
|
|
May 12, 2020
|
|
$
|
0.029000
|
|
May 15, 2020
|
|
May 29, 2020
|
|
June 15, 2020
|
|
$
|
0.015300
|
|
June 15, 2020
|
|
June 30, 2020
|
|
July 15, 2020
|
|
$
|
0.003800
|
|
Year
to Date – 2020
|
|
|
|
|
|
$
|
0.152230
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019:
|
|
|
|
|
|
|
|
|
January 18, 2019
|
|
January 31, 2019
|
|
February 14, 2019
|
|
$
|
0.005135
|
|
February 15, 2019
|
|
February 28, 2019
|
|
March 14, 2019
|
|
$
|
0.026550
|
|
March 18, 2019
|
|
March 29, 2019
|
|
April 15, 2019
|
|
$
|
0.076357
|
|
April 18, 2019
|
|
April 30, 2019
|
|
May 14, 2019
|
|
$
|
0.016800
|
|
May 20, 2019
|
|
May 31, 2019
|
|
June 14, 2019
|
|
$
|
0.006988
|
|
June 17, 2019
|
|
June 28, 2019
|
|
July 15, 2019
|
|
$
|
0.041556
|
|
July 19, 2019
|
|
July 31, 2019
|
|
August 14, 2019
|
|
$
|
0.021476
|
|
August 16, 2019
|
|
August 30, 2019
|
|
September 16, 2019
|
|
$
|
0.020600
|
|
Year
to Date - 2019
|
|
|
|
|
|
$
|
0.215462
|
|
In July and August 2020, the direct operating
and development expenses exceeded revenues, causing the net profits to be negative. As a result, there were no distributions to
the Trust unitholders in August and September 2020, respectively.
In December 2018, the direct
operating and development expenses exceeded revenues, causing the net profits to be negative. This was primarily due to the
delay in transitioning operator reporting for the Underlying Properties to the Sponsor, thus reducing the cash receipts to
the Trust for this period. As a result, there were no net profits reported in December 2018 to be distributed to the Trust
unitholders in January 2019. In January 2019, net profits from the Underlying Properties were positive, and the aggregate
shortfall in net profits of $667,227 from December 2018 was deducted from such net profits when calculating the distribution
paid in February 2019.
6. ADVANCES TO THE TRUST
From time to time,
if the Trust’s cash on hand (including available cash reserves, if any) is not sufficient to pay the Trust’s ordinary
course administrative expenses that are due prior to the monthly payment to the Trust of proceeds from the Net Profits Interest,
COERT may advance funds to the Trust to pay such expenses. Such advances are recorded as a liability on the Statements of Assets,
Liabilities and Trust Corpus until repaid. As of September 30, 2020 and December 31, 2019, advances to the Trust were $159,071
and $34,818, respectively.
7. TRUSTEE FEES
Under the terms of
the Trust Agreement, the Trust pays an administrative fee of $200,000 per year to the Trustee and an annual fee of $2,000 to the
Delaware Trustee. During the three- and nine-month periods ended September 30, 2020 and 2019, the Trust paid $50,000 and $150,000,
respectively, to the Trustee pursuant to the terms of the Trust Agreement. During the three- and nine-month periods ended September
30, 2020 and 2019, the Trust paid $0 and $2,000, respectively, to the Delaware Trustee pursuant to the terms of the Trust Agreement.
8. 2017 DIVESTITURE
PROPERTIES HOLDBACK AMOUNT
In September 2017,
Enduro completed the sale of certain properties in the Permian Basin. In connection with the sale, Enduro withheld $750,000 (the
“Holdback Amount”) from the net proceeds allocable to the Trust to cover possible indemnification obligations under
the related purchase and sale agreements arising within 25 months of the closing of the transactions, or by the end of October
2019 (the “Indemnification Term”). In connection with the Sale Transaction, Enduro released the Holdback Amount to
the Trustee on September 4, 2018, with the Trustee announcing that it would continue to retain the Holdback Amount for the remainder
of the Indemnification Term. The Trustee announced in September 2019 that it would release the Holdback Amount, totaling approximately
$752,000, including interest, as part of the Trust distribution to unitholders payable in October 2019.
9. SUBSEQUENT
EVENTS
On October 15, 2020,
the Trust announced that there would be no distribution to the Trust unitholders in November
2020 as a result of the cumulative outstanding net profits shortfall.
Item 2.
|
Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.
|
References to the
“Trust” in this document refer to Permianville Royalty Trust, previously known as Enduro Royalty Trust, while references
to “COERT” or the “Sponsor” in this document refer to COERT Holdings 1 LLC. References to “Enduro”
in this document refer to Enduro Resource Partners LLC, the original sponsor of the Trust. The following review of the Trust’s
financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as
well as Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Trust’s
2019 Annual Report on Form 10-K. The Trust’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all other filings with the SEC are available on the SEC’s website at www.sec.gov.
Forward-Looking Statements
This Form 10-Q includes
“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included
in this Form 10-Q, including without limitation the statements under this “Trustee’s Discussion and Analysis of
Financial Condition and Results of Operations” are forward-looking statements. Such statements may be influenced by factors
that could cause actual outcomes and results to differ materially from those projected. No assurance can be given that such expectations
will prove to have been correct. When used in this document, the words “believes,” “expects,” “anticipates,”
“intends” or similar expressions are intended to identify such forward-looking statements. The following important
factors, in addition to those discussed elsewhere in this Form 10-Q, in the Trust’s 2019 Annual Report on Form 10-K
and the Trust’s other filings with the SEC could affect the future results of the energy industry in general, and COERT and
the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:
|
•
|
risks associated with the drilling and operation of oil and natural gas wells;
|
|
|
|
|
•
|
the amount of future direct operating expenses and development expenses;
|
|
|
|
|
•
|
the effect, impact, potential duration or other implications of the outbreak of a novel strain of coronavirus (“COVID-19”)
which the World Health Organization declared a pandemic in March 2020;
|
|
|
|
|
•
|
the actions of the Organization of Petroleum Exporting Countries (“OPEC”);
|
|
|
|
|
•
|
the effect of existing and future laws and regulatory actions;
|
|
|
|
|
•
|
the effect of changes in commodity prices or alternative fuel prices;
|
|
|
|
|
•
|
the prohibition on the Trust’s entry into any new hedging arrangements under the terms of the Conveyance;
|
|
|
|
|
•
|
conditions in the capital markets;
|
|
|
|
|
•
|
competition from others in the energy industry;
|
|
|
|
|
•
|
uncertainty of estimates of oil and natural gas reserves and production; and
|
|
|
|
You should not place
undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this Form 10-Q.
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 Form 10-Q or to reflect the occurrence of unanticipated events, unless the securities
laws require us to do so.
This Form 10-Q
describes other important factors that could cause actual results to differ materially from expectations of the Sponsor and the
Trust, including under the caption “Risk Factors.” All forward-looking statements in this report and all subsequent
written and oral forward-looking statements attributable to the Sponsor or the Trust or persons acting on behalf of the Sponsor
or the Trust are expressly qualified in their entirety by such factors. The Trust assumes no obligation, and disclaims any duty,
to update these forward-looking statements.
Overview
Permianville Royalty
Trust, a statutory trust created in May 2011, completed its initial public offering in November 2011. The Trust’s
only 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.
Additionally, third parties operate substantially all of the wells on the Underlying Properties and, therefore, the Sponsor is
not in a position to control the timing of development efforts, associated costs, or the rate of production of the reserves.
On August 31, 2018,
COERT completed the acquisition from Enduro of the Underlying Properties and all of the outstanding Trust Units owned by Enduro
(the “Sale Transaction”). In connection with the Sale Transaction, COERT assumed all of Enduro’s obligations
under the Amended and Restated Trust Agreement of the Trust and other instruments to which Enduro and the Trustee were parties.
The Trust is
required to make monthly cash distributions of substantially all of its monthly cash receipts, after deducting the Trust’s
administrative expenses, to the holders of Trust Units as of the applicable record date (generally the last business day of each
calendar month) 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 July 1, 2011 attributable to production occurring on or after June 1, 2011. The amount
of Trust revenues and cash distributions to Trust unitholders depends on, among other things:
·
|
|
oil and natural gas sales prices;
|
|
|
|
·
|
|
volumes of oil and natural gas produced and sold attributable to the Underlying Properties;
|
|
|
|
·
|
|
production and development costs;
|
|
|
|
·
|
|
price differentials;
|
|
|
|
·
|
|
potential reductions or suspensions of production;
|
|
|
|
·
|
|
the amount and timing of Trust administrative expenses; and
|
|
|
|
·
|
|
the establishment, increase, or decrease of reserves for approved development expenses or future liabilities of the Trust.
|
Generally, the Sponsor
receives cash 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.
New York Stock Exchange Listing Status.
As previously disclosed,
on September 25, 2020, the Trust received written notification from the New York Stock Exchange (“NYSE”) that the Trust
no longer satisfied the continued listing compliance standards set forth under Section 802.01C of the NYSE Listed Company Manual
because the average closing price of the Trust’s units of beneficial interest fell below $1.00 over a 30 consecutive trading-day
period that ended September 24, 2020. If the Trust is unable to regain compliance with the applicable standards within a six-month
cure period, the NYSE will commence suspension and delisting procedures. If delisted
by the NYSE, the Trust units may be transferred to the over-the-counter market. During the cure period, the Trust units will continue
to trade on the NYSE, subject to compliance with other continued listing requirements.
Outlook
The outlook for development
activity for the Underlying Properties during the remainder of 2020 remains uncertain given the significant oil and natural gas
price volatility experienced since the beginning of 2020. The West Texas Intermediate spot price of crude oil has dropped sharply
from $61.17 per barrel on January 2, 2020 to $35.79 per barrel on October 30, 2020, but in the interim ranged widely in response
to the economic effects of the COVID-19 pandemic and the dispute over production levels between Russia and the members of OPEC.
COVID-19 has resulted in widespread and localized health crises that adversely affect general commercial activity, the economies
and financial markets of many countries and localities, as well as global demand for oil and natural gas. COVID-19 also has resulted
in significant business and operational disruptions, including business closures, disruptions to supply chains, travel restrictions
and limitations on the availability of workforces. The full impact of COVID-19 is unknown and is rapidly evolving, and it is not
possible to reliably estimate the impact that these developments will have on future periods. While oil prices have recently stabilized
and the demand for oil and refined products has improved from the lows experienced earlier this year, a prolonged period of low
crude oil and natural gas prices will adversely affect the operators of the Underlying Properties. If commodity prices for
crude oil and natural gas remain volatile and below historical levels, monthly cash distributions to unitholders will be substantially
lower than historical distributions, and in certain periods there may be no distribution to unitholders.
In response to the
drop in commodity prices, a number of the operators on the Underlying Properties elected to defer production sales or temporarily
shut-in some of the producing wells on the Underlying Properties, which negatively affected recent reported production. However,
the Sponsor has reported to the Trustee that various operators of the Underlying Properties have indicated plans to return production
to prior, pre-shut-in levels.
As previously disclosed,
the Sponsor anticipated 2020 capital expenditures to range from $4 million to $6 million attributable to the properties in which
the Trust owns a net profits interest, or $3 million to $5 million net to the Trust’s 80% net profits interest. Given publicly
announced reduced capital spending plans by a number of the operators of the Underlying Properties in response to current crude
oil prices, the Sponsor now expects the previously anticipated capital expenditures to be at the low end or below the projected
range. The Sponsor maintains significant liquidity and financial flexibility to respond to the operational and capital spending
changes of the operators of the Underlying Properties. The Underlying Properties also have exposure to natural gas reserves in
the Haynesville shale and other properties, where commodity prices and capital markets activity have held up in contrast to oil
prices. The Sponsor will continue to monitor and possibly participate in future capital projects in 2020 as operators shift from
oil weighted to gas weighted projects.
Results of Operations
Three Months Ended September 30, 2020
Compared to Three Months Ended September 30, 2019
The Trust’s
net profits income consists of monthly net profits attributable to the Net Profits Interest, which was determined as shown in the
following table:
|
|
Three Months Ended
September 30,
|
|
|
Increase
|
|
|
|
2020
|
|
|
2019
|
|
|
(Decrease)
|
|
Gross profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
1,841,329
|
|
|
$
|
9,806,488
|
|
|
|
(81
|
)%
|
Natural gas sales
|
|
|
423,695
|
|
|
|
2,186,510
|
|
|
|
(81
|
)%
|
Total
|
|
|
2,265,024
|
|
|
|
11,992,998
|
|
|
|
(81
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
1,686,000
|
|
|
|
5,549,975
|
|
|
|
(70
|
)%
|
Compression, gathering and transportation
|
|
|
142,000
|
|
|
|
485,435
|
|
|
|
(71
|
)%
|
Production, ad valorem and other taxes
|
|
|
171,000
|
|
|
|
1,083,568
|
|
|
|
(84
|
)%
|
Development expenses
|
|
|
50,000
|
|
|
|
1,180,000
|
|
|
|
(96
|
)%
|
Total
|
|
|
2,049,000
|
|
|
|
8,298,978
|
|
|
|
(75
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from sale/lease of undeveloped acreage
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Net profits
|
|
|
216,024
|
|
|
|
3,694,020
|
|
|
|
(94
|
)%
|
Percentage allocable to Net Profits Interest
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
|
|
Net profits allocable to Net Profits Interest
|
|
|
172,819
|
|
|
|
2,955,216
|
|
|
|
(94
|
)%
|
Less: Sponsor loan repayment
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Less: Trust general and administrative expenses and cash withheld for expenses
|
|
|
(47,419
|
)
|
|
|
(195,360
|
)
|
|
|
(76
|
)%
|
Distributable income
|
|
$
|
125,400
|
|
|
$
|
2,759,856
|
|
|
|
(95
|
)%
|
During the three months
ended September 30, 2020, there were two months in which direct operating and development expenses exceeded revenues, thereby causing
net profits attributable to the Underlying Properties to be negative. As a result, there were no distributions to Trust unitholders
in August and September 2020, respectively. This resulted in an aggregate net profits shortfall of $2.7 million, prior to repayment
of Sponsor advances, as of August 30, 2020. For September 2020, excluding prior net profits interest shortfalls, income from the
distributable net profits interest was approximately $0.5 million which would have been distributed in October 2020. The $0.5 million
reduced the aggregate shortfall to approximately $2.2 million, prior to repayment of Sponsor advances, as of September 30, 2020.
This aggregate shortfall will be carried forward to be deducted from future net profits generated by the Underlying Properites.
As net profits for the two months were negative and therefore no distributions were paid to unitholders with respect to these two
months, the corresponding revenues and associated direct operating and development expenses are excluded from the calculation of
distributable income for the three months ended September 30, 2020 detailed in the table above as well as the related sales volumes
detailed below.
The following table
displays reported oil and natural gas sales volumes and average prices from the Underlying Properties, representing the amounts
included in the net profits calculation for distributions paid during the three months ended September 30, 2020 and 2019:
|
|
Three Months Ended September 30,
|
|
|
Increase
|
|
|
|
2020
|
|
|
2019
|
|
|
(Decrease)
|
|
Underlying Properties Production Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls)
|
|
|
59,043
|
|
|
|
175,274
|
|
|
|
(66
|
)%
|
Natural Gas (Mcf)
|
|
|
321,994
|
|
|
|
907,877
|
|
|
|
(65
|
)%
|
Combined (Boe)
|
|
|
112,709
|
|
|
|
326,587
|
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil - NYMEX (applicable NPI period) ($/Bbl)
|
|
$
|
30.45
|
|
|
$
|
60.97
|
|
|
|
(50
|
)%
|
Differential
|
|
$
|
0.74
|
|
|
$
|
(5.02
|
)
|
|
|
(115
|
)%
|
Oil prices realized ($/Bbl)
|
|
$
|
31.19
|
|
|
$
|
55.95
|
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas - NYMEX (applicable NPI period) ($/Mcf)
|
|
$
|
2.16
|
|
|
$
|
2.84
|
|
|
|
(24
|
)%
|
Differential
|
|
$
|
(0.84
|
)
|
|
$
|
(0.43
|
)
|
|
|
95
|
%
|
Natural gas prices realized ($/Mcf)
|
|
$
|
1.32
|
|
|
$
|
2.41
|
|
|
|
(45
|
)%
|
Income from Net Profits
Interest for the three months ended September 30, 2020 is calculated from the following:
|
·
|
oil sales primarily related to oil produced from the Underlying Properties from March 2020;
|
|
|
|
|
·
|
natural gas sales primarily related to natural gas produced from the Underlying Properties from
February 2020; and
|
|
|
|
|
·
|
direct operating and development expenses primarily related to expenses incurred from April 2020.
|
Net profits attributable
to the Underlying Properties for the three months ended September 30, 2020 were $0.2 million compared to $3.7 million for the three
months ended September 30, 2019. As a result of direct operating expenses and development expenses exceeding oil and natural gas
sales for two months during the period, the Trust did not pay a distribution to unitholders in August and September 2020. Accordingly,
under the modified cash basis of accounting, the oil and natural gas sales, direct operating expenses and development expenses
for such periods were not included in the three months ended September 30, 2020 and instead will be included in a future period
once the shortfall has been recouped. Therefore, several variances between the periods are due to the inclusion of only one month
of results in the three months ended September 30, 2020 compared to three months during the quarter ended September 30, 2019. The
$3.5 million decrease in net profits attributable to the Underlying Properties from the 2019 period to the 2020 period was
primarily due to the following items:
|
·
|
Oil sales decreased $8.0 million, primarily due to the inclusion of only one month of oil sales
in the quarter ended September 30, 2020 compared to three months in the quarter ended September 30, 2019. The 66% decrease in oil
production volumes decreased revenues by $6.5 million, and the 44% decrease in realized oil sales prices in the 2020 period compared
to the 2019 period decreased revenues by $1.5 million.
|
|
·
|
Natural gas sales decreased $1.8 million, primarily due to the inclusion of only one month of natural
gas sales in the quarter ended September 30, 2020 compared to three months in the quarter ended September 30, 2019. The 65% decrease
in natural gas production volumes decreased revenues by $1.4 million, and the 45% reduction in realized natural gas prices decreased
revenues by $0.4 million.
|
|
·
|
Lease operating expenses decreased $3.9 million, primarily attributable to the difference in the
number of months included in the respective periods.
|
|
·
|
Compression, gathering and transportation costs decreased $0.3 million, primarily due to the 65%
decrease in natural gas production.
|
|
·
|
Production, ad valorem and other taxes decreased $0.9 million during the three months ended September
30, 2020 compared to the three months ended September 30, 2019, due to the decrease in oil and natural gas sales.
|
|
·
|
Development expenses decreased $1.1 million primarily due to the decrease in capital workover activity
in the Permian Basin Area.
|
For the three
months ended September 30, 2020, the Trust withheld $0.1 million, and paid $0.1 million for general and administrative
expenses. Expenses paid during the period primarily consisted of fees for the preparation of the Trust’s monthly press
releases, financial statement audit fees, and Trustee fees. For the three months ended September 30, 2019, the Trust withheld
$0.2 million, and paid $0.2 million for general and administrative expenses.
Nine Months Ended September 30, 2020
Compared to Nine Months Ended September 30, 2019
The Trust’s
net profits income consists of monthly net profits attributable to the Net Profits Interest, which was determined as shown in the
following table:
|
|
Nine Months Ended
September 30,
|
|
|
Increase
|
|
|
|
2020
|
|
|
2019
|
|
|
(Decrease)
|
|
Gross profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
19,805,707
|
|
|
$
|
26,076,236
|
|
|
|
(24
|
)%
|
Natural gas sales
|
|
|
3,567,562
|
|
|
|
8,453,400
|
|
|
|
(58
|
)%
|
Total
|
|
|
23,373,269
|
|
|
|
34,529,636
|
|
|
|
(32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
12,233,000
|
|
|
|
15,559,974
|
|
|
|
(21
|
)%
|
Compression, gathering and transportation
|
|
|
1,016,000
|
|
|
|
1,693,435
|
|
|
|
(40
|
)%
|
Production, ad valorem and other taxes
|
|
|
1,616,000
|
|
|
|
3,147,568
|
|
|
|
(49
|
)%
|
Development expenses
|
|
|
1,552,000
|
|
|
|
4,720,000
|
|
|
|
(67
|
)%
|
Total
|
|
|
16,417,000
|
|
|
|
25,120,977
|
|
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from sale/lease of undeveloped acreage
|
|
|
-
|
|
|
|
221,615
|
|
|
|
|
|
Net profits
|
|
|
6,956,269
|
|
|
|
9,630,274
|
|
|
|
(28
|
)%
|
Percentage allocable to Net Profits Interest
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
|
|
Net profits allocable to Net Profits Interest
|
|
|
5,565,015
|
|
|
|
7,704,219
|
|
|
|
(28
|
)%
|
Less: Sponsor loan repayment
|
|
|
(101,148
|
)
|
|
|
-
|
|
|
|
|
|
Less: Trust general and administrative expenses and cash withheld for expenses
|
|
|
(440,277
|
)
|
|
|
(593,973
|
)
|
|
|
(26
|
)%
|
Distributable income
|
|
$
|
5,023,590
|
|
|
$
|
7,110,246
|
|
|
|
(29
|
)%
|
During the nine months
ended September 30, 2020, there were two months in which direct operating and development expenses exceeded revenues, thereby causing
net profits attributable to the Underlying Properties to be negative. As a result, there were no distributions to Trust unitholders
in August and September 2020, respectively. This resulted in an aggregate net profits shortfall of $2.7 million, prior to repayment
of Sponsor advances, as of August 30, 2020. For September 2020, excluding prior net profits interest shortfalls, income from the
distributable net profits interest was approximately $0.5 million which would have been distributed in October 2020. The $0.5 million
reduced the aggregate shortfall to approximately $2.2 million, prior to repayment of Sponsor advances, as of September 30, 2020.
This aggregate shortfall will be carried forward to be deducted from future net profits generated by the Underlying Properites.
As net profits for the two months were negative and therefore no distributions were paid to unitholders with respect to these two
months, the corresponding revenues and associated direct operating and development expenses are excluded from the calculation of
distributable income for the nine months ended September 30, 2020 detailed in the table above as well as the related sales volumes
detailed below.
During the nine months
ended September 30, 2019, some third-party operators of the Underlying Properties encountered delays in transitioning their reporting
processes from Enduro to the Sponsor, which reduced the reported cash receipts to the Trust for this period when compared to the
nine months ended September 30, 2020. A majority of these reporting issues were addressed, with a majority of the revenues held
in suspense as a result of these delays having been distributed to the Trust as part of the March 2019 distribution of $0.076357
per unit, which was paid on April 15, 2019.
The following table
displays reported oil and natural gas sales volumes and average prices from the Underlying Properties, representing the amounts
included in the net profits calculation for distributions paid during the nine months ended September 30, 2020 and 2019:
|
|
Nine Months Ended September 30,
|
|
|
Increase
|
|
|
|
2020
|
|
|
2019
|
|
|
(Decrease)
|
|
Underlying Properties Production Volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls)
|
|
|
390,796
|
|
|
|
515,421
|
|
|
|
(24
|
)%
|
Natural Gas (Mcf)
|
|
|
2,021,759
|
|
|
|
3,054,170
|
|
|
|
(34
|
)%
|
Combined (Boe)
|
|
|
727,756
|
|
|
|
1,024,449
|
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil - NYMEX (applicable NPI period ($/Bbl)
|
|
$
|
52.44
|
|
|
$
|
59.55
|
|
|
|
(12
|
)%
|
Differential
|
|
$
|
(1.76
|
)
|
|
$
|
(8.96
|
)
|
|
|
(80
|
)%
|
Oil prices realized ($/Bbl)
|
|
$
|
50.68
|
|
|
$
|
50.59
|
|
|
|
(0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas - NYMEX (applicable NPI period ($/Mcf)
|
|
$
|
2.20
|
|
|
$
|
3.20
|
|
|
|
(31
|
)%
|
Differential
|
|
$
|
(0.43
|
)
|
|
$
|
(0.43
|
)
|
|
|
0
|
%
|
Natural gas prices realized ($/Mcf)
|
|
$
|
1.76
|
|
|
$
|
2.77
|
|
|
|
(36
|
)%
|
Income from Net Profits
Interest for the nine months ended September 30, 2020 is calculated from the following:
|
·
|
oil sales primarily related to oil produced from the Underlying Properties from September 2019
through March 2020;
|
|
|
|
|
·
|
natural gas sales primarily related to natural gas produced from the Underlying Properties from
August 2019 through February 2020; and
|
|
|
|
|
·
|
direct operating and development expenses primarily related to expenses incurred from October 2019
to April 2020.
|
Net profits attributable
to the Underlying Properties for the nine months ended September 30, 2020 were $7.0 million compared to $9.6 million for the nine
months ended September 30, 2019. As a result of direct operating expenses and development expenses exceeding oil and natural gas
sales for two months during the period, the Trust did not pay a distribution to unitholders in August and September 2020. Accordingly,
under the modified cash basis of accounting, the oil and natural gas sales, direct operating expenses and development expenses
for such periods were not included in the nine months ended September 30, 2020 and instead will be included in a future period
once the net profits shortfall has been recouped. Therefore, several variances between the periods are due to the inclusion of
only seven months of results in the nine months ended September 30, 2020 compared to nine months during the nine-month period ended
September 30, 2019. The $2.7 million decrease in net profits attributable to the Underlying Properties from the 2019 period
to the 2020 period was primarily due to the following items:
|
·
|
Oil sales decreased $6.3 million, primarily due to the inclusion of only seven months of oil sales
volumes in the nine-month period ended September 30, 2020 compared to nine months in the nine-month period ended September 30,
2019. The decrease in oil sales volumes of 24% decreased revenues by $6.3 million, while realized oil sales prices remained consistent
with the prior year.
|
|
·
|
Natural gas sales decreased $4.9 million, primarily due to the inclusion of only seven months of
natural gas sales volumes in the nine-month period ended September 30, 2020 compared to nine months in the nine-month period ended
September 30, 2019. The 34% decrease in gas sales volumes decreased revenues by $2.9 million, and lower realized gas prices caused
an additional decrease in revenues of $2.0 million.
|
|
·
|
Lease operating expenses decreased $3.3 million, primarily due to the inclusion of only seven months
of natural gas sales volumes in the nine-month period ended September 30, 2020 compared to nine months in the nine-month period
ended September 30, 2019.
|
|
·
|
Compression, gathering and transportation costs decreased $0.7 million, primarily due to the 24%
decrease in oil production and a 34% decrease natural gas production.
|
|
·
|
Production, ad valorem and other taxes decreased $1.5 million, primarily due to the decrease in
oil and natural gas sales.
|
|
·
|
Development expenses decreased $3.1 million primarily due to a decrease in capital projects in
the Permian Basin.
|
As previously disclosed,
in January 2019, the Sponsor completed the sale of certain of the Underlying Properties located in Glasscock County, Texas for
a total purchase price of approximately $62,000 (approximately $49,000 net to the Trust’s 80% net profits interest). Also
in January 2019, the Sponsor entered into a lease arrangement with a private equity backed operator with respect to a portion of
the mineral rights relating to certain of the Underlying Properties located in Gaines County, Texas (no current production is associated
with these mineral acres), for total proceeds of $160,000 ($128,000 net to the Trust’s 80% net profits interest).
For the nine
months ended September 30, 2020, the Trust withheld $0.5 million, and paid $0.7 million for general and administrative
expenses. Expenses paid during the period primarily consisted of fees for the preparation of the Trust’s monthly press
releases, financial statement audit fees, and Trustee fees. For the nine months ended September 30, 2019, the Trust withheld
$0.6 million, and paid $0.8 million for general and administrative expenses.
Liquidity and Capital Resources
The Trust’s
principal sources of liquidity are cash flow generated from the Net Profits Interest and borrowing capacity under the letter of
credit described below. Other than Trust administrative expenses, including any reserves established by the Trustee for future
liabilities, the Trust’s only use of cash is for distributions to Trust unitholders. Available funds are the excess cash,
if any, received by the Trust from the Net Profits Interest and other sources (such as interest earned on any amounts reserved
by the Trustee) in any given month, over the Trust’s expenses paid for that month. Available funds are reduced by any cash
the Trustee determines to hold as a reserve against future expenses.
The Trustee may create
a cash reserve to pay for future liabilities of the Trust. If the Trustee determines that the cash on hand and the cash to be received
are, or will be, insufficient to cover the Trust’s liabilities, the Trustee may authorize the Trust to borrow money to pay
administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow
from any person, including the Trustee or the Delaware Trustee or an affiliate thereof, although none of the Trustee, the Delaware
Trustee or any affiliate thereof intends to lend funds to the Trust. The Trustee may also cause the Trust to mortgage its assets
to secure payment of the indebtedness. The terms of such indebtedness and security interest, if funds were to be loaned by the
entity serving as Trustee or Delaware Trustee or an affiliate thereof, would be similar to the terms which such entity would grant
to a similarly situated commercial customer with whom it did not have a fiduciary relationship. In addition, COERT has provided
the Trust with a $1.2 million letter of credit to be used by the Trust if its cash on hand (including available cash reserves)
is insufficient to pay ordinary course administrative expenses. Further, if the Trust requires more than the $1.2 million under
the letter of credit to pay administrative expenses, COERT has agreed to loan funds to the Trust necessary to pay such expenses.
Any loan made by COERT to the Trust would be evidenced by a written promissory note, be on an unsecured basis, and have terms that
are no less favorable to COERT than those that would be obtained in an arm’s length transaction between COERT and an unaffiliated
third party. If the Trust borrows funds or draws on the letter of credit, no further distributions will be made to Trust unitholders
until such amounts borrowed or drawn are repaid. Except for the foregoing, the Trust has no source of liquidity or capital resources.
The Trustee has no current plans to authorize the Trust to borrow any funds. At September 30, 2020 and December 31, 2019, the Trust
held cash of $63,598 and $90,665, respectively, for future Trust expenses. Since its formation, the Trust has not borrowed any
funds and no amounts have been drawn on the letter of credit.
From time to time,
if the Trust’s cash on hand (including available cash reserves, if any) is not sufficient to pay the Trust’s ordinary
course administrative expenses that are due prior to the monthly payment to the Trust of proceeds from the Net Profits Interest,
COERT may advance funds to the Trust to pay such expenses. At September 30, 2020 and December 31, 2019, there was an outstanding
advance of $159,071 and $34,818, respectively. The full amount of the advance to the Trust will be repaid out of the funds payable
to the Trust relating to the monthly operational update announced on September 18, 2020.
In connection with
Enduro’s sale of certain properties in the Permian Basin completed in September 2017, Enduro withheld $750,000 (the “Holdback
Amount”) from the net proceeds allocable to the Trust to cover possible indemnification obligations under the related purchase
and sale agreements arising within 25 months of the closing of the transactions, or by the end of October 2019 (the “Indemnification
Term”). In connection with the Sale Transaction, Enduro released the Holdback Amount to the Trustee on September 4, 2018,
with the Trustee announcing that it would continue to retain the Holdback Amount for the remainder of the Indemnification Term.
In September 2019, the Trustee announced the release of the Holdback Amount, totaling approximately $752,000, including interest,
which was distributed to unitholders in October 2019.
Cash held by the
Trustee as a reserve against future liabilities or for distribution at the next distribution date may be held in a noninterest-bearing
account or may be invested in:
|
•
|
interest-bearing obligations of the United States government;
|
|
•
|
money market funds that invest only in United States government securities;
|
|
•
|
repurchase agreements secured by interest-bearing obligations of the United States government; or
|
|
•
|
bank certificates of deposit.
|
The Trust pays the
Trustee an annual administrative fee of $200,000 and the Delaware Trustee an annual fee of $2,000. The Trust also incurs, either
directly or as a reimbursement to the Trustee, legal, accounting, tax and engineering fees, printing costs and other expenses that
are deducted by the Trust before distributions are made to Trust unitholders. The Trust also is responsible for paying other expenses
incurred as a result of being a publicly traded entity, including costs associated with annual and quarterly reports to Trust unitholders,
tax return and Form 1099 preparation and distribution, NYSE listing fees, independent auditor fees and registrar and transfer
agent fees.
The Trust does not
have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect
the Trust’s liquidity or the availability of capital resources.
Distributions Declared After Quarter End
The Trust did not
declare any distributions after the end of the quarter.
Off-Balance Sheet Arrangements
The Trust has no off-balance
sheet arrangements. The Trust has not guaranteed the debt of any other party, nor does the Trust have any other arrangements or
relationships with other entities that could potentially result in unconsolidated debt, losses or contingent obligations.
Critical Accounting Policies and Estimates
Please read “Item
7. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies
and Estimates” of the Trust’s 2019 Annual Report on Form 10-K for additional information regarding the Trust’s
critical accounting policies and estimates. There were no material changes to the Trust’s critical accounting policies or
estimates during the nine months ended September 30, 2020.
Subsequent Events
On October 15, 2020,
the Trust announced that there would be no distribution to the Trust unitholders in November
2020 as a result of the cumulative outstanding net profits shortfall.