| ITEM 1. | Financial Statements |
The condensed financial statements included herein are presented
without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information
and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations,
and Argent Trust Company, as Trustee (the “Trustee”), believes that the disclosures are adequate to make the information presented
not misleading. These condensed interim financial statements and notes thereto should be read in conjunction with the audited financial
statements and notes thereto included in the Trust’s 2022 Annual Report on Form 10-K (“2022 Annual Report”). In the
opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets,
liabilities and Trust corpus of PermRock Royalty Trust at March 31, 2023, and December 31, 2022, and the distributable income and changes
in Trust corpus for the three-month periods ended March 31, 2023, and March 31, 2022, have been included. Distributable income for such
interim periods is not necessarily indicative of distributable income for the full year.
The accompanying notes to condensed financial statements are an integral
part of these financial statements.
PERMROCK ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES
AND TRUST CORPUS
| | |
March 31, 2023
(unaudited) | | |
December 31, 2022 | |
| ASSETS | |
| | | |
| | |
| Cash and short-term investments | |
$ | 1,611,413 | | |
$ | 1,981,938 | |
| Net Profits Interest(1) | |
| 79,246,703 | | |
| 80,041,113 | |
| TOTAL ASSETS | |
$ | 80,858,116 | | |
$ | 82,023,051 | |
| LIABILITIES AND TRUST CORPUS | |
| | | |
| | |
| Distribution payable to unitholders | |
$ | 611,413 | | |
$ | 981,938 | |
| Cash reserves(2) | |
| 1,000,000 | | |
| 1,000,000 | |
| Trust corpus | |
| 79,246,703 | | |
| 80,041,113 | |
| TOTAL LIABILITIES AND TRUST CORPUS | |
$ | 80,858,116 | | |
$ | 82,023,051 | |
| (1) | See Note 2 to condensed financial statements for further discussion of the Net Profits Interest.
|
| (2) | The Trustee is authorized to retain cash from distributions received by the Trust in an amount not to exceed $1.0 million to be used
in the event that cash on hand is not sufficient to pay ordinary course administrative expenses and to provide for future liabilities
of the Trust.
|
The accompanying notes to condensed financial statements are an integral
part of these financial statements.
PERMROCK ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME
(UNAUDITED)
| | |
Three Months
Ended March 31, | |
| | |
2023 | | |
2022 | |
| Net profits income | |
$ | 2,366,677 | | |
$ | 2,787,336 | |
| Interest income | |
| 13,727 | | |
| 37 | |
| Total revenue | |
$ | 2,380,404 | | |
$ | 2,787,373 | |
| Expenditures – general and administrative | |
| (177,118 | ) | |
| (260,483 | ) |
| Interest received but not distributed | |
| (0 | ) | |
| (0 | ) |
| Cash reserves (1) | |
| (0 | ) | |
| (0 | ) |
| Distributable income | |
$ | 2,203,286 | | |
$ | 2,526,890 | |
| Distributable income per unit (2) | |
$ | 0.181106 | | |
$ | 0.207704 | |
| (1) | The Trustee is authorized to retain cash from distributions received by the Trust in an amount not to exceed $1.0 million to be used
in the event that cash on hand is not sufficient to pay ordinary course administrative expenses and to provide for future liabilities
of the Trust.
|
| (2) | Based on 12,165,732 Trust units issued and outstanding as of May 15, 2023.
|
The accompanying notes to condensed financial statements
are an integral part of these financial statements.
PERMROCK ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST
CORPUS (UNAUDITED)
| | |
Three Months
Ended March 31, | |
| | |
2023 | | |
2022 | |
| Trust corpus, beginning of period | |
$ | 80,041,113 | | |
$ | 83,821,848 | |
| Amortization of Net Profits Interest | |
| (794,410 | ) | |
| (967,259 | ) |
| Distributable income | |
$ | 2,203,286 | | |
$ | 2,526,890 | |
| Distributions declared | |
| (2,203,286 | ) | |
| (2,526,890 | ) |
| Trust corpus, end of period | |
$ | 79,246,703 | | |
$ | 82,854,589 | |
The accompanying notes to condensed financial statements
are an integral part of these financial statements.
PERMROCK ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
PermRock Royalty Trust (the “Trust”) is a Delaware statutory
trust formed on November 22, 2017 under the Delaware Statutory Trust Act pursuant to a trust agreement dated November 22, 2017, as amended
and restated on May 4, 2018, by and among Boaz Energy II, LLC (“Boaz Energy”), as trustor, Simmons Bank, as trustee, and Wilmington
Trust, National Association, as Delaware Trustee (the “Delaware Trustee”) (such amended and restated trust agreement, as amended
to date, the “Trust Agreement”).
In accordance with the successor trustee provisions of the Trust Agreement,
Argent Trust Company, as successor trustee of the Trust, is subject to all terms and conditions of the Trust Agreement. The defined term
“Trustee” as used herein shall refer to Simmons Bank (which maintains its offices at 2200 West 7th Street, Suite 210, P.O.
Box 470727, Fort Worth, Texas 76147) for periods prior to December 30, 2022, and shall refer to Argent Trust Company (which maintains
its offices at 2911 Turtle Creek Blvd, Suite 850, Dallas, Texas 75219-6291) for periods on and after December 30, 2022.
The Trust was created to acquire and hold the Net Profits Interest
for the benefit of the Trust unitholders. In connection with the closing of the initial public offering of Trust units, on May 4, 2018,
Boaz Energy conveyed the Net Profits Interest to the Trust in exchange for Trust units pursuant to a conveyance agreement between Boaz
Energy, the Trustee and the Delaware Trustee (the “Conveyance”). The Net Profits Interest represents an interest in the Underlying
Properties.
The Net Profits Interest entitles the Trust to receive 80% of the
net profits from the sale of 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 control over, or responsibility for, costs relating to the operation of the Underlying Properties.
The Trust has and will continue to make monthly cash distributions of all of its monthly cash receipts, after deduction of fees and expenses
for the administration of the Trust and any cash reserves, to holders of its Trust units as of the applicable record date on or before
the 10th business day after the record date. Distributions generally relate to sales from a one-month period.
The Trustee may deposit funds awaiting distribution in an account
with an FDIC-insured or national bank, including the Trustee, if the interest paid to the Trust at least equals amounts paid by the Trustee
on similar deposits, and make other short-term investments with the funds distributed to the Trust.
In May 2018, Boaz Energy completed an initial public offering of
6,250,000 of the 12,165,732 total Trust units outstanding, retaining ownership of 5,915,732 Trust units. As of March 31, 2023, Boaz Energy
owned 5,194,632 Trust units of the 12,165,732 Trust units issued and outstanding.
| 2. | Trust Significant Accounting Policies |
The Trust uses the modified cash basis of accounting to report Trust
receipts of the Net Profits Interest and payments of expenses incurred. The Net Profits Interest represents the right to receive revenues
(primarily oil and natural gas sales), less direct operating expenses, overhead expenses, lease operating expenses, severance and ad valorem
taxes and development expenses of the Underlying Properties, multiplied by 80%, less any payments made or plus any payments received in
connection with the settlement of certain hedge contracts. 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.
The financial statements of the Trust, as prepared on a modified
cash basis, reflect the Trust’s assets, liabilities, Trust corpus, earnings and distributions as follows:
| • | Income from the Net Profits Interest is recorded when distributions are received by the Trust; |
| • | Distributions to Trust unitholders are recorded when declared by the Trust; |
| • | Trust general and administrative expenses (which includes the Trustee’s fees as well as accounting, printing, engineering, legal,
tax advisory and other professional fees) are recorded when paid; cash reserves for Trust expenses may be established by the Trustee for
certain expenditures that would not be recorded as contingent liabilities under United States generally accepted accounting principles
(“GAAP”); |
| • | Amortization of the investment in the Net Profits Interest is calculated on a unit-of-production basis and is charged directly to
Trust corpus, and such amortization does not affect distributions from the Trust; and |
| • | The Trust’s investment in the Net Profits Interest is periodically assessed to determine whether its aggregate value has been
impaired below its total capitalized cost basis. In general, neither the Trustee nor Boaz
Energy view temporarily low prices as an indication of impairment. The markets for crude oil and natural
gas have a history of significant price volatility and though prices will occasionally drop significantly, industry prices over the
long term will continue to be driven by market supply and demand. If events and circumstances indicate
the carrying value may not be recoverable, the Trustee
would use the estimated undiscounted future net cash flows from the Net
Profits Interest to evaluate the recoverability of the Trust assets. If the undiscounted future net cash flows from the Net Profits Interest
are less than the Net Profits Interest carrying value, the Trust would recognize an impairment
loss for the difference between the Net Profits Interest carrying value and the estimated fair value of
the Net Profits Interest. The determination as to whether the Net Profits Interest is impaired is based on the best information available
to the Trustee at the time of the evaluation, including information provided by Boaz Energy such as estimates of future production and
development and operating expenses. Any impairment would be charged directly to the Trust corpus. |
The financial statements of the Trust are prepared on a modified
cash basis of accounting, which is considered to be the most meaningful basis of preparation for a royalty trust because monthly distributions
to the Trust unitholders are based on net cash receipts. Although this basis of accounting is permitted for royalty trusts by the SEC,
the financial statements of the Trust differ from financial statements prepared in accordance with GAAP because net profits income is
not accrued in the month of production, expenses are not recognized when incurred, cash reserves may be established for certain contingencies,
and overpayments received do not need to be paid back and are instead taken from future payments that would not be recorded in GAAP financial
statements. 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.
| b. | Interim Financial Statements. |
The accompanying unaudited financial statements have been prepared
by the Trust in accordance with the accounting policies stated in the audited financial statements and notes of the Trust thereto included
in the Trust’s 2022 Annual Report and reflect all adjustments that are, in the opinion of the Trustee, necessary to state fairly
the information in the Trust’s unaudited interim financial statements.
The preparation of financial statements requires the Trust to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
| d. | Risks and Uncertainties. |
The Trust’s revenue and distributions are substantially dependent
upon the prevailing and future prices for oil and natural gas, each of which depends on numerous factors beyond the Trust’s control
such as economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil
and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future.
Contingencies related to the Underlying Properties that are unfavorably
resolved would generally be expected to result in reductions to cash receipts to the Trust in respect of the Net Profits Interest with
corresponding reductions to cash distributions to Trust unitholders. Please see the discussion of litigation in Note 8 to condensed financial
statements.
Tax counsel advised the Trust at the time of formation that for
U.S. federal income tax purposes, the Trust is treated as a grantor trust and will not be subject to federal income tax at the trust level.
Trust unitholders will be treated for such purposes as owning a direct interest in the assets of the Trust, and each Trust unitholder
is taxed directly on its pro rata share of the income and any gain, if sold, attributable to the assets of the Trust and is entitled to
claim its pro rata share of deductions and expenses attributable to the assets of the Trust. Each Trust unitholder should consult his
or her own tax advisor regarding income tax requirements, if any, applicable to such unitholder’s ownership of Trust units.
Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee
began retaining cash from the distributions the Trust receives to be used by the Trust in the event that its cash on hand (including available
cash reserves) is not sufficient to pay ordinary course administrative expenses as they become due. The Trustee is authorized to retain
cash reserves (i) in an amount not to exceed $1.0 million at any one time and (ii) in such amounts as the Trustee in its discretion deems
appropriate to pay for future liabilities of the Trust, but not less than $25,000 per month or more than $100,000 per month. Cash reserves
held by the Trustee for administrative expenses totaled $1,000,000 as of March 31, 2023, and December 31, 2022.
Boaz Energy is entitled under the Conveyance to reserve up to $3.0
million from the net profits for certain future taxes and development or operating expenses. As of December 31, 2022, the balance
of funds held back to cover certain future capital expenses
was $1,478,157 net to the Trust. As of March 31, 2023, the balance of funds held back to cover future capital expenses was $666,157 net
to the Trust.
| 5. | Distributions to Unitholders |
The Trust makes monthly cash distributions of the net amount, if
any, of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and cash reserves to holders
of its Trust units as of the applicable record date on or before the 10th business day after the record date.
Based on 12,165,732 Trust units outstanding at each date listed
below, the per unit distributions during the quarter ended March 31, 2023, were as follows:
| Record Date | |
Payment Date | |
Distribution
per Unit |
| January 31, 2023 | |
February 14, 2023 | |
$ | 0.070629 | |
| February 28, 2023 | |
March 14, 2023 | |
| 0.060217 | |
| March 31, 2023 | |
April 14, 2023 | |
| 0.050260 | |
| | |
| |
| | |
| | |
| |
$ | 0.181106 | |
| 6. | Related Party Transactions |
Trustee Administrative Fee. Under the terms of the Trust
Agreement, the Trust pays an annual administrative fee to the Trustee and the Delaware Trustee. The Delaware Trustee’s annual fee
is $4,000. For 2023, the Trustee’s annual administrative fee is approximately $200,357, which is divided into twelve equal monthly
payments throughout the year. The Trustee’s annual administrative fee increased at a rate of 3% per year for the first three years
of the Trust’s existence, increased at a rate of 2% in 2021 and 2022, and increased at a rate of 1% in 2023. The Trustee’s
annual administrative fee will continue to increase at a rate of 1% per year until the 20th anniversary of the Trust’s formation
and then remain flat thereafter. These costs of the Trust, which are included in administration expenses, are deducted by the Trust before
distributions are made to Trust unitholders.
Agreements with Boaz Energy. On May 4, 2018, the Trust entered
into a registration rights agreement for the benefit of Boaz Energy and certain of its affiliates and transferees, pursuant to which the
Trust agreed to register the offering of the Trust units held by Boaz Energy and certain of its affiliates and permitted transferees upon
request by Boaz Energy. As of March 31, 2022, Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding.
The Trust filed a Registration Statement on Form S-3 on April 28, 2022 (the “Registration Statement”) seeking the registration
of 5,801,675 Trust units held by Boaz Energy. The SEC confirmed the effectiveness of the Registration Statement on May 9, 2022. The Trust
has not and will not receive any of the proceeds received from the sale of the Trust units. The selling unitholder will bear all costs
and expenses incidental to the preparation and filing of the Registration Statement, excluding certain internal expenses of the Trust,
which will be borne by the Trust, and any underwriting discounts and commissions, which will be borne by the selling unitholder as the
seller of the Trust units. As of March 31, 2023, Boaz Energy owned 5,194,632 Trust units of the 12,165,732 Trust units issued and outstanding.
Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s
2023 capital budget for the Underlying Properties is $5.2 million, of which approximately $1.3 million had been expended as of March 31,
2023. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock Counties non-operated
drilling and waterflood conformance work in Crane, Terry, Schleicher and Stonewall Counties, as well as drilling two new operated wells
in Crane and Coke Counties sometime in 2023. The majority of capital spent in 2023 to date has been on a well deepening in the Abo
Area. The $5.2 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, Boaz Energy’s
actual capital requirements, the pace of regulatory approvals and the mix of projects.
| 8. | Settlements and Litigation |
On October 1, 2018, a lawsuit styled Thaleia L. Marston,
Trustee of the Marston Trust v. Blackbeard Operating, LLC, et.al, No. 18-10-24761 – CVW CVW in the 143rd District Court in
Ward County, Texas (the “2018 Litigation”) was filed, naming, among others, Boaz Energy and the Trust as defendants. The
plaintiff is a lessor under two leases operated by Blackbeard Operating LLC. The Underlying Properties include the interests of Boaz
Energy in some of the minerals covered by those leases. The litigation sought surface use damages and alleged violations of the
terms of the leases, among other things. The court had set a two-day bench trial to commence May 18, 2022, but on May 10, 2022, the
court granted motions for summary judgment effectively disposing of the plaintiff’s claims. At a status conference conducted
on May 12, 2022, the plaintiff confirmed the court’s rulings disposed of all the plaintiff’s claims. The court held a
hearing regarding attorneys’ fees in June 2022. On May 12, 2023 the court entered its Final Judgment, incorporating its prior
order granting the defendants’ motion for summary judgment and granting their motion for attorneys’ fees.
On April 18, 2023, the Trust declared a cash distribution of $0.030888
per Trust unit based upon production during the month of February 2023 to record holders as of April 28, 2023. The distribution was paid
on May 12, 2023. The following table shows underlying oil and natural gas sales and average prices during the production month of February
2023 and attributable to the distribution declared on April 18, 2023:
| | |
Underlying
Sales Volumes | |
Average
Price |
| | |
Oil
(Bbls) | |
Gas
(Mcf) | |
Oil
(per Bbl) | |
Gas
(per Mcf) |
| | February | | |
25,096 | |
| 33,908 | | |
$ | 73.41 | | |
$ | 4.23 | |
| ITEM 2. | Trustee’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
The following discussion and analysis is intended to help the reader
understand the Trust’s financial condition, results of operations, liquidity and capital resources. This discussion and analysis
should be read in conjunction with the Trust’s unaudited condensed financial statements and the accompanying notes included in
this Quarterly Report on Form 10-Q (“Quarterly Report”) and the Trust’s audited financial statements and the accompanying
notes included in the Trust’s 2022 Annual Report.
Cautionary Statement Regarding Forward Looking Statements
Certain information included in this Quarterly Report contains,
and other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written
statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Such forward-looking statements
generally are accompanied by words such as “may,” “will,” “estimate,” “expect,” “predict,”
“project,” “anticipate,” “goal,” “should,” “assume,” “believe,”
“plan,” “intend,” or other words that convey the uncertainty of future events or outcomes. All statements other
than statements of historical fact included in this Quarterly Report are forward-looking statements, including without limitation statements
under this “Trustee’s Discussion and Analysis of Financial Conditions and Results of Operations” and all statements
regarding Boaz Energy and Argent Trust Company’s (as Trustee of the Trust) expectations, beliefs and plans regarding the following:
(i) Boaz Energy’s capital projects, timing and estimated costs, and the resulting impact of those activities on the computation
of the Net Profits Interest; (ii) outside operators’ capital projects and the resulting impact of those activities on the Net Profits
Interest; (iii) implementation or continued use of waterflood projects and workovers and the location of waterflood projects and workovers;
(iv) Boaz Energy’s estimated capital expenditures; (v) the timing of capital expenditures and capital reserve amounts; (vi) the
expected timing of litigation proceedings; (vii) the impact of current litigation matters on the Trust; (viii) Boaz Energy’s staffing
levels or future reductions in staffing on the Underlying Properties; (ix) shut in of wells on the Underlying Properties; (x) the effects
of COVID-19 and disputes over production levels; and (xi) distributions to Trust unitholders. Such statements are based on certain assumptions
of the Trustee, and certain assumptions of information provided to the Trust by Boaz Energy, the owner of the Underlying Properties; are
based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Boaz Energy; and involve risks
and uncertainties. Certain factors could affect the future results of the energy industry in general, and Boaz Energy and the Trust in
particular, and could cause actual results to differ materially from those projected in such forward-looking statements. Those factors
include, without limitation, the following:
| • | the effect of changes in commodity prices or alternative fuel prices; |
| • | the impact of the COVID-19 pandemic and measures implemented in response thereto; |
| • | the effects armed conflict between Russia and Ukraine may have on global oil and gas markets; |
| • | political and economic conditions in or affecting other oil and natural gas producing regions or countries; |
| • | uncertainties in estimating production and oil and natural gas reserves of the Underlying Properties; |
| • | risks associated with the drilling and operation of oil and natural gas wells; |
| • | the cost of developing the Underlying Properties; |
| • | the ability to maintain anticipated production levels; |
| • | the amount of future direct operating expenses, development expenses and other capital expenditures; |
| • | availability and terms of capital to fund capital expenditures; |
| • | risks associated with Boaz Energy and its ability to transfer operation of the Underlying Properties to third parties without the
approval of Trust unitholders; |
| • | the performance of such third parties contracted by Boaz Energy and their ability or willingness to provide sufficient facilities
and services to Boaz Energy on commercially reasonable terms; |
| • | the effect of existing and future laws and regulatory actions; |
| • | the actions of the Organizations of Petroleum Exporting Countries (“OPEC”); |
| • | conditions in the capital markets; |
| • | competition from others in the energy industry; |
| • | uncertainty in whether development projects will be pursued; |
| • | severe or unseasonable weather that may adversely affect production; |
| • | adequacy of Boaz Energy’s insurance coverage; |
| • | costs to comply with current and future governmental regulation of the oil and natural gas industry, including environmental, health
and safety laws and regulations, and regulations with respect to hydraulic fracturing and the disposal of produced water; |
| • | the effect of existing and future laws and regulatory actions, including real estate, bankruptcy and tax legislation and the ability
to accurately interpret the impact of such laws; |
| • | general economic conditions affecting the Permian Basin; |
| • | risks associated with title deficiencies that may arise with respect to the Underlying Properties and Boaz Energy’s ability
to cure any such defects; |
| • | actions by Boaz Energy, including such that result in conflicts of interest, that adversely affect the Trust; |
| • | the ability to successfully estimate the impact of litigation matters, and certain accounting and tax matters; |
| • | the cost of inflation; and |
| • | the risk factors discussed in Item 1A of Part II of this Quarterly Report and in Part I of the Trust’s 2022 Annual Report. |
You should not place undue reliance on any forward-looking statements.
All forward-looking statements speak as of the date of this Quarterly Report. 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 Quarterly Report or to reflect
the occurrence of unanticipated events, unless required by applicable law.
Boaz Energy Information
As a holder of a net profits interest, the Trust relies on Boaz
Energy for information regarding Boaz Energy and its affiliates; the Underlying Properties, including the operations, acreage, well and
completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling
plans, drilling results and leasehold terms related to the Underlying Properties; and factors and circumstances that have or may affect
the foregoing.
Overview
PermRock Royalty Trust, a Delaware statutory trust formed in November
2017 by Boaz Energy, completed its initial public offering in May 2018. The Trust’s main 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.
The Trust is required to make monthly cash distributions of substantially
all of its monthly cash receipts, after deduction of fees and expenses for the administration of the Trust and any cash reserves, to holders
of its Trust units as of the applicable record date 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 January 1, 2018 attributable to production occurring on or after such date. 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 amount of Trust revenues and cash distributions to Trust unitholders depends on, among other things:
| • | production and development costs; |
| • | potential reductions or suspensions of production; and |
| • | the amount and timing of Trust administrative expenses. |
Boaz Energy typically receives 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.
Properties. The Underlying Properties consist of four operating
areas in the Permian Basin in Texas, aggregating 31,783 gross (22,731 net) acres. The Permian Clearfork area consists of 2,434 net acres
on the Central Basin Platform of the Permian Basin in Hockley and Terry Counties, Texas. The Permian Abo area consists of 1,667 net acres
on the Central Basin Platform of the Permian Basin in Terry and Cochran Counties, Texas. The Permian Shelf area consists of 14,727 net
acres on the Eastern Shelf of the Permian Basin in Glasscock, Schleicher, Stonewall and Coke Counties, Texas. The Permian Platform area
consists of 3,903 net acres on the Central Basin Platform of the Permian Basin in Ward, Crane, Terry and Ector Counties, Texas.
Outlook
Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s
2023 capital budget for the Underlying Properties is $5.2 million, of which approximately $1.3 million had been expended as of March 31,
2023. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock Counties, non-operated
drilling and waterflood conformance work in Crane, Terry, Schleicher and Stonewall Counties, as well as drilling two new operated wells
in Crane and Coke, Counties sometime in 2023. The majority of capital spent in 2023 to date has been on a well deepening in the
Abo Area. The $5.2 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, Boaz
Energy’s actual capital requirements, the pace of regulatory approvals and the mix of projects.
RESULTS OF OPERATIONS
Distributable Income
Three Months Ended March 31, 2023
For the three months ended March 31, 2023, net profits income received
by the Trust was $2,366,677 compared to $2,787,336 for the same period of the prior year. This decrease in net profits income was primarily
due to a decrease in oil and gas revenue resulting from decreased oil production and decreased gas prices in the current period. See “Computation
of Income from the Net Profits Interest Received by the Trust” below.
After considering interest income of $13,727 and
general and administrative expenditures of $177,118, distributable income for the three months ended March
31, 2023, was $2,203,286, or $0.181106 per Trust unit. For the three months ended March
31, 2022, total distributable income was $2,526,890, or $0.207704 per unit.
Interest income increased for the quarter
ended March 31, 2023, as compared to the prior year, due to higher interest rates. General and
administrative expenditures decreased by $83,365 for the three months ended March 31, 2023, as
compared to the prior year, primarily due to differences in timing of the receipt and payment of certain expenses by the Trust.
Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee
is authorized to retain cash reserves for administrative expenses. The Trustee did not retain any additional cash reserves during the
three months ended March 31, 2023, or March 31, 2022. During the three months ended March 31, 2023, and March 31, 2022, total cash reserves
were $1,000,000.
Based on 12,165,732 Trust units outstanding at each date listed
below, the per unit distributions during the three months ended March 31, 2023, were as follows:
| | |
| |
|
| Record Date | |
Payment Date | |
Distribution
per Unit |
| January 31, 2023 | |
February 14, 2023 | |
$ | 0.070629 | |
| February 28, 2023 | |
March 14, 2023 | |
| 0.060217 | |
| March 31, 2023 | |
April 14, 2023 | |
| 0.050260 | |
| | |
| |
| | |
| | |
| |
$ | 0.181106 | |
Computation of Income from the Net Profits Interest Received
by the Trust
The Net Profits Interest entitles the Trust to receive 80% of the
net profits attributable to Boaz Energy’s interest from the sale of oil and natural gas production from the Underlying Properties.
The Trust’s income from the Net Profits Interest consists of monthly net profits attributable to income from the Underlying Properties.
Because of the interval between the time of production and receipt of net profits income by the Trust, the Trust recognizes production
during the month in which the related net profits income is paid to the Trust. Net profits income for the three months ended March 31,
2023, was based on production during the months of November 2022 through January 2023. The table below outlines the computation of income
from the Net Profits Interest received by the Trust for the three months ended March 31, 2023, and March 31, 2022:
| | |
Three Months Ended
March 31, 2023 | | |
Three Months Ended
March 31, 2022 | |
| Underlying Properties sales volumes(1): | |
| | | |
| | |
| Oil (Bbl) | |
| 85,917 | | |
| 90,673 | |
| Natural gas (Mcf)(2) | |
| 104,286 | | |
| 103,264 | |
| Total sales (Boe) | |
| 103,298 | | |
| 107,883 | |
| Average realized sales price: | |
| | | |
| | |
| Oil (per Bbl) | |
$ | 76.79 | | |
$ | 76.02 | |
| Natural gas (per Mcf) | |
| 4.94 | | |
| 7.14 | |
| Calculation of net profits: | |
| | | |
| | |
| Gross profits: | |
| | | |
| | |
| Oil sales | |
$ | 6,597,442 | | |
$ | 6,893,016 | |
| Natural gas sales | |
| 514,728 | | |
| 737,547 | |
| Other revenue | |
| 22,663 | | |
| 29,415 | |
| Total gross profits | |
$ | 7,134,833 | | |
$ | 7,659,978 | |
| Costs: | |
| | | |
| | |
| Direct operating expenses | |
$ | 619,468 | | |
$ | 797,140 | |
| Lease operating expenses | |
| 2,131,712 | | |
| 1,547,101 | |
| Severance and ad valorem taxes | |
| 529,361 | | |
| 302,502 | |
| Development expenses | |
| 1,258,475 | | |
| 1,363,119 | |
| Other expenses | |
| 652,471 | | |
| 425,946 | |
| Total costs | |
$ | (5,191,487 | ) | |
$ | (4,435,808 | ) |
| Net profits | |
$ | 1,943,346 | | |
$ | 3,224,170 | |
| Percentage allocable to Net Profits Interest | |
| 80 | % | |
| 80 | % |
| Net profits income (before capital reserve) | |
$ | 1,554,677 | | |
$ | 2,579,336 | |
| Capital reserve(3) | |
$ | 812,000 | | |
$ | 208,000 | |
| Net Profits Interest audit fee | |
$ | (0 | ) | |
$ | (0 | ) |
| Net profits income received by the Trust | |
$ | 2,366,677 | | |
$ | 2,787,336 | |
| (1) | Quarterly sales volumes are typically reported for a three-month period, and therefore sales volumes for the three months ended March
31, 2023, reflect production volumes for November 2022 through January 2023. |
| (2) | Sales volumes for natural gas include NGLs. |
| (3) | Boaz Energy is entitled under the Conveyance to reserve up to $3.0 million from the net profits for certain future taxes and expenses.
For the three months ended March 31, 2023, the reserve was reduced by $812,000 net to the Trust. |
Important factors used in calculating the Trust’s net profits
income include the volumes of oil and natural gas produced from the Underlying Properties and the realized prices received for the sale
of those minerals, including oil and natural gas liquids, as well as direct operating expenses, lease operating expenses, severance and
ad valorem taxes, development and other expenses and capital reserves.
Sales Volumes
Oil
Oil sales volumes decreased by 4,757 Bbls (5.2%) for the three months
ended March 31, 2023, as compared to the same period in 2022 primarily due to a decrease in demand and natural decline in production.
Natural Gas
Natural gas sales volumes increased by 1,022 Mcf (1.0%) for the
three months ended March 31, 2023, as compared to the prior year period. Boaz Energy reports this increase was primarily because of reworking
wells in the Permian Platform area.
Sales Prices
Oil
The average realized oil price per Bbl increased for the three months
ended March 31, 2023, as compared to the prior year period primarily related to increases in industry prices.
Natural Gas
The average realized natural gas price per Mcf decreased for the
three months ended March 31, 2023, as compared to the prior year period related to decreases in industry prices.
Costs
Direct Operating Expenses
Direct operating expenses decreased for the three months ended March
31, 2023, as compared to the prior year period primarily because of fewer projects to return wells
to production.
Lease Operating Expenses
Lease operating expenses increased for the three months ended March 31, 2023, as compared
to the prior year period primarily because of costs related to additional Permian ABO wells.
Severance and ad Valorem Taxes
Severance and ad valorem taxes
increased for the three months ended March 31, 2023, as compared to the prior year period
as a result of an increase in the valuation of the Underlying Properties.
Development Expenses Related to the Underlying Properties
Development expenses related
to the Underlying Properties decreased for the three months ended March 31, 2023,
as compared to the prior year period because of fewer
capital projects.
Other Expenses
Other expenses increased for
the three months ended March 31, 2023, as compared
to the prior year period, primarily due to costs related to additional Permian ABO wells.
Capital Reserve
As of March 31, 2023, Boaz had reserved $666,157 net to the Trust
for future capital expenses, a decrease of $812,000 for the three months then ended.
LIQUIDITY AND CAPITAL RESOURCES
The Trust’s principal sources of liquidity and capital are
cash flow generated from the Net Profits Interest, the amounts held by the Trustee as cash reserves to pay future liabilities, and borrowings,
if any to fund administrative expenses. The Trust’s primary uses of cash are distributions to Trust unitholders, payment of Trust
administrative expenses, including, if applicable, any reserves established by the Trustee for future liabilities.
Administrative expenses include the Trustee and Delaware Trustee
fees, accounting, engineering, legal, tax advisory and other professional fees, and tax reporting and distribution expenses. The Trust
is also responsible for paying other expenses incurred as a result of being a publicly traded entity, including costs associated with
annual, quarterly and current reports to the SEC, New York Stock Exchange listing fees, independent auditor fees and registrar and transfer
agent fees. If the Trustee determines that cash on hand and cash to be received in respect of the Net Profits Interest are, or will be,
insufficient to cover the Trust’s liabilities and expenses, the Trustee may cause the Trust to borrow funds to pay liabilities of
the Trust.
As authorized under the Trust Agreement, the Trustee is authorized
to retain cash from the distributions the Trust receives (i) in an amount not to exceed $1.0 million at any one time to be used by the
Trust in the event that its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses
as they become due and (ii) in such amounts as the Trustee in its discretion deems appropriate to pay for future liabilities of the Trust,
but not less than $25,000 or more than $100,000 per month. Cash reserves previously retained and currently held by the Trustee for future
administrative expenses total $1,000,000 as of March 31, 2023.
On May 4, 2018, the Trust entered into a registration rights agreement
for the benefit of Boaz Energy and certain of its affiliates and transferees, pursuant to which the Trust agreed to register the offering
of the Trust units held by Boaz Energy and certain of its affiliates and permitted transferees upon request by Boaz Energy. As of March
31, 2022, Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding. The Trust filed a Registration
Statement on Form S-3 on April 28, 2022 (the “Registration Statement”) seeking the registration of 5,801,675 Trust units held
by Boaz Energy. The SEC confirmed the effectiveness of the Registration Statement on May 9, 2022. The Trust has not and will not receive
any of the proceeds received from the sale of the Trust units. The selling unitholder will bear all costs and expenses incidental to the
preparation and filing of the Registration Statement, excluding certain internal expenses of the Trust, which will be borne by the Trust,
and any underwriting discounts and commissions, which will be borne by the selling unitholder as the seller of the Trust units. As of
March 31, 2023, Boaz Energy owned 5,194,632 Trust units of the 12,165,732 units issued and outstanding.
Boaz Energy Capital Expenditure Budget
Boaz Energy has advised the Trustee that the estimate for Boaz Energy’s
2023 capital budget for the Underlying Properties is $5.2 million, of which approximately $1.3 million had been expended as of March 28,
2023. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock Counties, non-operated
drilling and waterflood conformance work in Crane, Terry, Schleicher and Stonewall Counties, as well as drilling two new operated wells
in Crane and Coke Counties sometime in 2023. The majority of capital spent in 2023 to date has been on a well deepening in the Abo
Area. The $5.2 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas,
Boaz Energy’s actual capital requirements, the pace of regulatory approvals and the mix of projects.
Distributions Declared After Quarter End
On April 18, 2023, the Trust declared a cash distribution of $0.030888
per Trust unit based upon production during the month of February 2023 to record holders as of April 28, 2023. The distribution was paid
on May 12, 2023. The following table shows underlying oil and natural gas sales and average prices during the production month of February
2023 and attributable to the distribution declared on April 18, 2023:
| | |
Underlying Sales Volumes | |
Average Price |
| | |
Oil
(Bbls) | |
Gas
(Mcf) | |
Oil
(per Bbl) | |
Gas
(per Mcf) |
| | February | | |
25,096 | |
| 33,908 | | |
$ | 73.41 | | |
$ | 4.23 | |
Off-Balance Sheet Arrangements
As of March 31, 2023, the Trust had no off-balance sheet arrangements.
New Accounting Pronouncements
As the Trust’s financial statements are prepared on the modified
cash basis, most accounting pronouncements are not applicable to the Trust’s financial statements. No new accounting pronouncements
have been adopted or issued that would impact the financial statements of the Trust.
Critical Accounting Policies and Estimates
Refer to Note 2 to the unaudited condensed financial statements
contained in this Quarterly Report and the Trust’s 2022 Annual Report on Form 10-K, including the audited financial statements of
the Trust and notes thereto included therein, for a description of the Trust’s accounting policies and use of estimates.