PERMIANVILLE ROYALTY TRUST References to the "Trust" in this document refer toPermianville Royalty Trust , previously known asEnduro Royalty Trust , while references to "COERT" or the "Sponsor" in this document refer toCOERT Holdings 1 LLC. References to "Enduro" in this document refer toEnduro 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 theSEC are available on theSEC'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 theSEC 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 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
• cost inflation.
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.
10
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 itis produced. Outlook The outlook for development activity for theUnderlying Properties during the remainder of 2020 remains uncertain given the significant oil and natural gas price volatility experienced since the beginning of 2020. TheWest Texas Intermediate spot price of crude oil has dropped sharply from$61.17 per barrel onJanuary 2, 2020 to$41.95 per barrel onAugust 6, 2020 but in the interim ranged widely and even briefly traded negative inApril 2020 in response to the economic effects of the COVID-19 pandemic and the dispute over production levels betweenRussia and the members of theOrganization of Petroleum Exporting Countries . 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 theUnderlying Properties . If commodity prices for crude oil and natural gas remain volitle 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. 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 theUnderlying Properties in response to current crude oil prices, the Sponsor now expects the previously ancitipated 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 theUnderlying 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. 11 Results of Operations
Three Months Ended
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
June 30,
Increase
2020 2019 (Decrease)
Gross profits:
Oil sales $ 9,518,343 $ 8,871,972 7 %
Natural gas sales 1,664,862 3,826,286 (56 %)
Total 11,183,205 12,698,258 (12 %)
Costs:
Direct operating expenses:
Lease operating expenses 5,309,000 4,716,000 13 %
Compression, gathering and transportation 491,000 583,000 (16 %)
Production, ad valorem and other taxes 788,000 1,071,000 (26 %)
Development expenses 716,000 2,183,000 (67 %)
Total 7,304,000 8,269,000 (15 %)
Gross proceeds from sale/lease of undeveloped
acreage - 221,615
Net profits 3,879,205 4,366,873 (11 %) Percentage allocable to Net Profits Interest 80 %
80 % Net profits allocable to Net Profits Interest 3,103,364 3,493,498
(11 %)
Less: Sponsor loan repayment (101,148 ) -
Less: Trust general and administrative expenses and cash withheld for expenses (187,316 ) (188,713 ) (1 %) Distributable income$ 2,814,900 $ 3,304,785 (15 %)
The following table displays reported oil and natural gas sales volumes and average prices from theUnderlying Properties , representing the amounts included in the net profits calculation for distributions paid during the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, Increase 2020 2019 (Decrease) Underlying Properties Production Volumes: Oil (Bbls) 173,526 196,674 (12 %) Natural Gas (Mcf) 875,623 1,187,547 (26 %) Combined (Boe) 319,463 394,599 (19 %) Average Prices:
Oil - NYMEX (December - February) ($/Bbl)$ 55.96 $
51.84 8 % Differential$ (1.11 ) $ (6.73 ) (84 %) Oil prices realized ($/Bbl)$ 54.85 $ 45.11 22 %
Natural gas - NYMEX (November - January) ($/Mcf)$ 2.41 $ 3.85 (37 %) Differential$ (0.51 ) $ (0.63 ) (19 %) Natural gas prices realized ($/Mcf)$ 1.90 $
3.22 (41 %)
12
Income from Net Profits Interest for the three months ended
· oil sales primarily related to oil produced from the
December 2019 throughFebruary 2020 ; · natural gas sales primarily related to natural gas produced from theUnderlying Properties fromNovember 2019 throughJanuary 2020 ; and
· direct operating and development expenses primarily related to expenses
incurred from January 2020 to March 2020 .
Net profits attributable to theUnderlying Properties for the three months endedJune 30, 2020 were$3.9 million compared to$4.4 million for the three months endedJune 30, 2019 . The$0.5 million decrease was primarily due to the following items:
· Oil sales increased
22% increase in realized oil sales prices in the 2020 period compared to the
2019 period increased revenues by
decreased revenues by$1.0 million .
· Natural gas sales decreased
lower realized prices. The 26% decrease in gas sales volumes in the 2020
period compared to the 2019 period decreased revenues by
lower realized gas prices decreased revenues by $1.2 million .
· Lease operating expenses increased
June 30, 2020 compared to the three months endedJune 30, 2019 due to an increase in routine maintenance activity.
· Compression, gathering and transportation costs decreased
primarily due to the 26% decrease in natural gas production.
· Production, ad valorem and other taxes decreased
months ended
primarily due to the 56% decrease in natural gas sales.
· Development expenses decreased
capital projects in the Permian Basin .
For the three months endedJune 30, 2020 , the Trust withheld$0.2 million , and paid$0.2 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 endedJune 30, 2019 , the Trust withheld$0.2 million , and paid$0.2 million for general and administrative expenses. 13
Six Months Ended
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:
Six Months Ended
June 30,
Increase
2020 2019 (Decrease)
Gross profits:
Oil sales $ 17,964,378 $ 16,269,748 10 %
Natural gas sales 3,143,867 6,266,890 (50 %)
Total 21,108,245 22,536,638 (6 %)
Costs:
Direct operating expenses:
Lease operating expenses 10,547,000 10,010,000 5 %
Compression, gathering and transportation 874,000 1,208,000 (28 %)
Production, ad valorem and other taxes 1,445,000 2,064,000 (30 %)
Development expenses 1,502,000 3,540,000 (58 %)
Total 14,368,000 16,822,000 (15 %)
Gross proceeds from sale/lease of undeveloped
acreage - 221,615
Net profits 6,740,245 5,936,253 14 % Percentage allocable to Net Profits Interest 80 %
80 % Net profits allocable to Net Profits Interest 5,392,196 4,749,002
14 %
Less: Sponsor loan repayment (101,148 ) -
Less: Trust general and administrative expenses and cash withheld for expenses (392,858 ) (398,614 ) (1 %) Distributable income$ 4,898,190 $ 4,350,388 13 % During the six months endedJune 30, 2019 , some third party operators of theUnderlying 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 six months endedJune 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 theMarch 2019 distribution of$0.076357 per unit, which was paid onApril 15, 2019 . 14
The following table displays reported oil and natural gas sales volumes and
average prices from the
Six Months Ended
June 30,
Increase
2020 2019 (Decrease)
Underlying Properties Production Volumes:
Oil (Bbls) 331,753 340,147 (2 %)
Natural Gas (Mcf) 1,699,765 2,146,293 (21 %)
Combined (Boe) 615,047 303,264 (12 %)
Average Prices:
Oil - NYMEX (September - February) ($/Bbl)
(5 %)
Differential $ (1.84 ) $ (11.01 ) (83 %)
Oil prices realized ($/Bbl) $ 54.15 $ 47.83 13 %
Natural gas - NYMEX (August - January) ($/Mcf)
(31 %)
Differential $ (0.49 ) $ (0.46 ) 6 %
Natural gas prices realized ($/Mcf) $ 1.85 $ 2.92 (37 %)
Income from Net Profits Interest for the six months ended
· oil sales primarily related to oil produced from the
September 2019 throughFebruary 2020 ; · natural gas sales primarily related to natural gas produced from theUnderlying Properties fromAugust 2019 throughJanuary 2020 ; and
· direct operating and development expenses primarily related to expenses
incurred from October 2019 to March 2020 .
Net profits attributable to the
· Oil sales increased
slight decrease in oil sales volumes of 2% in the 2020 period compared to the
2019 period decreased revenues by
prices caused an increase in revenues by$2.1 million .
· Natural gas sales decreased
lower realized prices. The 21% decrease in gas sales volumes in the 2020
period compared to the 2019 period decreased revenues by
lower realized gas prices caused an additional decrease in revenues by
million.
· Lease operating expenses increased by
an increase in routine maintenance activity.
· Compression, gathering and transportation costs decreased
primarily due to the 28% decrease in natural gas production.
· Production, ad valorem and other taxes decreased
months ended
primarily due to the 50% decrease in natural gas sales.
· Development expenses decreased
capital projects in the Permian Basin .
For the six months ended June 30, 2020 , the Trust withheld $0.4 million , and
paid $0.6 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 six months ended June 30, 2019 , the Trust withheld $0.4 million , and paid
$0.6 million for general and administrative expenses.
15
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. AtJune 30, 2020 andDecember 31, 2019 , the Trust held cash of$92 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. AtJune 30, 2020 andDecember 31, 2019 , there was an outstanding advance of$19,100 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 onJuly 15, 2020 . In connection with Enduro's sale of certain properties in thePermian Basin completed inSeptember 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 ofOctober 2019 (the "Indemnification Term"). In connection with the Sale Transaction, Enduro released the Holdback Amount to the Trustee onSeptember 4, 2018 , with the Trustee announcing that it would continue to retain the Holdback Amount for the remainder of the Indemnification Term. InSeptember 2019 , the Trustee announced the release of the Holdback Amount, totaling approximately$752,000 , including interest, which was distributed to unitholders inOctober 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 ofthe United States government; • money market funds that invest only inUnited States government securities; • repurchase agreements secured by interest-bearing obligations ofthe 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. 16 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 three months endedJune 30, 2020 . Subsequent Events
Distributions Paid or Declared
On
OnJuly 17, 2020 , the Trust announced a reduction in sales volumes when comparing the July distribution period to prior periods This reduction was due, in part, to shut ins by operators of certainUnderlying Properties coupled with lower commodity prices as a result of the COVID-19 pandemic. The result of this reduction is that direct operating expenses and development expenditures exceeded cash receipts for the calculation period and, as a result, a distribution will not be paid inAugust 2020 . The shortfall of$892,782 will be deducted from any net profits allocable to the Trust from the August distribution period. 17
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