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 2021 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 2021 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, impact, potential duration or other implications of the novel
strain of coronavirus ("COVID-19") pandemic;
· the actions of the
· the ongoing armed conflict between
destabilizing effect such conflict may pose for the European continent or the
global oil and gas markets;
· 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.
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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. 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.
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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. Outlook The outlook for development activity for theUnderlying Properties continued to improve during the first quarter of 2022, following the rise in commodity prices and operator activity in the second half of 2021. While the global economy remains volatile following the outbreak of the armed conflict betweenRussia andUkraine and given the continuing effects of the COVID-19 pandemic, the Sponsor does not expect the impact to theUnderlying Properties and the 2022 development activity to be material, aside from the effects of volatile commodity prices. The West Texas Intermediate spot price of crude oil has increased materially from$76.99 per barrel onDecember 31, 2021 to$106.13 per barrel onMay 12, 2022 . Natural gas prices have shown greater volatility and have increased at an even higher rate than crude oil prices, with the Henry Hub spot price increasing from$3.66 per MMBTU onDecember 31, 2021 to$7.25 per MMBTU onMay 12, 2022 . While lingering effects of the COVID-19 pandemic remain, most recently in the form of oilfield service inflationary pressures and supply chain bottlenecks, operators of theUnderlying Properties have continued to increase their spending activity. However, due to the current heightened market volatility and global macroeconomic uncertainty, it is not possible to reliably estimate the ultimate impact on of these conflicting market drivers against an overall supportive commodity price environment. If commodity prices for crude oil and natural gas remain volatile and inflationary trends continue, monthly cash distributions to unitholders could vary greatly and possibly be lower than historical distributions. The Sponsor previously announced an anticipated 2022 capital expenditures program between$6 million to$8 million attributable to theUnderlying Properties , or$4.8 million to$6.4 million net to the Trust's 80% Net Profits Interest. At the current pace, the Sponsor now expects the 2022 cash capital expenditures to be at the high end of that range, based on recent drilling proposals received from operators of theUnderlying Properties for projects that are expected to take place in 2022. To account for this increased activity level, the Sponsor has established a cash reserve for approved, future development expenses this year. In addition, the Sponsor maintains significant liquidity and financial flexibility to respond to the operational and capital spending changes of the operators of theUnderlying Properties . The Sponsor will continue to monitor and possibly participate in future, to be announced capital projects in 2022 as operators continue to increase capital ependitures to levels beyond that of recent years in response to current commodity prices. 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
March 31, Increase
2022 2021 (Decrease)
Gross profits:
Oil sales $ 9,387,220 $ 5,119,139 83 %
Natural gas sales 3,707,288 1,239,309 199 %
Total 13,094,508 6,358,448 106 %
Costs:
Direct operating expenses:
Lease operating expenses 5,158,000 4,029,000 28 %
Compression, gathering and transportation 809,000 623,000 30 %
Production, ad valorem and other taxes 1,173,000 813,000 44 %
Development expenses 1,891,000 320,000 491 %
Total 9,031,000 5,785,000 56 %Gross proceeds from sale of assets 130,030
-
Net profits 4,193,538 573,448 609 % Percentage allocable to Net Profits Interest 80 %
80 % Net profits allocable to Net Profits Interest 3,354,831 458,759
609 %
Less: Trust general and administrative expenses
and cash withheld for expenses (417,831 ) - (100 )%
Less: Net profits allocable to Net Profits
Interest Shortfall - (458,759 ) -
Distributable income 2,937,000 - -
Cumulative Net Profits Interest Shortfall - (1,254,429 ) -
For the three months ended March 31, 2021 , although the Net Profits Interest
generated positive income for each month in the period, these amounts were
applied to reduce the cumulative Net Profits Interest shortfall of $1.7 million
that existed as of December 31, 2020 . As a result, there were no net profits
reported or distributed in the first three months of 2021. The aggregate Net
Profits Interest shortfall, which was approximately $1.3 million as of March 31,
2021 , was carried forward and deducted from net profits generated by the
Underlying Properties in 2021 and was fully eliminated in August 2021 .
The following table displays reported oil and natural gas sales volumes and
average prices from the Underlying Properties , representing the amounts included
in the net profits calculation for distributions paid during the three months
ended March 31, 2022 and 2021:
Three Months Ended March 31,
Increase
2022 2021 (Decrease)
Underlying Properties Production Volumes:
Oil (Bbls) 125,837 137,369 (8 )%
Natural Gas (Mcf) 820,646 772,831 6 %
Combined (Boe) 262,611 266,174 (1 )%
Average Prices:Oil - NYMEX (applicable NPI period) ($/Bbl)$ 77.14 $ 40.18 92 % Differential$ (2.54 ) $ (2.91 ) (13 )% Oil prices realized ($/Bbl)$ 74.60 $ 37.27 100 %
Natural gas - NYMEX (applicable NPI period) ($/Mcf) $ 4.75 $ 2.18
118 %
Differential $ (0.23 ) $ (0.58 ) (60 )%
Natural gas prices realized ($/Mcf) $ 4.52
$ 1.60 183 %
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Net profits attributable to theUnderlying Properties for the three months endedMarch 31, 2022 were$3.3 million compared to$0.5 million for the three months endedMarch 31, 2021 . The$2.8 million increase in net profits attributable to theUnderlying Properties from the 2021 period to the 2022 period was primarily due to the following items:
· Oil sales increased
oil sales to increase by
sales volumes, which reduced oil sales by
received increased 100% primarily due to a 92% increase in the average NYMEX
oil price for the relevant production months. Oil sales volumes decreased 8% as
a result of natural production declines.
· Natural gas sales increased
increased natural gas sales by
which increased natural gas sales by
price received increased 183% primarily due to a 118% increase in the average
NYMEX natural gas price for the relevant production months.
· Lease operating expenses increased
increased number of producing wells in the quarter ended
compared to the quarter ended
· Compression, gathering and transportation costs increased
primarily due to the 6% increase in natural gas production.
· Production, ad valorem and other taxes increased
months ended
due to the increase in oil and natural gas sales.
· Development expenses increased
costs for drilling multiple new wells in the Permian and Haynseville Area.
For the three months endedMarch 31, 2022 , the Trust withheld$0.4 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 endedMarch 31, 2021 , the Trust withheld$0.0 million and paid$0.3 million for general and administrative expenses. 13
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. InNovember 2021 , the Trustee notified COERT that the Trustee intends to build a reserve for the payment of future known, anticipated or contingent expenses or liabilities. Commencing with the distribution to Trust unitholders paid inFebruary 2022 , the Trust has been withholding, and in the future intends to withhold,$37,833 from the funds otherwise available for distribution each month to gradually build a cash reserve of approximately$2.3 million . This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Trust. The Trustee may increase or decrease the targeted cash reserve amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the Trust unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to Trust unitholders, together with interest earned on the funds. 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. As ofMarch 31, 2022 andDecember 31, 2021 , the Trust had cash of$275,232 and$67,116 , respectively, to be used towards 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. AtMarch 31, 2022 andDecember 31, 2021 , there was no outstanding balance. Any advances to the Trust will be carried forward to be repaid out of future net profits generated by theUnderlying Properties .
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 in
· 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. 14
Distributions Declared After Quarter End
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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 2021 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 endedMarch 31, 2022 . Subsequent Events
Distributions Paid or Declared
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