PermRock Royalty Trust

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 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.

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 attributable to production. 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. The Trust is not subject to 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:

Oil prices increased in 2021 and the first part of 2022 following an extended period of depressed pricing primarily due to the COVID-19 pandemic. It is unclear whether prices will level out or decline further in 2023. Low oil and gas prices on production from the Underlying Properties could cause (i) a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders and (ii) a reduction in the amount of oil and natural gas that are economic to produce from the Underlying Properties.

2023 Recap and 2024 Outlook

In 2023, Boaz Energy participated in non-operated drilling and recompletion projects, waterflood conformance and reactivations in Terry, Coke, and Crane Counties. Boaz Energy completed reentry projects in the Permian Abo and Permian Shelf areas, maintained waterflood operations where prudent, and did necessary repairs to bring wells back to production.

In 2024, Boaz Energy plansto drill new producing wells in the Permian Shelf area and stimulate existing wells to improve production and waterflood operations. In addition, Boaz Energy plans to continue reactivating inactive wells by either returning them to production or recompleting them to new formations to maximize oil and gas production in this high commodity price environment.

Distributable Income

*** Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the year ended December 31, 2023, were as follows:***

Years Ended December 31, 2023, and 2022

The decrease in net profits income was primarily due to decreased oil and natural gas sales volumes and prices. See “Computation of Income from the Net Profits Interest Received by the Trust” below.

Interest Income. Interest income increased for the year ended December 31, 2023, as compared to the prior year, primarily due to higher interest rates.

General and Administrative Expenditures. General and administrative expenditures increased for the year ended December 31, 2023, as compared to the prior year, primarily because of differences in the timing and payment of some expenses.

Cash Reserves. Pursuant to the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses beginning in May 2019. In April 2020, the cash reserves retained reached $1,000,000 and no further cash reserves have been retained by the Trustee since April 2020. As of December 31, 2023, the Trustee continued to hold the previously retained $1,000,000 in cash reserves.

Years Ended December 31, 2022, and 2021

The increase in net profits income was primarily due to increased oil and natural gas prices. See “Computation of Income from the Net Profits Interest Received by the Trust” below.

Interest Income. Interest income increased for the year ended December 31, 2022, as compared to the prior year, primarily due to higher interest rates.

General and Administrative Expenditures. General and administrative expenditures increased for the year ended December 31, 2022, as compared to the prior year, primarily because of differences in the timing and payment of some expenses.

Cash Reserves. Pursuant to the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses beginning in May 2019. In April 2020, the cash reserves retained reached $1,000,000 and no further cash reserves have been retained by the Trustee since April 2020. As of December 31, 2022, the Trustee continued to hold the previously retained $1,000,000 in cash reserves.

Computation of Income from the Net Profits Interest Received by the Trust

The table below outlines the computation of income from the Net Profits Interest received by the Trust for the years ended December 31, 2023, 2022, and 2021:

Years Ended December 31, 2023, and 2022

Important factors used in calculating the Trust’s net profits income include the volumes of oil and gas produced from the Underlying Properties and the realized prices received for the sale of those minerals, including natural gas liquids, as well as direct operating and development expenses.

Sales Volumes

*Oil.*Oil sales volumes decreased for the year ended December 31, 2023, as compared to the prior year. This was primarily due to decreased demand and the natural decline in production.

*Natural Gas.*Natural gas sales volumes decreased for the year ended December 31, 2023, as compared to the prior year. This was primarily due to decreased demand and the natural decline in production.

Sales Prices

Oil.The average realized oil price per Bbl decreased for the year ended December 31, 2023, as compared to the prior year. The average realized oil price per Bbl for the year ended December 31, 2023, is primarily related to production from November 2022 through October 2023,**when the average NYMEX price was $78.57 per Bbl.

Natural Gas. The average realized natural gas price per Mcf decreased for the year ended December 31, 2023, as compared to the prior year. The average realized natural gas price per Mcf for the year ended December 31, 2023, is primarily related to production from November 2022 through October 2023, when the average NYMEX price was $3.01 per Mcf.

Costs

*Direct Operating Expenses.*Direct operating expenses decreased for the year ended December 31, 2023, as compared to the prior year primarily due to a decrease in capital projects to return wells to production.

Lease Operating Expenses. Lease operating expenses increased for the year ended December 31, 2023, as compared to the prior year primarily due to additional Permian ABO wells.

*Severance and Ad Valorem Taxes.*Severance and ad valorem taxes decreased for the year ended December 31, 2023, as compared to the prior year primarily due to lower sales valuation due to decreased industry prices for oil and natural gas.

*Development Expenses Related to the Underlying Properties.*Development expenses related to the Underlying Properties decreased for the year ended December 31, 2023, as compared to the prior year primarily due to fewer drilling and recompletion projects.

*Other Expenses.*Other expenses increased for the year ended December 31, 2023, as compared to the prior year primarily due to an increase in overhead expenses.

Capital Reserve and Operator Advance. Boaz Energy is entitled under the Conveyance to reserve up to $3 million from the net profits for certain taxes and development expenses. As of December 31, 2023, the balance of funds held back to cover certain future capital expenses was $650,157 net to the Trust**.**

Years Ended December 31, 2022, and 2021

Important factors used in calculating the Trust’s net profits income include the volumes of oil and gas produced from the Underlying Properties and the realized prices received for the sale of those minerals, including natural gas liquids, as well as direct operating and development expenses.

Sales Volumes

*Oil.*Oil sales volumes decreased for the year ended December 31, 2022, as compared to the prior year. This was primarily due to decreased demand and the natural decline in production.

*Natural Gas.*Natural gas sales volumes decreased for the year ended December 31, 2022, as compared to the prior year. This was primarily due to decreased demand and the natural decline in production.

Sales Prices

Oil.The average realized oil price per Bbl increased for the year ended December 31, 2022, as compared to the prior year. The average realized oil price per Bbl for the year ended December 31, 2022, is primarily related to production from November 2021 through October 2022,**when the average NYMEX price was $93.39 per Bbl.

Natural Gas. The average realized natural gas price per Mcf increased for the year ended December 31, 2022, as compared to the prior year. The average realized natural gas price per Mcf for the year ended December 31, 2022, is primarily related to production from November 2021 through October 2022, when the average NYMEX price was $6.03 per Mcf.

Costs

*Direct Operating Expenses.*Direct operating expenses increased for the year ended December 31, 2022, as compared to the prior year primarily due to an increase in workovers to bring wells back into operations.

Lease Operating Expenses. Lease operating expenses increased for the year ended December 31, 2022, as compared to the prior year primarily due to increases in industry pricing for materials and services.

*Severance and Ad Valorem Taxes.*Severance and ad valorem taxes increased for the year ended December 31, 2022, as compared to the prior year primarily due to higher sales valuation due to increased industry prices for oil and natural gas.

*Development Expenses Related to the Underlying Properties.*Development expenses related to the Underlying Properties increased for the year ended December 31, 2022, as compared to the prior year primarily due to the potential for capital projects to have a greater economic benefit given higher oil and gas prices.

*Other Expenses.*Other expenses decreased for the year ended December 31, 2022, as a result of a decrease in professional fees.

Capital Reserve and Operator Advance. Boaz Energy is entitled under the Conveyance to reserve up to $3 million from the net profits for certain taxes and development 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**.**

Liquidity and Capital Resources

The Trust’s principal sources of liquidity and capital are cash flow generated from the Net Profits Interest 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. If the Trustee causes the Trust to borrow funds, the Trust unitholders will not receive distributions until the borrowed funds or the amount drawn, as applicable, are repaid.

Pursuant to the Trust Agreement, the Trustee was authorized beginning May 2019 to retain cash from the distributions it 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. Boaz Energy provided the Trust with a $1.0 million Letter of Credit that could be drawn by the Trust to pay its administrative expenses. The Trustee is permitted to retain cash from distributions in such amount as the Trustee determines but not less than $25,000 per month or more than $100,000 per month until the reserve described in clause (i) equals or exceeds $1.0 million, at which time, the Trustee is required to release the Letter of Credit. The Letter of Credit expired May 2, 2020, as the Trustee had retained a total of $1,000,000 in cash reserves. As of December 31, 2023, the Trustee continued to hold the previously retained $1,000,000 in cash reserves.

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 25, 2024, Boaz Energy owned 4,884,861 Trust units of the 12,165,732 units issued and outstanding.

Boaz Energy Capital Expenditure Budget

Boaz Energy’s estimated capital budget for 2024 for the Underlying Properties is $4.5 million, of which approximately $0.9 million has been expended as of March 13, 2024. Based on current oil and gas prices, Boaz anticipates continuing to participate in Crane and Glasscock Counties non-operated drilling and waterflood conformance and expansion work in Crane & Terry Counties, as well as drilling 1 new operated wells in Crane County sometime in 2024. The majority of capital spent in 2024 to date was spent on non-operated projects in the Permian Shelf Area. The $4.5 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.

Boaz Energy’s capital expenditure by the end of 2023 was $4.4 million.

Off-Balance Sheet Arrangements

As of December 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

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 (oil and natural gas sales), less direct operating expenses (lease operating expenses and severance and ad valorem 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.

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:

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 and 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.

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. Estimated future cash flows used to determine amortization and potential impairment of the investment in the Net Profits Interest are subject to change.

Oil and Natural Gas Reserves. The proved oil and natural gas reserves for the Underlying Properties are estimated by independent petroleum engineers. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof. Estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using prices at the date of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices. Accordingly, oil and natural gas quantities ultimately recovered and the timing of production may be substantially different from original estimates.

The Financial Accounting Standards Board requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future net cash flows relating to proved oil and natural gas reserve quantities. Under this disclosure, future cash inflows are computed by applying the average prices during the 12-month period prior to fiscal year-end, determined as an unweighted arithmetic average of the first-day-of-the-month benchmark price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. Future price changes are only considered to the extent provided by contractual arrangements in existence at year-end. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and natural gas reserves. Changes in any of these assumptions, including consideration of other factors, could have a significant impact on the standardized measure. The standardized measure does not necessarily result in an estimate of the current fair market value of proved reserves.

Amortization of Net Profits Interest. The Trust calculates amortization of the Net Profits Interest in oil and natural gas properties on a unit-of-production basis based on the Underlying Properties’ production and reserves. The reserves upon which the amortization rate is based are quantity estimates which are subject to numerous uncertainties inherent in the estimation of proved reserves. The volumes considered to be commercially recoverable fluctuate with changes in 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 recorded on sales volumes paid by the Trust during the relevant period and is charged directly to the Trust corpus balance. As a result, amortization does not affect the cash earnings of the Trust.

*Impairment of Net Profits Interest.*The Trustee reviews the Trust’s Net Profits Interest in oil and natural gas properties for impairment annually and whenever events or circumstances indicate that the carrying value of the Net Profits Interest may not be recoverable. In the event of material revisions, the Trustee reviews the impact of these revisions on the amortization of Trust Units and impairment estimates. During 2023, a material revision was made to reserves resulting in the additional recognition of amortization of Trust Units. The Trust recognized $4,164,943 of amortization of Trust Units for the year ended December 31, 2023. There was no impairment present for the year ended December 31, 2023, after revisions to undiscounted cash flows. There was also no impairment as of December 31, 2022. 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 that 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.

Refer to Note 2 to the financial statements included in Item 8 of this report for the Trust’s significant accounting policies.