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Item 1. Financial Statements

2021-05-17 compared with 2020-11-16 · 108 added, 153 removed, 236 unchanged (53% of the section changed)

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These condensed interim financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto included in the Trusts 2020 Annual Report on Form 10-K (2020 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 September 30, 2020 and December 31, 2019, and the distributable income and changes in Trust corpus for the three- and nine-month periods ended September 30, 2020 and September 30, 2019 have been included.

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, 2021 and December 31, 2020, and the distributable income and changes in Trust corpus for the three-month periods ended March 31, 2021 and March 31, 2020 have been included.

Distributable income for such interim periods is not necessarily indicative of distributable income for the full year.

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CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

September 30,

Cash and short-term investments

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CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

Ended September 30,

Three Months Ended

Net profits income

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Expenditures general and administrative

Interest received but not distributed

Cash reserves (1)

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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.

Based on 12,165,732 Trust units issued and outstanding as of November 16, 2020.

Based on 12,165,732 Trust units issued and outstanding as of March 31, 2021.

The accompanying notes to condensed financial statements are an integral part of these financial statements.

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CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

Ended September 30,

Three Months Ended

Trust corpus, beginning of period

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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 its Trust units.

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, 2021, Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding.

Trust Significant Accounting Policies

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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, 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.

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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;

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 and, if an impairment loss is indicated by the carrying amount of the assets exceeding the sum of the undiscounted expected future net cash flows, then an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value.

PERMROCK ROYALTY TRUST

NOTES TO CONDENSED FINANCIAL STATEMENTS

The Trusts 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 .

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.

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Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future.

Revenue received by the Trust (and its ability to pay distributions) has been and will continue to be directly affected by the volatility in commodity prices, which declined sharply during the first and second quarters of 2020 and remained depressed in the third quarter of 2020 in response to the economic effects of the COVID-19 pandemic.

The decline in commodity prices has resulted in an oversupply of crude oil, further exacerbating the decline in crude oil prices, which could remain depressed for an extended period of time.

Revenue received by the Trust (and its ability to pay distributions) has been and will continue to be directly affected by the volatility in commodity prices in response to the economic effects of the COVID-19 pandemic.

The decline in commodity prices resulted in an oversupply of crude oil, further exacerbating the decline in crude oil prices.

While crude oil prices have been higher during the first quarter of 2021, fluctuations and depressions could continue for an extended period of time.

Contingencies.

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Please see the discussion of litigation in Note 8 to condensed financial statements.

PERMROCK ROYALTY TRUST

NOTES TO CONDENSED FINANCIAL STATEMENTS

Tax counsel advised the Trust at the time of formation that for U.S.

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Each Trust unitholder should consult his or her own tax advisor regarding income tax requirements, if any, applicable to such unitholders ownership of Trust units.

PERMROCK ROYALTY TRUST

NOTES TO CONDENSED FINANCIAL STATEMENTS

Cash Reserves

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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 September 30, 2020 .

Cash reserves held by the Trustee for administrative expenses totaled $1,000,000 as of March 31, 202 1.

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.

In July 2020, Boaz Energy applied $192,721 net to the Trust of funds previously reserved toward taxes and development expenses, plus an advancement from Boaz Energy to the Trust in the amount of $140,606.

Then, in August 2020, Boaz Energy reserved $320,960 net to the Trust, which was applied in part to recoupment of the $140,606 net to the Trust balance of previously advanced funds, and the remaining $180,354 net to the Trust was reserved for certain future taxes and development expenses.

In September 2020, Boaz Energy reserved an additional $117,802 net to the Trust for certain future taxes and development expenses.

As of September 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $298,156.

As of December 31, 2020, the balance of funds held back to cover certain future capital expenses was $222,157 net to the Trust.

As of March 31, 2021, the balance of funds reserved by Boaz Energy, net to the Trust, was $202,157.

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 September 30, 2020 were as follows:

Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the quarter ended March 31, 2021 were as follows:

Distribution per Unit

July 31, 2020

August 14, 2020

August 31, 2020

September 15, 2020

September 30, 2020

October 15, 2020

January 29, 2021

February 12, 2021

February 26, 2021

March 12, 2021

March 31, 2021

April 14, 2021

Related Party Transactions

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For 2021, the Trustees annual administrative fee is $193,163, which is divided into twelve equal monthly payments throughout the year.

The Trustees annual administrative fee will increase at a rate of 3% per year for the first three years of the Trusts existence, increase at a rate of 2% per year for the following two years, then increase at a rate of 1% per year until the 20th anniversary of the Trusts formation and then remain flat thereafter.

The Trustees annual administrative fee increased at a rate of 3% per year for the first three years of the Trusts existence, and will increase at a rate of 2% per year for the next two years, then increase at a rate of 1% per year until the 20th anniversary of the Trusts 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.

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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 September 30, 2020, Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding.

As of March 31, 2021, Boaz Energy owned 5,878,332 Trust units of the 12,165,732 Trust units issued and outstanding.

PERMROCK ROYALTY TRUST

NOTES TO CONDENSED FINANCIAL STATEMENTS

Derivative Contracts

Income from the Net Profits Interest is exposed to fluctuations in energy prices in the normal scope of business.

To mitigate the negative effects of a possible decline in oil prices on distributable income to the Trust, Boaz Energy entered into derivative put option contracts with respect to approximately 100% of expected oil production attributable to the Net Profits Interest during 2018 and 76% of such production during 2019.

These derivative contracts consisted of put option contracts with strike prices of $60 per barrel in 2018 and $50 per barrel in 2019.

Boaz Energy believed that these put option contracts provided downside protection to the Trust in the event spot prices for crude oil declined below the applicable strike price, while still allowing the Trust to benefit from increasing crude oil prices.

If prices for crude oil as quoted on NYMEX declined below the applicable strike prices, Boaz Energy could exercise its put option and receive payment generally equal to the difference between the applicable strike price and the market price for crude oil at the time of exercise, multiplied by the notional quantity of crude oil hedged under the applicable put option contract being exercised.

These contracts expired as of December 31, 2019, and after December 31, 2019 none of the production attributable to the Underlying Properties is hedged.

Because the derivative contracts have expired, there were no cash proceeds from settlement of derivative contracts during the three or nine months ended September 30, 2020.

There were no cash proceeds from settlement of derivative contracts during the three months ended September 30, 2019, but for the nine months ended September 30, 2019, there was $688,562 ($550,850 net to the Trust) in cash proceeds from the settlement of derivative contracts.

Development Costs

Boaz Energy has advised the Trustee that the estimate for Boaz Energys 2020 capital budget has been increased from $2.5 million to $4.2 million, based principally upon capital projects being implemented by outside operators, of which $3.3 million has been expended as of September 30, 2020.

Based on current oil and gas prices, Boaz Energy has informed the Trustee that it is not planning any new Boaz Energy-operated wells or other significant capital projects for the remainder of 2020, other than waterflood projects and workovers principally in the Permian Platform area, the costs of which are included in the $4.2 million estimate.

The estimated 2020 capital budget is subject to change based on, among other things, changes in the price of oil and natural gas, the impact of the COVID-19 pandemic on prices and economic activity, Boaz Energys actual capital requirements, capital expenditure requirements of third-party operators, the pace of regulatory approvals and the mix of projects.

Boaz Energy has advised the Trustee that the estimate for Boaz Energys 2021 capital budget for the Underlying Properties is $5.5 million, of which approximately $0.9 million had been expended as of March 31, 2021.

Based on current oil and gas prices, Boaz anticipates continuing to participate as a non-operator in certain drilling and waterflood conformance work in both Crane and Terry counties, as well as drilling two operated wells in Crane county sometime is 2021.

The majority of capital spent in 2021 to date has been on non-operated drilling and completion operations in Crane County.

The $5.5 million estimate is subject to change based on, among other things, changes in the price of oil and natural gas, including the ongoing impact of the COVID-19 pandemic on such prices, Boaz Energys actual capital requirements, the pace of regulatory approvals and the mix of projects.

Settlements and Litigation

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After delays related to COVID-19, a hearing on the summary judgment motions filed by the Defendants and Goodnight was held on August 27, 2020.

As of September 30, 2020 the court had not yet ruled on the motion for summary judgment.

As of March 31, 2021, the court had not yet ruled on the motion for summary judgment.

A mediation was conducted on November 10, 2020, but no settlement was reached.

PERMROCK ROYALTY TRUST

NOTES TO CONDENSED FINANCIAL STATEMENTS

The discovery period closed in January 2021.

Counsel for the defendants reported that during discovery, plaintiffs appeared to concede several points related to their claim against the Trust in responses to request for disclosure and a deposition of the Marston Trusts manager, including that the Trust and the other defendants are entitled to retain 40-acres around each producing well as defendants have contended all along.

However, plaintiffs have not formally amended their pleading or otherwise non-suited any claim against the Trust.

Consequently, the Trust and the other defendants filed a second summary judgment motion pointing out, in part, that plaintiffs appear to have conceded portions of their claim against the Trust and the other defendants regarding the trespass to try title claim.

That motion was set for hearing on April 1, 2021, but at that hearing, the court granted the plaintiffs counsels motion to withdraw from representing the plaintiffs and vacated the May 3, 2021 trial setting to allow plaintiffs an opportunity to retain new counsel.

The court did not re-open the expired discovery and pleading deadlines.

All other motions were carried forward.

At the time of the May 11, 2021 status conference, the plaintiffs had not yet retained replacement counsel, but the court advised it was going to move the case forward and would soon set a new trial date and a date for a pre-trial hearing to hear pending motions.

Subsequent Events

On October 20, 2020, the Trust declared a cash distribution of 0.013487 per Trust unit based upon production during the month of August 2020 to record holders as of October 30, 2020.

The distribution will be paid on November 16, 2020.

The following table shows underlying oil and natural gas sales and average prices during the production month of August 2020 and attributable to the distribution declared on October 20, 2020:

On April 20, 2021, the Trust declared a cash distribution of $0.044638 per Trust unit based upon production during the month of February 2021 to record holders as of April 30, 2021.

The distribution was paid on May 14, 2021.

The following table shows underlying oil and natural gas sales and average prices during the production month of February 2021 and attributable to the distribution declared on April 20, 2021:

Underlying Sales Volumes

Average Price

In October 2020, Boaz Energy reserved $104,000 net to the Trust for certain future taxes and development expenses.

A mediation was conducted on November 10, 2020 with respect to the 2018 Litigation, but no settlement was reached.

TRUSTEES DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements, including without limitation statements under this Trustees Discussion and Analysis of Financial Conditions and Results of Operations and all statements regarding Boaz Energy and Simmons Banks (as Trustee of the Trust) expectations, beliefs and plans regarding the following:

(i) Boaz Energys capital budget and projects, timing and estimated costs, and the resulting impact of those activities on the computation of the Net Profits Interest;

(i) Boaz Energys 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;

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(ix) shut in of wells on the Underlying Properties;

(x) the effects of COVID-19 and OPEC production levels;

(x) the effects of COVID-19 and disputes over production levels;

and (xi) distributions to Trust unitholders.

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the effect of changes in commodity prices or alternative fuel prices;

the effect of public health concerns such as the coronavirus disease (COVID-19) and any government response thereto;

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;

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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;

risks associated with derivative instruments, such as lower than expected production volumes, default of counterparties, and increases in price differentials;

The actions of the Organizations of Petroleum Exporting Countries (OPEC);

conditions in the capital markets;

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severe or unseasonable weather that may adversely affect production;

adequacy of Boaz Energys 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 areas where Boaz Energy operates;

general economic conditions affecting the Permian Basin;

risks associated with title deficiencies that may arise with respect to the Underlying Properties and Boaz Energys ability to cure any such defects;

actions by Boaz Energy, including such that result in conflicts of interest, that adversely affect the Trust;

the outcome of pending litigation matters;

the ability to successfully estimate the impact of litigation matters, and certain accounting and tax matters;

the cost of inflation;

the risk factors discussed in Item 1A of Part II of this Quarterly Report and in Part I of the Trusts 2019 Annual Report.

the risk factors discussed in Part I of the Trusts 2020 Annual Report.

You should not place undue reliance on any forward-looking statements.

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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.

Although the Trust was formed on November 22, 2017, the conveyance of the Net Profits Interest did not occur until May 4, 2018, with an effective date of January 1, 2018, and no proceeds were received by the Trust from Boaz Energy during the three-month period ended March 31, 2018.

As a result, the Trust did not recognize any income or make any distributions during the three-month period ended March 31, 2018.

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.

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The Permian Platform area consists of 4,169 net acres on the Central Basin Platform of the Permian Basin in Ward, Crane, Terry and Ector Counties, Texas.

Boaz Energy has informed the Trustee that due to current oil and natural gas pricing it is not planning any new Boaz Energy-operated wells or other significant capital projects for the remainder of 2020, other than waterflood projects and workovers, principally in the Permian Platform area.

Boaz Energy has implemented reduced staffing measures on the Underlying Properties and anticipates reacting on a monthly basis to the need to shut in wells on the Underlying Property to reduce the risk of a realization of negative oil prices in a production month.

Boaz Energy has indicated it currently intends to continue to build a reserve for capital costs and other expenses, as permitted under the Conveyance, which reserves will reduce distributions to the Trust.

The majority of capital spent in 2021 to date has been on non-operated drilling and completion operations in Crane County.

RESULTS OF OPERATIONS

Distributable Income

Three Months Ended September 30, 2020

For the three months ended September 30, 2020, net profits income received by the Trust was $326,946 compared to $2,950,430 for the same period of the prior year.

This decrease in net profits income was primarily due to decreased oil production and sales, as well as decreased oil prices and oversupply resulting from economic effects of the COVID-19 pandemic.

Three Months Ended March 31, 2021

For the three months ended March 31, 2021, net profits income received by the Trust was $1,289,639 compared to $1,754,255 for the same period of the prior year .

This decrease in net profits income was primarily due to lower volumes and prices resulting from decreased demand during COVID-19 and temporary shut downs in production during extraordinary winter storms in February 2021.

See Computation of Income from the Net Profits Interest Received by the Trust below.

After considering interest income of $127 and general and administrative expenditures of $205,416, distributable income for the three months ended September 30, 2020 was $121,657, or $0.010000 per Trust unit.

For the three months ended September 30, 2019, total distributable income was $2,556,326, or $0.210124 per unit.

Interest income was lower for the quarter ended September 30, 2020 as compared to the prior year, due to less investable cash received attributable to the Net Profits Interest and lower interest rates.

General and administrative expenditures decreased by $32,000 for the three months ended September 30, 2020 as compared to the prior year, primarily due to timing of payments.

Pursuant to the Trust Agreement, as of May 31, 2019, the Trustee was authorized to begin retaining cash reserves for administrative expenses.

The Trustee did not retain any cash reserves during the three months ended September 30, 2020.

During the three months ended September 30, 2019, $160,000 in cash reserves were retained.

Total cash reserves were $1,000,000 as of September 30, 2020 compared to $300,000 as of September 30, 2019.

Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the three months ended September 30, 2020 were as follows:

After considering interest income of $62 and general and administrative expenditures of $241,274, distributable income for the three months ended March 31, 2021 was $1,048,425, or $0.086177 per Trust unit.

For the three months ended March 31, 2020, total distributable income was $1,195,064, or $0.098230 per unit .

Interest income was lower for the quarter ended March 31, 2021 as compared to the prior year, due to lower interest rates and a reduction in funds held for distribution.

General and administrative expenditures decreased by $21,000 for the three months ended March 31, 2021 as compared to the prior year, primarily due to the timing of payments.

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 cash reserves during the three months ended March 31, 2021.

During the three months ended March 31, 2020, $300,000 in cash reserves were retained.

Total cash reserves were $1,000,000 as of March 31, 2021 compared to $900,000 as of March 31, 2020.

Based on 12,165,732 Trust units outstanding at each date listed below, the per unit distributions during the three months ended March 31, 2021 were as follows:

Distribution per Unit

July 31, 2020

August 14, 2020

August 31, 2020

September 15, 2020

September 30, 2020

October 15, 2020

Nine Months Ended September 30, 2020

For the nine months ended September 30, 2020, net profits income received by the Trust was $2,458,193 compared to $8,414,422 for the same period of the prior year.

This decrease in net profits income was primarily due to decreased oil production and sales, as well as decreased oil prices and oversupply resulting from economic effects of the COVID-19 pandemic and the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries.

See Computation of Income from the Net Profits Interest Received by the Trust below.

After considering interest income of $4,446, general and administrative expenditures of $745,917, distributable income for the nine months ended September 30, 2020 was $1,316,722, or $0.108232 per Trust unit.

For the nine months ended September 30, 2019, total distributable income was $7,272,839, or $0.597812 per unit.

Interest income decreased for the nine months ended September 30, 2020 as compared to the prior year, due to less investable cash received attributable to the Net Profits Interest in 2020 and lower interest rates.

General and administrative expenditures decreased by $103,000 for the nine months ended September 30, 2020 as compared to the prior year, primarily due to timing of payments and lower legal fees.

The Trustee retained $400,000 in cash reserves during the nine months ended September 30, 2020 compared to $160,000 in cash reserves retained in the prior year period.

Pursuant the terms of the Trust Agreement, the Trustee was authorized to begin retaining cash reserves for administrative expenses in May of 2019.

Total cash reserves were $1,000,000 as of September 30, 2020 compared to a total of $300,000 as of September 30, 2019.

January 29, 2021

February 12, 2021

February 26, 2021

March 12, 2021

March 31, 2021

April 14, 2021

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

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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 September 30, 2020, was based on production during the months of May 2020 through July 2020.

The table below outlines the computation of income from the Net Profits Interest received by the Trust for the three and nine months ended September 30, 2020 and September 30, 2019:

Net profits income for the three months ended March 31, 2021, was based on production during the months of November 2020 through January 2021.

The table below outlines the computation of income from the Net Profits Interest received by the Trust for the three months ended March 31, 2021 and March 31, 2020:

Three Months Ended

September 30, 2020

Three Months Ended

September 30, 2019

Nine Months Ended

September 30, 2020

Nine Months Ended

September 30, 2019

Underlying Properties sales volumes (1) :

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Total sales (Boe)

Oil (per Bbl)

Natural gas (per Mcf)

Average realized sales price:

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Other expenses

Settlement of derivative contracts (3)

Percentage allocable to Net Profits Interest

Net profits income (before capital reserve)

Capital reserve activity, net (4)

Capital reserve (3)

Operator advance

Net Profits Interest audit fee

Net profits income received by the Trust

Quarterly sales volumes are typically reported for a three-month period, and therefore sales volumes for the three months ended September 30, 2020 reflect production volumes for May 2020 through July 2020.

Sales volumes for the nine months ended September 30, 2020 reflect production volumes for November 2019 through July 2020.

Quarterly sales volumes are typically reported for a three-month period, and therefore sales volumes for the three months ended March 31, 2021 reflect production volumes for November 2020 through January 2021.

Sales volumes for natural gas include NGLs.

Reflects gross cash proceeds from settlement of derivative contracts relating to production as discussed in Note 7 to condensed financial statements and elsewhere in this Quarterly Report.

Boaz Energy is entitled under the Conveyance to reserve up to $3.0 million from the net profits for certain future taxes and expenses.

In September 2020, Boaz Energy reserved an additional $117,802 net to the Trust for certain future taxes and development expenses.

As of September 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $298,156.

As of March 31, 2021, Boaz had reserved $202,157 net to the Trust for future capital expense.

Important factors used in calculating the Trusts 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 sales volumes decreased by 44,563 Bbls (32%) and 59,649 Bbls (14%), respectively, for the three and nine months ended September 30, 2020 as compared to the same periods in the prior year.

Boaz Energy reports this decrease was primarily due to decreased oil demand as a result of oversupply and economic effects of COVID-19, and also, as pertains to the nine-month decrease, Boaz Energys shut in of a material amount of production in May 2020 due to price uncertainties.

Natural gas sales volumes decreased by 20,715 (14%) for the three months ended September 30, 2020 as compared to the prior year period.

Boaz Energy reports this decrease was primarily because of decreased natural gas demand and sales as a result of oversupply and economic effects of COVID-19.

Natural gas sales volumes decreased by 39,961 Mcf (9%) for the nine months ended September 30, 2020 as compared to the prior year period.

Boaz Energy reports this decrease was primarily because of the effects of a shut in at a natural gas processing plant in Crane County during the first quarter of 2020 and Boaz Energys shut in of a material amount of production in May 2020 due to price uncertainties, but also due to the decrease in natural gas demand and sales as a result of oversupply and economic effects of COVID-19.

The average realized oil price per Bbl decreased for the three months ended September 30, 2020 as compared to the prior year period primarily related to oversupply, decreased demand and economic effects of COVID-19.

The average realized oil price per Bbl for the three months ended September 30, 2020 is primarily related to production from May 2020 through July 2020, when the average NYMEX price was $35.84 per Bbl.

The average realized oil price per Bbl also decreased for the nine months ended September 30, 2020 due to oversupply, decreased demand and economic effects of COVID-19.

The average realized oil price per Bbl for the nine months ended September 30, 2020 is primarily related to production from November 2019 through July 2020, when the average NYMEX price was $42.19 per Bbl.

The average realized natural gas price per Mcf decreased for the three and nine months ended September 30, 2020 as compared to the prior year period because of oversupply of ethane and other natural gas liquids, decreased demand, depressed pricing and costs to dispose of excess natural gas liquids.

The average realized natural gas price per Mcf for the three months ended September 30, 2020 is primarily related to production from May 2020 through July 2020 when the average NYMEX price was $1.72 per Mcf.

The decrease in the average realized natural gas price per Mcf for the nine months ended September 30, 2020 is primarily related to production from November 2019 through July 2020, when the average NYMEX price was $1.94 per Mcf.

Oil sales volumes decreased by 29,164 Bbls (22%) for the three months ended March 31, 2021 as compared to the same period in the prior year.

Boaz Energy reports this decrease was primarily due to natural decline and some reduction in demand, offset by Boaz Energy methodically putting marginal wells back on post COVID-19 pandemic.

Natural gas sales volumes decreased by 3,905 Mcf (3%) for the three months ended March 31, 2021 compared to the prior year period.

Boaz Energy reports this decrease was primarily because of less demand due to the COVID-19 pandemic.

The average realized oil price per Bbl decreased for the three months ended March 31, 2021 as compared to the prior year period primarily related to decreased demand caused by the continuing COVID-19 pandemic.

The average realized natural gas price per Mcf increased for the three months ended March 31, 2021 as compared to the prior year period when there was an oversupply of ethane and other natural gas liquids, decreased demand and costs to dispose of excess natural gas liquids.

Direct Operating Expenses

Direct operating expenses decreased for the three and nine months ended September 30, 2020 as compared to the prior year periods primarily because of a slowdown in operations in light of current prices for oil and natural gas and economic conditions during the COVID-19 pandemic.

Direct operating expenses decreased for the three months ended March 31, 2021 because while Boaz Energy was engaged in pulling unit operations, fewer overall operations were conducted than in the first quarter of the previous year.

Lease Operating Expenses

Lease operating expenses decreased for the three and nine months ended September 30, 2020 as compared to the prior year periods as a result of less operating activity and a decrease in staffing.

There was no material change in lease operating expenses for the three months ended March 31, 2021 as compared to the prior year period.

Severance and ad Valorem Taxes

Severance and ad valorem taxes decreased for the three and nine months ended September 30, 2020 as a result of reduced volumes and prices of oil and natural gas and also because of a credit to the Trust in the first quarter of 2020 when actual ad valorem taxes were less than the accrual amounts.

Severance and ad valorem taxes decreased for the three months ended March 31, 2021 as compared to the prior year period as a result of lower sales volumes.

Development Expenses Related to the Underlying Properties

Development expenses related to the Underlying Properties decreased for the three and nine months ended September 30, 2020 as compared to the prior year period because of an overall slow-down in developmental activities in light of decreased oil and natural gas prices and economic uncertainty due to COVID-19.

Development expenses related to the Underlying Properties decreased for the three months ended March 31, 2021 as compared to the prior year period because of a decrease in development activity due to the COVID-19 pandemic and lower oil prices.

Other Expenses

Other expenses increased by $22,319 for the three months ended September 30, 2020 as compared to the prior year period, primarily due to the drilling of additional wells by outside operators.

Other expenses increased by $102,993 for the nine months ended September 30, 2020 as compared to the prior year period, primarily because of the drilling of additional wells as well as the annual adjustment to overhead made by Boaz Energy in January 2020.

Other expenses increased by $90,973 for the three months ended March 31, 2021 as compared to the prior year period, primarily due to the annual adjustment in overhead rate which occurred in April 2020 and January 2021.

Capital Reserve

In September 2020, Boaz Energy reserved an additional $117,802 net to the Trust for certain future taxes and development expenses.

As of September 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $298,156.

Derivative Contracts

Income from the Net Profits Interest is exposed to fluctuations in energy prices in the normal scope of business.

These derivative contracts consisted of put option contracts with strike prices of $60 per barrel in 2018 and $50 per barrel in 2019.

Boaz Energy believed that these put option contracts provided downside protection to the Trust in the event spot prices for crude oil decline below the applicable strike price, while still allowing the Trust to benefit from increasing crude oil prices.

These contracts expired as of December 31, 2019, and after December 31, 2019, none of the production attributable to the Underlying Properties is hedged.

Because the derivative contracts have expired, there were no cash proceeds from settlement of derivative contracts during the three or nine months ended September 30, 2020.

As of March 31, 2021, Boaz had reserved $202,157 net to the Trust for future capital expense.

LIQUIDITY AND CAPITAL RESOURCES

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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 Trusts liabilities and expenses, the Trustee may cause the Trust to borrow funds to pay liabilities of the Trust.

As authorized under the Trust Agreement, beginning May 31, 2019, the Trustee began retaining cash from the distributions the Trust received (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 held by the Trustee for administrative expenses totaled $1,000,000 as of September 30, 2020.

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, 2021.

Boaz Energy Capital Expenditure Budget

In September 2020, Boaz Energy reserved an additional $117,802 net to the Trust for certain future taxes and development expenses.

As of September 30, 2020, the balance of funds reserved by Boaz Energy, net to the Trust, was $298,156.

The majority of capital spent in 2021 to date has been on non-operated drilling and completion operations in Crane County.

Distributions Declared After Quarter End

On October 20, 2020, the Trust declared a cash distribution of 0.013487 per Trust unit based upon production during the month of August 2020 to record holders as of October 30, 2020.

The distribution will be paid on November 16, 2020.

The following table shows underlying oil and natural gas sales and average prices attributable to the distribution declared on October 20, 2020:

On April 20, 2021, the Trust declared a cash distribution of $0.044638 per Trust unit based upon production during the month of February 2021 to record holders as of April 30, 2021.

The distribution was paid on May 14, 2021.

The following table shows underlying oil and natural gas sales and average prices during the production month of February 2021 and attributable to the distribution declared on April 20, 2021:

Underlying Sales Volumes

Average Price

In October 2020, Boaz reserved $104,000 net to the Trust for certain future taxes and development expenses.

Off-Balance Sheet Arrangements

As of September 30, 2020, the Trust had no off-balance sheet arrangements.

As of March 31, 2021, the Trust had no off-balance sheet arrangements.

New Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements