PVL Permianville Royalty Trust

References to the “Trust” in this document refer to Permianville Royalty Trust, previously known as Enduro Royalty Trust, while references to “COERT” or the “Sponsor” in this document refer to COERT Holdings 1 LLC. References to “Enduro” in this document refer to Enduro 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 the SEC are available on the SEC’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 the SEC 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:

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.

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 10^th 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:

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 the Underlying Properties remained positive during the third quarter of 2022, despite the quarter-over-quarter decline in commodity prices. While the global economy remains volatile, reflecting, among other factors, the armed conflict between Russia and Ukraine and lingering effects of the COVID-19 pandemic, the Sponsor does not expect such factors to have a material impact on the Underlying Properties and the 2022 development activity, although volatile commodity prices and inflation are affecting third-party operators, and those effects could be material. The West Texas Intermediate spot price of crude oil has increased materially from $76.99 per barrel on December 31, 2021 to $85.70 per barrel on November 9, 2022. Natural gas prices continue to show greater volatility and have increased and subsequently decreased at an even higher rate than crude oil prices, with the Henry Hub spot price increasing from $3.66 per MMBTU on December 31, 2021 to $3.99 per MMBTU on November 9, 2022, while reaching a year-to-date high of $9.82 per MMBTU on August 22, 2022. Despite recent oilfield service inflationary pressures and supply chain bottlenecks, operators of the Underlying Properties have continued their spending activity. However, due to the current heightened market volatility and global macroeconomic uncertainty, it remains difficult to reliably estimate the ultimate impact 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.

As previously disclosed, the Sponsor now expects that the 2022 capital expenditure program will be between $10 million and $15 million attributable to the Underlying Properties, or between $8 million and $12 million net to the Trust’s 80% Net Profits Interest. This represents an increase from the previously expected capital expenditure program of $6 million to $8 million, or $4.8 million to $6.4 million net to the Trust’s 80% Net Profits Interest. To account for this increased activity level, the Sponsor has established a cash reserve for approved, future development expenses this year. This reserve is intended to fund the expected increase in development expenses; however, if those expenses are ultimately delayed or are less than expected, or if the outlook changes, amounts reserved but unspent will be released as an incremental cash distribution in a future period. In addition, the Sponsor maintains significant liquidity and financial flexibility to respond to the operational and capital spending changes of the operators of the Underlying Properties. The Sponsor will continue to monitor and possibly participate in future, to-be-announced capital projects in 2022, to the extent operator capital expenditures remain elevated compared to recent years in response to current commodity prices.

Capex Drilling Activity Update

Presented below is a summary of the current status of certain notable capital projects recently undertaken on the Underlying Properties pursuant to the capital expenditure program described above. Since the last summary of 2022 capital projects included in the Trust’s September 2022 monthly cash distribution announcement, various operators of the Underlying Properties, have commenced eight new projects, and several projects that had been identified as awaiting first revenues have begun producing. The Sponsor expects that the cost of these new projects, together with the other projects undertaken since the beginning of this year, will be within the range of the previously updated 2022 capital expenditure program, although total capital expenditures in 2022 ultimately could be at the higher end of the range disclosed above.

The following table is not intended to be a comprehensive list reflecting all capital expenditures to date. In addition, there can often be a several-month delay from the time of capital expenditures to the time of production and cash flows attributable to the Underlying Properties, especially given the non-operated nature of the Underlying Properties.

The Sponsor expects some of these projects to be completed and to begin producing before year-end, while others are expected to be completed and to begin producing during 2023.

For the three months ended September 30, 2021, the Net Profits Interest generated positive income for each month in the period, which eliminated the cumulative Net Profits Interest shortfall of $0.5 million as of June 30, 2021 and the cumulative outstanding Sponsor advances to the Trust of $0.8 million.

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 September 30, 2022 and 2021:

Net profits attributable to the Underlying Properties for the three months ended September 30, 2022 were $3.0 million compared to $1.9 million for the three months ended September 30, 2021. The $1.1 million increase in net profits attributable to the Underlying Properties from the 2021 period to the 2022 period was primarily due to the following items:

During the three months ended September 30, 2022, COERT withheld from the net profits otherwise payable to the Trust an aggregate of $0.5 million and released $0.9 million, with $0.7 million remaining for approved, future development expenses. This reserve is intended to fund an expected increase in development expenses; however, if those expenses are ultimately delayed or are less than expected, or if the outlook changes, amounts reserved but unspent will be released as an incremental cash distribution in a future period.

For the three months ended September 30, 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 ended September 30, 2021, the Trust withheld $0.2 million and paid $0.2 million for general and administrative expenses.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

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:

For the nine months ended September 30, 2021, the Net Profits Interest generated positive income for each month in the period, which eliminated the cumulative Net Profits Interest shortfall of $1.7 million as of December 31, 2020 and the cumulative outstanding Sponsor advances to the Trust of $0.8 million.

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 nine months ended September 30, 2022 and 2021:

Net profits attributable to the Underlying Properties for the nine months ended September 30, 2022 were $10.5 million compared to $3.1 million for the nine months ended September 30, 2021. As a result of the cumulative Net Profits Interest shortfall, there was only one distribution to unitholders during the first nine months of 2021. The $7.4 million increase in net profits attributable to the Underlying Properties from the 2021 period to the 2022 period was primarily due to the following items:

During the nine months ended September 30, 2022, COERT withheld from the net profits otherwise payable to the Trust an aggregate of $0.7 million for the establishment of a cash reserve for approved, future development expenses. This reserve is intended to fund an expected increase in development expenses; however, if those expenses are ultimately delayed or are less than expected, or if the outlook changes, amounts reserved but unspent will be released as an incremental cash distribution in a future period.

For the first nine months of 2022, the Trust withheld $1.3 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 nine months ended September 30, 2021, the Trust withheld $0.2 million and paid $0.7 million for general and administrative expenses.

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. In November 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 in February 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 of September 30, 2022 and December 31, 2021, the Trust had cash of $720,501 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. At September 30, 2022 and December 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 the Underlying 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:

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.

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 ended September 30, 2022.

Subsequent Events

Distributions Paid or Declared

On October 17, 2022, a distribution of $0.050500 per unit, which was declared on September 16, 2022, was paid to Trust unitholders of record as of September 30, 2022.

On October 17, 2022, the Trust declared a distribution of $0.051000 per unit to unitholders of record as of October 31, 2022. The distribution was paid to unitholders on November 14, 2022.