Monthly Dividend Stock In Focus: PermRock Royalty Trust

Updated on September 18th, 2024 by Felix Martinez

Income investors looking to buy oil and gas stocks may want to gain exposure to the booming Permian Basin. PermRock Royalty Trust (PRT) is an oil and gas producer with all of its properties in the Permian Basin, and the stock currently yields nearly 11.6%.

Beyond its high dividend yield, PermRock also pays monthly dividends instead of the traditional quarterly distribution schedule. Monthly dividend payments are superior for investors who need to budget around their dividend payments (such as retirees).

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PermRock’s nearly double-digit dividend yield instantly appeals to investors. But as always, investors need to understand the underlying business to ensure the dividend payout is sustainable.

This is where oil and gas royalty trusts become especially risky, so only investors with a high-risk tolerance should consider purchasing PermRock.

Business Overview

PermRock Royalty Trust is a trust formed in November 2017 by Boaz Energy, a company whose expertise is in acquiring, developing, and operating oil and natural gas properties in the Permian Basin.

The trust owns properties in the Permian Basin. It receives 80% of the net profits from the sale of oil and natural gas produced in its properties and distributes all those net profits in monthly dividends.

According to the EIA, Permian Basin is the most prolific oil-producing area in the U.S. This area extends over 75,000 square miles in West Texas and Southeastern New Mexico. Since its discovery in 1921, it has produced more than 30 billion barrels of oil and more than 75 Tcf of natural gas.

Source: Investor Relations

The properties of the trust have distinct advantages. They consist of long-life reserves in mature, conventional oil fields with a reliable production profile.

Thanks to the mature nature of these oil fields, production, and reserve estimates are highly reliable. This sharply contrasts the estimates of unconventional fields, which are characterized by a higher degree of uncertainty.

Those reserves are sufficient for approximately 10 years of production at the current production rate. However, the trust can enhance its output via water-flooding techniques while it will also discover new reserves in the area. As a result, management expects the trust to produce oil and natural gas economically for at least 75 years. Such a long reserve life should be sufficient to satisfy even the most demanding investors.

It is also worth noting that the properties of the trust are characterized by remarkably high operating margins. As the future path of the price of oil is highly unpredictable, oil producers need to grow their production consistently year after year in order to grow their earnings in the long run.

Growth Prospects

For the three months ending June 30, 2024, the Trust reported net profits income of $1.66 million, an increase from $1.57 million in the same period last year. This rise is attributed to higher oil and gas prices, along with reduced development expenses. After accounting for interest income of $14,609 and general and administrative expenses of $322,992, the Trust’s distributable income for this period was $1.35 million, or $0.110969 per unit. Notably, general and administrative expenses were lower this quarter compared to last year, and no cash reserves were retained by the Trustee.

For the six months ending June 30, 2024, net profits income totaled $2.95 million, a drop from $3.94 million during the same period in 2023. This decrease was largely due to lower oil and gas prices and higher production costs. The distributable income after interest and expenses amounted to $2.47 million, or $0.203235 per unit, compared to $3.44 million, or $0.282792 per unit, in the prior year. While interest income rose due to higher interest rates, administrative expenses decreased due to fewer legal expenses.

The Trust’s net profits are based on 80% of Boaz Energy’s income from the sale of oil and natural gas from underlying properties. For the three months ending June 30, 2024, oil and natural gas sales generated gross profits of $6 million, down slightly from $6.21 million the previous year. After accounting for direct operating, lease, and development expenses, the Trust’s net profits amounted to $2.29 million for the quarter, of which the Trust received $1.66 million. For the six-month period, total net profits were $4.26 million, with the Trust receiving $2.95 million.

Overall, it is prudent not to rely on PermRock to grow its distribution significantly in the upcoming years of this year’s high base.

Dividend Analysis

As mentioned above, PermRock Royalty Trust pays a variable monthly dividend depending on its underlying net profits. In 2023, the trust paid a total of $1.01 per share in dividends. Based on this, the stock would have a high dividend yield of 11.6%.

Overall, PermRock Royalty Trust offers an exceptionally high dividend yield, though investors should keep in mind that dividends may greatly vary from month to month, depending on the underlying oil prices. The extremely weak oil prices of 2019-2020 were a significant challenge for PermRock, which suspended its dividend for five consecutive months in 2020.

Conversely, PermRock Royalty Trust will benefit much more than the larger oil majors if the price of oil rises significantly from its current level. Indeed, the rebound of oil prices from the pandemic has allowed PermRock to resume growing its dividend since last year.

Therefore, the trust is ideal for those who are confident in higher future oil prices and want to gain exposure to the oil boom in the Permian Basin.

In summary, the trust is much more leveraged to the price of oil than the integrated oil companies and hence it has much more upside in the positive scenario (higher oil prices) and much more downside in the event of a downturn in the energy sector.

The properties of PermRock are in the Permian Basin, the most prolific oil producing area in the U.S. However, an oil royalty trust is a poor way to gain exposure to the booming production in this area. We believe investors would be much better off in a traditional oil and gas producer, or midstream company. The suspension of the dividend of PermRock for five months in 2020 is a stern reminder of the risk of an oil and gas royalty trust.

Final Thoughts

PermRock Royalty Trust has had a number of challenges in the past few years, including the weak oil price environment and the coronavirus pandemic, which suppressed global oil demand. The trust offers an exceptionally high dividend yield and operates in the most prolific oil-producing area in the U.S., with promising growth prospects.

As we do not expect another downturn in the energy sector in the near term, we believe the trust will offer a consistently high dividend yield. Nevertheless, due to the non-diversified business model of the trust and its dramatic reliance on the price of oil, investors should not allocate a great portion of their portfolio to this stock.

In addition, investors should be aware of the risks associated with investing in such a pure upstream player with commodity prices at 13-year highs. Whenever the next down cycle of the energy market shows up, PermRock will have excessive downside risk.

Moreover, the trust’s short history leaves much to be desired for investors seeking reasonable levels of dividend safety and consistency.

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