UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2021 |
for the Quarterly Period Ended June 30, 2020
or
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission File No. 001-08032
SAN JUAN BASIN ROYALTY TRUST
(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)
| Texas | 75-6279898 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
BBVA USA
2200 Post Oak Blvd, Floor 18
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
(866) 809-4553
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Units | SJT | New York Stock Exchange |
Number of Units of beneficial interest outstanding at August 10, 2020:16, 2021: 46,608,796
| PART I. FINANCIAL INFORMATION | ||||||
Item 1 | 1 | |||||
Item 2 | Trustee’s Discussion and Analysis of Financial Condition and Results of Operations | 5 | ||||
Item 3 | ||||||
Item 4 | ||||||
| PART II. OTHER INFORMATION | ||||||
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Item 1A | ||||||
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Item 6 | ||||||
| SIGNATURE | ||||||
i
SAN JUAN BASIN ROYALTY TRUST
FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
| June 30, | December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| June 30, 2020 (Unaudited) | December 31, 2019 (Audited) | (Unaudited) | (Audited) | |||||||||||||
ASSETS | ||||||||||||||||
Cash and short-term investments | $ | 892,858 | $ | 1,079,421 | $ | 1,821,025 | $ | 1,286,468 | ||||||||
Net overriding royalty interest in producing oil and gas properties (net of accumulated amortization of $128,103,458 and $127,823,321 at June 30, 2020 and December 31, 2019, respectively) | 5,172,070 | 5,452,207 | ||||||||||||||
Net overriding royalty interest in producing oil and gas properties (net of accumulated amortization of $128,889,723 and $128,151,694 at June 30, 2021 and December 31, 2020, respectively) | 4,385,805 | 5,123,834 | ||||||||||||||
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Total assets | $ | 6,064,928 | $ | 6,531,628 | $ | 6,206,830 | $ | 6,410,302 | ||||||||
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LIABILITIES AND TRUST CORPUS | ||||||||||||||||
Distribution payable to Unit Holders | $ | — | $ | 79,421 | $ | 821,025 | $ | 286,468 | ||||||||
Cash reserves | 892,858 | 1,000,000 | 1,000,000 | 1,000,000 | ||||||||||||
Trust corpus – 46,608,796 Units of beneficial interest authorized and outstanding | 5,172,070 | 5,452,207 | 4,385,805 | 5,123,834 | ||||||||||||
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Total liabilities | $ | 6,064,928 | $ | 6,531,628 | $ | 6,206,830 | $ | 6,410,302 | ||||||||
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CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Royalty income | $ | 970,722 | $ | 2,408,205 | $ | 6,039,129 | $ | 8,957,770 | $ | 7,565,789 | $ | 970,722 | $ | 15,777,876 | $ | 6,039,129 | ||||||||||||||||
Interest income | 2,052 | 9,664 | 5,613 | 17,714 | 357 | 2,052 | 770 | 5,613 | ||||||||||||||||||||||||
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Total income | 972,774 | 2,417,869 | 6,044,742 | 8,975,484 | 7,566,146 | 972,774 | 15,778,646 | 6,044,742 | ||||||||||||||||||||||||
General and administrative expenses | (494,672 | ) | (506,109 | ) | (948,379 | ) | (1,048,887 | ) | (400,138 | ) | (494,672 | ) | (861,395 | ) | (948,379 | ) | ||||||||||||||||
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Decrease in cash reserves | 107,142 | 84,943 | 107,142 | 84,943 | — | 107,142 | — | 107,142 | ||||||||||||||||||||||||
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Distributable income | $ | 585,244 | $ | 1,996,703 | $ | 5,203,505 | $ | 8,011,540 | $ | 7,166,008 | $ | 585,244 | $ | 14,917,251 | $ | 5,203,505 | ||||||||||||||||
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Distributable income per Unit (46,608,796 Units) | $ | 0.012557 | $ | 0.042840 | $ | 0.111642 | $ | 0.171890 | $ | 0.153748 | $ | 0.012557 | $ | 0.320052 | $ | 0.111642 | ||||||||||||||||
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These Condensed Financial Statements should be read in conjunction with the accompanying
Notes to Condensed Financial Statements included herein.
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Trust corpus, beginning of period | $ | 5,254,179 | $ | 5,673,052 | $ | 5,452,207 | $ | 5,844,727 | $ | 4,758,683 | $ | 5,254,179 | $ | 5,123,834 | $ | 5,452,207 | ||||||||||||||||
Amortization of net overriding royalty interest | (82,109 | ) | (86,732 | ) | (280,137 | ) | (258,407 | ) | (372,878 | ) | (82,109 | ) | (738,029 | ) | (280,137 | ) | ||||||||||||||||
Distributable income | 585,244 | 1,996,703 | 5,203,505 | 8,011,540 | 7,166,008 | 585,244 | 14,917,251 | 5,203,505 | ||||||||||||||||||||||||
Distributions declared | (585,244 | ) | (1,996,703 | ) | (5,203,505 | ) | (8,011,540 | ) | (7,166,008 | ) | (585,244 | ) | (14,917,251 | ) | (5,203,505 | ) | ||||||||||||||||
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Trust corpus, end of period | �� | $ | 5,172,070 | $ | 5,586,320 | $ | 5,172,070 | $ | 5,586,320 | $ | 4,385,805 | $ | 5,172,070 | $ | 4,385,805 | $ | 5,172,070 | |||||||||||||||
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Distributions declared (per Unit) | $ | 0.012557 | $ | 0.042840 | $ | 0.111642 | $ | 0.171890 | $ | 0.153748 | $ | 0.012557 | $ | 0.320052 | $ | 0.111642 | ||||||||||||||||
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These Condensed Financial Statements should be read in conjunction with the accompanying
Notes to Condensed Financial Statements included herein.
| 1. | Basis of Presentation |
The preceding (a) condensed statement of assets, liabilities and trust corpus as of December 31, 2019,2020, which has been derived from audited financial statements, and (b) the unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2019.2020. In the opinion of BBVA USA, the trustee of the Trust (the “Trustee”), and based upon information provided to the Trust by Hilcorp San Juan L.P. (“Hilcorp”), the present owner of certain oil and gas interests (the “Subject Interests”) originally owned by Southland Royalty Company (the “Subject Interests”(“Southland”) in properties located in the San Juan Basin of northwestern New Mexico (the “Royalty Income”), all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at June 30, 2020,2021, and the distributable income and changes in trust corpus for the three-month and six-month periods ended June 30, 20202021 and 2019.2020. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.
The financial statements of the Trust are prepared on the following basis and are not intended to present the financial position and results of operations of the Trust in conformity with U.S. generally accepted accounting principles (“GAAP”):
The net proceeds attributable to the 75% net overriding royalty interest (the “Royalty”) that burdens the Subject Interests recorded for a month is the amount computed and paid by Hilcorp to the Trustee for the Trust. Royalty Income consists of the proceeds received by Hilcorp from the sale of production less accrued production costs, development and drilling costs, applicable taxes, operating charges, and other costs and deductions, multiplied by 75%. The calculation of net proceeds by Hilcorp for any month includes adjustments to proceeds and costs for prior months and impactsaffects the Royalty Income paid to the Trust and the distribution to Unit Holders for that month. See Item 2 Part I of this Quarterly Report on Form 10-Q entitled “Gross Proceeds and Severance Tax Estimates” for a more detailed explanation of the estimate and true-up process for distributable income reporting and distributions to Unit Holders.
Although permitted under the Net Overriding Royalty Conveyance that transferred the Royalty to the Trust (the “Conveyance”), Hilcorp has informed the Trust that, for wells operated by Hilcorp, it generally does not intend to accrue lease operating expenses to the Trust.
Hilcorp has informed the Trust that oil revenue is typically reported to the Trust based on actual volumes and pricing and that due to timing, Hilcorp reports accrued natural gas revenues to the Trust based on actual production volumes from the meters. Generally, Hilcorp reconciles the natural gas revenue accruals with the plant processing statements the month following the previously reported financial information.
Hilcorp has notified the Trust that non-operated revenue is reported to the Trust based on a three-month lag. Non-operated revenue for a calendar year is typically based on the actual natural gas and oil production during the period beginning with October of the preceding calendar year through September of the current calendar year.
| • | Trust expenses recorded are based on liabilities paid and cash reserves established from Royalty Income for liabilities and contingencies. |
Distributions to Unit Holders are recorded when declared by the Trustee.
The Conveyance provides that any excess production costs applicable to the Subject Interests over gross proceeds from such properties must be recovered from future net proceeds before Royalty Income is again paid to the Trust. The Trust is not obligated to reimburse Hilcorp for any excess production costs if future gross proceeds from the Subject Interests are insufficient to cover such costs. Gross excess production costs applicable to the Subject Interests were $1.6 million
Depletion and any impairment are recorded as a reduction in trust corpus instead of June 30, 2020, with 75%, or $1.2 million (net) allocated to the Trustan expense.
The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for liabilities and contingencies which would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid instead of when incurred; and amortization of the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements, which include the provisions of ASC 842, Leases, the Trustee determined that this standard has no impact on the Trust’s financial statements.
The Trustee has determined that there are no additional disclosures required based on the Trust’s method of accounting. This comprehensive basis of accounting 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 Trustee routinely reviews the Trust’s royalty interests in oil and natural gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined
that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is charged directly to trust corpus instead of as an expense. There was no impairment of the Trust’s assets as of June 30, 2020.2021.
| 2. | Federal Income Taxes |
For federal income tax purposes, the Trust constitutes a fixed investment trust whichthat is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.
The Trust is a widely held fixed investment trust (“WHFIT”) classified as a non-mortgage widely held fixed investment trust (“NMWHFIT”) for federal income tax purposes. The Trustee is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.
The Royalty constitutes an “economic interest” in oil and natural gas properties for federal income tax purposes. Unit Holders must report their share of the production revenues of the Trust as ordinary income from oil and natural gas royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.
Under current federal income tax law, the Trust’s production and sale of natural gas from coal seam wells does not qualify for a tax credit under Section 45K (the “Section 45 Tax Credit”) of the Internal Revenue Code of 1986, as amended (the “Code”). Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trust’s current production for such credit has been enacted. No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.
The classification of the Trust’s income for purposes of the passive loss rules may be important to a Unit Holder. Royalty income such as that derived through the Trust will generally be treated as portfolio income that may not be offset or reduced by passive losses.
Tax positions taken by the Trust related to the Trust’s pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that the material tax positions it has taken would more likely than not be sustained by examination. As of June 30, 2020,2021, the Trust’s tax years 20162017 and thereafter remain subject to examination.
Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holder’s interest in the Trust.
| 3. | Commitments and Contingencies |
Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders. See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to recovery of costs.
Covid-19 Pandemic.The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas. Hilcorp further informed the Trust that itCovid-19 has not had, nor does notit anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the continuing impact of the ongoing Covid-19 pandemic, including additional surges or variants and required or recommended pandemic mitigation efforts, on Hilcorp and the Subject Interests is stillremains unknown and any such impact could result in actual results being different thanfrom Hilcorp’s expectations. Specifically,expectations, despite the lack of a materially adverse impact to-date of the pandemic.
Gross Proceeds and Severance Tax Estimates. Hilcorp has advised the Trust that for certain months (since the closing of its purchase of the assets), it has reported estimates of cash revenues and expenses based on the best information available to it at the time, instead of reporting actual amounts. Hilcorp further has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance with the Conveyance.
Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) are still occurring and being reported in 2021. In addition, Hilcorp informed the Trust that due to Hilcorp’s transition to a new accounting system, the February, March and April 2021 production months were based on estimated production, estimated prices and estimated costs utilizing historical trends. Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustments based upon prior months’ true-ups and rebooking, plus interest. During the three months ended June 30, 2021, Hilcorp made no true-up adjustments.
Hilcorp notified the Trust that as of the date of this Quarterly Report, Hilcorp anticipates that it will adjust the previously reported production and financial information for the production months of January 2021 through April 2021 for operated wells and November 2020 through April 2021 for non-operated wells. Therefore, Hilcorp believes that these adjustments will result in changes to future distributions of net proceeds to the Trust that reflects such rebooking and true-ups plus interest on such amounts (as required by the Conveyance) to the extent an under payment to the Trust has notedoccurred. Hilcorp has confirmed that prices have declined, which may leadit will continue to further reductions from expected negative waive interest to the extent there were any overpayments to the Trust based on true-ups for reported estimates from earlier periods in 2020.
| 4. | Settlements and Litigation |
None.None
| 5. | Subsequent Events |
In itsOn July 21, 2020 press release and Current Report on Form 8-K,20, 2021, the Trust reported thatannounced a cash distribution of $3,949,643.61 or $0.084740 per Unit, based primarily upon estimated production during the month of May 2021, which was paid on August 13, 2021. In addition, Hilcorp had advised the Trust that the May 20202021 reporting month included a reimbursement byadditional gross profits of $2,559,341 ($1,919,505 net to the TrustTrust) based on true-ups to Hilcorp of $1.2 million, which the Trust previously had included inlease operating expense, property tax and capital cost categories for the total $2.0 million in “Other” revenue that was included in the estimated gross proceeds in the December 2017 and January 2018 distribution2021 through April 2021 production months.
| Item 2. | Trustee’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
The Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980 between Southland Royalty Company (“Southland”) and The Fort Worth National Bank (the “Original Indenture”). The Original Indenture was amended and restated on September 30, 2002, and further amended and restated on December 12, 2007, which the Trust refers to as the “Indenture” in this Quarterly Report on Form 10-Q. As a resultBecause of a series of mergers and other business combination transactions, involving the Trustee of the Trust, the current Trustee of the Trust is BBVA USA. On June 1, 2021, the PNC Financial Services Group, Inc. (“PNC”) completed its acquisition of BBVA USA which isBancshares, Inc., including its U.S. banking subsidiary, BBVA USA. The Trustee will continue to operate as BBVA USA, a wholly-ownedwholly owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.PNC, until the conversion of bank systems, which PNC anticipates to occur in or around October 2021. After the conversion of bank systems is completed, the Trustee will be PNC Bank.
The Conveyance and the Royalty
Pursuant to the Net Overriding Royalty Conveyance (the “Conveyance”) effective November 1, 1980, Southland conveyed the Royalty that burdens the Subject Interests in properties located in the San Juan Basin of northwestern New Mexico to the Trust. Subsequent to the Conveyance of the Royalty, through a series of sales, assignments and mergers, Southland’s successor became Hilcorp, which acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (“Burlington”), an indirect wholly-ownedwholly owned subsidiary of ConocoPhillips, on July 31, 2017.
The Royalty constitutes the principal asset of the Trust. The beneficial interest in the Royalty is divided into 46,608,796 units (the “Units”) representing undivided fractional interests in the beneficial interest of the Trust equal to the number of shares of the common stock of Southland outstanding as of the close of business on November 3, 1980. Each stockholder of Southland of record at the close of business on November 3, 1980 received one freely tradable Unit for each share of the common stock of Southland then held. Holders of Units in the Trust are referred to herein as “Unit Holders.”
The Trustee
The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining available income to the Unit Holders. The amount of income distributable to Unit Holders, which we refer to as “Distributable Income,” depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves. The Trust has no employees, officers or directors. AllThe Trustee performs all administrative functions of the Trust are performed by the Trustee. Effective June 10, 2019, Compass Bank changed its name to BBVA USA.Trust.
Hilcorp
Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with the Trust, for marketing the oil and natural gas production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances. A very high percentage of the Royalty Income is attributable to the production and sale by Hilcorp of natural gas from the Subject Interests. Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.
Gross Proceeds and Severance Tax Estimates. The sale of San Juan Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017. Under the terms of the sale, Hilcorp is required to make payments to Burlington if natural gas prices are above a certain price. Hilcorp has confirmed that in accordance with the Conveyance, Hilcorp will not charge the Trust any portion of such payments.
Gross Proceeds and Severance Tax Estimates. Hilcorp has advised the Trust that sincefor certain months (since the closing of its purchase of the assets, for certain monthsassets), it has reported estimates of cash revenues and expenses based on the best information available to it at the time, instead of reporting actual amounts. Hilcorp further has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance with the Conveyance.
Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) during fiscal years 2017, 2018, and 2019 are still occurring and being reported in 2020. Hilcorp has informed the Trust that as it continues to further refine its estimating and reporting processes, Hilcorp will review prior periods to ensure greater accuracy
and consistency, both for prior periods as well as future reporting periods. As part of that review process,2021. In addition, Hilcorp informed the Trust that it will reversedue to Hilcorp’s transition to a new accounting system, the February, March and rebook revenue for certain prior periods.April 2021 production months were based on estimated production, estimated prices and estimated costs utilizing historical trends. Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustments based upon prior months’ true-ups and rebooking, plus interest. During the three months ended June 30, 2021, Hilcorp made no true-up adjustments.
Hilcorp notified the Trust that as of the date of this Quarterly Report, Hilcorp anticipates that it will still need to adjust the previously reported production and financial information associated with operated wells for the production months of January 20182021 through December 2018April 2021 for operated wells and therefore, possibly adjustNovember 2020 through April 2021 for non-operated wells. Therefore, Hilcorp believes that these adjustments will result in changes to future distributions of net proceeds to reflectthe Trust that reflects such rebooking and true-ups plus interest on such amounts (as required by the Conveyance) to the extent an under-or over-paymentunderpayment to the Trust has occurred.
During Hilcorp has confirmed that it will continue to waive interest to the three months ended June 30, 2020, Hilcorp made true-up and rebooking adjustments to revenue and severance tax resulting in a reduction of $0.7 million gross (approximately $0.5 million net) to Royalty Income revenueextent there were any overpayments to the Trust based on the production months of February 2019 through July 2019, and October 2019 through November 2019.
Other Gross Proceeds Estimates. The Trust has been advised by Hilcorp that during the period following the closing of its purchase of the Subject Interests from Burlington, Hilcorp included an additional $1.0 million in “Other” revenue in the gross proceeds estimates in each of the December 2017 and January 2018 distribution months. This additional “Other” revenue was based on Hilcorp’s estimated increases in natural gas production that were subsequently offset by lower natural gas prices. As of the date of this Quarterly Report, Hilcorp has not yet trued-up this $1.0 million in “Other” gross proceeds included in each of the December 2017 and January 2018 distributions. As a result, once Hilcorp has finalized its true-ups there could be a negative adjustment to the “Other” gross proceeds consisting of a reduction in Royalty Income to the Trust by Hilcorp of this estimated payment of up to $2.0 million, consisting of $1.0 million for each of December 2017 and January 2018. The timing of this “Other” gross proceeds true-up may be affected by additional items identified by the Trustee’s third-party compliance auditors that are pending resolution with Hilcorp.2021.
Commodity Prices. The Trust’s income and monthly distributions from the Subject Interests are heavily influenced by the price of oil and natural gas. These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas-basedgas based on market uncertainty or a variety of additional factors that are beyond the Trustee’s control. During
On January 20, 2021, President Biden signed an executive order that reversed the first halfUnited States withdrawal from the Paris Agreement, and the United States formally rejoined the Paris Agreement on February 19, 2021. At the federal regulatory level, both the Environmental Protection Agency (“EPA”) and the Bureau of 2020,Land Management (“BLM”) have adopted regulations for the control of methane emissions, which also include leak detection and repair requirements, from the oil and natural gas prices decreased substantially dueindustry. President Biden’s executive orders require the adoption of new regulations and policies to significantly decreased demandaddress climate change and suspend, revise or rescind prior agency actions that are identified as a result ofconflicting with the novel coronavirus (“Covid-19”) pandemic.Biden Administration’s climate policies. In addition, a dispute over oilfederal government efforts to limit or prohibit hydraulic fracturing and additional prohibitions on new leases for production levels between Russia and members of minerals on federal properties, including onshore lands could affect the Organization of Petroleum Exporting Countries (“OPEC”) created an oversupply of crude oil. The dispute was ultimately resolved through agreed-upon production cuts, but not until June 2020. Both events put substantial downward pressure on the price of oil and natural gas in the second quarter of 2020,Subject Interests and the Trust cannot guaranteein several ways. For example, Hilcorp could be required to increase its capital expenditures for the Subject Interests, the market could suffer a decreased demand for natural gas and oil production, or various agencies could limit the Subject Interests’ ability to produce natural gas or oil. The Trust is unable to determine what, if any, the effects of such actions will have on the Subject Interests’ ability to produce natural gas and oil, and Hilcorp’s ability to pay royalty income to the Trust.
Hilcorp previously informed the Trust that the prices willit does not continue to be negatively affectedbelieve that recent actions undertaken by the aforementioned events.Biden administration to curtail future leases for natural gas and oil drilling on federally owned land will affect the Subject Interests because as currently enacted, they do not affect current leases.
Results of Operations – for the Three and Six Months Ended June 30, 20202021 and 20192020
Royalty Income
Royalty Income consists of monthly net proceeds attributable to the Royalty. Royalty Income for the three and six months ended June 30, 20202021 and 20192020 was determined as shown in the following table:
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Gross proceeds from the Subject Interests: | ||||||||||||||||||||||||||||||||
Natural Gas | $ | 6,324,510 | $ | 12,123,999 | $ | 20,166,376 | $ | 30,762,506 | $ | 20,812,942 | $ | 6,324,510 | $ | 35,876,234 | $ | 20,166,376 | ||||||||||||||||
Oil | 258,592 | 809,378 | 644,237 | 1,252,584 | 536,116 | 258,592 | 856,454 | 644,237 | ||||||||||||||||||||||||
Other | (512,080 | )(1) | 507,000 | (2) | (104,047 | )(1) | 1,014,000 | (2) | 300,000 | (1) | (512,080 | )(2) | 546,647 | (3) | (104,047 | )(2) | ||||||||||||||||
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Total | 6,071,022 | 13,440,377 | 20,706,566 | 33,029,090 | 21,649,058 | (4) | 6,071,022 | 37,279,335 | (4)(5) | 20,706,566 | ||||||||||||||||||||||
Production Costs: | ||||||||||||||||||||||||||||||||
Severance tax – gas | 555,245 | 1,309,692 | 1,415,842 | 3,443,009 | 3,746,330 | 555,245 | 4,519,524 | 1,415,842 | ||||||||||||||||||||||||
Severance tax – oil | 24,206 | 67,671 | 55,918 | 104,452 | 101,862 | 24,206 | 146,865 | 55,918 | ||||||||||||||||||||||||
Lease operating expense and property tax | 5,764,655 | 6,786,230 | 12,695,269 | 14,749,195 | 7,550,359 | 5,764,655 | 11,191,102 | (6) | 12,695,269 | |||||||||||||||||||||||
Capital expenditures | 5,434 | 2,237,344 | 60,179 | 2,960,241 | 162,789 | 5,434 | 384,676 | 60,179 | ||||||||||||||||||||||||
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Total | 6,349,540 | 10,400,937 | 14,227,208 | 21,256,897 | 11,561,340 | 6,349,540 | 16,242,167 | 14,227,208 | ||||||||||||||||||||||||
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Production costs in excess of gross proceeds | 1,572,814 | 171,500 | 1,572,814 | 171,500 | — | 1,572,814 | — | 1,572,814 | ||||||||||||||||||||||||
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Net profits | 1,294,296 | 3,210,940 | 8,052,172 | 11,943,693 | 10,087,718 | 1,294,296 | 21,037,168 | 8,052,172 | ||||||||||||||||||||||||
Net overriding royalty interest | 75 | % | 75 | % | 75 | % | 75 | % | 75 | % | 75 | % | 75 | % | 75 | % | ||||||||||||||||
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Royalty Income | $ | 970,722 | $ | 2,408,205 | $ | 6,039,129 | $ | 8,957,770 | $ | 7,565,789 | $ | 970,722 | $ | 15,777,876 | $ | 6,039,129 | ||||||||||||||||
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| (1) | Estimated revenue from non-operated properties. |
| (2) | Estimated revenue from non-operated properties and granted audit exceptions with interest as a result of the 2018 audit, negatively offset by Hilcorp’s true-ups and adjustments of non-operated revenue from the February 2019 through July 2019 and October 2019 through November 2019 production months. |
Estimated revenue from non-operated |
| (4) | Due to Hilcorp’s transition to a new accounting system, the February, March and April production months were based on estimated production, estimated prices and estimated costs. |
| (5) | Due to Hilcorp’s transition to a new accounting system, the January 2021 production month was based on estimated production, actual realized prices and estimated costs. |
| (6) | Includes a $0.5 million credit by Hilcorp to the Trust due to the settlement of certain audit exceptions related to compressor maintenance services. |
The Royalty Income distributed to the Trust for both the three and six months ended June 30, 20202021 was lowerhigher than that distributed during the same period of 20192020. The increase was due primarily to lowerhigher natural gas prices and a slight decreasedue to the spike in natural gas production.prices during the February 2021 winter storms (February production month corresponds to the Trust’s April distribution month). The average natural gas price decreasedincreased from $1.74 per Mcf for the three months ended June 30, 2019 to $0.92 per Mcf for the three months ended June 30, 2020 to $2.77 per Mcf for the three months ended June 30, 2021, and the average natural gas price decreasedincreased from $2.14$1.47 Mcf for the six months ended June 30, 2020 to $2.71 per Mcf for the six months ended June 30, 2019 to $1.47 per Mcf for the six months ended June 30, 2020.2021. Production of natural gas from the Subject Interests decreased slightlyincreased from 6,970,358 Mcf for the three months ended June 30, 2019 to 6,871,522 Mcf for the three months ended June 30, 2020 and from 14,364,272to 7,517,056 Mcf for the sixthree months ended June 30, 2019 to2021, and decreased slightly from 13,735,521 Mcf for the six months ended June 30, 2020.2020 to 13,220,906 Mcf for the six months ended June 30, 2021.
Gross Proceeds from Subject Interests. Total Gross proceeds decreasedincreased approximately $7.4$15.6 million, or 55%257%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,2020, and decreasedincreased approximately $12$16.6 million, or 37%80%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. The decreaseincrease was due primarily to lowerhigher natural gas prices and a slight decrease in natural gas production from the Subject Interests along with negative adjustments to “Other” income in 2020 due to Hilcorp’s true-ups and adjustments of non-operated revenue from production months in 2019.
Capital Expenditures. Capital expenditures by Hilcorp decreasedincreased approximately $2.2 million, or 100%,$157,000 for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,2020, and decreasedincreased approximately $2.9 million, or 98%,$$324,000 for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. The decreaseincrease was primarily due to difference in timing in the payment of these expenditures along with capital expenditures attributable to Hilcorp’s reduced capital spending plan, which the Trust announced on February 24, 2020 (the “2020 Plan”). The 2020 Plan calls for total capital spending of $0.3 million for fiscal 2020.prior year’s budget.
Severance Taxes. Aggregate severance taxes decreasedincreased approximately $0.8$3.3 million or 58%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,2020, and decreasedincreased approximately $2.0$3.2 million or 59%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. The decreaseincrease in severance taxes was primarily attributable to lower revenue in 2020.higher gross proceeds during those periods. Severance taxes represented approximately 9.5%18% of gross proceeds for the three months ended June 30, 2020,2021, compared to approximately 10% for the same period of 2019. Severances2020. Severance taxes represented approximately 7%13% of gross proceeds for the six months ended June 30, 2020,2021, compared to approximately 11%7% for the same period of 2019.2020. The decreasedistributions in percentage was primarily attributable to Hilcorp’s 2020 included true-ups of natural gasprevious production months and oilthat resulted in fluctuations of severance tax during the six months ended June 30, 2020.taxes.
Lease Operating Expenses and Property Taxes. Lease operating expenses and property taxes decreased $1.0increased $1.8 million, or 15%31%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,2020. The increase is primarily due to estimated costs used in 2021 as well as increased activity at the Subject Interests by Hilcorp. Lease operating expenses and property taxes decreased $2.1$1.5 million, or 14%12%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. The decrease is primarily due to a $0.5 million credit by Hilcorp to the Trust in the first quarter of 2021 for the settlement of certain audit exceptions related to compressor maintenance services along with lower first quarter compression and well servicing expenses in addition to decreases across other cost categories due to Hilcorp’s efforts to reduce operating costs in the current price environment.
Monthly lease operating expenses of the Subject Interests, including property taxes, for the three months ended June 30, 20202021 averaged approximately $1.9$2.5 million, compared to $2.3$1.9 million for the three months ended June 30, 2019.2020. Monthly lease operating expenses of the Subject Interests, including property taxes, for the six months ended June 30, 20202021 averaged $2.1$1.9 million, compared to an average of $2.5$2.1 million for the six months ended June 30, 2019.2020.
Distributable Income
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Royalty Income | $ | 970,722 | $ | 2,408,205 | $ | 6,039,129 | $ | 8,957,770 | ||||||||
Interest Income | 2,052 | 9,664 | 5,613 | 17,714 | ||||||||||||
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Total Income | 972,774 | 2,417,869 | 6,044,742 | 8,975,484 | ||||||||||||
Expenses – General and administrative | (494,672 | ) | (506,109 | ) | (948,379 | ) | (1,048,887 | ) | ||||||||
Decrease in Cash Reserves | 107,142 | 84,943 | 107,142 | 84,943 | ||||||||||||
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Distributable Income | 585,244 | 1,996,703 | 5,203,505 | 8,011,540 | ||||||||||||
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Distributable Income per Unit (46,608,796 Units) | $ | 0.012557 | $ | 0.042840 | $ | 0.111642 | $ | 0.171890 | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
Royalty income | $ | 7,565,789 | $ | 970,722 | $ | 15,777,876 | $ | 6,039,129 | ||||||||
Interest income | 357 | 2,052 | 770 | 5,613 | ||||||||||||
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Total income | 7,566,146 | 972,774 | 15,778,646 | 6,044,742 | ||||||||||||
General and administrative expenses | (400,138 | ) | (494,672 | ) | (861,395 | ) | (948,379 | ) | ||||||||
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Decrease in cash reserves | — | 107,142 | — | 107,142 | ||||||||||||
Distributable income | $ | 7,166,008 | $ | 585,244 | $ | 14,917,251 | $ | 5,203,505 | ||||||||
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Distributable income per Unit (46,608,796 Units) | $ | 0.153748 | $ | 0.012557 | $ | 0.320052 | $ | 0.111642 | ||||||||
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Distributable Income. Distributable Income decreasedincreased by approximately $1.4$6.6 million, or 71%1,124%, to $7.2 million ($0.153748 per Unit) for the three months ended June 30, 2021 from $0.6 million ($0.012557 per Unit) for the three months ended June 30, 2020 from $2.02020. Distributable Income increased by approximately $9.7 million, or 187%, to $14.9 million ($0.0428400.320052 per Unit) for the threesix months ended June 30, 2019. Distributable Income decreased by approximately $2.8 million, or 35%, to2021 from $5.2 million ($0.111642 per Unit) for the six months ended June 30, 2020 from $8.0 million ($0.171890 per Unit) for the six months ended June 30, 2019.2020. The decreaseincrease in Distributable Income was primarily attributable to lowerhigher natural gas prices and lowerdue to the spike in natural gas production in 2020 offset by lower production costs, resulting in lower Royalty income.prices during the February 2021 winter storms. There was no distributable incomeDistributable Income in June 2020 due primarily to decreased natural gas prices and natural gas production along with true-ups of prior periods by Hilcorp, resulting in gross excess production costs applicable to the Subject Interests of $1.6 million, with 75%, or $1.2 million (net) allocated to the Trust.
Based on 46,608,796 Units outstanding, the per-Unit distributions during the second quarter of 20202021 were as follows:
April | $ | 0.008296 | $ | 0.095794 | ||||
May | 0.004261 | 0.040339 | ||||||
June | 0.000000 | 0.017615 | ||||||
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Quarter Total | $ | 0.012557 | $ | 0.153748 | ||||
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Interest Income. Interest income was lower for the three and six monthsmonth period ended June 30, 20202021 as compared to the same periodsperiod in 20192020 due primarily to lower yields on short-term investments and lower cash balances.investments.
General & Administrative Expenses. General and administrative expenses decreased approximately 2%19%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,2020, and decreased approximately $0.1 million, or 10%9%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. The decrease was primarily attributable to differences in timing in the receipt and payment of certain expenses by the Trust.
Cash Reserves. The Trust withdrew approximately $0.1 million from its established $1.0 million cash reserve in June 2020 to pay the Trust’s general and administrative expenses due to the Trust receiving no Royalty Income in June 2020. Total cash reserves were approximately $0.9$1.0 million as of June 30, 2020.2021. The primary purpose of the cash reserves is to have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses. The Trustee will replenish the cash reserve once it begins to receive Royalty Income from Hilcorp. The Trustee does not anticipate any increases to the cash reserve above a level of $1.0 million in 2020,2021, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.
Liquidity and Capital Resources
The Trust’s principal source of liquidity and capital is Royalty Income. The Trust’s distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses. The Trust is not liable for any production costs or liabilities attributable to the Royalty. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. If the Trustee determines that the Trust does not have sufficient funds to pay the Trust’s liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be made to Unit Holders until such borrowings are repaid in full. The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote of 75% of all of the Units outstanding; however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period without the consent of the Unit Holders.
In the event the Trust does not receive sufficient net cash payments from Hilcorp, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trust’s operating expenses until its cash reserve can be replenished from net cash payments from Hilcorp.
The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas. Hilcorp further informed the Trust that it does not anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the impact of the Covid-19 pandemic on Hilcorp and the Subject Interests is still unknown and any such impact could result in actual results being different than Hilcorp’s expectations. Specifically, the Trust has noted that prices have declined, which may lead to further reductions from expected negative true-ups for reported estimates from earlier periods in 2020.
Oil and Natural Gas Production
The natural gas volumes reported to the Trust by Hilcorp are based on plant residue gas volumes plus equivalent volumes for natural gas liquids. Hilcorp converts one barrel of natural gas liquids to six Mcf of natural gas using industry standards.
Royalty Income for the three months ended June 30, 20202021 is associated with oil and natural gas production during February through April 20202021 from the Subject Interests. Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended June 30, 20202021 and 20192020 were as follows:
| For the Three Months Ended June 30, | For the Three Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Natural Gas (Mcf) | Oil and Condensate (Bbls) | Natural Gas (Mcf) | Oil and Condensate (Bbls) | Natural Gas (Mcf) | Oil and Condensate (Bbls) | Natural Gas (Mcf) | Oil and Condensate (Bbls) | |||||||||||||||||||||||||
Production | ||||||||||||||||||||||||||||||||
Subject Interests | 6,871,522 | 11,896 | 6,970,358 | 16,750 | 7,517,056 | 10,596 | 6,871,522 | 11,896 | ||||||||||||||||||||||||
Royalty | (1,373,556 | )1 | 5,721 | 739,859 | 9,997 | 2,765,560 | 6,509 | (1,373,556 | )1 | 5,721 | ||||||||||||||||||||||
Average Price (per Mcf/Bbl) | $ | 0.92 | $ | 21.74 | $ | 1.74 | $ | 48.32 | $ | 2.77 | $ | 50.59 | $ | 0.92 | $ | 21.74 | ||||||||||||||||
| 1 | The oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost. The allocation formula for natural gas produced a negative volume due to excess production costs for natural gas in June 2020. Gross excess production costs applicable to the Subject Interests were $1.6 million as of June 30, 2020, with 75%, or $1.2 million (net) allocated to the Trust. |
Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the six months ended June 30, 20202021 and 20192020 were as follows:
| For the Six Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Natural Gas (Mcf) | Oil and Condensate (Bbls) | Natural Gas (Mcf) | Oil and Condensate (Bbls) | Natural Gas (Mcf) | Oil and Condensate (Bbls) | Natural Gas (Mcf) | Oil and Condensate (Bbls) | |||||||||||||||||||||||||
Production | ||||||||||||||||||||||||||||||||
Subject Interests | 13,735,521 | 19,322 | 14,364,272 | 27,571 | 13,220,906 | 19,462 | 13,735,521 | 19,322 | ||||||||||||||||||||||||
Royalty | 1,005,118 | 10,163 | 3,363,909 | 15,234 | 5,875,120 | 12,219 | 1,005,118 | 10,163 | ||||||||||||||||||||||||
Average Price (per Mcf/Bbl) | $ | 1.47 | $ | 33.34 | $ | 2.14 | $ | 45.43 | $ | 2.71 | $ | 44.01 | $ | 1.47 | $ | 33.34 | ||||||||||||||||
The Trust recognizes production during the month in which the related net proceeds attributable to the Royalty are paid to the Trust. Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current calendar year. Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oil and natural gas, respectively, by the prices received by Hilcorp for sales of such volumes from the Subject Interests, taking into consideration production taxes attributable to the Subject Interests. Because the oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including Hilcorp’s capital expenditures and the timing of Hilcorp’s true-ups of prior reported estimated oil and natural gas production data, the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty. Future true-ups will impact future royalty proceeds, but will not change the reported amounts due to the accounting basis used.
The fluctuations in natural gas production that have occurred during the three-month period ended June 30, 20202021 and 2019,2020, respectively, generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve. Also, production from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin. As noted above, oil and natural gas sales attributable to the Royalty are based on an allocation formula dependent on many factors, including oil and natural gas prices and capital expenditures.
Marketing
There were no changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and processing of production during the three months ended June 30, 2020.2021.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
For a discussion of significant accounting policies and estimates that impact the Trust’s financial statements, see Part I, Item 1. Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8. Financial Statements and Supplemental Data contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Information Regarding Forward-Looking Information
Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may involve or may concern, among other things, the amount and variability in capital expenditures by Hilcorp, drilling activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trust’s activities, the differences between Hilcorp’s estimated revenue and actual revenue, and regulatory matters. Such forward-looking statements generally are accompanied by words such as “may,” “will,” “based,” “estimate,” “expect,” “predict,” “project,” “anticipate,” “believe,” “plan,” “intend,” or other words that convey the uncertainty of future events or outcomes. Such statements are based on certain assumptions of BBVA USA, the Trustee, and by Hilcorp, with respect to future events; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Hilcorp; and involve risks and uncertainties. However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and Hilcorp in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the
expected consequences to or effects on Hilcorp’s business and the Trust. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements, except as required by applicable law.
Hilcorp Information
As a holder of a net overriding royalty interest, the Trust’s reporting of financial information is reliant upon Hilcorp to accurately and timely report information regarding Hilcorp and its affiliates; the Subject Interests, including the operations, acreage, well and completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling plans, drilling results and leasehold terms related to the Subject Interests, and factors and circumstances that have or may affect the foregoing. See Part I, Item 4. Controls and Procedures.
The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas. Hilcorp further informed the Trust that it does not anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the impact of the Covid-19 pandemic on Hilcorp and the Subject Interests is still unknown and any such impact could result in actual results being different than Hilcorp’s expectations. Specifically, the Trust has noted that prices have declined, which may lead to further reductions from expected negative true-ups for reported estimates from earlier periods in 2020.
For information on the Trust’s exposure to market risk, please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
None.
| Item 4. | Controls and Procedures. |
The Trust maintains a system of internal disclosure controls and procedures that is designed to ensure that the information required to be disclosed in the Trust’s filings under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In its evaluation of its disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by Hilcorp, the owner of the properties. Consequently, the Trust’s ability to disclose timely and accurately disclose relevant information in its periodic reports is dependent upon Hilcorp’s timely delivery of accurate oil and gas revenue and production cost information and, therefore, the net proceeds owed to the Trust.
The Net Overriding Royalty Conveyance (the “Conveyance”) that transferred the royalty to the Trust obligates Hilcorp to provide the Trust with certain financial and operational information, including information concerning calculations of net proceeds owed to the Trust. Once the Trust receives the financial information from Hilcorp, the Trust engages independent public accountants, compliance auditors, attorneys and petroleum engineers in order to assist the Trustee to ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic reports. These outside professionals advise the Trustee in its review and compilation of this information for inclusion in this Quarterly Report on Form 10-Q and the other periodic reports provided by the Trust to the SEC.
Despite the Trust’s internal controls and procedures ensuring the accuracy of the Trust’s reporting based upon the financial information received from Hilcorp, Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates and reversing and rebooking periods during fiscal 2017, 2018, and 2019 are still occurring and being reported in 2020.2021. In addition, Hilcorp informed the Trust that due to Hilcorp’s transition to a new accounting system, the February, March and April 2021 production months were based on estimated production, estimated prices and estimated costs utilizing historical trends. Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustment based upon prior months’ true-ups and rebooking, plus interest. Hilcorp notified the Trust that as of the date of this Quarterly Report, Hilcorp anticipates that it will still need to adjust the previously reported production and financial information associated with operated wells for the production months of January 20182021 through December 2018,April 2021 for operated wells and November 2020 through April 2021 for non-operated wells and, therefore, possibly adjust future distributions of net proceeds to reflect such rebooking and true-ups plus interest on such amounts (as required by the Conveyance) to the extent an under- or over-payment has occurred.
The Trustee has evaluated the Trust’s internal disclosure controls and procedures as of June 30, 2020,2021, and has concluded that such disclosure controls and procedures are effective, at the “reasonable assurance” level (as such term is used in Rule 13a-15(f) of the Exchange Act), to ensure that material information received from Hilcorp is gathered on a timely basis to be included in the Trust’s periodic reports and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Additionally, during the three months ended June 30, 2020,2021, there were no changes in the Trust’s internal control over financial reporting (as such term is used in Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. Because the Trust does not have, nor does the Indenture provide for, officers, a board of directors or an independent audit committee, the Trustee has reviewed neither the Trust’s disclosure controls and procedures nor the Trust’s internal control over financial reporting in concert with management, a board of directors or an independent audit committee.
OTHER INFORMATION
| Item 1. | Legal Proceedings. |
None.
| Item 1A. | Risk Factors. |
Not required.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| Item 3. | Defaults Upon Senior Securities. |
None.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
| Item 5. | Other Information. |
None.
| Item 6. | Exhibits. |
| * | A copy of this exhibit is available to any Unit Holder (free of charge) upon written request to the Trustee, BBVA USA, 2200 Post Oak Blvd., Floor 18, Houston, Texas 77056. |
| ** | Filed herewith. |
| *** | Furnished herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BBVA USA, AS TRUSTEE OF THE SAN JUAN BASIN ROYALTY TRUST | ||
| By: | /s/ Joshua R. Peterson | |
Joshua R. Peterson Head of Trust Real Assets & Mineral Resources and Senior Vice President | ||
Date: August 10, 202016, 2021
(The Trust has no directors or executive officers.)