UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

ORor

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

For the transition period from                 to                 

Commission file numberFile Number 1-10243

 

 

BP PRUDHOE BAY ROYALTY TRUST

(Exact Name of Registrant as Specified in Itsits Charter)

 

 

 

Delaware 13-6943724
(State or Other Jurisdictionother jurisdiction of
Incorporationincorporation or Organization)organization)		 (I.R.S. Employer
Identification No.)
The Bank of New York Mellon Trust
Company, N.A., 601 Travis Street, Houston, TX		77002
(Address of Principal Executive Offices)(Zip Code)

The Bank of New York Mellon Trust Company, N.A.

601 Travis Street, Floor 16

Houston, Texas

(Address of principal executive offices)

77002

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (713) 483-6020

(Registrant’s telephone number, including area code)

 

 

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 of Beneficial InterestBPTNew York Stock Exchange

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 (17 CFR § 232.405)(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “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 Exchange 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 of Beneficial InterestBPTNew York Stock Exchange

As of August 10, 2020,May 7, 2021, 21,400,000 Units of Beneficial Interest were outstanding.

 

 

 

PART I

FINANCIAL INFORMATIONTABLE OF CONTENTS

 

Page

PART I—FINANCIAL INFORMATION

1

    Item 1.

Financial Statements1

    Item 2.

Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.9

    Item 3.

Quantitative and Qualitative Disclosures About Market Risk.13

    Item 4.

Controls and Procedures.13

PART II —OTHER INFORMATION

14

    Item 1.

Legal Proceedings14

    Item 1A.

Risk Factors14

    Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.14

    Item 3.

Defaults Upon Senior Securities.14

    Item 4.

Mine Safety Disclosures.14

    Item 5.

Other Information.14

    Item 6.

Exhibits.14

1

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

BP Prudhoe Bay Royalty Trust

StatementsStatement of Assets, Liabilities and Trust Corpus

(Prepared on a modified cash basis)

(Unaudited)

(In thousands, except unit data)

 

   June 30,
2020		   December 31,
2019		 

Assets

    

Cash and cash equivalents (Note 2)

  $479   $1,151 
  

 

 

   

 

 

 

Total assets

  $479   $1,151 
  

 

 

   

 

 

 

Liabilities and Trust Corpus

    

Accrued expenses

  $288   $253 

Royalty deposit liability (Note 8)

   67    —   

Trust corpus (40,000,000 units of beneficial interest authorized, 21,400,000 units issued and outstanding)

   124    898 
  

 

 

   

 

 

 

Total liabilities and trust corpus

  $479   $1,151 
  

 

 

   

 

 

 
   March 31,
2021		  December 31,
2020		 

Assets

   

Cash and cash equivalents (Note 3)

  $191  $266 
  

 

 

  

 

 

 

Total Assets

  $191  $266 
  

 

 

  

 

 

 

Liabilities and Trust Corpus

   

Accrued expenses

  $713  $139 

Royalty deposit liability (Note 7)

   69   68 
  

 

 

  

 

 

 

Total Liabilities

   782   207 

Trust Corpus (deficit) (40,000,000 units of beneficial interest authorized, 21,400,000 units issued and outstanding)

   (591)   59 
  

 

 

  

 

 

 

Total Liabilities and Trust Corpus (Deficit)

  $191  $266 
  

 

 

  

 

 

 

See accompanying notes to financial statements (unaudited).

1

BP Prudhoe Bay Royalty Trust

Statements of Cash Earnings and Distributions

(Prepared on a modified cash basis)

(Unaudited)

(In thousands, except unit data)

 

  Three Months Ended
June 30,		 Six Months Ended
June 30,		   Three Months Ended
March 31,		 
  2020 2019 2020 2019   2021 2020 

Royalty revenues

  $(67)  $7,748  $9,270  $29,507   $—    $9,337 

Interest income

   4  10  11  19 

Interest income (expense)

   (1)   7 

Less: Trust administrative expenses

   (689)  (312)  (942)  (638)    (75)   (253) 
  

 

  

 

  

 

  

 

   

 

  

 

 

Cash earnings (loss)

  $(752)  $7,446  $8,339  $28,888   $(76)  $9,091 
  

 

  

 

  

 

  

 

   

 

  

 

 

Cash distributions

  $—    $7,381  $9,078  $28,844   $—    $9,078 
  

 

  

 

  

 

  

 

   

 

  

 

 

Cash distributions per unit

  $—    $0.3449  $0.4242  $1.3479   $—    $0.4242 
  

 

  

 

  

 

  

 

   

 

  

 

 

Units outstanding

   21,400,000  21,400,000  21,400,000  21,400,000    21,400,000   21,400,000 
  

 

  

 

  

 

  

 

   

 

  

 

 

See accompanying notes to financial statements (unaudited).

 

2

BP Prudhoe Bay Royalty Trust

Statements of Changes in Trust Corpus

(Prepared on a modified cash basis)

(Unaudited)

(In thousands)

 

   Three Months Ended
June 30,		  Six Months Ended
June 30,		 
   2020  2019  2020  2019 

Trust corpus at beginning of period

  $475  $698  $898  $692 

Cash earnings (loss)

   (752)   7,446   8,339   28,888 

Decrease (increase) in accrued expenses

   401   (29)   (35)   (2) 

Cash distributions

   —     (7,381)   (9,078)   (28,844) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Trust corpus at end of period

  $124  $734  $124  $734 
  

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended
March 31,		 
   2021  2020 

Trust Corpus at beginning of period

  $59  $898 

Cash earnings (loss)

   (76)   9,091 

Increase in accrued expenses

   (574)   (436) 

Cash distributions

   —     (9,078) 
  

 

 

  

 

 

 

Trust Corpus (deficit) at end of period

  $(591)  $475 
  

 

 

  

 

 

 

See accompanying notes to financial statements (unaudited).

 

3

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements (Unaudited)

(Prepared on a modified cash basis)

June 30, 2020March 31, 2021

 

(1)

Formation of the Trust and Organization

BP Prudhoe Bay Royalty Trust (the “Trust”), a grantor trust, was created as a Delaware business trust pursuant to a Trust Agreement dated February 28, 1989 (the “Trust Agreement”), among The Standard Oil Company (“Standard Oil”), BP Exploration (Alaska) Inc. (“BP Alaska”) (now known as Hilcorp North Slope, LLC (“HNS”)1), The Bank of New York Mellon, as trustee, and BNY Mellon Trust of Delaware (successor to The Bank of New York (Delaware)), as co-trustee. On December 15, 2010, The Bank of New York Mellon resigned as trustee and was replaced by The Bank of New York Mellon Trust Company, N.A., a national banking association, as successor trustee (the “Trustee”). At the time of the formation of the Trust, Standard Oil and BP Alaska were indirect, wholly-owned subsidiaries of BP p.l.c. (“BP”).

On February 28, 1989, Standard Oil conveyed an overriding royalty interest (the “Royalty Interest”) to the Trust. The Trust was formed for the sole purpose of owning and administering the Royalty Interest. The Royalty Interest represents the right to receive a per barrel royalty (the “Per Barrel Royalty”) of 16.4246% on the lesser of (a) the first 90,000 barrels of the average actual daily net production of oil and condensate per quarter or (b) the average actual daily net production of oil and condensate per quarter from HNS’sBP Alaska’s working interests as of February 28, 1989 in the Prudhoe Bay field situated on the North Slope of Alaska (the “1989 Working Interests”). Trust Unit holders are subject to the risk that production will be interrupted or discontinued or fall, on average, below 90,000 barrels per day in any quarter. BP has guaranteed the performance of BP Alaska of its payment obligations with respect to the Royalty Interest and that guarantee remains in place with respect to the performance of HNS of such payment obligations.

Effective January 1, 2000, BP Alaska and all other Prudhoe Bay working interest owners cross-assigned interests in the Prudhoe Bay field pursuant to the Prudhoe Bay Unit Alignment Agreement. BP Alaska retained all rights, obligations, and liabilities associated with the Trust.

The trustees of the Trust are The Bank of New York Mellon Trust Company, N.A.N.A and BNY Mellon Trust of Delaware, a Delaware banking corporation. BNY Mellon Trust of Delaware serves as co-trustee in order to satisfy certain requirements of the Delaware Statutory Trust Act. The Bank of New York Mellon Trust Company, N.A. alone is able to exercise the rights and powers granted to the Trustee in the Trust Agreement.

1

As noted in the Trust’s Current Report on Form 8-K dated July 6, 2020, on July 1, 2020, BP p.l.c. (“BP”) announced the completion of the “upstream” part of its planned $5.6 billion sale of assets and operations in Alaska to Hilcorp Alaska, including the transfer of leases in the Prudhoe Bay oil field and Point Thomson gas field. The completed portion of the sale also includes the previously announced acquisition by Hilcorp Alaska of BP’s interest in BP Alaska, that owned all of BP’s upstream oil and gas interest in Alaska (including oil and gas leases in the Prudhoe Bay field). The sale involving BP’s “midstream” assets, including its interest in the Trans Alaska Pipeline System (TAPS), remains subject to Alaska state regulatory review, which is expected to be completed in September 2020. On July 1, 2020, BP Alaska, a Delaware corporation, converted to a Delaware limited liability company and changed its name to “Hilcorp North Slope, LLC”.

4

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements

(Prepared on a modified cash basis)

June 30, 2020

The Per Barrel Royalty in effect for any day is equal to the price of West Texas Intermediate crude oil (the “WTI Price”) for that day less scheduled Chargeable Costs (adjusted for inflation) and Production Taxes (based on statutory rates then in effect)existence).

The Trust is passive, with the Trustee having only such powers as are necessary for the collection and distribution of revenues, the payment of Trust liabilities, and the protection of the Royalty Interest. The Trustee, subject to certain conditions, is obligated to establish cash reserves and borrow funds to pay liabilities of the Trust when they become due. The Trustee may sell Trust properties only (a) as authorized by a vote of the Trust Unit holders, (b) when necessary to provide for the payment of specific liabilities of the Trust then due (subject to certain conditions) or (c) upon termination of the Trust. Each Trust Unit issued and outstanding represents an equal undivided share of beneficial interest in the Trust. Royalty payments are received by the Trust and distributed to Trust Unit holders, net of Trust expenses, in the month succeeding the end of each calendar quarter. The Trust will terminate (i) upon a vote of Trust unit holders of not less than 60% of the outstanding Trust Units, or (ii) at such time the net revenues from the Royalty Interest for two successive years are less than $1,000,000 per year (unless the net revenues during such period are materially and adversely affected by certain events constituting “Force Majeure”, as defined in theevents).

4

BP Prudhoe Bay Royalty Trust Agreement).2

Notes to Financial Statements (Unaudited)

(Prepared on a modified cash basis)

March 31, 2021

 

(2)

Impact of COVID-19 Pandemic and Liquidity

A novel strain of coronavirus, SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), surfaced in late 2019 and has since spread around the world. In March 2020, the World Health Organization characterized the disease caused by the virus—COVID-19—as a pandemic. Due to the economic impacts of the COVID-19 pandemic, the markets have experienced a decline in oil prices in response to oil demand concerns further exacerbated by the price war among members of the Organization of Petroleum Exporting Countries and other non-OPEC producer nations during the first quarter 2020 and global storage considerations. There wasAs a result of lower oil prices, the Trust received no royalty payment received bypayments for the Trustquarters ended March 31, June 30, September 30, and December 31, 2020 and, as discussed in Note 8 to these financial statements, did not receive a royalty payment in April 20202021 for the quarter ended March 31, 2020 or in July 2020 for the quarter ended June 30, 2020.2021. If oil prices remain depressed and at current levels, which are below the “break-even” WTI price of $54.34 in order$60.72 per barrel necessary for the Trust to receive a positive Per Barrel Royalty with respect to a particular day’s production, the Trust’s operations will continue to be adversely impacted.

2

“Force Majeure” is defined in Section 9.01 of the Trust Agreement to mean the following:

(i) acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders or restraints of any kind of the government of the United States or of the State of Alaska or any of their departments, agencies, political subdivisions or officials, or any civil or military authority; insurrections; civil disturbances; riots; epidemics [emphasis added]; sabotage; war, whether or not declared; landslides; lightning; earthquakes; fires; hurricanes; winds; tornados; storms; droughts; floods; arrests; restraint of government and people; explosions; breakage, malfunction or accident to facilities, machinery, transmission pipes or canals; partial or entire failure of utilities; shortages of labor, materials, supplies or transportation; or

(ii) any other cause, circumstance or event (other than depletion of the petroleum reservoir in which the Trust has an interest) not reasonably within the control of the Company.

5

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements

(Prepared on a modified cash basis)

June 30, 2020

In order to ensure that the Trust has the ability to pay future expenses, the Trust established a cash reserve account, which is intended to be sufficient to pay approximately one year’s current and expected liabilities and expenses of the Trust. If the Trust does not receive additional royalty payments during the remainder of 2020 or in the first quarter of 2021, the Trust’s ability to meet its obligations would be adversely affected, which raises substantial doubt about its ability to continue as a going concern. As noted above, as a general matter, the Trust is expected to terminate at such time the net revenues from the Royalty Interest for two successive years are less than $1,000,000 per year.

In order to ensure that the Trust has the ability to pay future expenses, the Trust established a cash reserve account in July 1999. The cash reserve account was funded from periodic deductions from the royalty payments. These deductions were intended to result in an available cash balance in the cash reserve account that would be sufficient to pay approximately one year’s current and expected liabilities and expenses of the Trust.

As previously disclosed, the Trust has not received any royalty payments attributable to the four quarters of 2020 and the first quarter 2021. As a result, the Trust has not been able to make a quarterly deduction to replenish the funds on deposit in the cash reserve account since January of 2020.

Pursuant to Section 7.02 of the Trust Agreement, the Trustee, on December 18, 2020, notified HNS in writing that available assets in the trust created under the Trust Agreement were insufficient to pay current expenses that had been incurred on behalf of the Trust relating to the Trustee’s administration of the Trust. Pursuant to the indemnity provisions contained in Section 7.02 of the Trust Agreement, the Trustee made a demand for indemnity and reimbursement of expenses upon HNS in the amount of $537,835, representing the Trust’s unpaid expenses through December 18, 2020. HNS paid the requested funds to the Trustee on December 28, 2020, and the Trustee applied those funds to the Trust’s unpaid expenses in accordance with the Trust Agreement.

Although HNS agreed to make an indemnity payment to reimburse the Trust for current administrative expenses incurred by the Trustee on behalf of the Trust through December 18, 2020, there can be no assurance that HNS will make any further indemnification payments and in such case, the Trustee will continue to review its options under the Trust Agreement and Support Agreement, including obtaining a loan for the Trust, selling a portion of the Trust assets, or selling all of the Trust assets, or enforcing such indemnity, if necessary.

The Trustee anticipates incurring significant additional expenses relating to continued compliance with the Trust’s Securities and Exchange Act and tax reporting requirements through the remainder of fiscal year 2021 and subsequent periods. As disclosed in the Trust’s report on Form 10-K for the year ended December 31, 2020, the Trustee is continuing to explore with HNS the options available to the Trust under the Trust Agreement to address the Trust’s continuing operational funding shortfall. These steps may include obtaining a loan for the Trust, selling a portion of the Trust assets, or selling all of the Trust assets and taking the necessary steps to terminate the Trust. In addition, the Trustee intends to increase the amount of the cash reserve, in the event that royalty payments are available to the Trust in the future. There can be no assurance that the Trust will be able to secure a loan or arrange for the sale of Trust assets, or that any loan or sale will be on terms that are acceptable to the Trust.

The uncertainty surrounding the receipt of future royalties necessary for the Trust to avoid termination, coupled with the Trust’s current liquidity position, raises substantial doubt regarding the Trust’s ability to continue as a going concern.

5

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements (Unaudited)

(Prepared on a modified cash basis)

March 31, 2021

 

(3)

Basis of Accounting

The financial statements of the Trust are prepared on a modified cash basis and reflect the Trust’s assets, liabilities, corpus, earnings, and distributions, as follows:

 

 a.

Revenues are recorded when received (generally within 15 days of the end of the preceding quarter) and distributions to Trust Unit holders are recorded when paid.

 

 b.

Trust expenses (which include accounting, engineering, legal, and other professional fees, trustees’ fees, and out-of-pocket expenses) are recorded on an accrual basis.

 

 c.

Cash reserves may be established by the Trustee for certain contingencies that would not be recorded under generally accepted accounting principles.

While these statements differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America, the modified cash basis of reporting revenues and distributions is considered to be the most meaningful because quarterly distributions to the Trust Unit holders are based on net cash receipts. TheseThe accompanying modified cash basis financial statements are unaudited but, in the opinion of the Trustee, includecontain all adjustments necessary to present fairly the assets, liabilities and corpus of the Trust as of June 30, 2020March 31, 2021 and December 31, 2019,2020, and the modified cash basis of cash earnings and distributions and changes in Trust corpus for the three and six-monththree-month periods ended June 30, 2020March 31, 2021 and 2019.2020. The adjustments are of a normal recurring nature and are, in the opinion of the Trustee, necessary to fairly present the results of operations.

As of June 30, 2020March 31, 2021 and December 31, 2019,2020 cash equivalents which represent the cash reserve consist of a Morgan Stanley ILF Treasury Fund and U.S. Treasury Bills with original maturities of ninety days or less.

6

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements

(Prepared on a modified cash basis)

June 30, 2020

Estimates and assumptions are required to be made regarding assets, liabilities and changes in Trust corpus resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ, and the differencesdifference could be material.

These unaudited financial statements should be read in conjunction with the financial statements and related notes in the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020. The cash earnings and distributions for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

(4)

Royalty Interest

At inception in February 1989, the Royalty Interest held by the Trust had a carrying value of $535,000,000. In accordance with generally accepted accounting principles, the Trust amortized the value of the Royalty Interest based on the units of production method. Such amortization was charged directly to the Trust corpus, and did not affect cash earnings. In addition, the Trust periodically evaluated impairment of the Royalty Interest by comparing the undiscounted cash flows expected to be realized from the Royalty Interest to the carrying value, pursuant to the Financial Accounting Standards Board Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment. If the expected future undiscounted cash flows were less than the carrying value, the Trust recognized impairment losses for the difference between the carrying value and the estimated fair value of the Royalty Interest. By December 31, 2010, the Trust had recognized accumulated amortization of $359,473,000 and aggregate impairment write-downs of $175,527,000 reducing the carrying value of the Royalty Interest to zero.

 

6

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements (Unaudited)

(Prepared on a modified cash basis)

March 31, 2021

(5)

Income Taxes

The Trust files its federal tax return as a grantor trust subject to the provisions of subpart E of Part I of Subchapter J of the Internal Revenue Code of 1986, as amended, rather than as an association taxable as a corporation. The Trust Unitunit holders are treated as the owners of Trust income and corpus, and the entire taxable income of the Trust will be reported by the Trust Unitunit holders on their respective tax returns.

If the Trust were determined to be an association taxable as a corporation, it would be treated as an entity taxable as a corporation on the taxable income from the Royalty Interest, the Trust Unitunit holders would be treated as shareholders, and distributions to Trust Unitunit holders would not be deductible in computing the Trust’s tax liability as an association.

7

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements

(Prepared on a modified cash basis)

June 30, 2020

 

(6)

Alaska Oil and Gas Production Tax

On April 14, 2013, Alaska’s legislature passed an oil-tax reform bill amending Alaska’s oil and gas production tax statutes, AS 43.55.10 et seq.seq (the “Production Tax Statutes”) with the aim of encouraging oil production and investment in Alaska’s oil industry. On May 21, 2013, the Governor of Alaska signed the bill into law as chapter 10 of the 2013 Session lawsLaws of Alaska (the “Act”). Among significant changes, the Act eliminated the monthly “progressivity” tax rate implemented by certain amendments to the Production Tax Statutes in 2006 and 2007, increased the base rate from 25% to 35% and added a stair-step per-barrel tax credit for oil production. This tax credit is based on the gross value at the point of production per barrel of taxable oil and may not reduce a producer’s tax liability below the “minimum tax” (which is a percentage, ranging from zero to 4%, of the gross value at the point of production of a producer’s taxable production during the calendar year based on the average price per barrel for Alaska North Slope crude oil for sale on the United States West Coast for the year) under the Production Tax Statutes. These changes became effective on January 1, 2014.

On January 15, 2014, the Trustee executed a letter agreement with BP Alaska dated January 15, 2014 (the “2014 Letter Agreement”) regarding the implementation of the Act with respect to the Trust. Pursuant to the 2014 Letter Agreement, Production Taxes for the Trust’s Royalty Production will equal the tax for the relevant quarter, minus the allowable monthly stair-step per-barrel tax credits for the Royalty Production during that quarter. If there is a “minimum tax”-related limitation on the amount of the stair-step per-barrel tax credits that could otherwise be claimed for any quarter during the year, any difference between that limitation as preliminarily determined on a quarterly basis and the actual limitation for the entire year will be reflected in the payment to the Trust for the first quarter Royalty Production in the following year.

On July 6, 2015, BP Alaska and the Trustee signed a letter agreement (the “2014 Letter Agreement Amendment”) amending the 2014 Letter Agreement to provide that if there is a “minimum tax”-related limitation on the amount of the stair-step per-barrel tax credits that could otherwise be claimed for any quarter during the year, any difference between that limitation as preliminarily determined on a quarterly basis and the actual limitation for the entire year will be reflected in the payment to the Trust for the fourth quarter Royalty Production payment for such year rather than in the payment to the Trust for the first quarter Royalty Production in the following year.

7

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements (Unaudited)

(Prepared on a modified cash basis)

March 31, 2021

 

(7)

Royalty Revenue Adjustments

Certain of the royalty payments received by the Trust in 2020 and 2019 were adjusted by BP Alaska (as predecessor to HNS) to compensate for underpayments or overpaymentoverpayments of the royalties due with respect to the quarters ended prior to the dates of such payments. Average net production of crude oil and condensate from the proved reserves allocated to the Trust was less than 90,000 barrels per day during certain quarters. Royalty payments by BP Alaska with respect to those quarters were based on estimates by BP Alaska of production levels because actual data was not available by the date on which payments were required to be made to the Trust. Subsequent recalculation by BP Alaska of the royalty payments due based on actual production data resulted in the payment adjustments shown in the table below (in thousands).

 

8

BP Prudhoe Bay Royalty Trust

Notes to Financial Statements

(Prepared on a modified cash basis)

June 30, 2020

   Payments Received
(In Thousands)		 
   Jan. 2020   Apr. 2019   Jan. 2019 

Royalty payment as calculated

  $9,321   $7,732   $21,361 

Adjustment for previous quarter’s underpayment (overpayment), plus accrued interest

   16    16    398 
  

 

 

   

 

 

   

 

 

 

Total payment received

  $9,337   $7,748   $21,759 
  

 

 

   

 

 

   

 

 

 
Payments
Received
Jan. 2020

Royalty payment as calculated

$9,321

Adjustment for previous quarter’s underpayment (overpayment), plus accrued interest

16

 

(8)

Subsequent Event

Total payment received

$9,337

There was no royalty payment received by the Trust in July 2020 for the quarter ended June 30, 2020. Moreover, as noted in Note 8 of Notes to Financial Statements (Unaudited) in Part I, Item 1, “Financial Statements” of the Trust’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, it was determined in that, dueDue to a slight over estimation of the December 2019’s2019 production volume included in the 2019 fourth quarter royalty payment calculation, there was an overpayment by BP Alaska of $66,899,$68,541, including interest through June 30, 2020,March 31, 2021, with respect to the 2019 fourth quarter royalty payment. This overpayment would be recovered by HNS in one or more future quarters with a sufficient positive royalty payment. In the event that there are no future, or insufficient, positive payments, it is expected that HNS would explore other options it may have under the Trust Agreement, the Conveyance or otherwise to recover the amount of the 2019 fourth quarter overpayment.

As provided in

(8)

Subsequent Event

There was no royalty payment received by the Trust Agreement of the Trust, the quarterly royalty payment by HNS to the Trust is the sum of the individual revenues attributed to the Trust as calculated each day during the quarter. The amount of such revenues is obtained by multiplying Royalty Production for each day in the calendar quarter by the Per Barrel Royalty for that day. Pursuant to the Trust Agreement, the Per Barrel Royalty for any day is the WTI PriceApril 2021 for the day lessquarter ended March 31, 2021.

Subsequent events have been evaluated through the sumdate of (i) Chargeable Costs multiplied by the Cost Adjustment Factor and (ii) Production Taxes. As discussed in Item 1A “RISK FACTORS”, of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019, on January 1, 2020, the “break-even” WTI price (the price at which all taxes and prescribed deductions are equal to the WTI price) for the Trust to receive a positive Per Barrel Royalty with respect to a particular day’s production was $54.34. As a result of the decline i oil prices during the first and second quarters of 202, the daily WTI price was below the “break-even” point for each day of the quarters after January 23, 2020, resulting in a negative value for the payment calculation for the quarter. However, as provided in the Trust Agreement, the payment with respect to the Royalty Interest for any calendar quarter may not be less than zero.this report.

 

98

Item 2.

Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary StatementIntroduction

ThisBP Prudhoe Bay Royalty Trust (the “Trust”), a grantor trust, was created as a Delaware business trust pursuant to a Trust Agreement dated February 28, 1989 (the “Trust Agreement”), among The Standard Oil Company (“Standard Oil”), BP Exploration (Alaska) Inc. (“BP Alaska”), The Bank of New York Mellon, as trustee, and BNY Mellon Trust of Delaware (successor to The Bank of New York (Delaware)), as co-trustee. On December 15, 2010, The Bank of New York Mellon resigned as trustee and was replaced by The Bank of New York Mellon Trust Company, N.A., a national banking association, as successor trustee (the “Trustee”). At the time of formation of the Trust, Standard Oil and BP Alaska were indirect, wholly-owned subsidiaries of BP p.l.c. (“BP”).

On August 27, 2019, BP announced that it had agreed to sell BP Alaska and its other assets and operations in Alaska for total consideration of $5.6 billion to Hilcorp Alaska, LLC and its affiliates, which are affiliates of Houston-based Hilcorp Energy Company (collectively “Hilcorp”). On June 30, 2020, Hilcorp completed its acquisition of BP’s entire upstream business in Alaska, including BP’s interest in BP Alaska, which owned all of BP’s upstream oil and gas interest in Alaska (including oil and gas leases in the Prudhoe Bay field), and on December 18, 2020, an affiliate of Hilcorp completed its acquisition of BP’s midstream business in Alaska. On July 1, 2020, BP Alaska, a Delaware corporation, converted to a Delaware limited liability company and changed its name to Hilcorp North Slope, LLC, a wholly-owned subsidiary of Hilcorp Alaska, LLC. Hilcorp and its affiliates employ approximately 1,400 full-time employees in Alaska. Under the terms of the Trust Agreement, HNS is the successor to BP Alaska. For purposes of this Quarterly Report on Form 10-Q, “HNS” means (i) at all times prior to June 30, 2020, BP Alaska, and (ii) at all times after and including June 30, 2020, Hilcorp North Slope, LLC (formerly known as BP Alaska).

The information in this report contains forward lookingrelating to the Prudhoe Bay Unit, the calculation of royalty payments and certain other matters has been furnished to the Trustee by HNS, and the Trustee is entitled to rely on the accuracy of such information in accordance with the Trust Agreement.

Forward-Looking Statements

Various sections of this report contain forward-looking statements (that is, statements anticipating future events or conditions and not statements of historical fact) 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 (the “Exchange Act”). Words such as “anticipate,” “expect,” “believe,” “intend,” “plan” or “project,” and “should,” “would,” “could,” “potentially,” “possibly” or “may,” and other words that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements in this report are subject to a number of risks and uncertainties beyond the control of the Trustee. Currently, the most significant of suchThese risks and uncertainties relate to the COVID-19 pandemic, which has caused a global slowdown of economic activity (including decrease in demand for a broad variety of goods and services), disruptions in global supply chains and significant volatility and disruption of financial markets. The severity, magnitude and duration of the impact that the COVID-19 pandemic will continue to have on the world economy are uncertain, rapidly changing and difficult to predict. Among other risks and uncertainties are:include such matters as future changes in oil prices;prices, oil production levels;levels, production charges and costs, economic activity;activity, domestic and international political events and developments;developments, legislation and regulation;regulation, COVID-19, and certain changes in expenses of the Trust.

The actual results, performance and prospects of the Trust could differ materially from those expressed or implied by forward-looking statements. Descriptions of materialsome of the risks known to the Trustee that could affect the future performance of the Trust appear in Item 1A, “Risk Factors,“RISK FACTORS,” of the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 (the “2019“2020 Annual Report”Report”). There may be additional risks of which the Trustee is unaware or which are currently deemed immaterial.

In the light of these risks, uncertainties and assumptions, you should not rely unduly on any forward-looking statements. Forward-looking events and outcomes discussed in the 20192020 Annual Report and in this report may not occur or may transpireturn out differently. The Trustee undertakes no obligation to update forward-looking statements after the date of this report, except as required by law, and all such forward-looking statements in this report are qualified in their entirety by the preceding cautionary statements.

Liquidity and Capital Resources

The Trust is a passive entity. The Trustee’s activities are limited to collecting and distributing the revenues from the Royalty Interest and paying liabilities and expenses of the Trust. Generally, the Trust has no source of liquidity and no capital resources other than the revenue attributable to the Royalty Interest that it receives from time to time. (SeeSee the discussion under “THE ROYALTY INTEREST” in Part I, Item 1 of the 20192020 Annual Report for a description of the calculation of the Per Barrel Royalty, and the discussion under “THE PRUDHOE BAY UNIT AND FIELD – Reserve Estimates” in Part I, Item 1 of the 20192020 Annual Report for information concerning the estimated future net revenues of the Trust.) However, the Trust Agreement gives the Trustee has a limited power to borrow, establish a cash reserve, or dispose of all or part of the Trust Estate,property under limited circumstances pursuant to the terms of the Trust Agreement.circumstances. See the discussion under “THE TRUST”TRUST – Sales of Royalty Interest; Borrowings and Reserves” in Part I, Item 1 of the 20192020 Annual Report.

 

109

SinceIn July 1999, the Trustee has maintainedestablished a $1,000,000 cash reserve to provide liquidity to the Trust during any future periods in which the Trust does not receive a distribution. As noted under “THE TRUST – Sales of Royalty Interest; Borrowingsdistribution from HNS. The Trustee draws funds from the cash reserve account during any quarter in which the quarterly distribution received by the Trust does not exceed the liabilities and Reserves” in Part I, Item Iexpenses of the 2019 Annual Report, onTrust, and replenishes the reserve from future quarterly distributions, if any. The Trustee may increase or decrease the targeted 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 Unit holders. The Trustee anticipates that it will keep this cash reserve program in place, to the extent that it receives a distribution from HNS, until termination of the Trust. In December 19, 2018, the Trust issued a press release to announceannounced that the Trustee had determined to gradually increase the Trustee’s existing cash reserve for the payment of future expenses and liabilities of the Trust, as permitted by the Trust Agreement. Commencing with the distribution to Unit holders payable in April 2019, the Trustee intends to withholdbegan withholding the greater of $33,750 or 0.17% of the funds otherwise available for distribution each quarter to gradually increase existing cash reserves by a total of approximately $270,000.3 The Trustee may increase or decrease the targeted 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 Unit holders. reserves.

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 Unit holders, together with interest earned on the funds.

The Trustee will draw funds from the cash reserve account during any quarter in which the quarterly distribution received by the Trust does not exceed the liabilities and expenses of the Trust, and will replenish the reserve from future quarterly distributions, if any.4 The Trustee anticipated keeping this cash reserve program in place until termination of the Trust. However, if there are no future positive quarterly distributions, funds in the cash reserve account are not expected to be sufficient to last until the technical termination of the Trust, which, unless terminated sooner upon a vote of holders of not less than 60% of the outstanding Trust Units, would occur at such time as net revenues from the Royalty Interest for two successive years are less than $1,000,000 per year, subject to the exception noted above in footnote 2.

Amounts Any amounts set aside for the cash reserve are invested by the Trustee in U.S. government or agency securities secured by the full faith and credit of the United States, or mutual funds investing in such securities.

A novel strain of coronavirus, SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), surfaced in late 2019 and has since spread around the world. In March 2020, the World Health Organization characterized the disease caused by the virus—COVID-19—as a pandemic. Due to the economic impacts of the COVID-19 pandemic, the markets experienced a decline in oil prices in response to oil demand concerns and global storage considerations. As a result of, among other things, lower oil prices and the increase in Chargeable Costs, the Trust received no royalty payments for the quarters ended March 31, June 30, September 30, and December 31, 2020. As discussed under “CERTAIN TAX CONSIDERATIONS” in Part I, Item 1Note 8 to the financial statements, the Trust did not receive a Royalty Payment for the first quarter of 2021, because during such period, oil prices were below the “break-even” price of West Texas Intermediate crude oil (the “WTI Price”) of $60.72 needed for the Trust to receive a positive Per Barrel Royalty with respect to a particular day’s production (such price, the “Break-Even Price”).

Because the Trust did not receive any royalty payments attributable to the four quarters during 2020 or the first quarter of 2021, the Trust has been unable to make a quarterly deduction to replenish the funds on deposit in the cash reserve account since the January 2020 distribution made for royalty payments attributed to the fourth quarter of 2019. In December 2020, the remaining funds on deposit in the cash reserve were insufficient to pay the Trustee’s fees and administrative fees, expenses, charges and costs, including accounting, engineering, legal, financial advisory, and other professional fees incurred in connection with the Trust (“AdministrativeExpenses”). Subsequently, the Trustee made a demand for indemnity and reimbursement of expenses upon HNS in accordance with the Trust Agreement in the amount of $537,835, representing the Trust’s current unpaid expenses through December 18, 2020. On December 28, 2020, HNS paid the requested funds to the Trustee and the Trustee applied those funds to the Trust’s current unpaid Administrative Expenses in accordance with the Trust Agreement. Although HNS agreed to make an indemnity payment to reimburse the Trust for current Administrative Expenses incurred by the Trustee on behalf of the 2019 Annual Report, amounts received byTrust through December 18, 2020, there can be no assurance that HNS will make any further indemnification payments and in such case, the Trustee will continue to review its options under the Trust as quarterly distributions are income toAgreement and Support Agreement, including obtaining a loan for the holdersTrust, selling a portion of the Units (as are any earnings on investmentTrust assets, selling all of the Trust assets, or enforcing such indemnity, if necessary.

At March 31, 2021, the cash balance of the cash reserve) and must be reported by the holdersreserve account was $191,000. The Trust has incurred additional Administrative Expenses in excess of the Units,cash balance of the reserve fund and anticipates incurring additional Administrative Expenses. The Trust is exploring the options available under the Trust Agreement to address the Trust’s continuing operational shortfall. These steps may include obtaining a loan for the Trust, selling a portion of the Trust assets, or selling all of the Trust assets and taking the necessary steps to terminate the Trust. The Trustee has engaged a firm with expertise in the oil industry to provide financial advisory, investment banking, valuation, and consulting services to assist the Trust in identifying a potential lender or potential purchaser of Trust assets, and to advise the Trust with respect to the timing of its potential termination pursuant to the Trust Agreement. These efforts are ongoing and there can be no assurance that the Trust will be able to secure a loan or arrange for the sale of Trust assets, or if it can, that the loan or sale will be on terms that are acceptable to the Trust.

Although the Trust did not receive Royalty Payments attributable to any quarter in 2020 or the first quarter of 2021, in part due to the decline in WTI prices, the increase in Chargeable Costs and the payment of Production Taxes, coupled with decreased Royalty Production from the Prudhoe Bay Field, significantly reduce the likelihood of any material Royalty Payments to Unit holders for the remainder of 2021 or in subsequent periods.

The Trustee expects to retain in reserve future Royalty Payments, if any, made in fiscal year 2021 or subsequent periods for future Administrative Expenses of at least $1,270,000 and potentially more in an amount sufficient to pay Trust fees and expenses for at least one year plus anticipated expenses in connection with the termination of the Trust. In order to comply with the Trust Agreement’s termination process and requirements, the Trust is likely to incur significant additional expenditures. Accordingly, even if the Trust receives royalty revenues during 2021 or 2022, it is unlikely that Unit holders will receive Royalty Payments on outstanding Units during such amounts are used byperiods, since the TrusteeTrust would need to repay borrowings orwithhold sufficient funds from such Royalty Payments to replenish the cash reserve and ensure there are sufficient funds on hand to provide for an orderly termination of Trust in accordance with its terms, before distributing any funds to the Unit Holders.

10

If the Trust does not received byreceive any additional royalty revenues in 2021 or thereafter, or obtain alternative funding, the holders ofTrust’s ability to meet its obligations would be adversely affected, which raises substantial doubt about its ability to continue as a going concern. As a general matter, the Units.Trust is expected to terminate at such time the net revenues from the Royalty Interest for two successive years are less than $1,000,000 per year.

Results of Operations

Relatively modest changes in oil prices significantly affect the Trust’s revenues and results of operations. Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects the members of OPEC and other producing countries. The effect of changing economic and political conditions on the demand for and supply offor energy throughout the world and future prices of oil cannot be accurately projected.

3

Because no royalty payment was received by the Trust in April 2020 for the quarter ended March 31, 2020 or in July 2020 for the quarter ended June 30, no funds were added to the cash reserve with respect to those quarters.

4

The Trustee drew on the cash reserves to pay expenses of the Trust for the first and second quarters of 2020.

11

Under the terms of the Conveyance of the Royalty Interest to the Trust, the Per Barrel Royalty for any day is the WTI Price for the day less the sum of (i) Chargeable Costs multiplied by the Cost Adjustment Factor and (ii) Production Taxes. The narrative under the captions “THE TRUST – Trust Property” and “THE ROYALTY INTEREST” in the 2019 Annual Report explains the meanings of the terms “Conveyance,” “Royalty Interest,” “Per Barrel Royalty,” “WTI Price, “Chargeable Costs” and “Cost Adjustment Factor” and should be read in conjunction with this report.

Royalty revenues are generally received on the Quarterly Record Date (generally the fifteenth day of the monthmonth) following the end of the calendar quarter in which the related Royalty Production occurred (the “Quarterly Record Date”).occurred. The Trustee, to the extent possible, pays all accrued expenses of the Trust for each quarter on eachthe Quarterly Record Date fromon which the royalty paymentrevenues for the quarter are received. Revenues and Trust expenses presented inFor the statement of cash earnings and distributions, revenues and Trust expenses are recorded on a modified cash basis and, as a result, royalty revenues and distributions shownto Unit holders in such statements for the three-month and six-monthperiods ended June 30,March 31, 2021 and 2020, and 2019, respectively, are attributable to BP Alaska’sHNS’s operations during the three and six-monththree-month periods ended MarchDecember 31, 2020 and 2019, respectively.

The following table summarizes the factors which determined the Per Barrel Royalties used to calculate the payments received by the Trust in January and April 2020 and 2019, respectively (see Note 1 of Notes to Financial Statements (Unaudited) in Part I, Item 1). The information in the table has been furnished by BP Alaska.

Data for Quarter

“Royalty
Payment
in Month

Is Based on
Data for
Quarter
Ended		Average
WTI
Price		Chargeable
Costs		Cost
Adjustment
Factor		Adjusted
Chargeable
Costs		Average
Production
Taxes		Average
Per Barrel
Royalty		Average
Net
Production
(mb/d)

Apr 2020

Jan 2020


03/31/2020

12/31/2019


$

46.35

55.20


$

$

26.50

23.75



1.992

1.981


$

$

52.78

47.04


$

$

1.54

1.96


$

$

0.00

8.02



77.4

77.0


Apr 2019

Jan 2019


03/31/2019

12/31/2018


$

$

54.87

58.82


$

$

23.75

20.00



1.946

1.941


$

$

46.23

38.81


$

$

1.88

2.04


$

$

6.77

17.94



77.4

78.7


“Royalty Production”Production” for each day in a calendar quarter is 16.4246% of the first 90,000 barrels of the actual average daily net production of oil and condensate for the quarter from the proved reserves allocated to the Trust. During periods when BP Alaska’sWhen HNS’s average daily net production of oil and condensate per quarter from those reservesthe 1989 Working Interests exceeds 90,000 barrels a day, the principal factors affecting the Trust’s revenues and distributions to Unit holders are changes in WTI Prices, scheduled annual increases in Chargeable Costs, changes in the Consumer Price Index and changes in Production Taxes. Since 2006, BP Alaska has undertaken a program of field wide infrastructure renewal, pipeline replacementHowever, it is likely that the Trust’s revenues in future periods also will be affected by increases and well mechanical improvements. As a consequence of these activities and the required downtime, and the naturaldecreases in production declines from the Prudhoe Bay field, Royalty Production from the proved reserves1989 Working Interests. HNS’s net production of oil and condensate allocated to the Trust from proved reserves was less than 90,000 barrels per day on an annual basis in 2017,during 2018, 2019 and 2019. BP Alaska anticipates2020. The Trustee has been advised that itsHNS expects that average net production of oil and condensateallocated to the Trust from thosethe proved reserves will be belowless than 90,000 barrels pera day on an annual basis in most future years.

During 2020 and the first quarter of 2021, WTI Prices were below the level necessary for the Trust to receive a Per Barrel Royalty. Whether the Trust will be entitled to future distributions during the remainder of 2021 will depend on, among other things, WTI Prices prevailing during the remainder of the year.

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On January 1, 2021, the “break-even” WTI price (the price at which all taxes and prescribed deductions are equal to the WTI price) for the Trust to receive a positive Per Barrel Royalty with respect to a particular day’s production was $60.72. From the beginning of the first quarter of 2021 through May 7, 2021, the closing WTI crude oil spot price fluctuated between a high of $66.09 per barrel on March 5, 2021, and a low of $47.62 per barrel on January 4, 2021. The closing WTI crude oil spot price on May 7, 2021, was $64.90 per barrel. The quarterly royalty payment by HNS to the Trust is the sum of the individual revenues attributed to the Trust as calculated each day during the quarter. Any single calculation of a calendar day will not reflect the value of the dividend paid to the Trust for the quarter, nor will it reflect the estimated future value of the Trust. However, if a low oil price environment should occur for a protracted period, quarterly royalty payments are likely to be insignificant or be zero.

BP AlaskaHNS estimates Royalty Production from the reserves allocated to the Trust1989 Working Interests for purposes of calculating quarterly royalty payments to the Trust because complete actual field production data for the preceding calendar quarter generally is not available by the Quarterly Record Date. To the extent that average net production from those reservesthe 1989 Working Interests is below 90,000 barrels per day, in any quarter, recalculationcalculation by BP AlaskaHNS of actual Royalty Production data may result in revisions of prior Royalty Production estimates. Revisions by BP AlaskaHNS of its Royalty Production calculations cause BP Alaska to adjust itsmay result in quarterly royalty payments to the Trust to compensateby HNS which reflect adjustments for overpayments or underpayments of royalties with respect to prior quarters. Such adjustments, if material, may adversely affect certain Unit holders who buy or sell Units between the Quarterly Record Dates for the Quarterly Distributions affected.

The Quarterly Distributions received by the Trust from BP AlaskaHNS in January 2020 and 2019 were adjusted by BP AlaskaHNS to compensate for the underpayment of royalties due to the Trust with respect to the quartersquarter ended December 31, 2019 and December 31, 2018, respectively.2019. See Note 7 of Notes to Financial Statements (Unaudited) in Item 1. Because the statements of cash earnings and distributions of the Trust are prepared on a modified cash basis, royalty revenues for the three and six-month periodsthree-month period ended June 30,March 31, 2020, and 2019 reflect the amount of the adjustments with respect to the earlier fiscal periods.period.

The following table summarizes the factors which determined the Per Barrel Royalty used to calculate the payment received by the Trust in January 2020 and the lack of a payment in January 2021. See Note 1 of Notes to Financial Statements (Unaudited) in Part I, Item 1. The information in the table has been furnished to the Trust by HNS.

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    Data for Quarter 

Royalty

Payment in

Month

  Based on Data
for Quarter
Ended		   Average
WTI Price		   Chargeable
Costs		   Cost
Adjustment
Factor		   Adjusted
Chargeable
Costs		   Average
Production
Taxes		   Average Per
Barrel
Royalty		  Average Net
Production
(mb/d)		 

Jan 2021

   12/31/2020   $42.66   $26.50    2.00   $53.10   $1.39   $(11.84)   74.8 

Jan 2020

   12/31/2019   $55.22   $23.75    1.981   $47.04   $1.96   $8.02   77.0 

Three Months Ended June 30, 2020March 31, 2021 Compared to

Three Months Ended June 30, 2019March 31, 2020

Royalty Production

Trust royalty revenues received duringfor the second quarter of the fiscal year arethree-month period ended March 31, 2021, is based on the Royalty Production during the firstfourth quarter of the fiscal year.year ended December 31, 2020. The first of the following two tablestable shows the changes frombetween the firstfourth quarter ofended December 31, 2020 and the fourth quarter ended December 31, 2019, to the first quarter of 2020 in the factors whichthat determined the Per Barrel Royalties used to calculate the royalty paymentspayment received by the Trust during the second quarters of 2019 and 2020. The second of the two tables shows the resulting changes in the Trust’s revenues and distributionsquarter ended March 31, 2020, and the changes inlack of a royalty payment for the Trust’s expenses from the second quarter of 2019 to the second quarter of 2020.three-months ended March 31, 2021.

 

      Increase
(decrease)		           Increase (decrease)   
  3 Months
Ended
3/31/2020		   Amount   Percent   3 Months
Ended
3/31/2019		   Three Months
Ended
12/31/2020		   Amount   Percent Three Months
Ended
12/31/2019		 

Average WTI Price

  $46.35   ($8.52)    (15.5)   $54.87   $42.66   ($14.36)    (25.18%)  $57.02 

Adjusted Chargeable Costs

  $52.78   $6.55    14.2   $46.23   $53.10   $6.06    12.88%  $47.04 

Average Production Taxes

  $1.54   ($0.34)    (18.1)   $1.88   $1.39   ($0.57)    (29.08%)  $1.96 

Average Per Barrel Royalty

  $0.00   ($6.77)    (100.0)   $6.77   ($11.84)   ($19.86)    (247.63%)  $8.02 

Average net production (mb/d)

   77.4   ($0.0)    0.0    77.4 

Average Net Production (mb/d)

   74.8    (2.2)    (2.86%)   77.0 

The impact ofaverage WTI price for the COVID-19 pandemic on the world economy led to a sudden decrease in oil prices in the firstfourth quarter of 2020 withwas down 25.2% compared to the average WTI price falling more than 15 percent compared to the levels for the first quarter of 2019. As a result of this decrease and the 14 percent2019 fourth quarter. The increase in Adjusted Chargeablethe Consumer Price Index used to calculate the Cost that resulted fromAdjustment Factor, as well as the scheduled annual increase in Chargeable Costs from $23.75 in calendar 2019 to $26.50 in calendar 2020, resulted in a 12.9% percent increase in Adjusted Chargeable Costs during the total dailythree months ended December 31, 2020. The 247.6% decrease in the average Per Barrel Royalty for the quarter resulted inperiod to a negative value. However, asvalue resulted primarily from the decrease in WTI prices and the increase in Adjusted Chargeable Costs. As provided in the Trust Agreement, the payment with respect to the Royalty Interest for any calendar quarter may not be less than zero. See Note 8 of Notes to Financial Statements (Unaudited) in Item 1 above. The 18 percent decrease in

13

Production Taxes for the quarter reflects the decrease in WTI price for the period. Production Taxes remained low for the quarter because, as has occurred in each quarter since the second quarter of 2015, Production Taxes were calculated on the basis of the minimum tax under the Act and the 2014 Letter Agreement. See Note 56 of Notes to Financial Statements (Unaudited) in Item 1 above.

The average net production from the 1989 Working Interest for the two reporting periods remained identical, notwithstandingdeclined by 2.9%. This decrease was due to the naturally declining production rate from the Prudhoe Bay field and variance in the impacts of planned and unplanned downtime during the two reporting periods.field.

The following table shows the changes to the Trust’s revenues received and distributions paid during the second quarters of 2019 andquarter ended March 31, 2021, as compared to the same period in 2020 resulting from the factors in the table above, as well as changes forin the Trust’s administrative expenses.Administrative Expenses.

 

      Increase (decrease)           Increase (decrease)   
  3 Months
Ended
6/30/2020		   Amount   Percent   3 Months
Ended
6/30/2019		   Three Months
Ended
3/31/2021		   Amount   Percent Three Months
Ended
3/31/2020		 
  (Dollar amounts in thousands)   (Dollar amounts in thousands) 

Royalty revenues

  $(67)   ($7,815)    (100.9)   $7,748    —     ($9,337)    (100.00%)  $9,337 

Cash earnings (loss)

  ($752)   ($8,198)    (110.1)   $7,446   $(76)   ($9,167)    (100.84%)  $9,091 

Cash distributions

  $0   ($7,381)    (100.0)   $7,381    —     ($9,078)    (100.00%)  $9,078 

Administrative expenses

  $689   $377    120.8   $312 

Administrative Expenses (paid)

  $75   ($178)    (70.36%)  $253 

The period-to-period  decreases decreases in royalty revenues, cash earnings and cash distributions are due mainly to the lowersubstantial decline in the average Per Barrel Royalty as a result of the decline in average WTI Prices that prevailed in the first quarter of 2020 compared to the first quarter of 2019, as well asPrice, the increase in Adjusted Chargeable Costs noted and the decline

12

in connection with preceding table.average net production that prevailed during the three months ended March 31, 2021, compared to the same period in 2020. The decrease in Administrative Expenses paid during the three months ended March 31, 2021, reflects the near depletion of the cash reserve. As a result, the Trust has limited cash on hand to pay accrued Administrative Expenses. Accrued Administrative Expenses for the three months ended March 31, 2021, were $713,000, an increase of $574,000 from the prior year’s quarter. The increase in administrativeaccrued Administrative Expenses relates to the Trust’s efforts to address the diminished amount of cash available to fund expenses reflects higher overall costsand lack of suppliesroyalty revenues attributable to the 2020 calendar year and servicesfirst quarter of 2021, as well as an increase in professional fees, and timing differences in accruals of expenses.

Six Months Ended June 30, 2020 Compared to

Six Months Ended June 30, 2019

Trust royalty revenues received during the first six months of the fiscal year are based on Royalty Production during the first quarter of the fiscal year and the fourth quarter of the preceding fiscal year. The first of the following two tables shows the changes from the six months ended March 31, 2019 to the six months ended March 31, 2020 in the factors which determined the Per Barrel Royalties used to calculate the royalty payments received during the six months ended June 30 of the respective years. The second of the two tables shows the resulting changes in the Trust’s revenues and distributions and the changes in the Trust’s expenses from the first six months of 2019 to the first six months of 2020.

14

       Increase (decrease)     
   6 Months
Ended
3/31/2020		   Amount   Percent   6 Months
Ended
3/31/2019		 

Average WTI Price

  $50.78   ($6.09)    (10.7)   $56.87 

Adjusted Chargeable Costs

  $49.91   $7.39   17.4   $42.52 

Average Production Taxes

  $1.75   ($0.17)    (8.9)   $1.92 

Average Per Barrel Royalty

  $8.02   ($4.34)    (35.1)   $12.36 

Average net production (mb/d)

   77.2    (0.9)    (1.2)    78.1 

The sharp decrease in the average Per Barrel RoyaltyTrust corpus is primarily due to the increase in accrued expenses for the period resulted from the negative value of the total daily Per Barrel Royalty for the first quarter of 2020. This negative value was due to the significant decrease in WTI prices and the large increase in Adjusted Chargeable Costs for the first quarterlack of 2020. As noted above, the increase in Adjusted Chargeable Costs resulted from the scheduled increase in Chargeable Costs from $23.75 in 2019 to $26.50 in 2020.

The modest decline in the average net production from the 1989 Working Interest was due to the naturally declining production rate from the Prudhoe Bay field and variance in the impacts of planned and unplanned downtime during the two reporting periods.

The following table shows the changes to the Trust’s revenues received and distributions paid during the first and second quarters of 2019 and 2020 resulting from the factors in the table above, as well as changes for the Trust’s administrative expenses.royalty revenues.

 

       Increase (decrease)     
   6 Months
Ended
6/30/2020		   Amount   Percent   6 Months
Ended
6/30/2019		 
   (Dollar amounts in thousands) 

Royalty revenues

  $9,270   ($20,237)    (68.6)   $29,507 

Cash earnings

  $8,339   ($20,549)    (71.1)   $28,888 

Cash distributions

  $9,078   ($19,766)    (68.5)   $28,844 

Administrative expenses

  $942   $304    47.6   $638 

The period-to-period decreases in royalty revenues, cash earnings and cash distributions are due mainly to the lower average WTI Prices that prevailed in the six month period ended March 31, 2020 compared to the six month period ended March 31, 2019, as well as the increase in Adjusted Chargeable Costs in the first quarter of 2020. The increase in administrative expenses reflects higher overall costs of supplies and services and timing differences in accruals of expenses.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The Trust is a passive entity and except for the Trust’s ability to borrow money as necessary to pay liabilities of the Trust that cannot be paid out of cash on hand, the Trust is prohibited from engaging in borrowing transactions. The Trust periodically holds short-term investments acquired with funds held by the Trust pending distribution to Unit holders and funds held in reserve for the payment of Trust expenses and liabilities. Because of the short-term nature of these investments and limitations on the types of investments which may be held by the Trust, the Trust is not subject to any material interest rate risk. The Trust does not engage in transactions in foreign currencies which could expose the Trust or Unit holders to any foreign currency related market risk or invest in derivative financial instruments. It has no foreign operations and holds no long-term debt instruments.

 

15

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Bank of New York Mellon Trust Company, N.A., as Trustee has disclosure controlsof the Trust, is responsible for establishing and procedures (asmaintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(e) and Rule 15d-15(e)13a-15(f) promulgated under the Exchange Act) that areAct. The Trust’s internal control over financial reporting is defined as a process designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. These controls and procedures include but are not limited to controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is accumulated and communicated to the responsible trust officerssupervision of the Trustee to allow timely decisionsprovide reasonable assurance regarding required disclosure.

Under the termsreliability of financial reporting and the preparation of the Trust Agreement and the Conveyance, HNS, beginningTrust’s financial statements for external reporting purposes in accordance with the third quartermodified cash basis of 2020, has, significant disclosureaccounting. The Trust’s internal control over financial reporting includes policies and procedures that pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with the modified cash basis of accounting, and that receipts and expenditures are being made only in accordance with authorizations of the Trustee; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Trust’s assets that could have a material effect on the Trust’s financial statements.

Because of its inherent limitations, internal control over financial reporting obligationsmay not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the Trust. BP Alaska was, and HNS will be, required to providerisk that controls may become inadequate because of changes in conditions, or that the Trust such information concerning the Royalty Interest as the Trustee may need and to which BP Alaska had, and HNS has, access to permit the Trust to comply with any reporting or disclosure obligationsdegree of the Trust pursuant to applicable law and the requirements of any stock exchange on which the Units are listed. These reporting obligations include furnishing the Trust a report by February 28 of each year containing all information of a nature, of a standard and in a form consistentcompliance with the requirements of the SEC respecting the inclusion of reserve and reserve valuation information in filings under the Exchange Act and with applicable accounting rules. The report is required to set forth, among other things, HNS’s, as applicable, estimates of future net cash flows from proved reserves attributable to the Royalty Interest, the discounted present value of such proved reserves and the assumptions utilized in arriving at the estimates contained in the report.

In addition, the Conveyance gives the Trust certain rights to inspect the books and records of BP Alaska and discuss the affairs, finances and accounts of HNS relating to the 1989 Working Interests with representatives of HNS; it also requires HNS to provide the Trust with such other information as the Trusteepolicies or procedures may reasonably request from time to time and to which HNS has access.deteriorate.

The Trustee’s disclosure controls and procedures include ensuring that the Trust receives the information and reports that HNS is required to furnish to the Trust on a timely basis, that the appropriate responsible personnel of the Trustee examine such information and reports, and that information requested from and provided by HNS is included in the reports that the Trust files or submits under the Exchange Act.

As of the end of the period covered by this report, the trust officers of the Trustee responsible for the administration of the Trust conducted an evaluation of the effectiveness of the Trust’s disclosure controls and procedures. Theirinternal control over financial reporting based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Based on the Trustee’s evaluation considered, among other things,under the COSO criteria, the Trustee concluded that the Trust Agreement and the Conveyance impose enforceable legal obligations on HNS, and that HNS has provided the information required by those agreements and other information requested by the Trustee from time to time on a timely basis. The trust officers concluded the Trust’s disclosure controls and procedures are effective.5internal control over financial reporting was effective as of March 31, 2021.

5

All information for purposes of this quarterly report was provided to the Trustee by BP Alaska prior to the completion of BP’s sale of the “upstream” part of its planned $5.6 billion sale of assets and operationsChanges in Alaska to Hilcorp Alaska noted above in footnote 1.

16

Internal Control Over Financial Reporting

There has not been any change in the Trust’s internal control over financial reporting identified in connection with the Trustee’s evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange ActTrust’s internal control over financial reporting that occurred during the Trust’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.

 

1713

PART II

OTHER —OTHER INFORMATION

 

Item 1.

Legal Proceedings.

None.

 

Item 1A.

Risk Factors

In December 2019, a novel strain of coronavirus,There have been no changes from the risk factors disclosed in the Trust’s annual report on Form SARS-CoV-210-K (severe acute respiratory syndrome coronavirus 2), surfaced in Wuhan, China, and has since spread to other countries, including the United States. In March 2020, the World Health Organization characterized the disease caused by the virus—COVID-19—as a pandemic. The pandemic resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. While governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impact of COVID-19, the pandemic has resulted in significant economic contraction. The oil industry, in particular, has been substantially disrupted, both domestically and internationally, by the COVID-19 pandemic, which has caused significant changes in energy fuel supply and demand. As a result, WTI prices fell from around $61 per barrel at the beginning of 2020 to below $14 per barrel on April 22, 2020, before recovering somewhat to end just under $22 per barrel on May 4, 2020. Due to this precipitous decline, the current WTI price remains far below the price required to reach the “break even” WTI price (the price at which all taxes and prescribed deductions are equal to the WTI price) of $54.34 in order for the Trust to receive a positive Per Barrel Royalty with respect to a particular day’s production. While future oil prices cannot be accurately projected, the U.S. Energy Information Administration forecasts in its Short-Term Energy Outlook, released on July 7, 2020, that WTI prices will average approximately $38 per barrel in second half of 2020 and approximately $46 per barrel in 2021. Should these forecast WTI prices prevail, it is very unlikely that the Trust would receive a positive Per Barrel Royalty with respect to any day’s production during that period.year December 31, 2020.

 

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.

(a) Reference is made to Note 8 of Notes to Financial Statements (Unaudited) in Part I, Item 1 (Form 8-K, Item 8.01).

(b) Not applicable.None.

 

18

Item 6.

Exhibits.

 

31*
  4.1

BP Prudhoe Bay Royalty Trust Agreement dated February  28, 1989 among The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of New York Trustee, and F. James Hutchinson,Rule Co-Trustee.13a-14(a) Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 1-10243).Certification

  4.2Overriding Royalty Conveyance dated February  27, 1989 between BP Exploration (Alaska) Inc. and The Standard Oil Company. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 1-10243).
  4.3Trust Conveyance dated February  28, 1989 between The Standard Oil Company and BP Prudhoe Bay Royalty Trust. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 1-10243).
  4.4Support Agreement dated as of February 28, 1989, as amended May  8, 1989, among The British Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The Standard Oil Company and BP Prudhoe Bay Royalty Trust. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No. 1-10243).
  4.5Letter agreement executed October  13, 2006 between BP Exploration (Alaska) Inc. and The Bank of New York, as Trustee. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-10243).
  4.6Letter agreement executed January  11, 2008 between BP Exploration (Alaska) Inc. and The Bank of New York, as Trustee. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Current Report on Form 8-K dated January 11, 2008 (File No. 1-10243).
10.1Settlement Agreement, dated May  8, 2009, among BP Exploration (Alaska) Inc., The Bank of New York Mellon, as Trustee, and BNY Mellon Trust Company of Delaware, as Co-Trustee. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Current Report on Form 8-K dated May 8, 2009 (File No. 1-10243).
10.2Agreement of Resignation, Appointment and Acceptance dated as of December  15, 2010 among BP Exploration (Alaska) Inc., The Bank of New York Mellon and The Bank of New York Mellon Trust Company, N.A. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (File No. 1-10243).

 

19

32*
31*Rule 13a-14(a)/15d-14(a) Certifications.
32*

Section 1350 Certification.Certification

99Report of Miller and Lents, Ltd., dated February  21, 2020. Incorporated by reference to the correspondingly numbered exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No. 1-10243).

101

Explanatory note:note: An Interactive Data File is not submitted with this filing pursuant to Item 601(101) of Regulation S-K, because the Trust does not prepare its financial statements in accordance with generally accepted accounting principles as used in the United States. See Note 23 of Notes to Financial Statements (Unaudited) in Part I, Item 1.

 

*

Filed herewith.

 

2014

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BP PRUDHOE BAY ROYALTY TRUST
By: THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee
By: 

/s/ Elaina C. Rodgers

 Elaina C. Rodgers
 Vice President

Date: AugustMay 10, 20202021

The registrantRegistrant is a trust and has no officers or persons performing similar functions. No additional signatures are available and none have been provided.

 

21

15