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 | (I.R.S. Employer Identification No.) | |
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 Interest | BPT | New 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:
|
|
| ||
As of August 10, 2020,May 7, 2021, 21,400,000 Units of Beneficial Interest were outstanding.
PART I
FINANCIAL INFORMATIONTABLE OF CONTENTS
Page | ||||||
1 | ||||||
Item 1. | Financial Statements | 1 | ||||
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 | ||||
14 | ||||||
Item 1. | Legal Proceedings | 14 | ||||
Item 1A. | Risk Factors | 14 | ||||
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
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.
|
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.
|
(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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
There was no royalty payment received by the Trust Subsequent events have been evaluated through the
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 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. The actual results, performance and prospects of the Trust could differ materially from those expressed or implied by forward-looking statements. Descriptions of 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 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.
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.
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 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 At March 31, 2021, the cash balance of the cash 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 10 If the Trust does not 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
Royalty revenues are generally received on the Quarterly Record Date (generally the fifteenth day of the
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.
The Quarterly Distributions received by the Trust from 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. 11
Three Months Ended Three Months Ended Royalty Production Trust royalty revenues received
The
The average net production from the 1989 Working Interest for the two reporting periods The following table shows the changes to the Trust’s revenues received and distributions paid during the
The period-to-period decreases 12 in
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.
Evaluation of Disclosure Controls and Procedures The Bank of New York Mellon Trust Company, N.A., as Trustee
Because of its inherent limitations, internal control over financial reporting
The
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
None.
None.
None.
Not applicable
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Date: The
15 |