UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended SeptemberJune 30, 20212022

OR

Commission File Number: 1-10476

For the transition period from to .

Hugoton Royalty Trust

(Exact name of registrant as specified in its charter)

c/o The Corporate Trustee:

Simmons Bank

2911 Turtle Creek Blvd, Suite 850

Dallas, Texas 75219

(Address of principal executive offices) (Zip Code)

(855) 588-7839

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if change since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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  ☒☑

Indicate the number of units of beneficial interest outstanding, as of the latest practicable date:

Outstanding as of November 1, 2021August 3, 2022

40,000,000

HUGOTON ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20212022

TABLE OF CONTENTS

HUGOTON ROYALTY TRUST

GLOSSARY OF TERMS

The following are definitions of significant terms used in this Form 10-Q:

HUGOTON ROYALTY TRUST

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.Statements

The condensed financial statements included herein are presented, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Unless specified otherwise, all amounts included herein are presented in U.S. dollars. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Trust’s latest Annual Report on Form 10-K. In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets, liabilities and trust corpus of the Hugoton Royalty Trust at SeptemberJune 30, 20212022 and the distributable income and changes in trust corpus for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20212022 and 20202021 have been included. Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. The condensed financial statements as of September 30, 2021, and for the three-month and nine-month periods ended September 30, 2021 and 2020 have been subjected to a review by PricewaterhouseCoopers LLP, the Trust’s independent registered public accounting firm, whose report is included herein.

HUGOTON ROYALTY TRUST

Condensed Statements of Assets, Liabilities and Trust Corpus (Unaudited)

The accompanying notes to condensed financial statements are an integral part of these statements.

HUGOTON ROYALTY TRUST

Condensed Statements of Distributable Income(Unaudited)

The accompanying notes to condensed financial statements are an integral part of these statements.

HUGOTON ROYALTY TRUST

Condensed Statements of Changes in Trust Corpus (Unaudited)

The accompanying notes to condensed financial statements are an integral part of these statements.

HUGOTON ROYALTY TRUST

Notes to Condensed Financial Statements (Unaudited)

The financial statements of Hugoton Royalty Trust (the “Trust”) are prepared on the following basis and are not intended to present financial position and results of operations in conformity with U.S. generally accepted accounting principles (“GAAP”):

The Trust’s financial statements differ from those prepared in conformity with U.S. GAAP because revenues are recognized when received rather than accrued in the month of production, expenses are recognized when paid rather than when incurred and certain cash reserves may be established by the Trustee for contingencies which would not be recorded under U.S. GAAP. This comprehensive basis of accounting other than U.S. GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with U.S. GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements.

Net profits interests in oil and gas properties

The initial carrying value of the net profits interests of $247,066,951 represents XTO Energy’s historical net book value for the interests on December 1, 1998, the date of the transfer to the Trust. During the second quarter 2016, the carrying value of the net profits interests was written down to its fair value of $28,801,000, resulting in an impairment of $57,306,527 charged directly to trust corpus. During the third quarter 2019, the carrying value of the net profits interests was written down to its fair value of zero, resulting in an impairment of $15,681,533 charged directly to trust corpus. Amortization of the net profits interests is calculated on a unit-of-production basis using proved reserves and is charged directly to trust corpus. Accumulated amortization was $174,078,891 as of September 30, 2019, when the net profits interests was written down to its fair value of zero.

Liquidity and Going Concern

The accompanying condensed financial statements have been prepared assuming that the Trust will continue as a going concern. Financial statements prepared on a going concern basis assume the realization of assets and the settlement of liabilities in the normal course of business. Increases inBetween April 2018 and October 2020, accumulated excess costs for the Kansas, Oklahoma and Wyoming conveyances have resulted in insufficient net proceeds to the Trust versus its current and anticipated expenses and a reduction in the Trust’s expense reserve to zero. Following depletion of the expense reserve, ongoing expenses and accumulated excess costs continued to result in no net proceeds to the Trust through February 2022. These conditions raiseraised substantial doubt about the Trust’s ability to continue as a going concern as the Trust doesdid not have sufficient cash to meet its obligations during the one year period after the datedates that the financial statements arewere issued. Factors attributable to the cash shortage arewere primarily the previously disclosed development costs to drill four horizontal wells in Major County, Oklahoma, lower oil and gas prices during 2019 and 2020, and excess cost positions on the Kansas, Oklahoma and Wyoming conveyances which have resulted in no unitholder distributions since March 2018. Since March 2022, both the Wyoming and Oklahoma conveyances received enough net profits income to recoup all of the excess costs in those conveyances plus the accrued interest. The net profits income received was also sufficient to reimburse Simmons Bank for the administrative expenses that it advanced after the expense reserve was depleted in October 2020 and fund the expense reserve. As of the July 2022 distribution announcement, the expense reserve has been replenished to $1,000,000. The Trustee does not currently anticipate any increase to the cash reserve in 2022. In addition, on May 18, 2021, the Panelarbitration panel issued its second interim final award over the amount of XTO Energy’s settlement in theChieftain class action lawsuit that can be charged to the Trust as a production cost which XTO Energy has estimated to be approximately $14.6 million.million net to the Trust after the arbitration panel has determined the remaining claims and issued its final award. This adjustment would further increase excess costs onlikely result in the Oklahoma conveyance.conveyance returning to an excess cost position for a period of time, but would not affect the other conveyances. The Trustee has prepared a preliminary budget estimating the administrative expenses for the year ending December 31, 20212022 and the eleveneight months ending November 30, 2022August 31, 2023 which assumes no cash inflow from either net profits income orother than the payments received from other sources. TheMarch 2022 through July 2022 totaling $5,322,000. Based on the above assumptions, the Trustee has sought financing to paybelieves that the Trust would be able to meet its financial obligations duringfor the one yearone-year period after the date the financial statements are issued, especially now thatissued.

During the expense reserve was depletedperiod of time in October 2020; however, to date such financing has not become available.

Thewhich the Trust received no net profits income, the Trustee is reviewingreviewed the Trust’s alternatives to continuing as a going concern, which may includeincluded a potential sale of the Trust’s assets and/or termination of the Trust. The Trustee engaged a third party to market the Trust’s assets, and following an extensive marketing period for the assets, on July 2, 2021, the Trustee entered into a purchase and sale agreement for the Trust’s assets with the highest bidder, XTO Energy, for a cash purchase price of $6,600,000 (subject to adjustment as set forth in the purchase and sale agreement). Although the Trustee and XTO Energy have entered into the purchase and sale agreement, there is no assurance that a sale can be completed under the terms of the indenture, or if a sale is completed under the terms of the indenture, that there will be any funds available for distribution to unitholders. Any material sale of assets and/or termination of the Trust requires unitholder approval by at least 80% of all outstanding units. AThe Trustee held a Special Meeting of the unitholders is scheduled on December 10, 2021 for a vote to approvethe purpose of approving the sale of the assets. Simmons Bank, as Trustee, is currently paying the expenses for the Trust, subject to its rights to be indemnified and reimbursed pursuant to the termsThe sale was not approved by unitholders. As of the Trust indenture. However, there is nothingdate hereof, the purchase and sale agreement with XTO Energy remains in the Trust indenture that requires Simmons Bank to pay the expenses for the Trust. Any funds that Simmons Bank, as Trustee, utilizes to pay expenses of the Trust must be repaid in full (including from proceeds received from a sale of the Trust’s assets, if any) before distributions to unitholders could be made.

Each unitholder should consult their own tax advisor regarding income tax requirements, if any, applicable to such person’s ownership of Trust units.

Unitholders should consult the Trust’s latest annual report on Form 10-K for a more detailed discussion of federal and state tax matters.

Litigation

Royalty Class Action and Arbitration

As previously disclosed, XTO Energy advised the Trustee that it reached a settlement with the plaintiffs in the Chieftain class action royalty case. On July 27, 2018 the final plan of allocation was approved by the court. Based on the final plan of allocation, XTO Energy advised the Trustee that it believes approximately $24.3 million in additional production costs should be allocated to the Trust. On May 2, 2018, the Trustee submitted a demand for arbitration seeking a declaratory judgment that the Chieftain settlement is not a production cost and that XTO Energy is prohibited from charging the settlement as a production cost under the conveyance or otherwise reducing the Trust’s payments now or in the future as a result of the Chieftain litigation. The Trust and XTO Energy conducted the interim hearing on the claims related to the Chieftain settlement on October 12-13, 2020. In the arbitration, the Trustee contended that the approximately $24.3 million allocation related to the Chieftain settlement was not a production cost and, therefore, there should not be a related adjustment to the Trust’s share of net proceeds. However, XTO Energy contended that the approximately $24.3 million was a production cost and should reduce the Trust’s share of net proceeds.

On January 20, 2021, the arbitration panel issued its Corrected Interim Final Award (i) “reject[ing] the Trust’s contention that XTO has no right under the Conveyance to charge the Trust with amounts XTO paid under section 1.18(a)(i) as royalty obligations to settle the Chieftain litigation” and (ii) stating “[t]he next phase will determine how much of the Chieftain settlement can be so charged, if any of it can be, in the exercise of the

Other Trustee claims related to disputed amounts on the computation of the Trust’s net proceeds for 2014 through 2016 were bifurcated from the initial arbitration and will be heard at a later date, which is still to be determined should the arbitration proceed. Pursuant to the purchase and sale agreement entered into between the Trustee and XTO Energy, the parties have agreed to stay the arbitration from the date of execution of the purchase and sale agreement to the earlier of the termination of the purchase and sale agreement or closing date of the sale of assets. The Panel has stayed proceedings.

Other Lawsuits and Governmental Proceedings

Certain of the underlying properties are involved in various other lawsuits and governmental proceedings arising in the ordinary course of business. XTO Energy has advised the Trustee that, based on the information available at this stage of the various proceedings, it does not believe that the ultimate resolution of these claims will have a material effect on the financial position or liquidity of the Trust, but may have an effect on annual distributable income.

Other

Several states have enacted legislation requiring state income tax withholding from payments made to nonresident recipients of oil and gas proceeds. After consultation with its tax counsel, the Trustee believes that it is not required to withhold on payments made to the unitholders. However, regulations are subject to change by the various states, which could change this conclusion. Should amounts be withheld on payments made to the Trust or the unitholders, distributions to the unitholders would be reduced by the required amount, subject to the filing of a claim for refund by the Trust or unitholders for such amount.

The following summarizes excess costs activity, cumulative excess costs balance and accrued interest to be recovered by conveyance as calculated by XTO Energy:

For the quarter ended SeptemberJune 30, 2021,2022, net recoveries of excess costs of $33,637were $2,331,946 ($26,9091,865,556 net to the Trust) were recovered on properties underlying the Kansas net profits interests.interests primarily because of timing of net profits related to a non-operated unit.

For the quarter ended SeptemberJune 30, 2021,2022, net recoveries of excess costs of $5,266,894were $3,902,946 ($4,213,5153,122,358 net to the Trust) and recoveries of accrued interest were recovered$2,513,028 ($2,010,422 net to the Trust) on properties underlying the Oklahoma net profits interests. The cumulativeinterests leaving no remaining excess costs as of June 30, 2022. This balance does not include the portion of the Chieftain settlement the Panel determined could be charged as a production cost. XTO Energy has estimated the amount to be approximately $14.6 million (net to the Trust).

For the quarter ended September 30, 2021, excess costs of $999,402 ($799,521 net to the Trust) were recovered on properties underlying the Wyoming net profits interests.Trust.

Underlying cumulative excess costs for the Kansas Oklahoma and Wyoming conveyancesconveyance remaining as of SeptemberJune 30, 20212022 totaled $26.6$0.8 million ($21.30.6 million net to the Trust), including accrued interest of $2.9$0.5 million ($2.30.4 million net to the Trust).

The following discussion should be read in conjunction with the Trustee’s discussion and analysis contained in the Trust’s 20202021 Annual Report on Form 10-K, as well as the condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The Trust’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the Trust’s web sitewebsite at www.hgt-hugoton.com.

Distributable Income

Quarter

For the quarter ended SeptemberJune 30, 2021,2022, net profits income was $0$1,856,317 as compared to $0 for thirdsecond quarter 20202021 primarily due to higher gasoil and oilgas prices ($6.05.6 million), and increased oil and gas production ($0.83.4 million), and decreased development costs ($1.9 million), partially offset by net excess costs activity ($6.27.1 million), increased production expenses ($0.9 million), increased taxes, transportation and other costs ($0.50.9 million), and increased production expenseoverhead ($0.1 million). See “Net Profits Income” below.

After adding interest income of $0, paying off the outstanding payable to Simmons Bank of $1,037,848, establishing an expense reserve of $652,451, and deducting administration expense of $244,124, and utilizing cash funded by Simmons Bank of $244,124 for the payment of Trust expenses,$166,018, distributable income for the quarter ended SeptemberJune 30, 20212022 was $0, or $0.000000 per unit of beneficial interest. Administration expense for the quarter increased $3,858decreased $720 as compared to the prior year quarter, primarily related to the timing of receipt and payment of Trust expenses and terms of professional services. Changes in interest income are attributable to fluctuations in net profits income, cash reserve and interest rates. For thirdsecond quarter 2020,2021, distributable income was $0, or $0.000000 per unit.

Distributions to unitholders for the quarter ended SeptemberJune 30, 20212022 were:

to the same 20202021 period, primarily related to the timing of receipt and payment of Trust expenses and terms of professional services. Changes in interest income are attributable to fluctuations in net profits income, cash reserve and interest rates. For the ninesix months ended SeptemberJune 30, 2020,2021, distributable income was $0, or $0.000000 per unit.

Net Profits Income

Net profits income is recorded when received by the Trust, which is the month following receipt by XTO Energy, and generally two months after oil and gas production. Net profits income is generally affected by three major factors:

The following is a summary of the calculation of net profits income received by the Trust:

The following are explanations of significant variances on the underlying properties from thirdsecond quarter 20202021 to thirdsecond quarter 20212022 and from the first ninesix months of 20202021 to the comparable period in 2021:2022:

Sales Volumes

Gas

Gas sales volumes were relatively flatincreased 2% for the thirdsecond quarter and decreased 10%1% for the nine-monthsix-month period as compared with the same 20202021 periods primarily because of lower gas sales from new wells in Major County, Oklahoma, increaseddecreased downtime, and natural production decline,timing of cash receipts, partially offset by timing of cash receipts.natural production decline.

Oil

Oil sales volumes increased 24%117% for second quarter and 51% for the third quarter primarily because of timing of sales from non-operatedsix-month wells, partially offset by lower oil sales from new wells in Major County, Oklahoma, and natural production decline. Oil sales volumes decreased 29% for the nine-month period as compared with the same 2020 period2021 periods primarily because of lower oil sales from new wells in Major County, Oklahoma, increaseddecreased downtime and natural production decline,timing of cash receipts, partially offset by sales from non-operated wells.natural production decline.

The estimated rate of natural production decline on the underlying oil and gas properties is approximately 6% to 8% a year.

Sales Prices

Gas

The thirdsecond quarter 2022 average gas price was $6.33 per Mcf, a 72% increase from the second quarter 2021 average gas price was $3.82 per Mcf, up 106% from the third quarter 2020 average gas price of $1.85$3.67 per Mcf. For the nine-monthsix-month period, the average gas price increased 73%87% to $3.61$6.52 per Mcf in 20212022 from $2.09$3.49 per Mcf in 2020. The third quarter 2021 gas price is primarily related to production from May through July 2021, when the average NYMEX price was $3.18 per MMBtu.2021.

Oil

The thirdsecond quarter 2022 average oil price was $76.08 per Bbl, a 29% increase from the second quarter 2021 average oil price was $62.18 per Bbl, up 108% from the third quarter 2020 average oil price of $29.93$58.79 per Bbl. For the nine-month period, theThe year-to-date average oil price increased 33%51% to $55.61$75.75 per Bbl in 20212022 from $41.82$50.25 per Bbl in 2020. The third quarter 2021 oil price is primarily related to production from May through July 2021, when the average NYMEX price was $69.76 per Bbl.2021.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs increased 34%51% for the thirdsecond quarter primarily because of increased production taxes. Taxes, transportation and other costs increased 11%16% for the nine-monthsix-month period primarily because of increased production and property taxes, and gas deductions, partially offset by decreased gas deductions.receipt of Oklahoma production tax refunds.

Development Costs

Development costs deducted are based on the current level of development expenditures, budgeted future development costs and the cumulative actual costs under (over) previous deductions. XTO Energy has advised the Trustee that actual development costs were charged to the Trust as incurred. These development costs increased 72%decreased 89% for the thirdsecond quarter and 297%57% for the nine-monthsix-month period primarily because of decreased drilling costs on arelated to non-operated well. For further informationwells. Changes in oil or natural gas prices could impact future development plans on development costs, see Note 2 to Condensed Financial Statements.the underlying properties.

Overhead

Overhead decreased 2% for the third quarter andincreased 3% for the nine-monthsecond quarter and 5% for the six-month period. Overhead is charged by XTO Energy and other operators for administrative expenses incurred to support operations of the underlying properties. Overhead fluctuates based on changes in the active well count and drilling activity on the underlying properties, as well as an annual cost level adjustment based on an industry index.

Excess Costs

If monthly costs exceed revenues for any conveyance, these excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net profits income from another conveyance. Underlying cumulative excess costs for the Kansas Oklahoma and Wyoming conveyancesconveyance remaining as of SeptemberJune 30, 20212022 totaled $26.6$0.8 million ($21.30.6 million net to the Trust), including accrued interest of $2.9$0.5 million ($2.30.4 million net to the Trust). This balance does not include the portion of the Chieftain settlement the Panel determined could be charged as a production cost. XTO Energy has estimated the amount to be approximately $14.6 million (net to the Trust). For further information on excess costs, see Note 54 to Condensed Financial Statements.

Other Proceeds

The calculation of net profits income for the quarter ended September 30, 2021 included $7,942 ($6,353 net to the Trust) from XTO Energy due to interest received on past due payments. The calculation of net profits income for the nine-month period included $96,949 ($77,559 net to the Trust) from XTO Energy due to interest received on past due payments.

Contingencies

For information on contingencies, see Note 43 to Condensed Financial Statements.

Forward-Looking Statements

StatementsCertain information included in this quarterly report and other materials filed, or to be filed, by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by XTO Energy or the Trustee) contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, relating to future plans, predictions,the Trust, operations of the underlying properties and the oil and gas industry. Such forward-looking statements may concern, among other things, potential asset sales or termination of the Trust, future unitholder votes, continued funding of Trust expenses by Simmons Bank, production, excess costs, litigation, arbitration, liquidity, financing, regulatory or court decisions, economic activity and recovery, and the impact of public health events and the accompanying government response on trade, travel and energy demand andreserve-to-production ratios, future

Item 3. Quantitative and Qualitative Disclosures about Market Risk.Risk

Not applicable. Upon qualifying as a smaller reporting company, this information is no longer required.

Item 4. Controls and Procedures.Procedures

As of the end of the period covered by this report, the Trustee carried out an evaluation of the effectiveness of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded that the Trust’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 and are effective in ensuring that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Trustee to allow timely decisions regarding required disclosure. In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy. There has not been any change in the Trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.

The Oklahoma conveyance is already currently subject to excess costs that will need to be recovered prior to any distribution to unitholders. Therefore, the reduction in the Trust’s share of net proceeds from the portion of the settlement amount the Panel has ruled may be charged against the Oklahoma conveyance would result in additional excess costs under the Oklahoma conveyance that would likely result in no distributions under the Oklahoma conveyance for several additional years while these additional excess costs are recovered. This award completes the portion of the arbitration related to the Chieftain settlement.

Other Trustee claims related to disputed amounts on the computation of the Trust’s net proceeds for 2014 through 2016 were bifurcated from the initial arbitration and will be heard at a later date, which is still to be determined should the arbitration proceed. Pursuant to the purchase and sale agreement entered into between the Trustee and XTO Energy, the parties have agreed to stay the arbitration from the date of execution of the purchase and sale agreement to the earlier of the termination of the purchase and sale agreement or closing date of the sale of assets. The Panel has stayed proceedings.

SIGNATURES

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

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