UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

for the Quarterly Period Ended SeptemberJune 30, 20212022

or

for the transition period from _____ to _____

Commission File No. 001-08032

SAN JUAN BASIN ROYALTY TRUST

(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)

PNC Bank, National Association

PNC Asset Management Group

2200 Post Oak Blvd.,Blvd, Floor 18

Houston, TXTexas 77056

(Address of principal executive offices) (Zip Code)

(866) 809-4553

(Registrant’s telephone number, including area code)

BBVA USA, Trust Department

2200 Post Oak Blvd., Floor 18

Houston, TX 77056N/A

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

Securities registered pursuant to Section 12(b) 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☐    No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” orand “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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.   ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No ☒

Number of Units of beneficial interest outstanding at NovemberAugust 15, 2021:2022: 46,608,796

Table of Contents

SAN JUAN BASIN ROYALTY TRUST

PART I

FINANCIAL INFORMATION

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

1. Basis of Presentation

The preceding condensed statement of assets, liabilities and trust corpus as of December 31, 2020,2021, which has been derived from audited financial statements, and the unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2020.2021. In the opinion of PNC Bank, National Association, the trustee of the Trust (“PNC Bank” or the “Trustee”), and based upon information provided to the Trust by Hilcorp San Juan L.P. (“Hilcorp”), the present owner of certain oil and gas interests (the “Subject Interests”) originally owned by Southland Royalty Company (“Southland”) in properties located in the San Juan Basin of northwestern New Mexico, all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at SeptemberJune 30, 2021,2022, and the distributable income and changes in trust corpus for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20212022 and 2020.2021. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

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

The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for liabilities and contingencies which would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid, instead of when incurred; and amortization of the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received, or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements. This comprehensive basis of accounting corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

The Trustee routinely reviews the Trust’s royalty interests in oilnatural gas and natural gasoil properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is charged directly to trust corpus instead of as an expense. There was no impairment of the Trust’s assets as of SeptemberJune 30, 2021.2022.

2. Federal Income Taxes

For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment trust (“WHFIT”) classified as a non-mortgage widely held fixed investment trust (“NMWHFIT”) for federal income tax purposes. The Trustee is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.

The Royalty constitutes an “economic interest” in oilnatural gas and natural gasoil properties for federal income tax purposes. Unit Holders must report their share of the production revenues of the Trust as ordinary income from oilnatural gas and natural gasoil royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.

Under present law, the Trust’s production and sale of natural gas from Coal Seam Wells does not qualify for tax credit under Section 45K of the Code (the “Section 45 Tax Credit”). Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trust’s current production for such credit has been enacted. No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.

The classification of the Trust’s income, for purposes of the passive loss rules, may be important to a Unit Holder. Royalty incomeIncome, such as that derived through the Trust, will generally be treated as portfolio income that may not be offset or reduced by passive losses.

Tax positions taken by the Trust related to the Trust’s pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that the material tax positions it has taken would more likely than not be sustained by examination. As of SeptemberJune 30, 2021,2022, the Trust’s tax years 20172018 and thereafter remain subject to examination.

Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holder’s interest in the Trust.

3. Commitments and Contingencies

Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders. See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to recovery of costs.

Covid-19 Pandemic.Pandemic. The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that future Covid-19 restrictions or outbreaks may have on production, including as it relates to personnel availability in New Mexico and other Subject InterestInterests’ areas. Hilcorp further informed the Trust that it does not anticipate that the current state of the Covid-19 has not had, nor does it anticipate that Covid-19pandemic will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the continuing impact of the ongoingcontinued Covid-19 pandemic, including additional surgesa resurgence of COVID-19 lockdowns in Asia, may extend existing supply chain disruptions and order backlogs for materials or variants and requiredservices needed to maintain production in the Subject Interest areas, or recommended pandemic mitigation efforts,have other unknown impacts on Hilcorp and the Subject Interests, remains unknown and any such impact could result in actual results being different from Hilcorp’s expectations, despiteexpectations.

Geo-Political Uncertainties. Prices for goods and services have risen over the lacklast 12 months, and inflationary pressures have accelerated in the first half of a materially adverse2022, as regional and global commodity prices have risen in response to the conflict in Ukraine. The impact to-dateof ongoing or extended conflict on Hilcorp’s ability to produce from the pandemic.Subject Interests or on commodity prices is unknown.

Gross Proceeds and Production Cost Estimates.

Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) were still occurring and being reported in 2021. At the beginning of 2021, Hilcorp has advisedinformed the Trust that it planned to refine further its estimating and reporting processes and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods. As part of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain periods. Thus, distributions to the Trust from Hilcorp in certain months (sinceduring 2021 were subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

Hilcorp informed the closingTrust that it completed the transition to its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August 2021 reporting month) and that it has reversed and rebooked revenue for certain prior periods. As of its purchaseDecember 31, 2021, Hilcorp believes that all prior month true-ups have been completed for operated wells. The true-ups of revenues for non-operated properties for the 2021 distribution periods were completed in the February and March 2022 reporting months.

The amount of Gross Proceeds depends on the volumes of natural gas and oil produced from the Subject Interests. Under the terms of the assets), it has reported estimates of cash revenuesIndenture, the Trust cannot acquire new natural gas and expenses basedoil assets, and as a result, Royalty Income is dependent on the best information availablenatural gas and oil volumes attributable to it at the time, insteadSubject Interests. Although Hilcorp and other operators of reporting actual amounts.the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets; Hilcorp further has informed the Trust that it believes that its estimates have been preparedis unable to estimate the productive life of the Subject Interests. The reduction in accordance withproved reserve quantities is a common measure of depletion. Hilcorp’s (or a future operator’s) capital investments in the Conveyance,Subject Interests will affect the quantity of proved reserves and can offset any reduction in proved reserves. Lower commodity prices may also cause Hilcorp to reduce drilling operations, workover, and/or recompletions, thus reducing the Trustvolume of natural gas and its advisors continueoil produced from the Subject Interests by Hilcorp. Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to review such estimates for compliance with the Conveyance.date in 2022.

The Trustee

The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining available income to the Unit Holders. The amount of income distributable to Unit Holders, which we refer to as “Distributable Income,” depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves. The Trust has no employees, officers, or directors. The Trustee performs all administrative functions of the Trust.

Hilcorp

Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with the Trust, for marketing the oilnatural gas and natural gasoil production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances. A very high percentage of the Royalty Income is attributable to the production and sale by Hilcorp of natural gas, from the Subject Interests.Interests, by Hilcorp. Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Natural Gas and Oil. The sale of San Juan Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017. Under the terms of the sale, Hilcorp is required to make payments to Burlington if natural gas prices are above a certain price. Hilcorp has confirmed that in accordance with the Conveyance, Hilcorp will not charge the Trust any portion of such payments.

Gross Proceeds and Severance Tax Estimates.Hilcorp has advised the Trust that for certain months (since the closing of its purchase of the assets), it has reported estimates of cash revenues and expenses based on the best information available to it at the time, instead of reporting actual amounts. Hilcorp further has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance with the Conveyance.

Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) arewere still occurring and being reported in 2021. In addition, Hilcorp informedAt the Trust that due to Hilcorp’s transition to a new accounting system beginning in Marchof 2021, revenue and severance tax categories for the February through May 2021 production months were based on estimates utilizing historical trends. Revenue and severance tax for the May, June and July production months were trued-up in August and September 2021.

During the November 2021 Meeting, Hilcorp informed the Trust that it had completedplanned to refine further its actualizationestimating and validationreporting processes, and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods. As part of January, February, and March 2021 with respect to the gross proceeds and severance tax estimates attributable to the Royalty Interests owned by the Trust. Based on suchthat review process, Hilcorp informed the Trust that it had determinedmay reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in certain months during 2021 were subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

Hilcorp informed the Trust that it owescompleted the Trust an additional $448,780transition to its new accounting system and began to report actual, not estimated, revenue and expenses for these timeoperated wells beginning with the June 2021 production month (August 2021 reporting month) and that it has reversed and rebooked revenue for certain prior periods. As of December 31, 2021, Hilcorp believes that all prior month true-ups have been completed for operated wells. The true-ups of revenues for non-operated properties for the 2021 distribution periods along with $63,496were completed in interest in accordance withthe February and March 2022 reporting months.

The amount of Gross Proceeds also depends on the volumes of natural gas and oil produced from the Subject Interests. Under the terms of the Conveyance.Indenture, the Trust cannot acquire new natural gas and oil assets, and as a result, Royalty Income is dependent on the natural gas and oil volumes attributable to the Subject Interests. Although Hilcorp intendsand other operators of the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets; Hilcorp has informed the Trust that it is unable to includeestimate the payments for these actualizationsproductive life of the Subject Interests. The reduction in proved reserve quantities is a common measure of depletion. Hilcorp’s (or a future operator’s) capital investments in the Subject Interests will affect the quantity of proved reserves and adjustments, togethercan offset any reduction in proved reserves. Lower commodity prices may also reduce the volume of natural gas and oil produced from the Subject Interests by Hilcorp. Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to date in 2022.

Relatedly, because of Hilcorp’s prior process of providing production estimates rather than actual production, a simple year-over-year comparison from the prior distribution reports from Hilcorp will not reflect the actual comparable production amounts. For example, a comparison of the April 2021 estimated production with the related interest,April 2022 actual production on the June 2022 Distribution Report would reflect a decline of approximately 7.1%. However, comparing the April 2021 actual production from the November 2021 Distribution Report actualization to April 2022 actual production would reflect an,increase of 14.7%. In reviewing the Distribution Reports on a year-to-date basis, the total MMBtu production was 14,689,896 as of June 2021 compared to the total MMBtu production of 13,672,177 as of June 2022, which results in a year-to-date decline of 6.93%

On February 17, 2022, the Trust announced that Hilcorp had provided the Trust with its 2022 capital project plan for the Subject Interests (the “2022 Plan”), and Hilcorp has estimated its 2022 capital expenditures for the Subject Interests to be $1.9 million. The objective of this capital project plan is to address the natural depletion of oil and gas assets. Specifically, Hilcorp informed the Trust that its 2022 Plan will allocate approximately $1.5 million of the 2022 Plan’s budget towards 24 well recompletions and workovers scheduled to be completed in the November reportingMesaverde, Pictured Cliffs and distributionFruitland Coal formations. Approximately $300,000 of the 2022 Plan’s budget will be allocated to the Trust.

Lease operating expensesfacilities projects related to natural gas compression, and capitalapproximately $100,000 will be spent for permitting and surveying costs for the January through April 2021 production months were based on estimates, but the lease operating expensesfuture new drill projects that are being considered for 2023 and capital costs for May 2021 were based on actual costs. Both Lease operating expense and capital costs for the January through May 2021 production months were trued-up in July 2021. However, due to excess production costs for the June production month (which corresponds with the Trust’s August distribution month), there was no cash distribution made in August 2021. These true-up corrections resulted in no distribution payment declared for the August 2021 reporting month.

Hilcorp also confirmed that it continues to work on its actualization and accounting of the operated revenue and severance tax computations for the production month of April 2021 (the remaining 2021 production month that was based on estimates) and will notify the Trust promptly upon completion of such actualization and accounting by the end of 2021.2024. Hilcorp further informed the Trust that its planned project status for 2022 is subject to revision if it believesrevises its assumptions underlying the 2022 Plan, and that in any event actual capital costs may vary from these estimates.

Under the April 2021terms of the Conveyance, production costs are deducted from Gross Proceeds in calculating Net Proceeds, which is multiplied by 75% to calculate Royalty Income. “Production Costs” generally means costs incurred on an accrual basis by Hilcorp in operating the Subject Interests, including both capital and true-upnon-capital costs. For example, these costs include development drilling, production and adjustment may result in changes to future distributions of net proceeds toprocessing costs, applicable taxes and operating charges. However, Hilcorp informed the Trust that reflectfor wells operated by Hilcorp it did not intend to accrue lease operating expenses to the Trust. If production costs exceed Gross Proceeds in any month, the excess is recovered out of future Gross Proceeds prior to the making of further payments to the Trust. However, the Trust is not otherwise liable for any Production Costs or other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such rebooking and true-upsoverpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, on such amounts (as required byat a rate specified in the Conveyance)Conveyance. The Trust and the Trustee has very limited authority to control the extent an underpayment to the Trust has occurred. Hilcorp has confirmed that it will continue to waive interest to the extent there were any overpayments to the Trust based on true-ups in 2021.amount and timing of Production Costs.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust’s third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments, true-ups, and recoupments. TheIn addition, the Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

Factors that Affect Net Proceeds. Generally, Net Proceeds are affected by (a) disruptions caused by weather, particularly winter storms that disrupt access to the production fields, (b) the timing and size of Hilcorp’s capital expenditures, and (c) commodity prices.

Weather. Hilcorp has advised the Trust that it is possible for it to experience disruptions during the winter months that could impact Hilcorp’s ability to access fields and maintain production.

Capital Expenditures. The timing and size of capital expenditures by Hilcorp may impact Net Proceeds. Capital expenditures by Hilcorp decreased approximately $56,100, or 34.47%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, and decreased approximately $198,500, or 51.61%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The decrease was primarily attributable to differences in timing in the payment of these expenditures along with capital expenditures attributable to the prior year’s budget.

Commodity Prices. The Trust’s income and monthly distributions from the Subject Interests are heavily influenced by the price of oilnatural gas and natural gas.oil. These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oilnatural gas and natural gasoil based on market uncertainty or a variety of additional factors that are beyond the Trustee’s control.

Results of Operations – for the Three and NineSix Months Ended September 30,June 2022 and 2021 and 2020

Royalty Income

Royalty Income consists of 75% of the monthly net proceedsNet Proceeds attributable to the Royalty. Royalty Income for the three and ninesix months ended SeptemberJune 30, 20212022, and 20202021 was determined as shown in the following table:

Severance Taxes. Aggregate severance taxes increaseddecreased approximately $1.1 million$204,000, or 5.3%, for the three months ended SeptemberJune 30, 20212022, compared to the three months ended SeptemberJune 30, 2020,2022, and increased approximately $4.3$2.9 million, or 61%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The decrease in severance taxes in the three-month period is primarily attributable to the overestimation of severance taxes of $1.0 million for the nineFebruary to April 2021 production months ended September 30, 2021 comparedwhich offset the increase in severance taxes attributable to the nine months ended September 30, 2020.higher Gross Proceeds. The increase in severance taxes in the six-month period was primarily attributable to higher gross proceeds during those periods.Gross Proceeds and also to corrections made in the first quarter of 2021 to the June 2018 through December 2018 production months, which reduced reported severance taxes for this period by $1.4 million. The corrections included the reversal of severance tax estimates and tax only adjustments associated with the Jicarilla Apache Nation. Severance taxes represented approximately 13% of gross proceedsGross Proceeds for the three months ended SeptemberJune 30, 2021,2022, compared to approximately 18% for the same period of 2020.2021. Severance taxes represented approximately 13% of gross proceedsGross Proceeds for the ninesix months ended SeptemberJune 30, 2022. Excluding the $1.4 million correction in the first quarter of 2021, compared toseverance taxes were approximately 10%16% of Gross Proceeds for the same period of 2020. The distributions in 2020 included true ups of previous productionsix months which resulted in fluctuations of severance taxes.ended June 30, 2021.

Lease Operating Expenses and Property Taxes. Lease operating expenses and property taxes increased $3.5decreased $1.1 million, or 69%15%, for the three months ended SeptemberJune 30, 20212022, compared to the three months ended SeptemberJune 30, 2020, and increased $2 million, or 11%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.2021. The increasedecrease is primarily due to true-ups and corrections for the January through May 2021 production months, as well as to increaseddecreased activity at the Subject Interests by Hilcorp. Specifically, production decreased by 1,603,525 MMBtu, or 19.20%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. Lease operating expenses and property taxes increased $2.6 million, or 23% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase is primarily due to increased expenses in the first quarter of 2022 which included approximately $0.5 million in non-operated lease operating expense true-ups, the payment of approximately $1 million for year-end salaries and bonuses for Hilcorp employees, and differences in the timing in the receipt and payment of these costs, offset by a $450,000 credit by Hilcorp to the Trust in 2021 due to the settlement of certain audit exceptions related to compressor maintenance services. The Trust and its consultants are conducting a detailed analysis of these expenses associated with the year-end salaries and bonuses for Hilcorp employees to determine if they comport with the Conveyance and other operative agreements.

Monthly lease operating expenses offor the Subject Interests, including property taxes, for the three months ended SeptemberJune 30, 20212022, averaged approximately $2.9$2.1 million, compared to $1.7$2.5 million for the three months ended SeptemberJune 30, 2020.2021. Monthly lease operating expenses of the Subject Interests, including property taxes, for the ninesix months ended SeptemberJune 30, 20212022, averaged $2.2$2.3 million, compared to an average of $2$1.9 million for the ninesix months ended SeptemberJune 30, 2020.2021.

Distributable Income

General & Administrative Expenses. General and administrative expenses increaseddecreased approximately 33%,4.6 % for the three months ended SeptemberJune 30, 20212022, compared to the three months ended SeptemberJune 30, 2020,2021, and increased 0.7%,approximately 4.9% for the ninesix months ended SeptemberJune 30, 20212022, compared to the ninesix months ended SeptemberJune 30, 2020.2021. The increase in general and administrative expenses waschanges for both periods were primarily attributable to differences in timing in the receipt and payment of certain expenses by the Trust, and increased legal expenses during the transition from BBVA to PNC Bank as the Trustee.Trust.

Cash Reserves. Total cash reserves were $1.0 million as of SeptemberJune 30, 2021.2022. The primary purpose of the cash reserves is to have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses. The Trustee does not anticipate any increases to the cash reserve above a level of $1.0 million in 2021,2022, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.

Liquidity and Capital Resources

The Trust’s principal source of liquidity and capital is Royalty Income. The Trust’s distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses. The Trust is not liable for any production costsProduction Costs or liabilities attributable to the Royalty. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. If the Trustee determines that the Trust does not have sufficient funds to pay the Trust’sits liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be made to Unit Holders until such borrowings are repaid in full. The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote of the Unit Holders of 75% of all of the Units outstanding; however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period period without the consent of the Unit Holders.

Due to excess production costs in June 2021, the Trust did not declare a distribution in August 2021. The cash required for monthly expenses was funded by the cash reserve. The amount taken from the cash reserve was replenished in September 2021.

In the event the Trust does not receive sufficient net cash paymentsRoyalty Income from Hilcorp sufficient to pay its liabilities, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trust’s operating expenses until its cash reserve can be replenished from net cashsubsequent Royalty Income payments from Hilcorp.

OilNatural gas and Natural GasOil Production

The natural gas volumes reported to the Trust by Hilcorp are based on plant residue gas volumes plus equivalent volumes for natural gas liquids. Hilcorp converts one barrel of natural gas liquids to six Mcf of natural gas using industry standards.

Royalty Income for the three months ended SeptemberJune 30, 20212022, is associated with oil and natural gas and oil production during MayFebruary through July 2021April 2022 from the Subject Interests.

Production of oilnatural gas and natural gasoil and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended SeptemberJune 30, 20212022, and 20202021 were as follows:

Based on Hilcorp’s reporting methodology, the Trust recognizes production during the month in which the related net proceeds attributable to the Royalty areIncome is paid to the Trust. Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current calendar year. However, for 2021, non-operated revenue has been based on estimated natural gas and oil production. Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oilnatural gas and natural gas,oil, respectively, by the prices received by Hilcorp for sales of such volumes from the Subject Interests, taking into consideration production taxes attributable to the Subject Interests. Because the oilnatural gas and natural gasoil sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including Hilcorp’s capital expenditures, and the timing of Hilcorp’s true-ups of prior reported estimated oil and natural gas production data, the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty. Future true-ups will impact future royalty proceeds, but will not change the reported amounts due to the accounting basis used.

The fluctuations in natural gas production that have occurred during the three-month period ended SeptemberJune 30, 20212022, and 2020,2021, respectively, generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve. Also, production from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin. As noted above, oilnatural gas and natural gasoil sales attributable to the Royalty are based on an allocation formula dependent on many factors, including oilnatural gas and natural gasoil prices and capital expenditures.

Marketing

There were no changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and processing of production during the three months ended SeptemberJune 30, 2021.2022.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that impact the Trust’s financial statements, see Part I, Item 1. Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8. Financial Statements and Supplemental Data contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

For information on the Trust’s exposure to market risk, please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

None.

The Trust maintains a system of internal disclosure controls and procedures that is designed to ensure that the information required to be disclosed in the Trust’s filings under the Exchange Act is recorded, processed, summarized, and reported within the time periodstimes specified in the SEC’s rules and forms. In its evaluation of its disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by Hilcorp, the owner of the properties. Consequently, the Trust’s ability to disclose timely and accurately disclose relevant information in its periodic reports is dependent upon Hilcorp’s timely delivery of accurate oil and gas revenue and production costProduction Cost information and, therefore, the net proceedsRoyalty Income owed to the Trust.

The Net Overriding Royalty Conveyance (the “Conveyance”) that transferred the royaltyRoyalty to the Trust obligates Hilcorp to provide the Trust with certain financial and operational information, including information concerning calculations of net proceedsRoyalty Income owed to the Trust. Once the Trust receives the financial information from Hilcorp, the Trust engages independent public accountants, compliance auditors, attorneys and petroleum engineers in order to assist the Trustee to ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic reports. These outside professionals advise the Trustee in its review and compilation of this information for inclusion in this QuarterlyAnnual Report on Form 10-Q10-K and and the other periodic reports provided by the Trust to the SEC.

Despite the Trust’s internal controls and procedures ensuring the accuracy of the Trust’s reporting based upon the financial information received from Hilcorp, Hilcorp’s process of reconciling actual revenueGross Proceeds and severance taxes to previously reported estimates are(which the Trust refers to as “true-ups”) during fiscal years 2018 and 2020 were still occurring and being reported in 2021. Hilcorp has informed the Trust that it continues to refine further its estimating and reporting processes. As part of that review process, Hilcorp informed the Trust that it would reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in any given month in 2022 may be subject to adjustment based uponinclude adjustments for the reversal and rebooking of prior months’ true-ups and rebooking,revenue, plus interest. In addition, Hilcorp informed the Trust that due to Hilcorp’s transition to a new accounting system beginning in March 2021, revenue and severance tax categories for the February through May 2021 production months were based on estimates utilizing historical trends. Revenue and severance tax for the May, June and July 2021 production months were trued-up in August and September 2021. Hilcorp informed the Trust that it will complete the process of truing-up, accounting for and reporting to the Trust the operated revenue and severance tax computations for the April 2021 production month by the end of 2021. At this time the amount of these true-ups is unknown. The Trustee will coordinate with Hilcorp on the timing of any further true-ups and will communicate that timing to Unit holders.

PART II

OTHER INFORMATION

None.

Not required.

None.

None.

Not applicable.

SIGNATURE

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.

Date: NovemberAugust 15, 20212022

(The Trust has no directors or executive officers.)

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