Item 2. Properties
Item 2.
Properties
The net overriding royalties conveyed to the Trust (the Royalties) include: (1) a 75% net overriding royalty carved out of Southland
Royaltys fee mineral interests in the Waddell Ranch in Crane County, Texas (the Waddell
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Ranch properties); and (2) a 95% net overriding royalty carved out of Southland Royaltys major producing royalty interests in Texas (the Texas Royalty properties).
The interests out of which the Trusts net overriding royalty interests were carved were in all cases less than 100%. The Trusts net overriding royalty interests represent burdens against the properties in favor of the Trust without
regard to ownership of the properties from which the overriding royalty interests were carved. The net overriding royalty for the Texas Royalty properties is subject to the provisions of the lease agreements under which such royalties were created.
References below to net wells and acres are to the interests of the owner of the Underlying Properties (from which the Royalties were carved) in the gross wells and acres.
A production index for oil and gas properties is the number of years derived by dividing remaining reserves by current production. The production index
for the Trust properties based on the reserve report prepared by independent petroleum engineers as of December 31, 2020, is approximately 10.1 years.
The following information under this Item 2 is based upon data and information, including audited computation statements, furnished to the Trustee by
Blackbeard, the owner of the Waddell Ranch properties and BROG, the former owner of the Waddell Ranch properties, and Riverhill Energy, the owner of the Texas Royalty properties.
PRODUCING ACREAGE, WELLS AND DRILLING
Waddell Ranch Properties . The net profits/overriding royalty interest in the Waddell Ranch properties is the largest asset
of the Trust. The mineral interests in the Waddell Ranch, from which such net royalty interests are carved, vary from 37.5% (Trust net interest) to 50% (Trust net interest) in 78,715 gross (34,205 net) producing acres. A majority of the proved
reserves are attributable to six fields: Dune, Sand Hills (Judkins), Sand Hills (McKnight), Sand Hills (Tubb), University-Waddell (Devonian) and Waddell. At December 31, 2020, the Waddell Ranch properties contained 648 gross (221 net)
productive oil wells, 109 gross (39 net) productive gas wells and 209 gross (67 net) injection wells.
As of April 1, 2020, Blackbeard
Operating, LLC (Blackbeard) became operator of record of the Waddell Ranch properties. All field, technical and accounting operations have been contracted by agreements between the working interest owners and Schlumberger Integrated
Project Management (IPM) and Riverhill Capital Corporation (Riverhill Capital), but remain under the direction of Blackbeard, as of December 31, 2020.
Six major fields on the Waddell Ranch properties account for more than 80% of the total production. In the six fields, there are 12 producing zones
ranging in depth from 2,800 to 10,600 feet. Most prolific of these zones are the Grayburg and San Andres, which produce from depths between 2,800 and 3,400 feet. Also productive from the San Andres are the Sand Hills (Judkins) gas field and the Sand
Hills (McKnight) oil field, the Dune (Grayburg/San Andres) oil field, and the Waddell (Grayburg/San Andres) oil field.
The Dune and Waddell oil
fields are productive from both the Grayburg and San Andres formations. The Sand Hills (Tubb) oil fields produce from the Tubb formation at depths averaging 4,300 feet, and the University Waddell (Devonian) oil field is productive from the Devonian
formation between 8,400 and 9,200 feet.
The Waddell Ranch properties are mature producing properties, and all of the major oil fields are currently
being waterflooded for the purpose of facilitating enhanced recovery. Proved reserves and estimated future net revenues attributable to the properties are included in the reserve reports summarized below. The owner of the Underlying Properties for
Waddell Ranch does not own the full working interest in any of the tracts constituting the Waddell Ranch properties and, therefore, implementation of any development programs will require approvals of other working interest holders as well as the
owner of the Underlying Properties. In addition, implementation of any development programs will be dependent upon oil and gas prices currently being received and anticipated to be received in the future. There were 16 gross (6 net) drill wells
completed on the Waddell Ranch properties during 2020. At December 31, 2020, there were 4 drill wells and 3 workover in progress on the Waddell Ranch properties. There were 3 gross (0 net) drill wells completed on the Waddell Ranch properties
during 2019. At December 31, 2019, there were 0 drill wells and 0 workover in progress on the Waddell Ranch properties. There were 0 gross (0 net) drill wells completed on the Waddell Ranch properties during 2018. At December 31, 2018,
there was 1 drill well and 1 workover in progress on the Waddell Ranch properties.
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Blackbeard has advised the Trustee that the total amount of capital expenditures for 2020 with regard
to the Waddell Ranch properties totaled $10.4 million (gross). Capital expenditures include the cost of remedial and maintenance activities. The amount spent on remedial and maintenance activities was approximately $71,000 of the amount
expended by Blackbeard in 2020.
Blackbeard has advised the Trustee that the capital expenditures budget for 2021 totals approximately
$86.6 million (gross) ($32.5 million net to the Trust), of which approximately $1.5 million (gross) is attributable to facilities. Accordingly, there is a $76.2 million increase in capital expenditures for 2021 as compared
with the 2020 capital expenditures. There will be 91 new drill wells and 24 recompletions in 2021 as compared to 16 new drill wells and 3 recompletion in 2020.
The Trustee has been advised that, effective November 1, 2019, BROG sold its interests in the Waddell Ranch properties to Blackbeard. In
conjunction with the transfer and assignment of the Waddell Ranch properties, BROG also assigned to Blackbeard all of its rights, title and interest in and to the Net Overriding Royalty Conveyance (Permian Basin Royalty Trust - Waddell Ranch) dated November 1, 1980. BROG handled all operations and accounting on behalf of Blackbeard until March 31, 2020.
Texas Royalty Properties . The Texas Royalty properties consist of royalty interests in mature producing oil fields, such
as Yates, Wasson, Sand Hills, East Texas, Kelly-Snyder, Panhandle Regular, N. Cowden, Todd, Keystone, Kermit, McElroy, Howard-Glasscock, Seminole and others located in 33 counties across Texas. The Texas Royalty properties consist of approximately
125 separate royalty interests containing approximately 303,000 gross (approximately 51,000 net) producing acres. Approximately 41% of the future net revenues discounted at 10% attributable to Texas Royalty properties are located in the Wasson and
Yates fields. Detailed information concerning the number of wells on royalty properties is not generally available to the owners of royalty interests. Consequently, an accurate count of the number of wells located on the Texas Royalty properties
cannot readily be obtained.
In February 1997, BROG sold its interests in the Texas Royalty properties that are subject to the Net Overriding
Royalty Conveyance to the Trust dated effective November 1, 1980 (Texas Royalty Conveyance) to Riverhill Energy Corporation (Riverhill Energy), which was then a wholly-owned subsidiary of Riverhill Capital and an
affiliate of Coastal Management Corporation (CMC). At the time of such sale, Riverhill Capital was a privately owned Texas corporation with offices in Bryan and Midland, Texas. The Trustee was informed by BROG that, as required by the
Texas Royalty Conveyance, Riverhill Energy succeeded to all of the requirements upon, and the responsibilities of BROG under, the Texas Royalty Conveyance with regard to the Texas Royalty properties. BROG and Riverhill Energy further advised the
Trustee that all accounting operations pertaining to the Texas Royalty properties were being performed by Riverhill Energy.
The Trustee has been
advised that, effective April 1, 1998, Schlumberger Technology Corporation (STC) acquired all of the shares of stock of Riverhill Capital. Prior to the acquisition by STC, CMC and Riverhill Energy were wholly-owned subsidiaries of
Riverhill Capital. The Trustee has further been advised, in accordance with the STC acquisition of Riverhill Capital, the shareholders of Riverhill Capital acquired ownership of all shares of stock of Riverhill Energy. Effective January 1, 2001
CMC merged into STC. Thus, the ownership in the Texas Royalty properties remained in Riverhill Energy.
The Trustee has been advised that as of
May 1, 2000, the accounting operations pertaining to the Texas Royalty properties were transferred from STC to Riverhill Energy. As of January 1, 2012, ConocoPhillips assumed all field, technical and accounting operations, on behalf of
BROG, with regard to the Waddell Ranch properties. ConocoPhillips currently provides summary reporting of monthly results for the Waddell Ranch properties.
Well Count and Acreage Summary . The following table shows as of December 31, 2020, the gross and net producing wells
and acres for the Blackbeard interests on the Waddell Ranch. The net wells and acres are determined by multiplying the gross wells or acres by the Blackbeard interests owners working interest in the wells or acres as of December 31, 2020.
Similar information is not available for the Riverhill Energy interests. There is no undeveloped acreage on the Waddell Ranch properties.
NUMBER OF WELLS
ACRES
Gross
Net
Gross
Net
Blackbeard Interests
966
327
78,715
34,205
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OIL AND GAS PRODUCTION
The Trust recognizes production during the month in which the related distribution is received. Production of oil and gas attributable to the Royalties
and the Underlying Properties, the related average sales prices and the average production cost per unit of production attributable to the Underlying Properties for the three years ended December 31, 2020, excluding portions attributable to the
adjustments discussed below, were as follows:
Waddell Ranch Properties
Texas Royalty
Properties
Total
2020
2019
2018
2020
2019
2018
2020
2019
2018
Royalties:
Production
Oil (barrels)
219,634
132,972
228,277
215,685
227,634
239,196
435,319
360,606
467,473
Gas (Mcf)
1,282,070
632,770
1,343,148
155,292
225,239
252,851
1,437,362
858,009
1,595,999
Underlying Properties:
Production
Oil (barrels)
583,386
612,146
628,228
247,755
259,367
266,324
831,141
871,513
894,552
Gas (Mcf)
3,341,590
3,092,465
3,678,665
178,925
254,457
281,442
3,520,515
3,346,922
3,960,107
Average Sales Price
Oil/barrel
$
39.02
$
52.02
$
58.22
$
40.74
$
51.38
$
58.44
$
39.51
$
51.74
$
58.11
Gas/Mcf
$
1.37
$
2.77
$
3.32
$
3.33
$
4.60
$
6.58
$
1.47
$
2.64
$
3.55
Average Production Cost Oil/Gas BOE
$
32.92
$
25.19
$
20.30
$
4.27
$
5.40
$
5.18
$
26.54
$
21.01
$
17.26
Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such
factors as price and cost (including capital expenditures), production amounts do not necessarily provide a meaningful comparison.
Waddell Ranch
properties lease operating expense for 2020 was $19.6 million (gross). The lease operating expense decreased from $23.4 in 2019 primarily because of decreasing activity and facilities maintenance. Waddell Ranch lifting cost on a barrel of oil
equivalent (BOE) basis was $32.92/bbl as compared to $25.19 in 2019 and $20.30 in 2018.
PRICING INFORMATION
Reference is made to the caption entitled Regulation for information as to federal regulation of prices of natural gas. The following
paragraphs provide information regarding sales of oil and gas from the Waddell Ranch properties. As a royalty owner, Riverhill Energy is not furnished detailed information regarding sales of oil and gas from the Texas Royalty properties.
Oil . The Trustee has been advised by the operator that since June 2006, the oil from the Waddell Ranch has been marketed
by the operator by soliciting bids from third parties on an outright sale basis of production listed in bid packages.
Gas . The gas produced from the Waddell Ranch properties is processed through a natural gas processing plant and sold at
the tailgate of the plant. Plant products are marketed by Burlington Resources Trading Inc., an indirect subsidiary of BRI. The processor of the gas (Warren Petroleum Company, L.P.) receives 15% of the liquids and residue gas as a fee for gathering,
compression, treating and processing the gas.
OIL AND GAS RESERVES
The following are definitions adopted by the SEC and the Financial Accounting Standards Board which are applicable to terms used within this Item:
Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated
with reasonable certainty to be economically producible from a given date forward, from
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known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless
evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain
that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes:
(A) The area identified by drilling and limited by fluid contacts, if any, and
(B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain
economically producible oil or gas on the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved
quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas
cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection)
are included in the proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with
properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering
analysis on which the project or program was based; and
(B) The project has been approved for development by all necessary parties
and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a
reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of
the first-day-of-the-month price for each month within such period, unless prices are
defined by contractual arrangements, excluding escalations based upon future conditions.
Developed oil and gas reserves are reserves of
any category that can be expected to be recovered (i) through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and
(ii) through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.
Estimated future net revenues are computed by applying average prices during the 12-month period
prior to fiscal year-end determined as an unweighted arithmetic average of the
first-day-of-the-month benchmark price for each month within such period, unless prices
are defined by contractual arrangements, excluding escalations based upon future conditions to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based
on current costs) to be incurred in developing and producing the proved reserves, and assuming continuation of existing economic conditions. Estimated future net revenues are sometimes referred to herein as estimated future net cash
flows.
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Present value of estimated future net revenues is computed using the estimated future net
revenues and a discount factor of 10%.
Reserves are estimated remaining quantities of oil and gas and related substances anticipated to
be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue
interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for recompletion.
(i) Reserves on undrilled acreage shall be limited to those
directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.
(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled
to be drilled within five years, unless the specific circumstances, justify a longer time.
(iii) Under no circumstances shall estimates for
undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an
analogous reservoir, as defined in 17 CFR 210.4-10(a)(2), or by other evidence using reliable technology establishing reasonable certainty.
The process of estimating oil and gas reserves is complex and requires significant judgment. As a result, the Trustee has developed internal policies
and controls for estimating reserves. As described above, the Trust does not have information that would be available to a company with oil and gas operations because detailed information is not generally available to owners of royalty interests.
The Trustee gathers production information (which information is net to the Trusts interests in the Underlying Properties) and provides such information to Cawley, Gillespie & Associates, Inc., who extrapolates from such information
estimates of the reserves attributable to the Underlying Properties based on its expertise in the oil and gas fields where the Underlying Properties are situated, as well as publicly available information. The Trusts policies regarding reserve
estimates require proved reserves to be in compliance with the SEC definitions and guidance.
The independent petroleum engineers reports as
to the proved oil and gas reserves attributable to the Royalties conveyed to the Trust were obtained from Cawley, Gillespie & Associates, Inc. Cawley, Gillespie & Associates, Inc. has been in business since 1973 when the petroleum
consulting firm Keller & Augustson merged with the petroleum consulting firm Cawley, Harrington & Gillespie. The primary business of Cawley, Gillespie & Associates, Inc. is the estimation and evaluation of petroleum
reserves. Kenneth J. Mueller, has been employed by Cawley, Gillespie & Associates, Inc. since 1996. Mr. Mueller attended Texas A&M University from 1975 to 1979, graduating with a Bachelor of Science degree, Summa Cum Laude, in
Petroleum Engineering in 1979, and has in excess of twenty years experience in oil and gas reserves studies and evaluations. Mr. Mueller is a licensed professional engineer with the Texas Board of Professional Engineers and a member of
the Texas Society of Professional Engineers.
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Cawley, Gillespie & Associates, Inc.s reports are attached as exhibits to this Form 10-K. The following table presents a reconciliation of proved reserve quantities from January 1, 2018 through December 31, 2020 (in thousands):
Waddell Ranch
Properties
Texas Royalty
Properties
Total
Oil
(Bbls)
Gas
(Mcf)
Oil
(Bbls)
Gas
(Mcf)
Oil
(Bbls)
Gas
(Mcf)
January 1, 2018
1,628
8,492
2,978
2,010
4,606
10,502
Extensions, discoveries, and other additions
46
109
46
109
Revisions of previous estimates
(367
)
(1,523
)
445
425
78
(1,098
)
Production
(230
)
(1,356
)
(239
)
(253
)
(469
)
(1,609
)
December 31, 2018
1,077
5,722
3,184
2,182
4,261
7,904
Extensions, discoveries, and other additions
5
18
5
18
Revisions of previous estimates
(29
)
(1,412
)
153
(266
)
124
(1,678
)
Production
(133
)
(633
)
(228
)
(225
)
(361
)
(858
)
December 31, 2019
920
3,695
3,109
1,691
4,029
5,386
Extensions, discoveries, and other additions
615
1,327
615
1,327
Revisions of previous estimates
155
1,060
87
62
242
1,122
Production
(220
)
(1,282
)
(216
)
(155
)
(436
)
(1,437
)
December 31, 2020
1,470
4,800
2,980
1,598
4,450
6,398
Estimated quantities of proved reserves and net cash flow as of December 31, 2020 are as follows:
Waddell Ranch
Properties
Oil
(Mstb)
Gas
(Mcf)
Net
Cash
Flow, M$
10% Disc.
Cash Flow,
M$
Proved Developed Producing
766
3,337
$
34,826
$
23,216
Proved Developed Non-Producing
89
136
$
2,392
$
397
Proved Developed
855
3,473
$
37,218
$
23,613
Proved Undeveloped
615
1,327
$
24,513
$
10,239
Total Proved
1,470
4,800
$
61,731
$
33,852
Texas Royalty
Properties
Oil
(Mstb)
Gas
(Mcf)
Net Cash
Flow, M$
10% Disc.
Cash Flow,
M$
Proved Developed Producing
2,980
1,598
$
108,715
$
46,239
Proved Developed
2,980
1,598
$
108,715
$
46,239
Total Proved
2,980
1,598
$
108,715
$
46,239
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Total Waddell Ranch Plus Texas Royalty
Properties
Oil
(Mstb)
Gas
(Mcf)
Net Cash
Flow, M$
10% Disc.
Cash Flow,
M$
Proved Developed Producing
3,746
4,935
$
143,541
$
69,455
Proved Developed Non-Producing
89
136
$
2,392
$
397
Proved Developed
3,835
5,071
$
145,933
$
69,852
Proved Undeveloped
615
1,327
$
24,513
$
10,239
Total Proved
4,450
6,398
$
170,446
$
80,091
Estimated quantities of proved developed reserves of oil and gas as of the dates indicated were as follows (in
thousands):
Oil
(Barrels)
Gas
(Mcf)
Proved Developed Reserves:
January 1, 2018
4,606
10,502
December 31, 2018
4,261
7,904
December 31, 2019
4,029
5,386
December 31, 2020
4,450
6,398
The SEC requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future
net cash flows relating to proved oil and gas reserve quantities. Under this disclosure, future cash inflows are computed by applying the average prices during the 12-month period prior to fiscal year-end, determined as an unweighted arithmetic average of the
first-day-of-the-month benchmark price for each month within such period, unless prices
are defined by contractual arrangements, excluding escalations based upon future conditions. Future price changes are only considered to the extent provided by contractual arrangements in existence at year end. The standardized measure of discounted
future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and gas reserves.
Estimates of proved oil and gas reserves are by their very nature imprecise. Estimates of future net revenue attributable to proved reserves are
sensitive to the unpredictable prices of oil and gas and other variables.
The 2020, 2019 and 2018 change in the standardized measure of discounted
future net cash revenues related to future royalty income from proved reserves attributable to the Royalties discounted at 10% is as follows (in thousands):
Waddell Ranch
Properties
Texas Royalty
Properties
Total
2020
2019
2018
2020
2019
2018
2020
2019
2018
January 1
$
34,239
$
54,226
$
64,682
$
68,516
$
85,142
$
65,228
$
102,755
$
139,368
$
129,910
Extensions, discoveries, and other additions
10,240
16
994
10,240
16
994
Accretion of discount
3,424
5,408
6,468
6,852
8,514
6,523
10,276
13,922
12,991
Revisions of previous estimates and other
(11,039
)
(17,146
)
(843
)
(20,101
)
(12,917
)
28,404
(31,140
)
(30,063
)
27,561
Royalty income
(3,012
)
(8,265
)
(17,025
)
(9,028
)
(12,223
)
(15,013
)
(12,040
)
(20,488
)
(32,088
)
December 31
$
33,852
$
34,239
$
54,226
$
46,239
$
68,516
$
85,142
$
80,091
$
102,755
$
139,368
Average oil and gas prices of $39.57 per barrel and $2.00 per Mcf were used to determine the estimated future net
revenues from the Waddell Ranch properties and the Texas Royalty properties, respectively, at December 31, 2020. The downward revisions of both reserves and discounted future net cash flows for the Waddell Ranch properties are primarily due to
stronger pricing for oil and by weaker gas pricing. The Texas Royalty properties are revised downward due to weaker pricing for oil.
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Average oil and gas prices of $55.69 per barrel and $2.58 per Mcf were used to determine the estimated
future net revenues from the Waddell Ranch properties and the Texas Royalty properties, respectively, at December 31, 2019. The downward revisions of both reserves and discounted future net cash flows for the Waddell Ranch properties are
primarily due to weaker pricing for oil and by weaker gas pricing. The Texas Royalty properties are revised downward due to weaker pricing for oil.
Average oil and gas prices of $65.56 per barrel and $3.11 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch
properties and the Texas Royalty properties, respectively, at December 31, 2018. The upward revisions of both reserves and discounted future net cash flows for the Waddell Ranch properties are primarily due to stronger pricing for oil and gas.
The Texas Royalty properties are revised upward due to stronger pricing for oil and gas.
The following presents estimated future net revenue and
the present value of estimated future net revenue attributable to the Royalties, for each of the years ended December 31, 2020, 2019 and 2018 (in thousands):
2020
2019
2018
Estimated
Future Net
Revenue
Present
Value at
10%
Estimated
Future Net
Revenue
Present
Value at
10%
Estimated
Future Net
Revenue
Present
Value at
10%
Total Proved
Waddell Ranch properties
$
61,731
$
33,852
$
51,879
$
34,239
$
78,347
$
54,084
Texas Royalty properties
108,715
46,239
159,684
68,516
192,115
85,142
Total
$
170,446
$
80,091
$
211,563
$
102,755
$
270,462
$
139,226
Reserve quantities and revenues shown in the preceding tables for the Royalties were estimated from projections of
reserves and revenue attributable to the combined Blackbeard, River Hill Energy and Trust interests in the Waddell Ranch properties and Texas Royalty properties. Reserve quantities attributable to the Royalties were estimated by allocating to the
Royalties a portion of the total estimated net reserve quantities of the interests, based upon gross revenue less production taxes. Because the reserve quantities attributable to the Royalties are estimated using an allocation of the reserves, any
changes in prices or costs will result in changes in the estimated reserve quantities allocated to the Royalties. Therefore, the reserve quantities estimated will vary if different future price and cost assumptions occur.
Proved reserve quantities are estimates based on information available at the time of preparation and such estimates are subject to change as additional
information becomes available. The reserves actually recovered and the timing of production of those reserves may be substantially different from the original estimate. Moreover, the present values shown above should not be considered as the market
values of such oil and gas reserves or the costs that would be incurred to acquire equivalent reserves. A market value determination would include many additional factors.
Detailed information concerning the number of wells on royalty properties is not generally available to the owner of royalty interests. Consequently,
the Registrant does not have information that would be disclosed by a company with oil and gas operations, such as an accurate account of the number of wells located on the above royalty properties, the number of exploratory or development wells
drilled on the above royalty properties during the periods presented by this report, or the number of wells in process or other present activities on the above royalty properties, and the Registrant cannot readily obtain such information.
REGULATION
Many aspects of the production,
pricing, transportation and marketing of crude oil and natural gas are regulated by federal and state agencies. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory
burden on affected members of the industry.
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Exploration and production operations are subject to various types of regulation at the federal,
tribal, state and local levels. Such regulation includes requiring permits for the drilling and production of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling
and casing wells, controlling and remediating pollution from exploration and production activities, proper handling and disposal of waste generated from exploration and production operations, the surface use and restoration of properties upon which
wells are drilled and the plugging and abandonment of wells. Natural gas and oil operations are also subject to various conservation laws and regulations that regulate the size of drilling and spacing units or proration units and the density of
wells which may be drilled and unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum allowable production from natural gas and oil wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of natural gas and oil that can be produced, potentially to raise prices, and to limit the number of wells or the locations
which can be drilled.
Federal Natural Gas Regulation
The Federal Energy Regulatory Commission (the FERC) is primarily responsible for federal regulation of natural gas. The interstate
transportation and sale for resale of natural gas is subject to federal governmental regulation, including regulation of transportation and storage tariffs and various other matters, by the FERC. On August 8, 2005, Congress enacted the Energy
Policy Act of 2005. The Energy Policy Act, among other things, amended the Natural Gas Act to prohibit market manipulation by any entity, to direct the FERC to facilitate market transparency in the market for sale or transportation of physical
natural gas in interstate commerce, and to significantly increase the penalties for violations of the Natural Gas Act, the Natural Gas Policy Act of 1978, or the FERC rules, regulations or orders thereunder. Wellhead sales of domestic natural gas
are not subject to regulation. Consequently, sales of natural gas may be made at market prices, subject to applicable contract provisions.
Sales of
natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation remain subject to extensive federal and state regulation. Several major regulatory changes have been
implemented by Congress and the FERC from 1985 to the present that affect the economics of natural gas production, transportation, and sales. In addition, the FERC continues to promulgate revisions to various aspects of the rules and regulations
affecting those segments of the natural gas industry, most notably interstate natural gas transmission companies, that remain subject to the FERCs jurisdiction. These initiatives may also affect the intrastate transportation of gas under
certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry and these initiatives generally reflect more light-handed regulation of the natural gas
industry. The ultimate impact of the rules and regulations issued by the FERC since 1985 cannot be predicted. In addition, many aspects of these regulatory developments have not become final but are still pending judicial decisions and final
decisions by the FERC.
New proposals and proceedings that might affect the natural gas industry are considered from time to time by Congress, the
FERC, state regulatory bodies and the courts. The Trust cannot predict when or if any such proposals might become effective, or their effect, if any, on the Trust. The natural gas industry historically has been very heavily regulated; therefore,
there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue.
Sales of crude oil,
condensate and natural gas liquids are not currently regulated and are made at market prices. Crude oil prices are affected by a variety of factors. Since domestic crude price controls were lifted in 1981, the principal factors influencing the
prices received by producers of domestic crude oil have been the pricing and production of the members of the Organization of Petroleum Export Countries (OPEC).
On December 19, 2007, President Bush signed into law the Energy Independence & Security Act of 2007 (PL 110 140). The EISA, among other
things, prohibits market manipulation by any person in connection with the purchase or sale of crude oil, gasoline or petroleum distillates at wholesale in contravention of such rules and regulations that the Federal Trade Commission may prescribe,
directs the Federal Trade Commission to enforce the regulations, and establishes penalties for violations thereunder.
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State Regulation
The various states regulate the production and sale of oil and natural gas, including imposing requirements for obtaining drilling permits, the method of
developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas resources. The rates of production may be regulated and the maximum daily production allowables from both oil and gas wells may be established on a
market demand or conservation basis, or both.
Local Regulation
Drilling for and production and transportation of crude oil and natural gas are also regulated by local authorities. Local laws may include land use
regulations, permitting requirements, and noise and traffic ordinances. Such regulation could increase drilling and production costs or create delays in development and production of the Underlying Properties.
Environmental Regulation
Companies in the oil and gas
industry are subject to stringent and complex federal, tribal, state and local laws and regulations governing the health and safety aspects of oil and gas operations, the management and discharge of materials into the environment, or otherwise
relating to environmental protection. Those laws and regulations may impose numerous obligations that are applicable to the operations of the Underlying Properties, including the acquisition of a permit before conducting drilling, production or
underground injection activities; the restriction on the types, quantities and concentrations of materials that can be emitted or released into the environment; the limitation or prohibition of drilling activities on certain lands lying within
wilderness, wetlands, endangered or threatened species habitat, and other protected areas; the installation of emission monitoring and/or pollution control equipment; the reporting of the types and quantities of various substances that are stored,
processed, or released in connection with operation of the Underlying Properties; the remediation of pollution from current or former operations, such as cleanup of releases, pit closure, removal of surface equipment and plugging of abandoned wells;
the planning and preparedness for spill and emergency response activities; the application of specific health and safety criteria addressing worker protection; and the imposition of substantial liabilities for pollution resulting from operations
including waste generation, air emissions, water discharges and current and historical waste disposal practices. Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal penalties; the
imposition of investigatory or remedial obligations; and the issuance of injunctions limiting or preventing some or all of the operations. Under certain environmental laws and regulations, the operators of the Underlying Properties could also be
subject to joint and several, strict liability for the removal or remediation of previously released materials or property contamination, in either case, whether at a drill site or a waste disposal facility, regardless of whether the operators were
responsible for the release or contamination or if the operations were in compliance with all applicable laws at the time those actions were taken.
In addition, climate change is the subject of an important public policy debate and the basis for new legislation proposed by the United States Congress
and certain states. Some states have adopted climate change statutes and regulations. The United States Environmental Protection Agency (the EPA) has promulgated greenhouse gas monitoring and reporting regulations that, since 2011, have
required annual reporting of carbon dioxide, methane and nitrous oxide emissions from certain sources in the oil and natural gas industry sector, including in the onshore oil and natural gas production segment.
Beyond measuring and reporting, the EPA issued an Endangerment Finding under Section 202(a) of the Clean Air Act, concluding that
greenhouse gas pollution threatens the public health and welfare of future generations. The EPA indicated that it will use data collected through the reporting rules to decide whether to promulgate future greenhouse gas emission limits. On
August 16, 2012, the EPA issued a final rule, known as New Source Performance Standards (NSPS) Subpart OOOO, that established new source performance standards for volatile organic compounds (VOC(s)) and sulfur dioxide,
an air toxics standard for major sources of oil and natural gas production, and an air toxics standard for major sources of natural gas transmission and storage. The rule required that, starting
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January 1, 2015, all hydraulically fractured or refractured natural gas wells be completed using reduced emission (green) completion technology, which significantly reduces
VOC emissions. Limiting emissions of VOCs will have the co-benefit of also limiting methane, a greenhouse gas. These regulations also include requirements applicable to storage tanks and other equipment in the
affected oil and natural gas industry segments. On May 12, 2016, the EPA issued a final rule, known as NSPS Subpart OOOOa, establishing additional standards for the reduction of methane, VOCs, and other emissions from new and existing sources
in the oil and gas sector. Among other requirements, these new standards require green completion technology for new hydraulically fractured or refractured oil wells. And rulemaking concerning regulation of greenhouse gas and other emissions from
the oil and natural gas industry continues: in October 2018, the EPA released proposed revisions to some of the 2016 requirements, including reducing the required frequency of fugitive emissions monitoring at well sites and compressor stations. Most
recently, EPA published two new rules on September 14 and 15, 2020 that remove the transmission and storage sectors of the oil and gas industry from regulation under the NSPS and rescind methane-specific standards for the production and
processing segments of the industry. However, states and environmental groups brought suit challenging the new rules almost immediately. Although the bulk of the 2012 and 2016 standards are currently in effect, future implementation and the ultimate
scope of the 2012 and 2016 standards are uncertain at this time as a result of these challenges and current uncertainty regarding how the standards may be altered under the administration of recently elected U.S. President Biden. Accordingly, the
ultimate scope of these regulations remains uncertain.
Congress and various states, including Texas, have proposed or adopted legislation
regulating or requiring disclosure of the chemicals in the hydraulic fracturing fluid that is used in the drilling operation. Texas requires oil and gas operators to disclose the chemicals on the Frac Focus website. Hydraulic fracturing has
historically been regulated by state oil and natural gas commissions. The EPA, however, has asserted federal regulatory authority over certain hydraulic fracturing activities involving diesel under the Safe Drinking Water Act (the SDWA).
The EPA has issued permitting guidance for oil and natural gas hydraulic fracturing activities using diesel fuels. Under the guidance, EPA defined the term diesel to include five categories of oils, including some such as kerosene, that
are not traditionally considered to be diesel.
The Federal Water Pollution Control Act, also known as the Clean Water Act (CWA), and
analogous state laws impose restrictions and strict controls on the discharge of pollutants, including produced waters and other oil and natural gas wastes, into waters of the United States. The discharge of pollutants into regulated waters is
prohibited, except in accordance with the terms of a permit issued by EPA or the relevant state agency. The CWA also prohibits the discharge of dredge and fill material in regulated waters, including wetlands, unless authorized by a permit issued by
the U.S. Army Corps of Engineers. In May 2015, EPA and the U.S. Army Corps of Engineers jointly announced a final rule defining the Waters of the United States (WOTUS) which are protected under the CWA. The rule, which would
have made additional waters expressly Waters of the United States and therefore subject to the jurisdiction of the Clean Water Act, rather than subject to a case-specific evaluation, was stayed by the U.S. Court of Appeals for the Sixth Circuit
before it took effect. On February 1, 2018, EPA officially delayed implementation of the 2015 rule until early 2020, and in July 2018, the EPA proposed repeal of the 2015 WOTUS rule. Later that year, EPAs decision was challenged in court,
which resulted in a decision by the U.S. District Court for the District of South Carolina to enjoin EPAs February 2018 delay rule. Several states then acted to halt reinstatement of the 2015 WOTUS rule, the effect of all of which was that the
2015 WOTUS definition was in effect in 22 states. In September 2019, EPA finalized the repeal of the 2015 WOTUS rule, and the repeal became effective in December 2019, reinstating the pre-2015 standards.
Litigation of the repeal quickly ensued. Meanwhile, in December 2018, the EPA and the U.S. Army Corps of Engineers issued a proposed rule to revise the definition of Waters of the United States. The rule became effective on June 22,
2020. The rule narrows the WOTUS definition, excluding, for example, streams that flow only after precipitation and wetlands without a direct surface connection to traditional navigable waters. Litigation by parties opposing the rule again quickly
followed, including a challenge in the U.S. District Court for the District of Colorado, which resulted in a statewide stay of the rule on June 19, 2020. This ruling is currently being appealed in the Tenth Circuit. Regardless, the applicable
WOTUS definition affects what CWA permitting or other regulatory obligations may be triggered during development and operation of the Underlying Properties, and changes to the WOTUS definition could cause delays in development and/or increase the
cost of development and operation of the Underlying Properties.
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Spill prevention, control, and countermeasure (SPCC) regulations promulgated under the CWA
and later amended by the Oil Pollution Act of 1990 impose obligations and liabilities related to the prevention of oil spills and damages resulting from such spills into or threatening waters of the United States or adjoining shorelines. For
example, operators of certain oil and natural gas facilities that store oil in more than threshold quantities, the release of which could reasonably be expected to reach jurisdictional waters, must develop, implement, and maintain SPCC Plans.
Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and
regulations.
The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as the superfund
law, imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the current or
previous owner and operator of a site where a hazardous substance has been disposed and persons who disposed or arranged for the disposal of a hazardous substance at a site, or transported a hazardous substance to a site for disposal. CERCLA also
authorizes the EPA and, in some cases, private parties to take actions in response to threats to the public health or the environment and to seek recovery from such responsible classes of persons of the costs of such an action. In the course of
operations, the working interest owner and/or the operator of the Underlying Properties may have generated and may generate wastes that may fall within CERCLAs definition of hazardous substances. The operator of the Underlying
Properties or the working interest owners may be responsible under CERCLA for all or part of the costs to clean up sites at which such substances have been disposed. Although the Trust is not the operator of any of the Underlying Properties, or the
owner of any working interest, its ownership of royalty interests could cause it to be responsible for all or part of such costs to the extent CERCLA imposes responsibility on such parties as owners.
The Underlying Properties have produced oil and/or gas for many years and, in connection with that production, managed waste, such as drilling fluids
and produced water, that is subject to regulation under environmental laws. Although the Trust has no knowledge of the procedures followed by the operators of the Underlying Properties in this regard, hydrocarbons or other solid or hazardous wastes
may have been or may be disposed or released on, under, or from the Underlying Properties by the current or previous operators or may have been disposed offsite of the Underlying Properties. Federal, state and local laws and regulations applicable
to oil and gas-related wastes and properties have become increasingly more stringent. Failure to comply with these laws and regulations may result in the assessment of administrative, civil or criminal
penalties, the imposition of investigatory, ongoing monitoring, or remedial obligations, and/or the issuance of injunctions limiting or preventing some or all of the operations. Under these laws, removal or remediation of current releases of such
materials or of previously disposed wastes or property contamination at a drill site or a waste disposal facility could be required by a governmental authority regardless of whether the operators of the Underlying Properties were responsible for the
release or contamination or if the operations were in compliance with all applicable laws at the time those actions were taken.
The federal Safe
Drinking Water Act (SDWA) and the Underground Injection Control (UIC) program promulgated under the SDWA and state programs regulate the drilling and operation of salt water disposal wells. EPA directly administers the UIC
program in some states and in others administration is delegated to the state. Permits must be obtained before drilling salt water disposal wells, and casing integrity monitoring must be conducted periodically to ensure that the disposed waters are
not leaking into groundwater. In addition, because some states have become concerned that the injection or disposal of produced water could, under certain circumstances, trigger or contribute to earthquakes, they have adopted or are considering
additional regulations regarding such disposal methods. Changes in regulations or the inability to obtain permits for new disposal wells in the future may affect the ability of the operators of the Underlying Properties to dispose of produced water
and ultimately increase the cost of operation of the Underlying Properties or delay production schedules. For example, in 2014, the Railroad Commission of Texas (RRC) published a final rule governing permitting or re-permitting of disposal wells that would require, among other things, the submission of information on seismic events occurring within a specified radius of the disposal well location, as well as logs, geologic
cross sections and structure maps relating to the disposal area in question. If the permittee or an applicant of a disposal well permit fails to demonstrate that the injected fluids are confined to the disposal zone or if scientific data indicates
such a disposal well is likely to be or determined to be contributing to seismic activity, then the RRC may deny, modify, suspend or terminate the permit application or existing operating permit for that well.
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In addition, several cases have recently put a spotlight on the issue of whether injection wells may
be regulated under the CWA if a direct hydrological connection to a jurisdictional surface water can be established. The split among federal circuit courts of appeals that decided these cases engendered two petitions for writ of certiorari to the
United States Supreme Court in August 2018, one of which was granted in February 2019. Oral arguments were presented to the Supreme Court in November 2019. EPA has also brought attention to the reach of the CWAs jurisdiction in such instances
by issuing a request for comment in February 2018 regarding the applicability of the CWA permitting program to discharges into groundwater with a direct hydrological connection to jurisdictional surface water, which hydrological connections should
be considered direct, and whether such discharges would be better addressed through other federal or state programs. In a statement issued by EPA in April 2019, the Agency concluded that the CWA should not be interpreted to require
permits for discharges of pollutants that reach surface waters via groundwater. However, in April 2020, the Supreme Court issued a ruling in the case, County of Maui, Hawaii v. Hawaii Wildlife Fund , holding that discharges into groundwater
may be regulated under the CWA if the discharge is the functional equivalent of a direct discharge into navigable waters. On December 10, 2020, EPA issued a draft guidance on the ruling, which emphasized that discharges to
groundwater are not necessarily the functional equivalent of a direct discharged based solely on proximity to jurisdictional waters. If in the future CWA permitting is required for saltwater injection wells as a result of the Supreme
Courts ruling in County of Maui, Hawaii v. Hawaii Wildlife Fund , the costs of permitting and compliance for injection well operations by the companies that operate the Underlying Properties could increase.
Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds
and their habitat, wetlands, and natural resources. These statutes include the Endangered Species Act, the Migratory Bird Treaty Act, the CWA, and CERCLA. The United States Fish and Wildlife Service (USFWS) may designate critical habitat
and suitable habitat areas that it believes are necessary for the survival of threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and private land use
and could delay or prohibit land access or development. Where takings of, or harm to, species or damages to wetlands, habitat or natural resources occur or may occur, government entities or at times private parties may act to restrict or prevent oil
and gas exploration or production activities or seek damages for harm to species, habitat or natural resources resulting from drilling or construction or production activities, including, for example, for releases of oil, wastes, hazardous
substances or other regulated materials, and may seek natural resources damages and, in some cases, criminal penalties.
The Underlying Properties
and operation thereof may be subject to the requirements of the federal Occupational Safety and Health Act (OSHA) and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA, the general duty clause and Risk Management Planning regulations promulgated under section 112(r) of the Clean Air Act, and similar state statutes may
require disclosure of information about hazardous materials used, produced or otherwise managed during operation of the Underlying Properties. These laws also require the development of risk management plans for certain facilities to prevent
accidental releases of pollutants.
The Trustee is unable to predict the total impact of the current and potential regulations upon the operators of
the Underlying Properties, but it is possible that the operators of the Underlying Properties could face operational delays, increases in the operating costs to comply with climate change or any other environmental legislation or regulation, or
decreases in the completion of new oil and natural gas wells, each of which could reduce net proceeds payable to the Trust and Trust distributions.
Other
Regulation
The petroleum industry is also subject to compliance with various other federal, tribal, state, and local regulations and laws, including, but not
limited to, occupational safety, resource conservation and equal employment opportunity. The Trustee does not believe that compliance with these laws by the operating parties will have any material adverse effect on Unit holders.
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Item 3.
Legal Proceedings
There are no material pending legal proceedings to which the Trust is a party or of which any of its property is the subject.
Item 4.
Mine Safety Disclosures
This Item is not applicable to the Trust.
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PART II
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.