Permianville Royalty Trust 10-Q

Item 1. Financial Statements. PERMIANVILLE ROYALTY TRUST Statements of Assets, Liabilities and Trust Corpus September 30, December 31, 2021 2020 (unaudited) ASSETS Cash and cash equivalents $ 1,091 $ 29,639 Net profits interest in oil and natural gas properties, net 66,500,234 71,265,032 Total assets $ 66,501,325 $ 71,294,671 LIABILITIES AND TRUST CORPUS Advances to the Trust $ – $ 348,821 Total liabilities – 348,821 Trust corpus (33,000,000 units issued and outstanding) 66,501,325 70,945,850 Total liabilities and Trust corpus $ 66,501,325 $ 71,294,671 The accompanying notes are an integral part of these financial statements. 2 PERMIANVILLE ROYALTY TRUST Statements of Distributable Income (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Income from net profits interest $ 1,399,460 $ 172,819 $ 1,399,460 $ 5,565,015 Interest and investment income – 1 1 445 General and administrative expenses (178,786 ) (123,887 ) (650,188 ) (693,190 ) Cash reserves used (withheld) for Trust expenses (791,674 ) 76,467 (320,273 ) 151,320 Distributable income $ 429,000 $ 125,400 $ 429,000 $ 5,023,590 Distributable income per unit (33,000,000 units) $ 0.013000 $ 0.003800 $ 0.013000 $ 0.152230 The accompanying notes are an integral part of these financial statements. 3 PERMIANVILLE ROYALTY TRUST Statements of Changes in Trust Corpus (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Trust corpus, beginning of period $ 67,243,490 $ 74,344,781 $ 70,945,850 $ 77,221,803 Cash reserves (used) withheld for Trust expenses 791,674 (76,467 ) 320,274 (151,320 ) Distributable income 429,000 125,400 429,000 5,023,590 Distributions to unitholders (429,000 ) (125,400 ) (429,000 ) (5,023,590 ) Amortization of net profits interest (1,533,839 ) (1,259,174 ) (4,764,799 ) (4,061,343 ) Trust corpus, end of period $ 66,501,325 $ 73,009,140 $ 66,501,325 $ 73,009,140 The accompanying notes are an integral part of these financial statements. 4 PERMIANVILLE ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS (unaudited) 1. TRUST ORGANIZATION AND PROVISIONS Permianville Royalty Trust (the “Trust”), previously known as Enduro Royalty Trust, is a Delaware statutory trust formed in May 2011 pursuant to a trust agreement (the “Trust Agreement”) among Enduro Resource Partners LLC (“Enduro”), as trustor, The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee, and Wilmington Trust Company (the “Delaware Trustee”), as Delaware Trustee. The Trust was created to acquire and hold for the benefit of the Trust unitholders a net profits interest representing the right to receive 80% of the net profits from the sale of oil and natural gas production from certain properties in the states of Texas, Louisiana and New Mexico held by Enduro as of the date of the conveyance of the net profits interest to the Trust (the “Net Profits Interest”). The properties in which the Trust holds the Net Profits Interest are referred to as the “Underlying Properties.” In connection with the closing of the initial public offering in November 2011, Enduro contributed the Net Profits Interest to the Trust in exchange for 33,000,000 units of beneficial interest in the Trust (the “Trust Units”). On August 31, 2018, COERT Holdings 1 LLC (“COERT” or the “Sponsor”) acquired from Enduro the Underlying Properties and all of the outstanding Trust Units owned by Enduro (the “Sale Transaction”). In connection with the Sale Transaction, COERT assumed all of Enduro’s obligations under the Trust Agreement and other instruments to which Enduro and the Trustee were parties. As of September 30, 2021, the Sponsor owned 8,600,000 Trust Units, or 26% of the issued and outstanding Trust Units. The Net Profits Interest is passive in nature and neither the Trust nor the Trustee has any management control over or responsibility for costs relating to the operation of the Underlying Properties. The Amended and Restated Trust Agreement provides, among other provisions, that: · the Trust’s business activities are limited to owning the Net Profits Interest and any activity reasonably related to such ownership, including activities required or permitted by the terms of the Conveyance of Net Profits Interest, dated effective as of July 1, 2011 (as supplemented and amended to date, the “Conveyance”). As a result, the Trust is not permitted to acquire other oil and natural gas properties or net profits interests or otherwise to engage in activities beyond those necessary for the conservation and protection of the Net Profits Interest; · the Trust may dispose of all or any material part of the assets of the Trust (including the sale of the Net Profits Interest) if approved by at least 75% of the outstanding Trust Units; · the Sponsor may sell a divided or undivided portion of its interests in the Underlying Properties, free from and unburdened by the Net Profits Interest, if approved by at least 50% of the outstanding Trust Units at a meeting of Trust unitholders; · the Trustee will make monthly cash distributions to unitholders (Note 5); · the Trustee may create a cash reserve to pay for future liabilities of the Trust; · the Trustee may authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed its cash on hand and available reserves. No further distributions will be made to Trust unitholders until such amounts borrowed are repaid; and · the Trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time. The Trust will dissolve upon the earliest to occur of the following: · the Trust, upon approval of the holders of at least 75% of the outstanding Trust Units, sells the Net Profits Interest; · the annual cash proceeds received by the Trust attributable to the Net Profits Interest are less than $2 million for each of any two consecutive years; · the holders of at least 75% of the outstanding Trust Units vote in favor of dissolution; or · the Trust is judicially dissolved. 5 PERMIANVILLE ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS - Continued (unaudited) 2. BASIS OF PRESENTATION The Statement of Assets, Liabilities and Trust Corpus as of December 31, 2020, which has been derived from audited financial statements, and the unaudited interim financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”). In the opinion of the Trustee, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal, recurring accrual adjustments, that are necessary for a fair presentation of the interim periods presented and include all the disclosures necessary to make the information presented not misleading. These interim results are not necessarily indicative of results for a full year. The preparation of financial statements requires the Trustee to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Although the Trustee believes that these estimates are reasonable, actual results could differ from those estimates. The Trust uses the modified cash basis of accounting to report Trust receipts of income from the Net Profits Interest and payments of expenses incurred. The Net Profits Interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses and production and property taxes) and development expenses of the Underlying Properties, multiplied by 80%. Cash distributions of the Trust are made based on the amount of cash received by the Trust pursuant to terms of the Conveyance creating the Net Profits Interest. Under the terms of the Conveyance, the monthly Net Profits Interest calculation includes oil and natural gas revenues received during the relevant month. Monthly operating expenses and capital expenditures represent estimated incurred expenses and, as a result, represent accrued expenses as well as expenses paid during the period. The financial statements of the Trust are prepared on the following basis: (a) Income from Net Profits Interest is recorded when distributions are received by the Trust; (b) Distributions to Trust unitholders are recorded when paid by the Trust; (c) Trust general and administrative expenses (which includes the Trustee’s fees as well as accounting, engineering, legal, and other professional fees) are recorded when paid; (d) Cash reserves for Trust expenses may be established by the Trustee for certain future expenditures that would not be recorded as contingent liabilities under accounting principles generally accepted in the United States of America (“GAAP”); (e) Amortization of the Net Profits Interest in oil and natural gas properties is calculated on a unit-of-production basis and is charged directly to the Trust corpus; and (f) The Net Profits Interest in oil and natural gas properties is periodically assessed whenever events or circumstances indicate that the aggregate value may have been impaired below its total capitalized cost based on the Underlying Properties. If an impairment loss is indicated by the carrying amount of the assets exceeding the sum of the undiscounted expected future net cash flows of the Net Profits Interest, then an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value determined using discounted cash flows. An impairment loss would be charged to the Trust and would not impact the Statement of Distributable Income. The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued; certain cash reserves may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP; general and administrative expenses are recorded when paid instead of when incurred; and amortization of the net profits interest calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense. While these statements differ from financial statements prepared in accordance with GAAP, the modified cash basis of reporting is considered to be the most meaningful because monthly distributions to the Trust unitholders are based on net cash receipts. This comprehensive basis of accounting other than GAAP 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 . 6 PERMIANVILLE ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS - Continued (unaudited) 3. NET PROFITS INTEREST IN OIL AND NATURAL GAS PROPERTIES The Net Profits Interest in oil and natural gas properties was recorded at its fair value on the date of conveyance. Amortization of the Net Profits Interest in oil and natural gas properties is calculated on a unit-of-production basis based on the Underlying Properties’ production and reserves. The reserves upon which the amortization rate is based are quantity estimates that are subject to numerous uncertainties inherent in the estimation of proved reserves. The volumes considered to be commercially recoverable fluctuate with changes in commodity prices and operating costs. These estimates are expected to change as additional information becomes available in the future. Downward revisions in proved reserves may result in an increased rate of amortization. Amortization is charged directly to the Trust corpus balance and does not affect the distributable income of the Trust. Accumulated amortization as of September 30, 2021 and December 31, 2020 was $290,590,924 and $285,826,125, respectively. The Net Profits Interest is periodically assessed for impairment whenever events or circumstances indicate that the current fair value based on expected future cash flows of the Underlying Properties may be less than the carrying value of the Net Profits Interest. While the Trust did not record an impairment during the three months ended September 30, 2021 or 2020, future downward revisions in actual production volumes relative to current forecasts, higher than expected operating costs, or lower than anticipated commodity prices could result in recognition of impairment in future periods. 4. INCOME TAXES Federal Income Taxes For federal income tax purposes, the Trust is a grantor trust and therefore is not subject to tax at the trust level. Trust unitholders are treated as owning a direct interest in the assets of the Trust, and each Trust unitholder is taxed directly on his or her pro rata share of the income and gain attributable to the assets of the Trust and entitled to claim his or her pro rata share of the deductions and expenses attributable to the assets of the Trust. The income of the Trust is deemed to have been received or accrued by each unitholder at the time such income is received or accrued by the Trust rather than when distributed by the Trust. The deductions of the Trust consist of severance taxes and administrative expenses. In addition, each unitholder is entitled to depletion deductions because the Net Profits Interest constitutes “economic interests” in oil and natural gas properties for federal income tax purposes. Each unitholder is entitled to amortize the cost of the Trust Units through cost depletion over the life of the Net Profits Interest or, if greater, through percentage depletion. Unlike cost depletion, percentage depletion is not limited to a unitholder’s depletable tax basis in the Trust Units. Rather, a unitholder could be entitled to percentage depletion as long as the applicable Underlying Properties generate gross income. Some Trust Units are held by a middleman, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an interest for a custodian in street name). Therefore, the Trustee considers the Trust to be a non-mortgage widely held fixed investment trust (“WHFIT”) for U.S. federal income tax purposes. The Bank of New York Mellon Trust Company, N.A., 601 Travis, 16 th Floor, Houston, Texas 77002, telephone number (512) 236-6545, is the representative of the Trust that will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT. Tax information is also posted by the Trustee at www.permianvilleroyaltytrust.com . Notwithstanding the foregoing, the middlemen holding units on behalf of unitholders, and not the Trustee of the Trust, are solely responsible for complying with the information reporting requirements under the U.S. Treasury Regulations with respect to such units, including the issuance of IRS Forms 1099 and certain written tax statements. Unitholders whose units are held by middlemen should consult with such middlemen regarding the information that will be reported to them by the middlemen with respect to the Trust Units. The tax consequences to a unitholder of ownership of Trust Units will depend in part on the unitholder’s tax circumstances. Unitholders should consult their tax advisors about the federal tax consequences relating to owning the Trust Units. 7 State Taxes The Trust’s revenues are from sources in the states of Louisiana, New Mexico, and Texas. Because it distributes all of its net income to unitholders, the Trust is not taxed at the trust level in Louisiana or New Mexico. Although the Trust does not owe tax, the Trustee is required to file a return with Louisiana reflecting the income and deductions of the Trust attributable to properties located in that state. Presently, Louisiana and New Mexico tax nonresident income from real property located within that state. Louisiana and New Mexico impose a corporate income tax which may apply to unitholders organized as corporations. Texas does not impose a state income tax, so the Trust’s income is not subject to income tax at the trust level in Texas. Texas imposes a franchise tax at a rate of 0.75% on gross revenues less certain deductions for returns originally due on or after January 1, 2016, as specifically set forth in the Texas franchise tax statutes. Entities subject to tax generally include trusts unless otherwise exempt. Trusts that receive at least 90% of their federal gross income from designated passive sources, including royalties from mineral properties and other income from other non-operating mineral interests, and do not receive more than 10% of their income from operating an active trade or business, generally are exempt from the Texas franchise tax as “passive entities.” Although the Trust is intended to be exempt from Texas franchise tax at the trust level as a passive entity, each unitholder that is considered a taxable entity under the Texas franchise tax would generally be required to include its portion of Trust net income in its own Texas franchise tax computation. Each unitholder should consult his or her own tax advisor regarding state tax requirements, if any, applicable to such person’s ownership of Trust Units. 5. DISTRIBUTIONS TO UNITHOLDERS Each month, the Trustee determines the amount of funds available for distribution to the Trust unitholders. Available funds are the excess cash, if any, received by the Trust from the Net Profits Interest and other sources (such as interest earned on any amounts reserved by the Trustee) that month, over the Trust’s liabilities for that month, subject to adjustments for changes made by the Trustee during the month in any cash reserves established for future liabilities of the Trust. No distributions will be made to Trust unitholders until the indebtedness created by such amounts drawn or borrowed as advances to the Trust have been repaid in full. Distributions are made to the holders of Trust Units as of the applicable record date (generally the last business day of each calendar month) and are payable on or before the 10th business day after the record date. The following table provides information regarding the Trust’s distributions per unit paid during the periods indicated: Declaration Date Record Date Payment Date Distribution per Unit Nine Months Ended September 30, 2021: August 15, 2021 August 31, 2021 September 15, 2021 $ 0.013000 Year to Date – 2021 $ 0.013000 Nine Months Ended September 30, 2020: December 16, 2019 December 31, 2019 January 15, 2020 $ 0.018000 January 17, 2020 January 31, 2020 February 14, 2020 $ 0.020630 February 18, 2020 February 28, 2020 March 13, 2020 $ 0.024500 March 16, 2020 March 31, 2020 April 14, 2020 $ 0.041000 April 17, 2020 April 30, 2020 May 12, 2020 $ 0.029000 May 15, 2020 May 29, 2020 June 15, 2020 $ 0.015300 June 15, 2020 June 30, 2020 July 15, 2020 $ 0.003800 Year to Date – 2020 $ 0.152230 In July and August 2020, the direct operating and development expenses exceeded revenues, causing the net profits to be negative and creating a Net Profits Interest shortfall of $2.2 million as of September 30, 2020, which was carried forward to be deducted from future net profits to be generated by the Underlying Properties. As a result, there were no distributions to the Trust unitholders in August and September 2020, respectively. During the nine months ended September 30, 2021, the Net Profits Interest generated positive income for each month in the period, which eliminated the cumulative outstanding Net Profits Interest shortfall of $1.7 million that existed as of December 31, 2020. In August 2021, the remaining amount of the shortfall and advances to the Trust were fully repaid, resulting in a positive distribution to the unitholders in September 2021. 8 6. ADVANCES TO THE TRUST From time to time, if the Trust’s cash on hand (including available cash reserves, if any) is not sufficient to pay the Trust’s ordinary course administrative expenses that are due prior to the monthly payment to the Trust of proceeds from the Net Profits Interest, COERT may advance funds to the Trust to pay such expenses. Such advances are recorded as a liability on the Statements of Assets, Liabilities and Trust Corpus until repaid. During the nine months ended September 30, 2021 the balance of the advance to the Trust has been fully repaid. As of September 30, 2021 and December 31, 2020, cumulative outstanding advances to the Trust were $0 and $348,821, respectively. 7. TRUSTEE FEES Under the terms of the Trust Agreement, the Trust pays an administrative fee of $200,000 per year to the Trustee and an annual fee of $2,000 to the Delaware Trustee. During each of the three- and nine-month periods ended September 30, 2021 and 2020, the Trust paid $50,000 and $150,000, respectively, to the Trustee pursuant to the terms of the Trust Agreement. The Trust paid $0 and $2,000 to the Delaware Trustee during the three- and nine-month periods ended September 30, 2021, respectively. The Trust paid a total of $0 and $2,000 to the Delaware Trustee during the three- and nine-month periods ended September 30, 2020, respectively. 8. SUBSEQUENT EVENTS Distributions Paid or Declared On October 15, 2021, a distribution of $0.021000 per unit, which was declared on September 17, 2021, was paid to Trust unitholders of record as of September 30, 2021. On October 18, 2021, the Trust declared a distribution of $0.02700 per unit to unitholders of record as of October 29, 2021. The distribution is expected to be paid to unitholders on November 15, 2021. Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations. References to the “Trust” in this document refer to Permianville Royalty Trust, previously known as Enduro Royalty Trust, while references to “COERT” or the “Sponsor” in this document refer to COERT Holdings 1 LLC. References to “Enduro” in this document refer to Enduro Resource Partners LLC, the original sponsor of the Trust. The following review of the Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Trust’s 2020 Annual Report on Form 10-K. The Trust’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other filings with the SEC are available on the SEC’s website at www.sec.gov . Forward-Looking Statements This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including without limitation the statements under this “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. Such statements may be influenced by factors that could cause actual outcomes and results to differ materially from those projected. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words “believes,” “expects,” “anticipates,” “intends” or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, in the Trust’s 2020 Annual Report on Form 10-K and the Trust’s other filings with the SEC could affect the future results of the energy industry in general, and COERT and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements: · risks associated with the drilling and operation of oil and natural gas wells; · the amount of future direct operating expenses and development expenses; · the effect, impact, potential duration or other implications of the novel strain of coronavirus (“COVID-19”) pandemic; · the actions of the Organization of Petroleum Exporting Countries (“OPEC”); · the effect of existing and future laws and regulatory actions; · the effect of changes in commodity prices or alternative fuel prices; · the prohibition on the Trust’s entry into any new hedging arrangements under the terms of the Conveyance; · conditions in the capital markets; · competition from others in the energy industry; · uncertainty of estimates of oil and natural gas reserves and production; and · cost inflation. 9 You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this Form 10-Q. The Trust does not undertake any obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, unless the securities laws require us to do so. This Form 10-Q describes other important factors that could cause actual results to differ materially from expectations of the Sponsor and the Trust, including under the caption “Risk Factors.” All forward-looking statements in this report and all subsequent written and oral forward-looking statements attributable to the Sponsor or the Trust or persons acting on behalf of the Sponsor or the Trust are expressly qualified in their entirety by such factors. The Trust assumes no obligation, and disclaims any duty, to update these forward-looking statements. 10 Overview Permianville Royalty Trust, a statutory trust created in May 2011, completed its initial public offering in November 2011. The Trust’s only asset and source of income is the Net Profits Interest, which entitles the Trust to receive 80% of the net profits from oil and natural gas production from the Underlying Properties. The Net Profits Interest is passive in nature and neither the Trust nor the Trustee has any management control over or responsibility for costs relating to the operation of the Underlying Properties. Additionally, third parties operate substantially all of the wells on the Underlying Properties and, therefore, the Sponsor is not in a position to control the timing of development efforts, associated costs, or the rate of production of the reserves. On August 31, 2018, COERT completed the acquisition from Enduro of the Underlying Properties and all of the outstanding Trust Units owned by Enduro (the “Sale Transaction”). In connection with the Sale Transaction, COERT assumed all of Enduro’s obligations under the Amended and Restated Trust Agreement of the Trust and other instruments to which Enduro and the Trustee were parties. The Trust is required to make monthly cash distributions of substantially all of its monthly cash receipts, after deducting the Trust’s administrative expenses, to the holders of Trust Units as of the applicable record date (generally the last business day of each calendar month) on or before the 10 th business day after the record date. The Net Profits Interest is entitled to a share of the profits from and after July 1, 2011 attributable to production occurring on or after June 1, 2011. The amount of Trust revenues and cash distributions to Trust unitholders depends on, among other things: · oil and natural gas sales prices; · volumes of oil and natural gas produced and sold attributable to the Underlying Properties; · production and development costs; · price differentials; · potential reductions or suspensions of production; · the amount and timing of Trust administrative expenses; and · the establishment, increase, or decrease of reserves for approved development expenses or future liabilities of the Trust. Generally, the Sponsor receives cash payment for oil production 30 to 60 days after it is produced and for natural gas production 60 to 90 days after it is produced. Outlook The outlook for development activity for the Underlying Properties improved during the first three quarters of 2021 when compared to the historic downturn in oil and gas prices seen during 2020. The West Texas Intermediate spot price of crude oil has rallied materially from $48.52 per barrel on December 31, 2020 to $81.34 per barrel on November 10, 2021. However, the lingering effects of the COVID-19 pandemic and the ongoing uncertainty around the timing of production increases from Russia and the members of OPEC continue to affect the oil and gas industry, with many operators electing to reduce their 2021 capital budgets to levels below those in prior years in which oil prices were comparable to current levels. The COVID-19 pandemic has resulted in widespread and localized health crises that adversely affect general commercial activity, the economies and financial markets of many countries and localities, as well as global demand for oil and natural gas. The pandemic also has resulted in significant business and operational disruptions, including business closures, disruptions to supply chains, travel restrictions and limitations on the availability of workforces. The lasting impact of COVID-19 is still unknown and the timing of a full oil and natural gas demand recovery continues to evolve, and it is not possible to reliably estimate the impact that these developments will have on the Sponsor or the Trust in future periods. If commodity prices for crude oil and natural gas remain volatile as seen in 2020, monthly cash distributions to unitholders could be substantially lower than historical distributions, and in certain periods there may be no distribution to unitholders. As previously disclosed, the Sponsor anticipates 2021 capital expenditures to range from $2 million to $4 million attributable to the Underlying Properties, or $1.6 million to $3.2 million net to the Trust’s 80% Net Profits Interest. The Sponsor now expects the 2021 cash capital expenditures to be at the high end of that range, based on recent drilling proposals received from operators of the Underlying Properties for projects that are expected to take place during the final months of 2021 and into 2022. The Sponsor maintains significant liquidity and financial flexibility to respond to the operational and capital spending changes of the operators of the Underlying Properties. The Underlying Properties also have exposure to natural gas reserves in the Haynesville shale and other properties, where commodity prices and capital markets activity held up in contrast to oil prices during 2020 and into early 2021. The Sponsor will continue to monitor and possibly participate in future capital projects in 2021 as operators continue to dynamically shift capital between oil and natural gas focused projects. 11 Results of Operations Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 The Trust’s net profits income consists of monthly net profits attributable to the Net Profits Interest, which was determined as shown in the following table: Three Months Ended September 30, 2021 2020 Increase (Decrease) Gross profits: Oil sales $ 7,212,993 $ 1,841,329 292 % Natural gas sales 2,210,735 423,695 422 % Total 9,423,728 2,265,024 316 % Costs: Direct operating expenses: Lease operating expenses 4,530,000 1,686,000 169 % Compression, gathering and transportation 751,000 142,000 429 % Production, ad valorem and other taxes 873,000 171,000 411 % Development expenses 911,000 50,000 1,722 % Total 7,065,000 2,049,000 245 % Net profits 2,358,728 216,024 992 % Percentage allocable to Net Profits Interest 80 % 80 % Net profits allocable to Net Profits Interest 1,886,982 172,819 992 % Less: Trust general and administrative expenses and cash withheld for expenses (172,716 (47,419 ) 264 % Less: Sponsor loan repayment (797,744 ) – 100 % Less: Net profits allocable to Net Profits Interest Shortfall (487,522 ) – 100 % Distributable income 429,000 $ 125,400 242 % For the three months ended September 30, 2021, the Net Profits Interest generated positive income for each month in the period, which eliminated the cumulative Net Profits Interest shortfall of $0.5 million as of June 30, 2021 and the cumulative outstanding Sponsor advances to the Trust of $0.8 million. During the three months ended September 30, 2020, there were two months in which direct operating and development expenses exceeded revenues, thereby causing net profits attributable to the Underlying Properties to be negative. As a result, there were no distributions to Trust unitholders in August and September 2020, respectively. This resulted in an aggregate Net Profits Interest shortfall of $2.7 million, prior to repayment of Sponsor advances, as of August 30, 2020, which was carried forward to be deducted from future net profits to be generated by the Underlying Properties. For September 2020, excluding the aggregate Net Profits Interest shortfall, income from the distributable net profits interest was approximately $0.5 million, which would have been distributed in October 2020. The income of $0.5 million reduced the aggregate Net Profits Interest shortfall to approximately $2.2 million, prior to repayment of Sponsor advances, as of September 30, 2020. As net profits for August and September 2020 were negative and therefore no distributions were paid to unitholders with respect to these two months, the corresponding revenues and associated direct operating and development expenses are excluded from the calculation of distributable income for the three months ended September 30, 2020 detailed in the table above as well as the related sales volumes detailed below. 12 The following table displays reported oil and natural gas sales volumes and average prices from the Underlying Properties, representing the amounts included in the net profits calculation for distributions paid during the three months ended September 30, 2021 and 2020: Three Months Ended September 30, 2021 2020 Increase (Decrease) Underlying Properties Production Volumes: Oil (Bbls) 117,087 59,043 98 % Natural Gas (Mcf) 868,950 321,994 170 % Combined (Boe) 261,912 112,709 132 % Average Prices: Oil - NYMEX (applicable NPI period) ($/Bbl) $ 63.07 $ 30.45 107 % Differential $ (1.47 ) $ 0.74 (299 )% Oil prices realized ($/Bbl) $ 61.60 $ 31.19 97 % Natural gas - NYMEX (applicable NPI period) ($/Mcf) $ 2.73 $ 2.16 27 % Differential $ (0.19 ) $ (0.84 ) (77 )% Natural gas prices realized ($/Mcf) $ 2.54 $ 1.32 92 % Net profits attributable to the Underlying Properties for the three months ended September 30, 2021 were $2.4 million compared to $0.2 million for the three months ended September 30, 2020. As a result of direct operating expenses and development expenses exceeding oil and natural gas sales for two months during the third quarter of 2020, the Trust did not pay a distribution to unitholders in August or September 2020. Accordingly, under the modified cash basis of accounting, the oil and natural gas sales, direct operating expenses and development expenses for such periods were not included in the three months ended September 30, 2020. Therefore, several variances between the three-month periods are due to the inclusion of three months of results during the quarter ended September 30, 2021 compared to only one month of results in the quarter ended September 30, 2020. The $2.2 million increase in net profits attributable to the Underlying Properties from the 2020 period to the 2021 period was primarily due to the following items: · Oil sales increased $5.4 million, primarily due to the inclusion of three months of oil sales in the quarter ended September 30, 2021 compared to one month in the quarter ended September 30, 2020. The 97% increase in realized oil sales prices in the 2021 period compared to the 2020 period increased revenues by $3.6 million, and the 98% increase in produced volumes increased revenues by $1.8 million. · Natural gas sales increased $1.8 million, primarily due to the inclusion of three months of natural gas sales in the quarter ended September 30, 2021 compared to one month in the quarter ended September 30, 2020. The 170% increase in gas sales volumes and 92% increase in realized gas prices in the 2021 period compared to the 2020 period increased revenues by $0.7 million and $1.1 million, respectively. · Lease operating expenses increased $2.8 million, primarily attributable to the difference in the number of months included in the respective periods. · Compression, gathering and transportation costs increased $0.6 million, primarily due to the 170% increase in natural gas production. · Production, ad valorem and other taxes increased $0.7 million during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, due to the increase in oil and natural gas sales. · Development expenses increased $0.9 million due to drilling and completion costs for drilling multiple new wells in the Haynesville Area. For the three months ended September 30, 2021, the Trust withheld $1.0 million and paid $0.2 million for general and administrative expenses. Expenses paid during the period primarily consisted of fees for the preparation of the Trust’s monthly press releases, financial statement audit fees, and Trustee fees. For the three months ended September 30, 2020, the Trust withheld $0.1 million and paid $0.1 million for general and administrative expenses. 13 Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 The Trust’s net profits income consists of monthly net profits attributable to the Net Profits Interest, which was determined as shown in the following table: Nine Months Ended September 30, 2021 2020 Increase (Decrease) Gross profits: Oil sales $ 18,731,117 $ 19,805,707 (5 )% Natural gas sales 5,440,693 3,567,562 53 % Total 24,171,810 23,373,269 3 % Costs: Direct operating expenses: Lease operating expenses 13,656,000 12,233,000 12 % Compression, gathering and transportation 1,943,000 1,016,000 91 % Production, ad valorem and other taxes 2,694,000 1,616,000 67 % Development expenses 1,988,000 1,552,000 28 % Total 20,281,000 16,417,000 24 % Net profits 3,890,810 6,956,269 (44 )% Percentage allocable to Net Profits Interest 80 % 80 % Net profits allocable to Net Profits Interest 3,112,648 5,565,015 (44 )% Less: Trust general and administrative expenses and cash withheld for expenses (172,716 ) (440,277 ) (61 )% Less: Sponsor loan repayment (797,744 ) (101,148 ) 689 % Less: Net profits allocable to Net Profits Interest Shortfall (1,713,188 ) – 100 % Distributable income 429,000 $ 5,023,590 (91 )% For the nine months ended September 30, 2021, the Net Profits Interest generated positive income for each month in the period, which eliminated the cumulative Net Profits Interest shortfall of $1.7 million as of December 31, 2020 and the cumulative outstanding Sponsor advances to the Trust of $0.8 million. During the nine months ended September 30, 2020, there were two months in which direct operating and development expenses exceeded revenues, thereby causing net profits attributable to the Underlying Properties to be negative. As a result, there were no distributions to Trust unitholders in August or September 2020. This resulted in an aggregate Net Profits Interest shortfall of $2.7 million, prior to repayment of Sponsor advances, as of August 30, 2020, which was carried forward to be deducted from future net profits to be generated by the Underlying Properties. For September 2020, excluding the aggregate Net Profits Interest shortfall, income from the distributable net profits interest was approximately $0.5 million, which would have been distributed in October 2020. The income of $0.5 million reduced the aggregate Net Profits Interest shortfall to approximately $2.2 million, prior to repayment of Sponsor advances, as of September 30, 2020. As net profits for July and August 2020 were negative and therefore no distributions were paid to unitholders with respect to these two months, the corresponding revenues and associated direct operating and development expenses are excluded from the calculation of distributable income for the nine months ended September 30, 2020 detailed in the table above as well as the related sales volumes detailed below. 14 The following table displays reported oil and natural gas sales volumes and average prices from the Underlying Properties, representing the amounts included in the net profits calculation for distributions paid during the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 Increase (Decrease) Underlying Properties Production Volumes: Oil (Bbls) 387,074 390,796 (1 )% Natural Gas (Mcf) 2,559,261 2,021,759 27 % Combined (Boe) 813,618 727,756 12 % Average Prices: Oil - NYMEX (applicable NPI period) ($/Bbl) $ 52.00 $ 52.44 (1 )% Differential $ (3.61 ) $ (1.76 ) 105 % Oil prices realized ($/Bbl) $ 48.39 $ 50.68 (5 )% Natural gas - NYMEX (applicable NPI period) ($/Mcf) $ 2.57 $ 2.20 17 % Differential $ (0.44 ) $ (0.44 ) 0 % Natural gas prices realized ($/Mcf) $ 2.13 $ 1.76 20 % Net profits attributable to the Underlying Properties for the nine months ended September 30, 2021 were $3.9 million compared to $7.0 million for the nine months ended September 30, 2020. As a result of direct operating expenses and development expenses exceeding oil and natural gas sales for two months during the third quarter of 2020, the Trust did not pay a distribution to unitholders in August or September 2020. Accordingly, under the modified cash basis of accounting, the oil and natural gas sales, direct operating expenses and development expenses for such periods were not included in the three months ended September 30, 2020. Therefore, several variances between the periods are due to the inclusion of nine months of results in the nine-month period ended September 30, 2021 compared to only seven months of results in the nine month period ended September 30, 2020. The $3.1 million decrease in net profits attributable to the Underlying Properties from the 2020 period to the 2021 period was primarily due to the following items: · Oil sales decreased $1.1 million, due to lower produced volumes and lower realized prices. The 5% decrease in realized oil sales prices in the 2021 period compared to the 2020 period decreased revenues by $0.9 million, and 1% lower produced volumes decreased revenues by $0.2 million. · Natural gas sales increased $1.9 million, primarily due to the inclusion of nine months of natural gas sales in the period ended September 30, 2021 compared to seven months in the period ended September 30, 2020. The 27% increase in gas sales volumes and 20% increase in realized gas prices in the 2021 period compared to the 2020 period increased revenues by $1.0 million and $0.9 million, respectively. · Lease operating expenses increased $1.4 million, primarily attributable to the difference in the number of months included in the respective periods. · Compression, gathering and transportation costs increased $0.9 million, primarily due to the 27% increase in natural gas production. · Production, ad valorem and other taxes increased $1.1 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due to the increase in oil and natural gas sales. · Development expenses increased $0.4 million due to drilling and completion costs for drilling multiple new wells in the Haynesville Area. For the nine months ended September 30, 2021, the Trust withheld $1.0 million, and paid $0.7 million for general and administrative expenses. Expenses paid during the period primarily consisted of fees for the preparation of the Trust’s monthly press releases, financial statement audit fees, and Trustee fees. For the nine months ended September 30, 2020, the Trust withheld $0.5 million and paid $0.7 million for general and administrative expenses. 15 Liquidity and Capital Resources The Trust’s principal sources of liquidity are cash flow generated from the Net Profits Interest and borrowing capacity under the letter of credit described below. Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trust’s only use of cash is for distributions to Trust unitholders. Available funds are the excess cash, if any, received by the Trust from the Net Profits Interest and other sources (such as interest earned on any amounts reserved by the Trustee) in any given month, over the Trust’s expenses paid for that month. Available funds are reduced by any cash the Trustee determines to hold as a reserve against future expenses. The Trustee may create a cash reserve to pay for future liabilities of the Trust. In November 2021, the Trustee notified COERT that the Trustee intends to build a reserve for the payment of future known, anticipated or contingent expenses or liabilities, commencing with the distribution payable in January 2022. The Trustee may increase or decrease the targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders, together with interest earned on the funds. If the Trustee determines that the cash on hand and the cash to be received are, or will be, insufficient to cover the Trust’s liabilities, the Trustee may authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from any person, including the Trustee or the Delaware Trustee or an affiliate thereof, although none of the Trustee, the Delaware Trustee or any affiliate thereof intends to lend funds to the Trust. The Trustee may also cause the Trust to mortgage its assets to secure payment of the indebtedness. The terms of such indebtedness and security interest, if funds were to be loaned by the entity serving as Trustee or Delaware Trustee or an affiliate thereof, would be similar to the terms which such entity would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. In addition, COERT has provided the Trust with a $1.2 million letter of credit to be used by the Trust if its cash on hand (including available cash reserves) is insufficient to pay ordinary course administrative expenses. Further, if the Trust requires more than the $1.2 million under the letter of credit to pay administrative expenses, COERT has agreed to loan funds to the Trust necessary to pay such expenses. Any loan made by COERT to the Trust would be evidenced by a written promissory note, be on an unsecured basis, and have terms that are no less favorable to COERT than those that would be obtained in an arm’s length transaction between COERT and an unaffiliated third party. If the Trust borrows funds or draws on the letter of credit, no further distributions will be made to Trust unitholders until such amounts borrowed or drawn are repaid. Except for the foregoing, the Trust has no source of liquidity or capital resources. The Trustee has no current plans to authorize the Trust to borrow any funds. As of September 30, 2021 and December 31, 2020, the Trust had cash of $1,091 and $29,639, respectively, to be used towards future Trust expenses. Since its formation, the Trust has not borrowed any funds and no amounts have been drawn on the letter of credit. From time to time, if the Trust’s cash on hand (including available cash reserves, if any) is not sufficient to pay the Trust’s ordinary course administrative expenses that are due prior to the monthly payment to the Trust of proceeds from the Net Profits Interest, COERT may advance funds to the Trust to pay such expenses. At September 30, 2021 and December 31, 2020, there was an outstanding advance of $0 and $348,821, respectively. Any advances to the Trust will be carried forward to be repaid out of future net profits generated by the Underlying Properties. Cash held by the Trustee as a reserve against future liabilities or for distribution at the next distribution date may be held in a noninterest-bearing account or may be invested in: ● interest-bearing obligations of the United States government; ● money market funds that invest only in United States government securities; ● repurchase agreements secured by interest-bearing obligations of the United States government; or ● bank certificates of deposit. The Trust pays the Trustee an annual administrative fee of $200,000 and the Delaware Trustee an annual fee of $2,000. The Trust also incurs, either directly or as a reimbursement to the Trustee, legal, accounting, tax and engineering fees, printing costs and other expenses that are deducted by the Trust before distributions are made to Trust unitholders. The Trust also is responsible for paying other expenses incurred as a result of being a publicly traded entity, including costs associated with annual and quarterly reports to Trust unitholders, tax return and Form 1099 preparation and distribution, NYSE listing fees, independent auditor fees and registrar and transfer agent fees. The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust’s liquidity or the availability of capital resources. 16 Distributions Declared After Quarter End On October 18, 2021, the Trust declared a distribution of $0.02700 per unit to unitholders of record as of October 29, 2021. The distribution is expected to be paid to unitholders on November 15, 2021. Off-Balance Sheet Arrangements The Trust has no off-balance sheet arrangements. The Trust has not guaranteed the debt of any other party, nor does the Trust have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt, losses or contingent obligations. Critical Accounting Policies and Estimates Please read “Item 7. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” of the Trust’s 2020 Annual Report on Form 10-K for additional information regarding the Trust’s critical accounting policies and estimates. There were no material changes to the Trust’s critical accounting policies or estimates during the nine months ended September 30, 2021. Subsequent Events Distributions Paid or Declared On October 15, 2021, a distribution of $0.021000 per unit, which was declared on September 17, 2021, was paid to Trust unitholders of record as of September 30, 2021. On October 18, 2021, the Trust declared a distribution of $0.02700 per unit to unitholders of record as of October 29, 2021. The distribution is expected to be paid to unitholders on November 15, 2021. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K, the Trust is not required to provide information required by this Item.