Permianville Royalty Trust 10-K

Item 5. Market for Registrant’s Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities. The Trust Units trade on the New York Stock Exchange under the symbol “PVL.” At December 31, 2022, there were 33,000,000 Trust Units outstanding. On March 23, 2023, there were four unitholders of record. This number does not include owners for whom Trust Units may be held in “street” name. Distributions 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 incurred expenses for that month. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities. The holders of Trust Units as of the applicable record date (generally the last business day of each calendar month) are entitled to monthly distributions payable on or before the tenth business day after the record date (or the next succeeding business day). For further information on distributions to Trust unitholders, see Note 5 of the Notes to Financial Statements in Item 8 of this Form 10-K. Equity Compensation Plans The Trust does not have any employees and does not maintain any equity compensation plans. Recent Sales of Unregistered Securities There were no equity securities sold by the Trust during the year ended December 31, 2022. Purchases of Equity Securities There were no purchases of Trust Units by the Trust or any affiliated purchaser during the fourth quarter of 2022. Item 6. [Reserved] 45 Item 7. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations. This discussion contains forward-looking statements. Please refer to “Forward-Looking Statements” for an explanation of these types of statements. Overview Permianville Royalty Trust, previously known as Enduro 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. 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 holders of record (generally the last business day of each calendar month) on or before the tenth 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. 2022 Recap and 2023 Outlook The average NYMEX oil price received for the production months included in 2022 distributions increased 97%, while the gas price received for the production months included in 2022 distributions increased 157%, from the prior year. The geopolitical events of 2022 along with a rapidly evolving supply and demand picture for oil and gas contributed to a material increase in the average NYMEX oil price and average NYMEX gas price for the relevant production months, in addition to tighter differentials for the received oil and natural gas prices for the Underlying Properties. The increase in commodity prices compared to 2021 also drove a significant increase in the amount of third party operator drilling activity on the Underlying Properties, which led to a 242% increase in development expenses for the production months of 2022 compared to 2021. The development activity increases were from both public and private operators in the Delaware and Midland basin areas of the Permian Basin as well as the Haynesville area of Louisiana. 46 Crude oil prices increased materially throughout the first half of 2022, to a high of $123.70/Bbl on March 8, 2022, before declining over the second half of the year, settling at $80.26/Bbl on December 30, 2022, only 5% above the spot oil price to start the year. Nevertheless, the longer-term outlook for the oil and gas industry, together with the continued improvement in economic activity and mobility during 2022 despite the lingering effects of the coronavirus pandemic, resulted in a material increase in industry activity. This improvement continued to be aided by relatively stable supply actions by members of OPEC, in contrast to prior years. The effects of the global COVID-19 pandemic have not completely subsided in parts of the world, particularly in China, and continue to create volatility for commodity prices. Despite the recovery in prices and activity, the oil and gas industry continues to face capital constraints from debt and equity capital providers focused on free cash flow over reserve and production growth. Natural gas prices saw a similar, and even more volatile, recovery in 2022, rallying from $3.59/MMBtu at the beginning of 2022 to a high of $9.84/MMBtu on August 22, 2022, before ending the year below where it started, at $3.52/MMBtu, as a warm winter and production growth offset the new LNG-directed US natural gas market. Such volatility, if it persists for the near term or longer, could adversely affect the operators of the Underlying Properties, production from the Underlying Properties and/or distributions to Trust unitholders. The operators of the Underlying Properties continue to evaluate planned capital expenditures during 2023, but based on currently available information, the Sponsor anticipates 2023 capital expenditures on the Underlying Properties to range from $6.0 million to $9.0 million, or $4.8 million to $7.2 million net to the Trust’s 80% Net Profits Interest. This would represent a decrease compared to last year, due in part to lower projected natural gas prices, which could reduce capital activity on the Haynesville area of the Underlying Properties, somewhat offset by continued activity strength in the portion of the Underlying Properties located in the Permian region. The Sponsor indicates that it continues to have access to adequate capital and liquidity to fund such capital expenditures as the come due. In addition to continued capital expenditure participation, the Sponsor believes there could be further opportunity in 2023 for prospective divestitures, as operators of some of the Underlying Properties look to acquire assets at compelling valuations against the backdrop of favorable oil prices compared to prior years. Capex Drilling Activity Update Presented below is a summary of the current status of certain notable capital projects recently undertaken on the Underlying Properties pursuant to the capital expenditure program described above. The following table is not intended to be a comprehensive list reflecting all capital expenditures to date. In addition, there can often be a several-month delay from the time of capital expenditures to the time of production and cash flows attributable to the Underlying Properties, especially given the non-operated nature of the Underlying Properties. Operator Region Number of Wells Underlying Properties Working Interest Project Capex Cumulative Total (in thousands) Status Large Cap Major Haynesville 2 2.5 % D&C New Drills $ 36 1 Drilled, Awaiting First Revenues; 1 Pre-Drill Large Cap E&P 1 Midland 8 7.2 % D&C New Drills $ 2,241 5 Producing, Awaiting First Revenues; 3 Drilling In-Process Large Cap E&P 2 Conventional Permian N/A (Field) 0.8 % New Drills / Workovers $ 69 In-process/ Continual Program Large Private E&P Haynesville 1 17.2 % Refrac $ 1,081 Producing, Awaiting First Revenues PE-Backed Private 1 Delaware 8 5.4 % D&C New Drills $ 2,851 4 Producing; 4 Drilling In-Process PE-Backed Private 2 Delaware 9 0.9 % D&C New Drills $ 226 3 Producing, Awaiting First Revenues; 6 Pre-Drill PE-Backed Private 3 Delaware 2 0.8 % D&C New Drills $ 38 Drilling In-Process Private E&P 1 Conventional Permian 3 24.0 % New Drills / Workovers $ 440 Producing Private E&P 2 Haynesville 3 3.6 % Refrac $ 126 In-Process 47 The Sponsor expects a majority of these projects to be completed and to begin producing during 2023 for those that are still in process or awaiting first revenues. Results of Operations The following table displays oil and natural gas sales volumes and average prices from the Underlying Properties, representing the amounts included in the net profits calculation for the distributions paid during the years ended December 31, 2022 and 2021. Underlying Properties Sales Volumes Average Price Month of Distribution Oil (Bbls) Natural Gas (Mcf) Oil (per Bbl) Natural Gas (per Mcf) 2022: January 40,878 280,503 $ 68.90 $ 3.78 February 40,779 214,181 $ 78.30 $ 4.28 March 44,180 325,962 $ 76.45 $ 5.31 April 40,390 290,847 $ 73.25 $ 4.96 May 47,114 266,091 $ 74.79 $ 4.09 June 40,553 331,076 $ 86.55 $ 5.00 July 40,102 380,958 $ 98.77 $ 4.84 August 41,122 301,477 $ 105.29 $ 4.52 September 37,350 297,117 $ 107.77 $ 5.37 October 37,873 287,116 $ 110.92 $ 6.85 November 43,632 237,538 $ 106.32 $ 7.56 December 42,594 144,367 $ 97.06 $ 7.05 Total—2022 496,567 3,357,233 $ 89.96 $ 5.21 2021: September 612,786 4,071,705 $ 41.20 $ 1.80 October 38,925 288,656 $ 70.47 $ 2.83 November 37,384 306,555 $ 70.27 $ 2.92 December 43,832 263,613 $ 65.22 $ 3.60 Total—2021 (1) 732,927 4,930,529 $ 62.82 $ 2.91 (1) The table for the year ended December 31, 2021 does not separately display sales volumes for January through August because the Trust did not pay a distribution with respect to those months, as the net profits interest calculation for each such period was negative. 48 Computation of Income from Net Profits Interest Received by the Trust 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 newly issued Trust Units. The Net Profits Interest entitles the Trust to receive 80% of the net profits from the sale and production of oil and natural gas attributable to the Underlying Properties that are produced during the term of the Conveyance, which commenced on July 1, 2011. The Trust’s Income from Net Profits Interest consists of monthly net profits attributable to the Net Profits Interest. Net profits income for the years ended December 31, 2022 and 2021 were determined as shown in the following table: Year Ended December 31, 2022 2021 Gross profits: Oil sales $ 44,669,834 $ 33,473,431 Natural gas sales 17,479,475 9,993,877 Total 62,149,309 43,467,308 Costs: Direct operating expenses: Lease operating expenses 21,914,000 26,611,000 Compression, gathering and transportation 3,276,000 3,352,000 Production, ad valorem and other taxes 4,750,000 4,670,000 Development expenses 12,143,000 3,549,000 Total 42,083,000 38,182,000 Gross proceeds from sale/lease of undeveloped acreage 130,030 157,956 Net profits attributable to underlying properties $ 20,196,339 $ 5,443,264 Percentage allocable to Net Profits Interest 80 % 80 % Income from Net Profits Interest $ 16,157,071 $ 4,354,611 Less: COERT Loan Repayment — (797,744 ) Capex Reserve – Holdback/release for Increasing 2022/2023 Capex Outlook (1,000,000 ) — Less: Trust general and administrative expenses and cash withheld for expenses (1,676,571 ) (438,367 ) Distributable income $ 13,480,500 $ 3,118,500 In 2020, there were five months in which direct operating and development expenses exceeded revenues, thereby causing net profits attributable to the Underlying Properties to be negative. This resulted in an aggregate Net Profits Interest shortfall of $2.7 million, prior to repayment of Sponsor advances, as of August 31, 2020, which was carried forward to be deducted from net profits to be generated by the Underlying Properties in future months. As a result, there were no distributions to Trust unitholders from August 2020 through August 2021. In September 2021, net profits from the Underlying Properties were positive, which eliminated the cumulative Net Profits Interest shortfall of $2.7 million and the cumulative outstanding Sponsor advances to the Trust of $0.8 million. Since the Net Profits Interest shortfall was eliminated in 2021, revenues and the associated direct operating and development expenses for the final five months of 2020 are included in the calculation of distributable income detailed in the table above for the year ended December 31, 2021 as well as the related sales volumes detailed below. 49 The following table displays oil and natural gas sales volumes and average prices from the Underlying Properties, representing the amounts included in the net profits calculation for distributions paid during the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 2021 Underlying Properties Sales Volumes: Oil (Bbls) 496,567 732,927 Natural Gas (Mcf) 3,357,233 4,930,529 Combined (Boe) 1,056,106 1,554,682 Average Prices: Oil – NYMEX (applicable NPI period) ($/Bbl) $ 91.84 $ 55.04 Differential $ (1.88 ) $ (9.37 ) Oil prices realized ($/Bbl) $ 89.96 $ 45.67 Natural gas – NYMEX (applicable NPI period) ($/Mcf) $ 5.85 $ 2.53 Differential $ (0.64 ) $ (0.50 ) Natural gas prices realized ($/Mcf) $ 5.21 $ 2.03 Years Ended December 31, 2022 and 2021 Net profits attributable to the Underlying Properties for the year ended December 31, 2022 are calculated from the following: • oil sales related to oil produced from the Underlying Properties primarily from September 2021 through August 2022; • natural gas sales related to natural gas produced from the Underlying Properties primarily from August 2021 through July 2022; and • direct operating and development expenses related to expenses and capital incurred primarily from October 2021 to September 2022. Net profits attributable to the Underlying Properties for the year ended December 31, 2022 were $20.2 million compared to $5.4 million for the year ended December 31, 2021. As a result of direct operating expenses and development expenses exceeding oil and natural gas sales for the last five months of 2020, the Trust did not pay a distribution to Trust unitholders from August 2020 through September 2021. 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 final five months of 2020 and instead are included in the results for the year ended December 31, 2021, as the Net Profits Interest shortfall was finally eliminated in September 2021. Therefore, several variances between the periods are due to the inclusion of 17 months of results in the year ended December 31, 2021 compared to 12 months included in the year ended December 31, 2022. The $14.8 million increase in net profits attributable to the Underlying Properties from the 2021 period to the 2022 period was primarily due to the following items: • Oil sales increased $11.2 million, primarily due to higher realized sales prices, which increased oil sales by $22.0 million. The average oil price received increased 97% as a result of the corresponding increase in the average NYMEX oil price for the relevant production months. The offsetting $10.8 million decrease in oil sales was due to lower oil sales volumes. The 32% decrease in oil sales volumes was primarily because the year ended December 31, 2022 only included 12 months of oil sales volumes while the year ended December 31, 2021 included 17 months of oil sales volumes. 50 • Natural gas sales increased $7.5 million due to higher realized sales prices, which increased natural gas sales by $10.7 million. The average natural gas price received increased 157% as a result of the corresponding increases in the average NYMEX gas price for the relevant production months. The offsetting $3.2 million decrease in natural gas sales was due to lower sales volumes. Natural gas volumes decreased 32% primarily because the year ended December 31, 2022 only included 12 months of gas sales volumes while the year ended December 31, 2021 included 17 months of gas sales volumes. • Lease operating expenses decreased $4.7 million in 2022 compared to 2021, primarily attributable to the difference in the number of months included in the respective periods. • Compression, gathering and transportation expenses decreased from $3.4 million in 2021 to $3.3 million in 2022. • Production, ad valorem and other taxes increased $0.1 million in 2022 compared to 2021, primarily due to the increase in realized sales prices, but was offset by the lower sales volumes. • Development expenses increased $8.6 million due to drilling and completion costs for drilling multiple new wells in the Permian and Haynesville areas. During the year ended December 31, 2022, the Sponsor withheld from the net profits otherwise payable to the Trust a net aggregate of $1.0 million for the establishment of a cash reserve for approved, future development expenses. This reserve is intended to fund an expected increase in development expenses; however, if those expenses are ultimately delayed or are less than expected, or if the outlook changes, amounts reserved but unspent will be released as an incremental cash distribution in a future period. The Trust withheld $1.7 million and paid $0.8 million for general and administrative expenses during the year ended December 31, 2022. Expenses paid during the period primarily consisted of fees for the preparation of 2021 tax information for Trust unitholders, preparation of the Trust’s 2021 reserve report and Annual Report on Form 10-K, 2021 financial statement audit fees, preparation of the Trust’s 2021 monthly press releases and Quarterly Reports on Form 10-Q, Trustee fees, and New York Stock Exchange listing fees. For the year ended December 31, 2021, the Trust withheld $1.2 million and paid $0.8 million for general and administrative expenses. 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 the Sponsor of the Trustee’s intent to build a cash reserve of approximately $2.3 million for the payment of future known, anticipated or contingent expenses or liabilities of the Trust. Since February 2022, the Trustee has been withholding $37,833, and in the future, commencing with the distribution to Trust unitholders payable in April 2023, intends to withhold $50,000, from the funds otherwise available for distribution each month to gradually build the reserve. The Trustee may increase or decrease the targeted cash reserve 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 Trust 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 Trust unitholders, together with interest earned on the funds. As of December 31, 2022, the Trustee has withheld $390,497 toward this cash reserve. 51 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, the Sponsor 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, the Sponsor has agreed to loan funds to the Trust necessary to pay such expenses. Any loan made by the Sponsor 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 the Sponsor than those that would be obtained in an arm’s length transaction between the Sponsor 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 money other than Sponsor advances to pay the Trust’s monthly operating expenses. At December 31, 2022 and 2021, the Trust held cash reserves of $922,913 and $67,116, respectively, for future Trust expenses. Since its formation, the Trust has not borrowed any funds other than Sponsor advances to pay the Trust’s monthly operating expenses 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, the Sponsor 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. 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. Neither Enduro nor the Sponsor has entered into any hedge contracts relating to oil and natural gas volumes produced from the Underlying Properties, attributable to the Net Profits Interest for the years ended December 31, 2022 or 2021, and the terms of the Conveyance prohibit COERT from entering into new hedging arrangements burdening the Trust. The Trust pays the Trustee an administrative fee of $200,000 per year. The Trust pays 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. New Accounting Pronouncements As the Trust’s financial statements are prepared on the modified cash basis, most accounting pronouncements are not applicable to the Trust’s financial statements. No new accounting pronouncements have been adopted or issued that would impact the financial statements of the Trust. 52 Critical Accounting Policies and 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 plus any payments made or net payments received in connection with the settlement of certain hedge contracts, 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. Under the terms of the Conveyance, the monthly Net Profits Interest calculation includes oil and natural gas revenues received. Monthly operating expenses and capital expenditures represent 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. Such amortization does not affect distributable income of the Trust; 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. Any impairment is a direct charge to the trust corpus. The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for 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 any impairment; 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 revenues, expenses, and distributions 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 . The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 53 Oil and Natural Gas Reserves. The proved oil and natural gas reserves for the Underlying Properties are estimated by independent petroleum engineers. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof. Estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using prices at the date of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices. Accordingly, oil and natural gas quantities ultimately recovered and the timing of production may be substantially different from original estimates. The Financial Accounting Standards Board requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future net cash flows relating to proved oil and natural 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 natural gas reserves. Changes in any of these assumptions, including consideration of other factors, could have a significant impact on the standardized measure. The standardized measure does not necessarily result in an estimate of the current fair market value of proved reserves. Amortization of Net Profits Interest. The Trust calculates amortization of the Net Profits Interest in oil and natural gas properties 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 which are subject to numerous uncertainties inherent in the estimation of proved reserves. The volumes considered to be commercially recoverable fluctuate with changes in 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 recorded on sales volumes paid by the Trust during the relevant period and is charged directly to the Trust corpus balance. As a result, amortization does not affect the cash earnings of the Trust. Impairment of Net Profits Interest. The Net Profits Interest in oil and natural gas properties 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. The Trust did not realize any impairment during the years ended December 31, 2022 or 2021. Future downward revisions in actual production volumes relative to current forecasts, higher than expected operating costs, or lower than anticipated market pricing could result in recognition of impairment in future periods. Any impairment of the Net Profits Interest will result in a non-cash charge to Trust corpus and will not affect distributable income. For further information, see “Note 3. Net Profits Interest in Oil and Gas Properties” of the Notes to Financial Statements in Item 8 of this Form 10-K. Item 7A. 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. 54