Item 5. Market for Registrant’s Common Equity
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, 2024, there were 33,000,000
Trust Units outstanding. On March 19, 2025, there were five 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 Part II, 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, 2024.
Purchases of Equity Securities
There were no purchases of Trust Units by the Trust
or any affiliated purchaser during the fourth quarter of 2024.
Item 6. [Reserved]
47
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.
2024 Recap and 2025 Outlook
The average NYMEX oil and natural gas prices experienced
continued volatility in 2024, with average oil prices relatively unchanged year-over-year but seeing lower highs than the prior year.
The average NYMEX oil price declined from $77.61 per Bbl in calendar year 2023 to $75.79 per Bbl in calendar year 2024, a decline of 2%.
Meanwhile, the price range varied from high of $86.91 per Bbl in April 2024 to a low of $65.75 per Bbl in September 2024. The
second half of 2024 saw more muted prices as the U.S. general election approached and macroeconomic concerns remained. Natural gas prices
faced continued volatility as well, but ended the year higher compared to crude oil’s lower trajectory over the same period. The
average NYMEX natural gas price declined from $2.66 per MMBtu in calendar year 2023 to $2.41 per MMBtu in calendar year 2024, a decline
of 10%. Prices for natural gas saw some of the lowest levels ever on an inflation-adjusted basis in 2024, ranging from a low of $1.56
per MMBtu in March 2024 to a high of $3.95 per MMBtu in late December 2024, near the high for the year and among the highest
levels since December 2022. Although average commodity prices declined for the year amid continued volatility, recorded third-party
operator drilling activity on the Underlying Properties increased materially, which contributed to a 202% increase in development expenses
for the production months of 2024 compared to 2023. The increase in activity despite lower average prices s due in part to the nature
of the operators of the Underlying Properties, with a substantial majority of the capital expenditures being directed by large, public
operators, most of which are investment grade rated with longer-term capital planning cycles.
48
COERT believes that the outlook for the oil and
gas industry remains mixed, with oil prices having ended 2024 at the low end of the $65-90 per Bbl range experienced since August 2022
and with geopolitical and tariff concerns weighing further on the outlook for global demand. However, the price of natural gas, which
is more regional given historical export constraints, rallied at the end of 2024 given a colder winter compared to recent years and an
expected expanding U.S. LNG export capacity in the coming years. In addition, mergers and acquisitions have continued to change the makeup
of the companies deploying capital in the sector over the last several years. As larger public companies continue to acquire smaller public
companies and private operators, COERT believes that these larger companies are likely to react differently to commodity price volatility
than smaller operators have in historical cycles, as evidenced by the material increase in capital expenditures on the Underlying Properties
in 2024 despite lower year-over-year average prices. Nevertheless, the capital spending activity or operating performance for the Underlying
Properties under new third-party operatorship in the future may not be consistent with such activity or performance experienced under
previous third-party operators in prior years. Although the estimated 2025 capital spending budgets for operators of the Underlying Properties
are still to be determined, COERT has advised the Trustee that early indications suggest 2025 will see lower total spending than the elevated
levels of 2024.
Given forward commodity prices, changing ownership
between some of the operators of the Underlying Properties as well as an uncertain macroeconomic outlook, planned capital expenditures
during 2025 remain somewhat uncertain. Based on currently available information, COERT anticipates 2025 capital expenditures on the Underlying
Properties to range from $7.0 million to $13.0 million, or $5.6 million to $10.4 million net to the Trust’s 80% Net Profits
Interest. This would represent a decrease from 2024 levels, partly due to lower projected oil prices, somewhat offset by possibly sustained
activity levels in the Haynesville area of the Underlying Properties given higher relative natural gas prices. COERT indicates that it
continues to have access to adequate capital and liquidity to fund such capital expenditures as they come due.
In
addition to continued capital expenditure participation, COERT believes there could be further opportunity in 2025 for prospective divestitures
of some or all of the Underlying Properties, as operators of some of the Underlying Properties look to consolidate non-operated interests
and acreage given recent merger and acquisition activity in the industry.
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
W/I
Project
Capex
Cumulative
Total
(in thousands)
Status
Large Cap E&P 1
Conventional Permian
N/A (Field)
0.8 %
New Drills / Workovers
$ 446
In-process/ Continual Program
Large Private E&P 1
Haynesville
6
3.5 %
D&C New Drills
$ 2,415
6 Producing Awaiting Revenues
PE-Backed Private 1
Delaware
4
0.7 %
D&C New Drills
-
4 Drilling In-Process
Large Cap E&P 2
Midland
4
3.4 %
D&C New Drills
$ 683
4 Drilling In-Process
Large Cap E&P 3
Delaware
19
1.0 %
D&C New Drills
-
19 Pre Drills
Large Major Cap E&P 1
Haynesville
3
13.6 %
D&C New Drills
$ 3,032
3 Drilling In-Process
The
Sponsor expects that a majority of the projects above that are still in process or awaiting first revenues will be completed and
will begin producing during 2025.
49
Sale of 2023 Divestiture Properties
On
May 3, 2023, the Sponsor notified the Trustee that the Sponsor had entered into an agreement to divest certain acreage and
associated production in the Permian Basin (the “2023 Divestiture Properties”) that constituted part of the Underlying Properties
and were therefore burdened by the Trust’s Net Profits Interest, for a total purchase price of approximately $6.7 million. On
July 19, 2023, at a special meeting of Trust unitholders, the unitholders approved the foregoing transaction and the release of the
Trust’s Net Profits Interest in the 2023 Divestiture Properties. On August 9, 2023, the Sponsor completed the sale of the 2023
Divestiture Properties, and the Trustee, on behalf of the Trust, reconveyed, terminated and released to the Sponsor the Net Profits Interest
with respect to the 2023 Divestiture Properties. The total proceeds received by the Sponsor from the sale of the 2023 Divestiture Properties,
after preliminary closing adjustments, were approximately $6.5 million, inclusive of the escrow funded by the buyer and partial expense
reimbursement associated with the proxy solicitation. The Sponsor deducted the final transaction expenses from the sales proceeds, along
with an escrow amount of $250,000 to cover possible indemnification obligations under the purchase and sale agreement (the “Indemnification
Escrow Amount”), to arrive at final net proceeds, based upon the Trust’s Net Profits Interest.
On
September 20, 2023, the Trust announced a special cash distribution to Trust unitholders of $0.069670 per Trust Unit, payable on
October 13, 2023 to Trust unitholders of record on October 2, 2023, reflecting 50% of the Trust’s share of the net proceeds,
after accounting for the Indemnification Escrow Amount. The remaining 50% of the Trust’s share of the net proceeds was temporarily
retained by the Sponsor as a source of payment of the Trust’s proportionate share of any post-closing purchase price adjustments,
with any amount remaining (less any amounts in dispute) after such adjustments to be paid to the Trust within five business days after
finalization of the settlement statement and included in a distribution to Trust unitholders. On November 6, 2023, the Trust announced
a special cash distribution to Trust unitholders of $0.077250 per Trust Unit, payable on November 22, 2023 to Trust unitholders of
record on November 16, 2023, reflecting the remaining 50% of the Trust’s share of the net proceeds (net of the Indemnification
Escrow Amount). On March 17, 2025, the Trust announced a special cash distribution to Trust unitholders of $0.008548 per Trust Unit,
payable on April 14, 2025 to Trust unitholders of record on March 31, 2025, reflecting the release of the Indemnification Escrow
Amount, together with interest, for a total of $282,072.
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, 2024 and 2023.
Underlying Properties Sales Volumes
Average Price
Month of Distribution
Oil
(Bbls)
Natural Gas
(Mcf)
Oil
(per Bbl)
Natural Gas
(per Mcf)
2024:
February
115,343
711,124
$ 83.99
$ 2.38
August
346,439
2,610,841
$ 77.10
$ 2.18
September
41,469
394,278
$ 79.53
$ 1.39
October
38,579
374,304
$ 77.69
$ 1.69
November
52,287
1,105,204
$ 79.43
$ 2.44
December
40,886
384,143
$ 75.88
$ 1.78
Total—2024 (1)
635,003
5,579,894
$ 78.94
$ 1.98
2023:
January
37,419
250,486
$ 94.66
$ 7.20
February
36,796
222,785
$ 85.39
$ 6.89
March
38,056
217,262
$ 80.01
$ 5.19
April
34,720
204,419
$ 78.48
$ 4.23
May
38,896
191,223
$ 75.01
$ 4.71
June
39,651
241,119
$ 75.60
$ 3.84
July
38,120
195,616
$ 71.94
$ 2.85
August
64,721
604,148
$ 86.52
$ 2.75
September
43,894
204,848
$ 71.99
$ 1.32
October
33,806
227,756
$ 69.15
$ 2.01
November
33,461
222,906
$ 73.07
$ 2.02
Total—2023 (2)
439,540
2,782,568
$ 78.84
$ 3.79
(1) The table for the year ended December 31, 2024 does not separately display sales volumes for January, March, April and July 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.
(2) The year ended December 31, 2023 does not include sales volumes for December as the Trust did not make a distribution in
that month, as the Net Profits Interest calculation for the corresponding production period was negative.
50
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, 2024 and 2023 were determined as shown in the following table:
Year Ended December 31,
2024
2023
Gross profits:
Oil sales
$ 50,291,248
$ 34,653,097
Natural gas sales
11,341,855
10,555,426
Total
61,633,103
45,208,523
Costs:
Direct operating expenses:
Lease operating expenses
26,801,000
22,136,000
Compression, gathering and transportation
3,773,000
1,696,000
Production, ad valorem and other taxes
4,140,000
2,963,000
Development expenses
20,345,000
6,729,000
Total
55,059,000
33,524,000
Gross proceeds from sale/lease of undeveloped acreage
146,400
306,250
Net profits attributable to Underlying Properties
$ 6,720,503
$ 11,990,773
Percentage allocable to Net Profits Interest
80 %
80 %
Income from Net Profits Interest
$ 5,376,403
$ 9,592,619
Capex Reserve – Release (Holdback) for anticipated 2023-2024 capital expenditures
(1,000,000 )
1,000,000
Less: COERT Loan Repayment
(527,076 )
—
Less: Trust general and administrative expenses and cash withheld for expenses
(1,027,825 )
(1,327,790 )
Distributable income generated by properties prior to divestiture
$ 2,821,500
$ 9,264,829
Income from sale of Net Profits Interest
—
4,848,281
Distributable income
$ 2,821,500
$ 14,113,110
As reflected in the Net Profits Interest calculation
for November 2023, direct operating and development expenses exceeded revenues, thereby causing net profits attributable to the Underlying
Properties to be negative and resulting in a Net Profits Interest shortfall of approximately $1.2 million. As a result, there was
no distribution to Trust unitholders in the month of December 2023. The shortfall of $1.2 million was carried forward to be deducted
from future net profits to be generated by the Underlying Properties, and the corresponding revenues and associated direct operating and
development expenses are excluded from the calculation of distributable income for the year ended December 31, 2023 detailed in the
table above as well as the related sales volumes detailed below. As a result, only eleven months of results are included in the results
for the year ended December 31, 2023.
51
In 2024, net profits from
the Underlying Properties were positive, which eliminated the cumulative Net Profits Interest shortfall of $1.2 million and the cumulative
outstanding Sponsor advances to the Trust of $0.5 million. Since the Net Profits Interest shortfall was eliminated in 2024, revenues
and the associated direct operating and development expenses for the last month of 2023 are included in the calculation of distributable
income detailed in the table above for the year ended December 31, 2024 and the related sales volumes are reflected in the table
below.
The following table displays oil and natural gas
sales volumes and average prices from the Underlying Properties, representing the amounts included in the net profits calculation for
distributions paid during the years ended December 31, 2024 and 2023:
Year Ended December 31,
2024
2023
Underlying Properties Sales Volumes:
Oil (Bbls)
635,003
439,540
Natural Gas (Mcf)
5,579,894
2,782,568
Combined (Boe)
1,564,985
903,301
Average Prices:
Oil – NYMEX (applicable NPI period) ($/Bbl)
$ 78.04
$ 76.83
Differential
$ 1.16
$ 2.01
Oil prices realized ($/Bbl)
$ 79.20
$ 78.84
Natural gas – NYMEX (applicable NPI period) ($/Mcf)
$ 2.28
$ 2.26
Differential
$ (0.25 )
$ 1.53
Natural gas prices realized ($/Mcf)
$ 2.03
$ 3.79
Years Ended December 31, 2024 and 2023
Net profits attributable to the Underlying Properties
for the year ended December 31, 2024 are calculated from the following:
· oil sales related to oil produced from the Underlying Properties primarily from August 2023 through August 2024;
· natural gas sales related to natural gas produced from the Underlying Properties primarily from July 2023 through July 2024;
and
· direct operating and development expenses related to expenses and capital incurred primarily from September 2023 to September 2024.
52
Net
profits attributable to the Underlying Properties for the year ended December 31, 2024 were $6.7 million compared to $12.0 million
for the year ended December 31, 2023. As discussed in “—Computation of Income from Net Profits Interest Received
by the Trust” above, no distribution was made to Trust unitholders in December 2023 due to the Net Profits Interest shortfall.
Accordingly, under the modified cash basis of accounting, the oil and natural gas sales, direct operating expenses and development expenses
attributable to the corresponding production period were excluded from the calculation of distributable income for the year ended December 31,
2023 and instead were included in the Trust’s results for the year ended December 31, 2024, once the shortfall was recouped.
Therefore, several variances between the periods are due to the inclusion of thirteen months of results in the year ended December 31,
2024 compared to eleven months in the year ended December 31, 2023. The $5.3 million decrease in net profits attributable to the
Underlying Properties from the 2023 period to the 2024 period was primarily due to the following items:
· Oil sales increased $15.6 million, primarily due to an increase in produced volumes, which increased revenues by $15.4 million. This
increase was primarily due to the several new Permian wells that either turned to sales or completed title work and thereby allowed production
attributable to prior periods to be released by the operators of the Underlying Properties. Realized oil sales prices increased by less
than 1% in the 2024 period compared to the 2023 period, which increased revenues by $0.2 million.
· Natural gas sales increased $0.8 million due to higher produced sales volumes, which increased natural gas sales by $10.6 million.
The 46% decrease in realized prices resulted in a $9.6 million decrease in natural gas sales for the year ended December 31, 2024
compared to 2023.
· Lease operating expenses during the year ended December 31, 2024 were $26.8 million compared to $22.1 million during the year
ended December 31, 2023, an increase of $4.7 million. Approximately $1.4 million of the 2023 expenses and approximately $1.4 million
of the 2024 expenses were attributable to a settlement between COERT and one of the operators of the Underlying Properties relating to
a dispute with respect to certain lease operating expenses from 2018 and 2019 that the operator had mistakenly coded for Enduro instead
of COERT. In May 2023, COERT and the operator agreed to settle the dispute at a discounted amount, resulting in an incremental lease
operating expense adjustment of approximately $0.4 million per month from June 2023 through December 2023, after which no additional
amounts relating to the disputed expenses will be owed to the operator. The remaining increase in lease operating expenses in 2024 was
primarily due to several new drilled wells that came online during the year.
· Compression, gathering and transportation expenses increased from $1.7 million in 2023 to $3.8 million in 2024 due to higher
sales volumes and the inclusion of thirteen months of expenses in the year ended December 31, 2024.
· Production, ad valorem and other taxes increased $1.2 million in 2024 compared to 2023, primarily due to the increased produced volumes.
· Development expenses increased $13.6 million due to several drilling and completion costs for drilling multiple new wells in
the Permian and Haynesville areas during 2024.
During the year ended December 31, 2023, COERT
fully released the total cash reserve of $1.0 million that it had previously established for approved, future development expenses. During
the year ended December 31, 2024, the Sponsor withheld from the net profits otherwise payable to the Trust a net aggregate total
of $1.0 million for the establishment of a cash reserve for approved, future development expenses. This reserve was 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 would be released as an incremental cash distribution in a future period. This cash reserve for
future development was fully released to the Trust in early 2025.
The Trust withheld $1.6 million and paid $1.0 million
for general and administrative expenses during the year ended December 31, 2024. Expenses paid during the period primarily consisted
of fees for the preparation of 2023 tax information for Trust unitholders, preparation of the Trust’s 2023 reserve report and Annual
Report on Form 10-K, 2023 financial statement audit fees, preparation of the Trust’s 2024 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, 2023, the Trust
withheld $1.3 million and paid $0.9 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.
53
The
Trustee may create a cash reserve to pay for future liabilities of the Trust. In November 2021, the Trustee notified COERT
of the Trustee’s intent to build a cash reserve for the payment of future known, anticipated or contingent expenses or liabilities
of the Trust. From February 2022 through March 2023, the Trustee withheld $37,833, and commencing with the distribution to Trust
unitholders paid in April 2023 has been withholding and, in the future, intends to withhold $50,000, from the funds otherwise available
for distribution each month to gradually build a cash reserve of approximately $2.3 million. 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,
2024, this cash reserve totaled $1,241,386.
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 money other than Sponsor advances to pay the Trust’s monthly operating expenses.
At December 31, 2024 and 2023, the Trust held cash reserves of $2,193,787 and $1,394,697, 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.
The
Sponsor has not 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, 2024 or 2023, and the terms of the Conveyance prohibit
COERT from entering into new hedging arrangements burdening the Trust.
54
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.
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.
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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; 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.
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,
2024 or 2023. 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 Part II, Item 8 of this
Form 10-K.
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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.
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