What changed in this filing

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Item 1. Financial Statements

2021-08-16 compared with 2021-05-17 · 263 added, 198 removed, 158 unchanged (74% of the section changed)

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Net overriding royalty interest in producing oil and gas properties (net of accumulated

amortization of $128,516,845 and $128,151,694 at March 31, 2021 and December 31, 2020, respectively)

amortization of $128,889,723 and $128,151,694 at June 30, 2021 and December 31, 2020, respectively)

LIABILITIES AND TRUST CORPUS

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Trust corpus 46,608,796 Units of beneficial interest authorized and outstanding

Total liabilities

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Royalty income

Interest income

Expenditures General and Administrative

General and administrative expenses

Decrease in cash reserves

Distributable income

Distributable income per Unit (46,608,796 Units)

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

Notes to Condensed Financial Statements included herein.

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Trust corpus, beginning of period

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interests (the Subject Interests) originally owned by Southland Royalty Company (Southland) in properties located in the San Juan Basin of northwestern New Mexico (the Royalty Income), all adjustments, consisting

only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at March 31, 2021, and the distributable income and changes in trust corpus for the three-month

periods ended March 31, 2021 and 2020.

only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at June 30, 2021, and the distributable income and changes in trust corpus for the three-month

and six-month periods ended June 30, 2021 and 2020.

The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

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and drilling costs, applicable taxes, operating charges, and other costs and deductions, multiplied by 75%.

The calculation of net proceeds by Hilcorp for any month includes adjustments to proceeds and costs for prior months and impacts the Royalty

The calculation of net proceeds by Hilcorp for any month includes adjustments to proceeds and costs for prior months and affects the Royalty

Income paid to the Trust and the distribution to Unit Holders for that month.

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corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

The Trustee routinely reviews the Trusts royalty interests in oil and natural gas

properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

If an impairment event occurs and it is determined that the carrying value of the Trusts royalty interests may not

be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is

charged directly to trust corpus instead of as an expense.

There was no impairment of the Trusts assets as of March 31, 2021.

For federal income tax purposes, the Trust constitutes a fixed investment trust which is taxed as a grantor trust.

grantor trust is not subject to tax at the trust level.

The Trustee routinely reviews the Trusts royalty interests in oil and natural gas properties for impairment whenever events or

circumstances indicate that the carrying amount of an asset may not be recoverable.

If an impairment event occurs and it is determined

that the carrying value of the Trusts royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty

interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is charged directly to trust corpus instead of as an expense.

There was no impairment of the Trusts assets as of

June 30, 2021.

Federal Income Taxes

For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust.

A grantor trust is not

subject to tax at the trust level.

The Unit Holders are considered to own the Trusts income and principal as though no trust were in existence.

The income of the Trust is deemed to have been received or accrued by each

Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely

held fixed investment trust (WHFIT) classified as a non-mortgage widely held fixed investment trust (NMWHFIT) for federal income tax purposes.

The Trustee is the representative of the

Trust that will provide tax information in accordance with the applicable U.S.

The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time

such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment

trust (WHFIT) classified as a non-mortgage widely held fixed investment trust (NMWHFIT) for federal income tax purposes.

The Trustee is the representative of the Trust that will provide

tax information in accordance with the applicable U.S.

Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.

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Trust has on file technical advice memoranda confirming such tax treatment.

Under current federal income tax law, the Trusts

production and sale of natural gas from coal seam wells does not qualify for a tax credit under Section 45K (the Section 45 Tax Credit) of the Internal Revenue Code of 1986, as amended (the Code).

Congress has at

various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trusts current production for such

credit has been enacted.

No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.

The classification of the Trusts income for purposes of the passive loss rules may be important to a Unit Holder.

Royalty income such as

that derived through the Trust will generally be treated as portfolio income that may not be offset or reduced by passive losses.

positions taken by the Trust related to the Trusts pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that the material tax positions it has taken would more likely than not be sustained by

As of March 31, 2021, the Trusts tax years 2017 and thereafter remain subject to examination.

Each Unit Holder

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

The classification of the Trusts income for purposes of

the passive loss rules may be important to a Unit Holder.

Royalty income such as that derived through the Trust will generally be treated as portfolio income that may not be offset or reduced by passive losses.

Tax positions taken by the Trust related to the Trusts pass-through status and state tax positions have been reviewed, and the Trustee

is of the opinion that the material tax positions it has taken would more likely than not be sustained by examination.

As of June 30, 2021, the Trusts tax years 2017 and thereafter remain subject to examination.

Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holders interest in

Commitments and Contingencies

Contingencies related to the Subject Interests that are unfavorably resolved would generally be

reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders.

See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to

recovery of costs.

Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future

Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders.

See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to recovery of costs.

Covid-19 Pandemic.

The Trust continues to request periodic updates from

Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing.

Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests production or taking any of the Subject Interests wells offline;

however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas.

Hilcorp further informed the Trust that the Covid-19 has not had, nor does it anticipate that Covid-19 will have, any material impact on its operation of the Subject

Interests or on its payments of Royalty Income to the Trust.

However, the continuing impact of the ongoing Covid-19 pandemic, including additional surges or mutations and required or recommended pandemic

mitigation efforts, on Hilcorp and the Subject Interests remains unknown and any such impact could result in actual results being different from Hilcorps expectations, despite the lack of a materially adverse impact to-date of the pandemic.

The Trust continues to request periodic updates from Hilcorp as to its

production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing.

Hilcorp has informed

the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests production or taking any of the Subject Interests wells offline;

however, both the Trust and

Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas.

Hilcorp further informed the Trust

that Covid-19 has not had, nor does it anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty

Income to the Trust.

However, the continuing impact of the ongoing Covid-19 pandemic, including additional surges or variants and required or recommended pandemic mitigation efforts, on Hilcorp and the Subject

Interests remains unknown and any such impact could result in actual results being different from Hilcorps expectations, despite the lack of a materially adverse impact to-date of the pandemic.

Gross Proceeds and Severance Tax Estimates.

Hilcorp has advised the Trust that for certain months (since the closing of its

purchase of the assets), it has reported estimates of cash revenues and expenses based on the best information available to it at the time, instead of reporting actual amounts.

Hilcorp further has informed the Trust that it believes that its

estimates have been prepared in accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance with the Conveyance.

Hilcorps process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as

true-ups) are still occurring and being reported in 2021.

In addition, Hilcorp informed the Trust that due to Hilcorps transition to a new accounting system, the February, March and April 2021 production months were based on

estimated production, estimated prices and estimated costs utilizing historical trends.

Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustments based upon prior months true-ups and rebooking, plus

During the three months ended June 30, 2021, Hilcorp made no true-up adjustments.

Hilcorp notified the Trust that as of the

date of this Quarterly Report, Hilcorp anticipates that it will adjust the previously reported production and financial information for the production months of January 2021 through April 2021 for operated wells and November 2020 through April 2021

for non-operated wells.

Therefore, Hilcorp believes that these adjustments will result in changes to future distributions of net proceeds to the Trust that reflects such rebooking and true-ups plus interest on such amounts (as required by the

Conveyance) to the extent an under payment to the Trust has occurred.

Hilcorp has confirmed that it will continue to waive interest to the extent there were any overpayments to the Trust based on true-ups in 2021.

Settlements and Litigation

Subsequent Events

On April 20, 2021, the Trust announced a cash distribution of $4,464,842.99 or $0.095794 per Unit, based primarily upon estimated

production during the month of February 2021, payable on May 14, 2021.

The increased distribution is primarily due to higher natural gas prices as a result of severe winter weather in February 2021.

On July 20, 2021, the Trust announced a cash distribution of $3,949,643.61 or $0.084740 per Unit, based primarily upon estimated

production during the month of May 2021, which was paid on August 13, 2021.

In addition, Hilcorp advised the Trust that the May 2021 reporting month included additional gross profits of $2,559,341 ($1,919,505 net to the Trust) based on true-ups to the lease operating expense, property tax and capital cost categories for the January 2021 through April 2021 production months.

Trustees Discussion and Analysis of Financial Condition and Results of Operations.

Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980 between Southland and The Fort Worth National Bank (the Original Indenture).

Original Indenture was amended and restated on September 30, 2002, and further amended and restated on December 12, 2007, which the Trust refers to as the Indenture in this Quarterly Report on Form 10-Q.

As a result of a series of mergers and other transactions involving the Trustee of the Trust, the current Trustee of the Trust is BBVA USA, which is a wholly-owned subsidiary of Banco Bilbao Vizcaya

Argentaria, S.A.

The Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance (the Conveyance) effective November 1, 1980, Southland conveyed the Royalty

that burdens the Subject Interests in properties located in the San Juan Basin of northwestern New Mexico to the Trust.

Subsequent to the Conveyance of the Royalty, through a series of sales, assignments and mergers, Southlands successor

became Hilcorp, which acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (Burlington), an indirect wholly-owned subsidiary of ConocoPhillips, on July 31, 2017.

Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980 between Southland Royalty Company (Southland) and The Fort Worth National Bank

(the Original Indenture).

The Original Indenture was amended and restated on September 30, 2002, and further amended and restated on December 12, 2007, which the Trust refers to as the Indenture in this Quarterly

Report on Form 10-Q.

Because of a series of mergers and other business combination transactions, the current Trustee of the Trust is BBVA USA.

On June 1, 2021, the PNC Financial Services Group, Inc.

(PNC) completed its acquisition of BBVA USA Bancshares, Inc., including its U.S.

banking subsidiary, BBVA USA.

The Trustee will continue to operate as BBVA USA, a wholly owned subsidiary of PNC, until the conversion of bank systems,

which PNC anticipates to occur in or around October 2021.

After the conversion of bank systems is completed, the Trustee will be PNC Bank.

Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance (the Conveyance) effective November 1,

1980, Southland conveyed the Royalty that burdens the Subject Interests in properties located in the San Juan Basin of northwestern New Mexico to the Trust.

Subsequent to the Conveyance of the Royalty, through a series of sales, assignments and

mergers, Southlands successor became Hilcorp, which acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (Burlington), an indirect wholly owned subsidiary of ConocoPhillips, on July 31, 2017.

The Royalty constitutes the principal asset of the Trust.

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The Trust has no employees, officers or directors.

All administrative

functions of the Trust are performed by the Trustee.

Effective June 10, 2019, Compass Bank changed its name to BBVA USA.

The Trustee performs

all administrative functions of the Trust.

Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with

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Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Gross Proceeds and Severance

Tax Estimates.

The sale of San Juan Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017.

Hilcorp has advised the Trust that for certain months (since the closing of its purchase of the assets),

it has reported estimates of cash revenues and expenses based on the best information available to it at the time, instead of reporting actual amounts.

Hilcorp further has informed the Trust that it believes that its estimates have been prepared in

accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance with the Conveyance.

Hilcorps process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as true-ups) are still occurring and being reported in 2021.

In addition, Hilcorp informed the Trust that due to Hilcorps transition to a new accounting system, the January 2021 production month was

based on estimated production, actual realized prices and estimated costs.

Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustments based upon prior months true-ups

and rebooking, plus interest.

During the three months ended March 31, 2021, Hilcorp made operated and non-operated true-ups resulting in an additional $644,000 gross ($483,000 net) Royalty Income revenue to the Trust based on the production months of June through December 2018

and July through October 2020.

Hilcorp notified the Trust that as of the date of this Quarterly Report, Hilcorp anticipates that it will

adjust the previously reported production and financial information for the production months of January 2021 for operated wells and November 2020, December 2020, and January 2021 for non-operated wells.

required by the Conveyance) to the extent an under-or over-payment to the Trust has occurred.

The sale of San

Juan Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017.

Under the terms of the sale, Hilcorp is required to make payments to Burlington if natural gas prices are above a certain price.

confirmed that in accordance with the Conveyance, Hilcorp will not charge the Trust any portion of such payments.

Gross Proceeds and

Severance Tax Estimates.

Hilcorp has advised the Trust that for certain months (since the closing of its purchase of the assets), it has reported estimates of cash revenues and expenses based on the best information available to it at the time,

instead of reporting actual amounts.

Hilcorp further has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance

with the Conveyance.

Hilcorps process of reconciling actual revenue and severance taxes to previously reported estimates (which the

Trust refers to as true-ups) are still occurring and being reported in 2021.

In addition, Hilcorp informed the Trust that due to Hilcorps transition to a new accounting system, the February,

March and April 2021 production months were based on estimated production, estimated prices and estimated costs utilizing historical trends.

Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustments based upon

prior months true-ups and rebooking, plus interest.

During the three months ended June 30, 2021, Hilcorp made no true-up adjustments.

Hilcorp notified the Trust that as of the date of this Quarterly Report, Hilcorp anticipates

that it will adjust the previously reported production and financial information for the production months of January 2021 through April 2021 for operated wells and November 2020 through April 2021 for

non-operated wells.

Hilcorp has confirmed that it will continue to waive interest to the extent there were

any overpayments to the Trust based on true-ups in 2021.

Commodity Prices.

The Trusts income and monthly distributions from the Subject Interests are heavily influenced by the price of

oil and natural gas.

These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas based on market uncertainty or a variety of additional factors that are beyond the Trustees

On January 20, 2021, President Biden signed an executive order that reversed the United States withdrawal from the Paris

Agreement, and the United States formally rejoined the Paris Agreement on February 19, 2021.

At the federal regulatory level, both the EPA and the BLM have adopted regulations for the control of methane emissions, which also include leak

detection and repair requirements, from the oil and gas industry.

President Bidens executive orders require the adoption of new regulations and policies to address climate change and suspend, revise or rescind prior agency actions that are

identified as conflicting with the Biden Administrations climate policies.

In addition, federal government efforts to limit or prohibit hydraulic fracturing and additional prohibitions on new leases for production of minerals on federal

properties, including onshore lands could impact the Subject Interests and the Trust in several ways.

For example, Hilcorp could be required to increase its capital expenditures for the Subject Interests, the market could suffer a decreased demand

for natural gas and oil production, or various agencies could limit the Subject Interests ability to produce natural gas or oil.

The Trust is unable to determine what, if any, the effects of such actions will have on the Subject

Interests ability to produce natural gas and oil, and Hilcorps ability to pay royalty income to the Trust.

Hilcorp previously

informed the Trust that it does not believe that recent actions undertaken by the Bidens administration to curtail future leases for natural gas and oil drilling on federally-owned land will impact the Subject Interests because as currently

enacted, they do not impact current leases.

Results of Operations for the Three Months Ended March 2021 and 2020

Trusts income and monthly distributions from the Subject Interests are heavily influenced by the price of oil and natural gas.

These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and

natural gas based on market uncertainty or a variety of additional factors that are beyond the Trustees control.

January 20, 2021, President Biden signed an executive order that reversed the United States withdrawal from the Paris Agreement, and the United States formally rejoined the Paris Agreement on February 19, 2021.

At the federal regulatory

level, both the Environmental Protection Agency (EPA) and the Bureau of Land Management (BLM) have adopted regulations for the control of methane emissions, which also include leak detection and repair requirements, from the

oil and gas industry.

President Bidens executive orders require the adoption of new regulations and policies to address climate change and suspend, revise or rescind prior agency actions that are identified as conflicting with the Biden

Administrations climate policies.

In addition, federal government efforts to limit or prohibit hydraulic fracturing and additional prohibitions on new leases for production of minerals on federal properties, including onshore lands could

affect the Subject Interests and the Trust in several ways.

For example, Hilcorp could be required to increase its capital expenditures for the Subject Interests, the market could suffer a decreased demand for natural gas and oil production, or

various agencies could limit the Subject Interests ability to produce natural gas or oil.

The Trust is unable to determine what, if any, the effects of such actions will have on the Subject Interests ability to produce natural gas and

oil, and Hilcorps ability to pay royalty income to the Trust.

Hilcorp previously informed the Trust that it does not believe that

recent actions undertaken by the Biden administration to curtail future leases for natural gas and oil drilling on federally owned land will affect the Subject Interests because as currently enacted, they do not affect current leases.

Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020

Royalty Income

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consists of monthly net proceeds attributable to the Royalty.

Royalty Income for the three months ended March 31, 2021 and 2020 was determined as shown in the following table:

Three Months Ended March 31,

Royalty Income for the three and six months ended June 30, 2021 and 2020 was determined as shown in the following table:

Three Months Ended

Six Months Ended

Gross proceeds from the Subject Interests:

Production Costs:

Severance tax natural gas

Severance tax gas

Severance tax oil

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Capital expenditures

Production costs in excess of gross proceeds

Net overriding royalty interest

Royalty Income

Estimated revenue from non-operated properties.

Estimated revenue from non-operated properties and granted audit

exceptions with interest as a result of the 2018 audit, negatively offset by Hilcorps true-ups and adjustments of non-operated revenue from the February 2019

through July 2019 and October 2019 through November 2019 production months.

Estimated revenue from non-operated properties offset by Hilcorps

true-ups and adjustments of non-operated revenue for the production months of June through December 2018 and July through October 2020.

Estimated revenue from non-operated properties offset by Hilcorps

true-ups and adjustments of non-operated revenue for the February and September 2019 production months.

Due to Hilcorps transition to a new accounting system, the February, March and April production months

were based on estimated production, estimated prices and estimated costs.

Due to Hilcorps transition to a new accounting system, the January 2021 production month was based on

estimated production, actual realized prices and estimated costs.

Includes a $450,000 credit by Hilcorp to the Trust due to the settlement of certain audit exceptions related to

compressor maintenance services.

The Royalty Income distributed to the Trust for the three months ended March 31,

2021 was higher than that distributed during the same period of 2020 due primarily to higher natural gas prices and lower lease operating expenses.

The average natural gas price increased from $2.02 per Mcf for the three months ended March 31,

2020 to $2.64 per Mcf for the three months ended March 31, 2021.

Production of natural gas from the Subject Interests decreased from 6,863,999 Mcf for the three months ended March 31, 2020 to 5,703,850 Mcf for the three months ended

March 31, 2021.

Includes a $0.5 million credit by Hilcorp to the Trust due to the settlement of certain audit exceptions

related to compressor maintenance services.

The Royalty Income distributed to the Trust for both the three and six

months ended June 30, 2021 was higher than that distributed during the same period of 2020.

The increase was due primarily to higher natural gas prices due to the spike in natural gas prices during the February 2021 winter storms (February

production month corresponds to the Trusts April distribution month).

The average natural gas price increased from $0.92 per Mcf for the three months ended June 30, 2020 to $2.77 per Mcf for the three months ended June 30, 2021, and

the average natural gas price increased from $1.47 Mcf for the six months ended June 30, 2020 to $2.71 per Mcf for the six months ended June 30, 2021.

Production of natural gas from the Subject Interests increased from 6,871,522 Mcf for

the three months ended June 30, 2020 to 7,517,056 Mcf for the three months ended June 30, 2021, and decreased slightly from 13,735,521 Mcf for the six months ended June 30, 2020 to 13,220,906 Mcf for the six months ended June 30,

Gross Proceeds from Subject Interests.

Total Gross proceeds increased approximately $1.0 million or

7% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was primarily due to higher natural gas prices offset by lower production.

Total Gross proceeds increased approximately $15.6 million, or 257%, for

the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and increased approximately $16.6 million, or 80%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was due primarily to higher natural gas prices along with negative adjustments to Other income in 2020 due to Hilcorps true-ups and adjustments of

non-operated revenue from production months in 2019.

Capital Expenditures .

Capital expenditures by Hilcorp increased approximately $167,000 for the three months ended March 31, 2021

compared to the three months ended March 31, 2020.

The increase was primarily attributable to differences in timing in the payment of these expenditures along with capital expenditures attributable to the prior years budget.

On February 24, 2021, the Trust announced that Hilcorp had provided it with Hilcorps 2021 capital project plan for the Subject

Interests (the 2021 Plan).

The 2021 Plan calls for total capital spending of $0.3 million.

Hilcorps accounting period for capital expenditures runs from January through December 31 of each calendar year, which corresponds

and is reported in Trust Distributions months March of the same calendar year through February of the following calendar year.

expenditures by Hilcorp increased approximately $157,000 for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and increased approximately $$324,000 for the six months ended June 30, 2021 compared

to the six months ended June 30, 2020.

The increase was primarily due to difference in timing in the payment of these expenditures along with capital expenditures attributable to the prior years budget.

Severance Taxes.

Aggregate severance taxes decreased approximately $74,000, or 8%, for the three months ended March 31, 2021

compared to the three months ended March 31, 2020.

The percentage decrease in the three-month period is primarily attributable to Hilcorps severance tax true-ups during the three months ended

March 31, 2021, which resulted in additional royalty income to the Trust of $1.0 million.

Severance taxes represented approximately 5% of gross proceeds for the three months ended March 31, 2021, compared to approximately 6% for the

same period of 2020.

Aggregate severance taxes increased approximately $3.3 million for the three months ended June 30, 2021

compared to the three months ended June 30, 2020, and increased approximately $3.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase in severance taxes was primarily

attributable to higher gross proceeds during those periods.

Severance taxes represented approximately 18% of gross proceeds for the three months ended June 30, 2021, compared to approximately 10% for the same period of 2020.

Severance taxes

represented approximately 13% of gross proceeds for the six months ended June 30, 2021, compared to approximately 7% for the same period of 2020.

The distributions in 2020 included true-ups of previous production months and that resulted in

fluctuations of severance taxes.

Lease Operating Expenses and Property Taxes.

Lease operating expenses and property taxes decreased

$3.3 million, or 47%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease is primarily due to a $450,000 credit by Hilcorp to the Trust due to the settlement of certain audit

exceptions related to compressor maintenance services along with lower compression and well servicing expenses in addition to decreases across other cost categories due to Hilcorps efforts to reduce operating costs in the current price

Monthly lease operating expenses of the Subject Interests, including property taxes, for the three months

ended March 31, 2021 averaged approximately $1.2 million, compared to $2.3 million for the three months ended March 31, 2020.

Lease operating expenses and property taxes

increased $1.8 million, or 31%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase is primarily due to estimated costs used in 2021 as well as increased activity at the Subject

Interests by Hilcorp.

Lease operating expenses and property taxes decreased $1.5 million, or 12%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The decrease is primarily due to a

$0.5 million credit by Hilcorp to the Trust in the first quarter of 2021 for the settlement of certain audit exceptions related to compressor maintenance services along with lower first quarter compression and well servicing expenses in

addition to decreases across other cost categories due to Hilcorps efforts to reduce operating costs in the current price environment.

Monthly lease operating expenses of the Subject Interests, including property taxes, for the three months ended

June 30, 2021 averaged approximately $2.5 million, compared to $1.9 million for the three months ended June 30, 2020.

Monthly lease operating expenses of the Subject Interests, including property taxes, for the six months ended

June 30, 2021 averaged $1.9 million, compared to an average of $2.1 million for the six months ended June 30, 2020.

Distributable Income

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Royalty income

Interest income

Expenditures General and Administrative

General and administrative expenses

Decrease in cash reserves

Distributable income

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Distributable Income .

Distributable Income increased from $4.6 million

($0.099085 per Unit) for the three months ended March 31, 2020 to $7.8 million ($0.166304 per Unit) for the three months ended March 31, 2021.

The increase in Distributable Income was primarily attributable to higher natural gas

prices and lower lease operating expenses offset by lower production.

Based on 46,608,796 Units outstanding, the per-Unit distributions during the first quarter of 2021 were as follows:

Distributable Income increased by approximately

$6.6 million, or 1,124%, to $7.2 million ($0.153748 per Unit) for the three months ended June 30, 2021 from $0.6 million ($0.012557 per Unit) for the three months ended June 30, 2020.

Distributable Income increased by

approximately $9.7 million, or 187%, to $14.9 million ($0.320052 per Unit) for the six months ended June 30, 2021 from $5.2 million ($0.111642 per Unit) for the six months ended June 30, 2020.

The increase in Distributable

Income was primarily attributable to higher natural gas prices due to the spike in natural gas prices during the February 2021 winter storms.

There was no Distributable Income in June 2020 due primarily to decreased natural gas prices and natural

gas production along with true-ups of prior periods by Hilcorp, resulting in gross excess production costs applicable to the Subject Interests of $1.6 million, with 75%, or $1.2 million (net)

allocated to the Trust.

Based on 46,608,796 Units outstanding, the per-Unit distributions during

the second quarter of 2021 were as follows:

Quarter Total

Interest Income.

Interest income was lower for the three months ended March 31, 2021 as compared

to the same period in 2020 due primarily to lower yields on short-term investments.

General & Administrative

General and administrative expenses increased approximately 1.7%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was primarily attributable to differences in timing

in the receipt and payment of certain expenses by the Trust.

Interest income was lower for the three and six month period ended June 30, 2021

as compared to the same period in 2020 due primarily to lower yields on short-term investments.

Administrative Expenses.

General and administrative expenses decreased approximately 19%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and decreased 9%, for the six months ended

June 30, 2021 compared to the six months ended June 30, 2020.

The decrease was primarily attributable to differences in timing in the receipt and payment of certain expenses by the Trust.

Cash Reserves.

Total cash reserves were $1.0 million as of

March 31, 2021.

The primary purpose of the cash reserves is to have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses.

The Trustee does not

anticipate any increases to the cash reserve above a level of $1.0 million in 2021, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.

Liquidity and Capital Resources

Trusts principal source of liquidity and capital is Royalty Income.

The Trusts distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses.

The Trust is not liable for any production costs or

liabilities attributable to the Royalty.

If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such

amount, plus interest, at a rate specified in the Conveyance.

If the Trustee determines that the Trust does not have sufficient funds to pay the Trusts liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no

distributions will be made to Unit Holders until such borrowings are repaid in full.

The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote of 75% of all of the Units outstanding;

however, the Trustee

may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period without the consent of the Unit Holders.

In the event the Trust does not receive sufficient net cash payments from Hilcorp, the Trust believes it has sufficient capacity to draw upon

the cash reserve amount or borrow funds against the Royalty to cover the Trusts operating expenses until its cash reserve can be replenished from net cash payments from Hilcorp.

Total cash reserves were $1.0 million as of June 30, 2021.

The primary purpose of the cash reserves is to

have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses.

The Trustee does not anticipate any increases to the cash reserve above a level of

$1.0 million in 2021, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.

Liquidity and Capital

The Trusts principal source of liquidity and capital is Royalty Income.

The Trusts distribution of income to

Unit Holders is funded by Royalty Income after payment of Trust expenses.

The Trust is not liable for any production costs or liabilities attributable to the Royalty.

If at any time the Trust receives more than the amount due under the Royalty, it

is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance.

If the Trustee determines that the Trust does not have sufficient

funds to pay the Trusts liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be made to Unit Holders until such borrowings are repaid in full.

The Trustee may not sell or dispose of any part of

the assets of the Trust without the affirmative vote of 75% of all of the Units outstanding;

however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any

12-month period without the consent of the Unit Holders.

In the event the Trust does not receive

sufficient net cash payments from Hilcorp, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trusts operating expenses until its cash reserve can be replenished

from net cash payments from Hilcorp.

Oil and Natural Gas Production

natural gas volumes reported to the Trust by Hilcorp are based on plant residue gas volumes plus equivalent volumes for natural gas liquids.

The natural gas volumes reported to the Trust by Hilcorp are based on plant residue gas volumes plus equivalent volumes for natural gas

Hilcorp converts one barrel of natural gas liquids to six Mcf of natural gas using industry standards.

Royalty Income for the three months ended March 31, 2021 is associated with oil and natural gas production during November 2020 through

January 2021 from the Subject Interests.

Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended March 31, 2021 and 2020 were as follows:

For the Three Months Ended March 31,

Royalty Income for the three months ended June 30, 2021 is associated with oil and

natural gas production during February through April 2021 from the Subject Interests.

Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended

June 30, 2021 and 2020 were as follows:

For the Three Months Ended June 30,

Subject Interests

Average Price (per Mcf/Bbl)

The Trust recognizes production during the month in which the related net proceeds

attributable to the Royalty are paid to the Trust.

Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current

calendar year.

Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oil and natural gas, respectively, by the prices received by Hilcorp for sales of such volumes from the Subject

Interests, taking into consideration production taxes attributable to the Subject Interests.

Because the oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost,

including Hilcorps capital expenditures and the timing of Hilcorps true-ups of prior reported estimated oil and natural gas production data, the aggregate sales amounts from the Subject Interests

may not provide a meaningful comparison to sales attributable to the Royalty.

The oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on

such factors as price and cost.

The allocation formula for natural gas produced a negative volume due to excess production costs for natural gas in June 2020.

Gross excess production costs applicable to the Subject Interests were $1.6 million

as of June 30, 2020, with 75%, or $1.2 million (net) allocated to the Trust.

Production of oil and natural

gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the six months ended June 30, 2021 and 2020 were as follows:

For the Six Months Ended June 30,

Subject Interests

Average Price (per Mcf/Bbl)

The Trust recognizes production during the month in which the related net proceeds attributable to the Royalty

are paid to the Trust.

Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current calendar year.

Sales volumes

attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oil and natural gas, respectively, by the prices received by Hilcorp for sales of such volumes from the Subject Interests, taking into consideration

production taxes attributable to the Subject Interests.

Because the oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including Hilcorps capital

expenditures and the timing of Hilcorps true-ups of prior reported estimated oil and natural gas production data, the aggregate sales amounts from the Subject Interests may not provide a meaningful

comparison to sales attributable to the Royalty.

Future true-ups will impact future royalty proceeds, but will not change the reported amounts due to the accounting basis used.

The fluctuations in natural gas production that have occurred during the three-month period ended March 31, 2021 and 2020,

respectively, generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve.

Also, production from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin.

As noted above, oil and natural gas sales attributable to the Royalty are based on an allocation formula

dependent on many factors, including oil and natural gas prices and capital expenditures.

The fluctuations in natural gas production that have occurred during the three-month period ended June 30, 2021 and 2020, respectively,

generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve.

production from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin.

As noted above, oil and natural gas sales attributable to the Royalty are based on an allocation formula dependent

on many factors, including oil and natural gas prices and capital expenditures.

There were no changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and

processing of production during the three months ended March 31, 2021.

processing of production during the three months ended June 30, 2021.

Off-Balance Sheet Arrangements

Critical Accounting Policies

and Estimates

For a discussion of significant accounting policies and estimates that impact the Trusts financial statements, see

Part I, Item 1.

Critical Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that impact the Trusts financial statements, see Part I, Item 1.

Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8.

Financial Statements and Supplemental Data contained in the Trusts Annual Report on Form 10-K for the

year ended December 31, 2020.

Financial Statements and Supplemental Data contained in the Trusts Annual Report on Form 10-K for the year ended

December 31, 2020.

Information Regarding Forward-Looking Information

18 unchanged sentences

Hilcorp Information

As a holder of a net overriding royalty interest, the Trusts reporting of financial information is reliant upon Hilcorp to accurately

and timely report information regarding Hilcorp and its affiliates;

the Subject Interests, including the operations, acreage, well and completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses,

reserves, drilling plans, drilling results and leasehold terms related to the Subject Interests, and factors and circumstances that have or may affect the foregoing.

holder of a net overriding royalty interest, the Trusts reporting of financial information is reliant upon Hilcorp to accurately and timely report information regarding Hilcorp and its affiliates;

the Subject Interests, including the

operations, acreage, well and completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling plans, drilling results and leasehold terms related to the Subject Interests, and

factors and circumstances that have or may affect the foregoing.

See Part I, Item 4.

Controls and Procedures.

For information on the Trusts exposure to market risk, please see Part II, Item 7A, Quantitative and Qualitative Disclosures About

Market Risk contained in the Trusts Annual Report on Form 10-K for the year ended December 31, 2020.

For information on the

Trusts exposure to market risk, please see Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk contained in the Trusts Annual Report on Form 10-K for the year

ended December 31, 2020.

Quantitative and Qualitative Disclosures about Market Risk.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements