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Item 1. Financial Statements

2021-11-15 compared with 2021-08-16 · 263 added, 222 removed, 199 unchanged (71% of the section changed)

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CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

September 30,

Cash and short-term investments

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

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

amortization of $129,246,192 and $128,151,694 at September 30, 2021 and December 31, 2020, respectively)

LIABILITIES AND TRUST CORPUS

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Royalty income

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Trust corpus, beginning of period

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December 31, 2020.

In the opinion of BBVA USA, the trustee of the Trust (the Trustee), and based upon information provided to the Trust by Hilcorp San Juan L.P.

(Hilcorp), the present owner of certain oil and gas

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 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.

In the opinion of PNC Bank, National Association, the trustee of the Trust (PNC Bank or the Trustee), and based upon information provided to the Trust by Hilcorp San Juan L.P.

the present owner of certain oil and gas interests (the Subject Interests) originally owned by Southland Royalty Company (Southland) in properties located in the San Juan Basin of northwestern New Mexico, 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 September 30, 2021, and the distributable income and changes in trust corpus for

the three-month and nine-month periods ended September 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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The net proceeds attributable to the 75% net overriding royalty interest (the Royalty) that burdens

the Subject Interests recorded for a month is the amount computed and paid by Hilcorp to the Trustee for the Trust.

Royalty Income consists of the proceeds received by Hilcorp from the sale of production less accrued production costs, development

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 affects the Royalty

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

See Item 2 Part I of this Quarterly Report on Form 10-Q entitled Gross Proceeds and Severance Tax Estimates for a more

detailed explanation of the estimate and true-up process for distributable income reporting and distributions to Unit Holders.

the Subject Interests recorded for a month is the amount computed and paid by Hilcorp to the Trustee for the Trust (the Royalty Income).

Royalty Income consists of the proceeds received by Hilcorp from the sale of production less accrued

production costs, development 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 affects the Royalty Income paid to the Trust and the distribution to Unit Holders for that month.

See Item 2 Part I of this Quarterly Report on Form 10-Q entitled Gross Proceeds and Severance

Tax Estimates for a more detailed explanation of the estimate and true-up process for distributable income reporting and distributions to Unit Holders.

Although permitted under the Net Overriding Royalty Conveyance that transferred the Royalty to the Trust (the

Conveyance), Hilcorp has informed the Trust that, for wells operated by Hilcorp, it generally does not intend to accrue lease operating expenses to the Trust.

Hilcorp has informed the Trust that oil revenue is typically reported to the Trust based on actual volumes and

pricing and that due to timing, Hilcorp reports accrued natural gas revenues to the Trust based on actual production volumes from the meters.

Generally, Hilcorp reconciles the natural gas revenue accruals with the plant processing statements the

month following the previously reported financial information.

Hilcorp has informed the Trust that oil and natural gas revenue is typically reported to the Trust based on

actual volumes and pricing.

Hilcorp has notified the Trust that non-operated revenue is reported to

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year through September of the current calendar year.

However, for 2021, non-operated revenue has been based on estimated natural gas and oil production.

Trust expenses recorded are based on liabilities paid and cash reserves established from Royalty Income for

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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

June 30, 2021.

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 September 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.

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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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.

As of September 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

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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.

Gross Proceeds and Production Cost 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.

Settlements and Litigation

Subsequent Events

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.

PNC Succession as the Trustee

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

(PNC) announced that it had completed the purchase of BBVA USA

Bancshares, Inc., a financial holding company, including its U.S.

banking subsidiary, BBVA USA, an Alabama-chartered bank and trustee of the Trust (BBVA USA).

On October 8, 2021, PNC Bank, an indirect wholly owned subsidiary of PNC,

succeeded BBVA USA as the trustee of the Trust following BBVA USAs merger with and into PNC Bank.

October Distribution

On October 19, 2021, the Trust announced a cash distribution of $3,155,671 or $0.067705 per Unit, based primarily upon the reported

production during the month of August 2021, which was paid on November 15, 2021.

Hilcorp Meeting and Reimbursements to the Trust

On November 11, 2021, Hilcorp met with the Trust (the November 2021 Meeting) to discuss several material issues that

the Trust had raised with respect to Hilcorps estimates of gross proceeds and severance taxes, as well as the Trusts audit of Hilcorps reported revenues and expenses.

During the November 2021 Meeting, Hilcorp informed the Trust

that it had completed its actualization and validation of January, February, and March 2021 with respect to the gross proceeds and severance tax estimates attributable to the Royalty Interests owned by the Trust.

Based on such review, Hilcorp

informed the Trust that it had determined that it owes the Trust an additional $448,780 for these time periods, along with $63,496 in interest in accordance with the terms of the Conveyance.

Also, during the November 2021 Meeting, Hilcorp informed the Trust that it had discovered errors made in the setup of a few of its general

ledger accounts during its SAP conversion process.

Specifically, Hilcorp stated that these accounts had been mislabeled as billable, including three of the Trusts general ledger accounts.

As a result, Hilcorp notified the Trust that it will

reimburse the Trust $2,681,521 for the erroneous billed labels for January through July 2021 production months, along with $72,667 in interest in accordance with the Conveyance.

Hilcorp believes that it has now corrected its accounting internal

control systems.

Hilcorp intends to include the payments for these actualizations and adjustments, together with the related interest, in

the November reporting and distribution to the Trust.

Hilcorp also confirmed that it continues to work on its actualization and accounting of the operated revenue and severance tax computations for the production month of April 2021 and will notify

the Trust promptly upon completion of such actualization and accounting.

The Trustee continues to engage with Hilcorp regarding its

ongoing accounting and reporting to the Trust, and the Trusts third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments, true-ups, and

The Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

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

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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.

On June 1, 2021, 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 Trustee continued to operate as BBVA USA, an indirect

wholly owned subsidiary of PNC, until the conversion of bank systems and merger of BBVA USA with and into PNC Bank, an indirect wholly owned subsidiary of PNC, which was completed in October 2021.

As a result, PNC Bank succeeded BBVA USA as Trustee

under the terms of the Indenture.

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.

The Royalty constitutes the principal asset of the Trust.

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Holders of Units in the Trust are referred to herein as Unit Holders.

The primary function of

the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining available income to the Unit Holders.

The amount of income distributable to Unit Holders, which we refer to as Distributable

Income, depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves.

The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining

available income to the Unit Holders.

The amount of income distributable to Unit Holders, which we refer to as Distributable Income, depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of

expenses paid by the Trust and any change in cash reserves.

The Trust has no employees, officers or directors.

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

the Trust, for marketing the oil and natural gas production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the

circumstances.

A very high percentage of the Royalty Income is attributable to the production and sale by Hilcorp of natural gas from the Subject Interests.

Accordingly, the market price and demand for natural gas produced and sold from the San Juan

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

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.

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 the Trust, for marketing the oil and natural gas production from such properties, either under existing sales contracts or under

future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances.

A very high percentage of the Royalty Income is attributable to the production and sale by Hilcorp of natural gas from the

Subject Interests.

Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

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.

Hilcorp has 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 beginning in March 2021, revenue and

severance tax categories for the February through May 2021 production months were based on estimates utilizing historical trends.

Revenue and severance tax for the May, June and July production months were

trued-up in August and September 2021.

During the November 2021 Meeting, Hilcorp informed the

Trust that it had completed its actualization and validation of January, February, and March 2021 with respect to the gross proceeds and severance tax estimates attributable to the Royalty Interests owned by the Trust.

Based on such review, Hilcorp

informed the Trust that it had determined that it owes the Trust an additional $448,780 for these time periods, along with $63,496 in interest in accordance with the terms of the Conveyance.

Hilcorp intends to include the payments for these

actualizations and adjustments, together with the related interest, in the November reporting and distribution to the Trust.

operating expenses and capital costs for the January through April 2021 production months were based on estimates, but the lease operating expenses and capital costs for May 2021 were based on actual costs.

Both Lease operating expense and capital

costs for the January through May 2021 production months were trued-up in July 2021.

However, due to excess production costs for the June production month (which corresponds with the Trusts August

distribution month), there was no cash distribution made in August 2021.

These true-up corrections resulted in no distribution payment declared for the August 2021 reporting month.

Hilcorp also confirmed that it continues to work on its actualization and accounting of the operated revenue and severance tax computations

for the production month of April 2021 (the remaining 2021 production month that was based on estimates) and will notify the Trust promptly upon completion of such actualization and accounting by the end of 2021.

Hilcorp further informed the Trust

that it believes that the April 2021 true-up and adjustment may result in changes to future distributions of net proceeds to the Trust that reflect such rebooking and

true-ups plus interest on such amounts (as required by the Conveyance) to the extent an underpayment 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.

The Trustee continues to engage

with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trusts third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments,

true-ups, and recoupments.

The Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

Commodity Prices.

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

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 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

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 affect the Subject Interests because as currently enacted, they do not affect current leases.

Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

Royalty Income

consists of monthly net proceeds attributable to the Royalty.

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

Royalty Income consists of monthly

net proceeds attributable to the Royalty.

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

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Gross proceeds from the Subject Interests:

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Royalty Income

Estimated revenue from non-operated properties.

Estimated revenue from non-operated properties, granted audit

exceptions with interest as a result of the audit, and interest owed from the true-up of January through April 2021 production costs.

Estimated revenue from non-operated properties and true-ups and adjustments of non-operated revenue for the production months of January 2018, February 2018, March 2018, January 2019, August 2019, December 2019, January 2020,

and February 2020, negatively offset by reimbursement by the Trust to Hilcorp of $1.5 million, being a portion of the total $2.0 million in Other revenue included in the estimated gross proceeds in the December 2017 and January

2018 distribution 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 and granted audit

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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.

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 May 2021 production month), was based on

estimated revenue and severance tax.

The May production month corresponds to the Trusts July distribution month.

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 $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,

The February, March and April production months were based on estimated production, estimated prices and estimated costs.

Interest charges on excess production costs.

Net proceeds (gross proceeds less production costs) for the three months ended September 30, 2020, were

$1,480,811, which reduced, but did not eliminate, the prior excess production costs of $1,572,814 from the three months ended June 30, 2020.

Gross excess production costs applicable to the Subject Interests were $92,000 as of September 30,

2020, with 75%, or $69,000 (net), allocated to the Trust.

The Royalty Income distributed to the Trust for both the three

and nine months ended September 30, 2021 was higher than that distributed during the same period of 2020 due primarily to higher natural gas prices.

There was no Royalty Income distributed to the Trust in the three months ended

September 30, 2020 due to excess production costs from the April 2020 production month.

The average natural gas price increased from $1.46 per Mcf for the three months ended September 30, 2020 to $2.74 per Mcf for the three months ended

September 30, 2021, and the average natural gas price increased from $1.47 Mcf for the nine months ended September 30, 2020 to $2.72 per Mcf for the nine months ended September 30, 2021.

Production of natural gas from the Subject

Interests increased from 5,786,304 Mcf for the three months ended September 30, 2020 to 6,410,955 Mcf for the three months ended September 30, 2021, and increased slightly from 19,521,825 Mcf for the nine months ended September 30,

2020 to 19,631,861 Mcf for the nine months ended September 30, 2021.

Gross Proceeds from Subject Interests.

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.

proceeds increased approximately $11 million, or 136%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, and increased approximately $27.6 million, or 96%, for the nine

months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase was due primarily to higher natural gas prices.

Capital Expenditures .

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 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.

Capital expenditures by Hilcorp decreased approximately $166,000 for the three months ended September 30,

2021 compared to the three months ended September 30, 2020.

The decrease is due primarily to a credit as a result of true-ups for the January through April 2021 production months.

Hilcorps capital

expenditures increased approximately $159,000 for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase was primarily due to differences in timing in the payment of these expenditures

along with capital expenditures attributable to the prior years budget.

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.

Aggregate severance taxes increased

approximately $1.1 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, and increased approximately $4.3 million for the nine months ended September 30, 2021 compared

to the nine months ended September 30, 2020.

The increase in severance taxes was primarily attributable to higher gross proceeds during those periods.

Severance taxes represented approximately 13% of gross proceeds for the three months ended

September 30, 2021, compared to approximately 18% for the same period of 2020.

Severance taxes represented approximately 13% of gross proceeds for the nine months ended September 30, 2021, compared to approximately 10% for the same period

The distributions in 2020 included true ups of previous production months which resulted in fluctuations of severance taxes.

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.

Lease operating expenses and property taxes increased $3.5 million, or 69%, for the

three months ended September 30, 2021 compared to the three months ended September 30, 2020, and increased $2 million, or 11%, for the nine months ended September 30, 2021 compared to the nine months ended September 30,

The increase is primarily due to true-ups and corrections for the January through May 2021 production months, as well as to increased activity at the Subject Interests by Hilcorp.

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.

September 30, 2021 averaged approximately $2.9 million, compared to $1.7 million for the three months ended September 30, 2020.

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

months ended September 30, 2021 averaged $2.2 million, compared to an average of $2 million for the nine months ended September 30, 2020.

Distributable Income

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Royalty income

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Distributable Income .

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:

Distributable Income for the three months ended

September 30, 2021 was $5.7 million ($0.121735 per Unit).

There was no Distributable Income during the three months ended September 30, 2020.

Distributable Income increased by approximately $15.4 million, or 296%, to

$20.6 million ($0.441787 per Unit) for the nine months ended September 30, 2021 from $5.2 million ($0.111642 per Unit) for the nine months ended September 30, 2020.

The increase in Distributable Income was primarily attributable

to higher natural gas prices.

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

during the third quarter of 2021 were as follows:

Quarter Total

Due to excess production costs for the June production month (which corresponds with the Trusts August

distribution month), there was no cash distribution made in August.

Interest Income.

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.

Interest income was lower for the three

months ended September 30, 2021 as compared to the same period in 2020 due primarily to lower yields on short-term investments.

General & Administrative Expenses.

General and administrative expenses increased approximately 33%, for the

three months ended September 30, 2021 compared to the three months ended September 30, 2020, and increased 0.7%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase in

general and administrative expenses was primarily attributable to differences in timing in the receipt and payment of certain expenses by the Trust, and increased legal expenses during the transition from BBVA to PNC Bank as the Trustee.

Cash Reserves.

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

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

The primary purpose of the cash reserves is to

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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.

Due to excess production costs in June

2021, the Trust did not declare a distribution in August 2021.

The cash required for monthly expenses was funded by the cash reserve.

The amount taken from the cash reserve was replenished in September 2021.

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

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

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

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

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,

Royalty Income for the three months ended September 30, 2021 is associated with oil and natural gas production during May through July

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 September 30, 2021 and 2020 were as follows:

For the Three Months Ended September 30,

Subject Interests

Average Price (per Mcf/Bbl)

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,

Production of oil and natural gas and related average sales prices attributable to each of the Subject

Interests and the Royalty for the nine months ended September 30, 2021 and 2020 were as follows:

For the Nine Months Ended September 30,

Subject Interests

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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 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 June 30, 2021.

However, for 2021,

non-operated revenue has been based on estimated natural gas and oil production.

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 September 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.

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.

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 September 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

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

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Such statements are based on

certain assumptions of BBVA USA, the Trustee, and by Hilcorp, with respect to future events;

certain assumptions of the Trustee and by Hilcorp, with respect to future events;

are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Hilcorp;

and involve risks and uncertainties.

However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and Hilcorp

in particular, and could cause those results to differ materially from those expressed in such forward-looking statements.

whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and Hilcorp in

particular, and could cause those results to differ materially from those expressed in such forward-looking statements.

The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the

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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