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Item 1. Financial Statements

2022-05-16 compared with 2021-11-15 · 298 added, 333 removed, 129 unchanged (83% of the section changed)

1 unchanged sentence

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

amortization of $129,838,708 and $129,584,681 at March 31, 2022 and December 31, 2021, respectively)

LIABILITIES AND TRUST CORPUS

2 unchanged sentences

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

Total liabilities

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Royalty income

Interest income

General and administrative expenses

Decrease in cash reserves

Expenditures General and Administrative

Distributable income

2 unchanged sentences

Notes to Condensed Financial Statements included herein.

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

Three Months Ended

September 30,

Nine Months Ended

September 30,

CONDENSED STATEMENTS OF CHANGES IN TRUST

CORPUS (UNAUDITED)

Three Months Ended March 31,

Trust corpus, beginning of period

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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.

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, 2022, and the distributable income and changes in trust corpus for the

three-month periods ended March 31, 2022 and 2021.

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

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generally accepted accounting principles (GAAP):

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 (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 and natural gas revenue is typically reported to the Trust based on

actual volumes and pricing.

The Net Overriding Royalty Conveyance (the Conveyance) conveyed to the Trust a 75% net overriding

royalty interest (the Royalty) that burdens the Subject Interests.

The Trust receives royalty income (Royalty Income) equal to 75% of the Net Proceeds attributable to the Subject Interests.

Net Proceeds, as used

in the Conveyance, means the excess of Gross Proceeds received by Hilcorp during a particular period over Production Costs for such period.

Gross Proceeds means the amount received by Hilcorp from the sale of production attributable to

the Subject Interests, subject to certain adjustments (e.g., fuel, gathering and transportation).

Production Costs include both capital and non-capital costs incurred by Hilcorp in operating the

Subject Interests including development drilling, production and processing costs, applicable taxes, and operating charges.

The calculation of Net Proceeds by Hilcorp for any month may include adjustments to proceeds and costs for prior months which

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

Although permitted under the Conveyance that transferred the Royalty to the Trust, 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 Gross Proceeds are typically reported to the Trust based on actual volumes

Proceeds from production in the first month are generally received by Hilcorp in the second month, the Royalty Income is paid by Hilcorp to the Trustee in the third month, and distribution by the Trustee to the Unit Holders is made in

the fourth month.

Net Proceeds for a calendar year are typically based on the actual oil and natural gas production during the period beginning with November of the preceding calendar year through October of the current calendar year.

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

the Trust based on a three-month lag.

Non-operated revenue for a calendar year is typically based on the actual natural gas and oil production during the period beginning with October of the preceding calendar

year through September of the current calendar year.

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

the Trust based on a three-month lag from operated revenues.

Non-operated revenue for a calendar year is typically based on the actual oil and natural gas production during the period beginning with August of

the preceding calendar year through July of the current calendar year.

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

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charged directly to trust corpus instead of as an expense.

There was no impairment of the Trusts assets as of September 30, 2021.

There was no impairment of the Trusts assets as of March 31, 2022.

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

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 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

Under present law, the Trusts production and sale of

natural gas from Coal Seam Wells does not qualify for tax credit under Section 45K of the Code (the Section 45 Tax Credit).

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, 2022, the Trusts tax years 2018 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.

Commitments and Contingencies

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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 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.

Hilcorp continue to monitor the impact that future Covid-19 restrictions or outbreaks may have on production, including personnel availability in New Mexico and other Subject Interest areas.

Hilcorp further

informed the Trust that it does not anticipate that the current state of the Covid-19 pandemic will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to

However, the impact of the continued Covid-19 pandemic or future restrictions or outbreaks on Hilcorp and the Subject Interests is still unknown and any such impact could result in actual results

being different from Hilcorps expectations.

Gross Proceeds and Severance Tax Estimates .

Hilcorps process of reconciling

Gross Proceeds and severance taxes to previously reported estimates (which the Trust refers to as true-ups) during fiscal years 2018 and 2020 were still occurring and being reported in 2021.

Hilcorp has informed the Trust that as it continues to refine further its estimating and reporting processes.

Hilcorp will review both prior periods, as well as future reporting periods, to ensure greater accuracy and consistency.

As part of that

review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain prior periods.

Thus, distributions to the Trust from Hilcorp in any given month in 2022 may include adjustments for the reversal and rebooking of prior

months revenue, plus interest.

Settlements and Litigation

Subsequent Events

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.

On April 19, 2022, the Trust announced a cash distribution of $3,863,096.64 or $0.082883 per Unit, based primarily upon production during

the month of February 2022, which was paid on May 13, 2022.

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 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.

On June 1, 2021, PNC completed its acquisition of BBVA USA Bancshares, Inc., including its U.S.

banking subsidiary, BBVA USA.

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.

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, the current Trustee of the Trust is 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.

The beneficial interest in the Royalty is divided into 46,608,796 units (the

Units) representing undivided fractional interests in the beneficial interest of the Trust equal to the number of shares of the common stock of Southland outstanding as of the close of business on November 3, 1980.

Each stockholder

of Southland of record at the close of business on November 3, 1980 received one freely tradable Unit for each share of the common stock of Southland then held.

Units) representing undivided fractional interests in the beneficial interest of the Trust, equal to the number of Southland common stock shares outstanding as of the close of business on November 3, 1980.

Each stockholder of

Southland of record at the close of business on November 3, 1980, received one freely tradable Unit for each share of the common stock of Southland then held.

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.

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

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 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.

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

Hilcorps process of reconciling

Gross Proceeds and severance taxes to previously reported estimates (which the Trust refers to as true-ups) were still occurring and being reported in 2021.

At the beginning of 2021, Hilcorp

informed the Trust that it planned to refine further its estimating and reporting processes, and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods.

of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain prior periods.

Thus, distributions to the Trust from Hilcorp in certain months during 2021 were subject to adjustments based upon prior

months true-ups and rebooking, plus interest.

Hilcorp informed the Trust that it completed

the transition to its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August reporting month), and that it has reversed and rebooked revenue for

certain prior periods.

As of December 31, 2021, Hilcorp believes that all prior month true-ups have been completed for operated wells.

The true-up of revenues for non-operated properties for the 2021 distribution periods was completed in the February and March 2022 reporting months.

The amount of Gross Proceeds also depends on the volumes of oil and natural gas produced from the Subject Interests.

Under the terms of the

Indenture, the Trust cannot acquire new oil and natural gas assets, and as a result, Royalty Income is dependent on the oil and natural gas volumes attributable to the Subject Interests.

Although Hilcorp and other operators of the Subject Interests

may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets and Hilcorp has informed the Trust that it is unable to estimate the productive life of the Subject Interests.

The reduction in proved

reserve quantities is a common measure of depletion.

Hilcorps (or a future operators) capital investments in the Subject Interests will affect the quantity of proved reserves and can offset any reduction in proved reserves.

commodity prices may also reduce the value of the oil and natural gas produced from the Subject Interests by Hilcorp.

Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021.

Relatedly, because of Hilcorps prior process of providing production estimates rather than actual production, a simple year-over-year

comparison from the prior distribution reports from Hilcorp will not reflect the actual comparable production amounts.

For example, a comparison of the January 2021 estimated production with the January 2022 actual production would reflect a decline

of almost 25%.

However, comparing the November 2021 actualizations of January 2021 production to January 2022 actual production, the decline is just under 5.5%.

In reviewing the Distribution Reports on an annual basis, the total 2020 MMBtu

production was 28,643,237 as compared to 2021 MMBtu of 26,899,877, which results in an annual decline of 6.09% year-over-year.

February 17, 2022, the Trust announced that Hilcorp had provided the Trust with its 2022 capital project plan for the Subject Interests (the 2022 Plan), and Hilcorp has estimated its 2022 capital expenditures for the Subject

Interests to be $1.9 million.

The objective of this capital project plan is to address the natural depletion of oil and gas assets.

Specifically, Hilcorp informed the Trust that its 2022 Plan would allocate approximately $1.5 million of

the 2022 Plans budget towards 24 well recompletions and workovers scheduled to be completed in the Mesaverde, Pictured Cliffs and Fruitland Coal formations.

Approximately $300,000 of the 2022 Plans budget will be allocated to facilities

projects related to natural gas compression, and approximately $100,000 will be spent for permitting and surveying costs for future new drill projects that are being considered for 2023 and 2024.

Hilcorp further informed the Trust that its planned

project status for 2022 is subject to revision if it revises its assumptions underlying the 2022 Plan, and that in any event actual capital costs may vary from these estimates.

Under the terms of the Conveyance, production costs are deducted from Gross Proceeds in calculating Net Proceeds, which is multiplied by 75%

to calculate Royalty Income.

Production costs generally means costs incurred on an accrual basis by Hilcorp in operating the Subject Interests, including both capital and non-capital costs.

example, these costs include development drilling, production and processing costs, applicable taxes and operating charges.

However, Hilcorp informed the Trust that for wells operated by Hilcorp it did not intend to accrue lease operating expenses

to the Trust.

If production costs exceed Gross Proceeds in any month, the excess is recovered out of future Gross Proceeds prior to the making of further payments to the Trust.

However, the Trust is not otherwise liable for any production costs or

other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom.

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.

The Trust and the Trustee has very limited authority to control the amount and timing of production costs.

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.

In addition, 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.

Factors that Affect Net

Generally, Net Proceeds are affected by (a) disruptions caused by weather, particularly winter storms that disrupt access to the production fields, (b) the timing and size of Hilcorps capital expenditures, and

Hilcorp has advised the Trust that it is possible for it to experience disruptions during the

winter months that could impact Hilcorps ability to access fields and maintain production.

Capital Expenditures.

The timing and size of capital expenditures by Hilcorp may

impact Net Proceeds.

Capital expenditures by Hilcorp decreased approximately $142,400 for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The decrease was primarily attributable to differences in

timing in the payment of these expenditures along with capital expenditures attributable to the prior years budget.

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 control.

Hilcorp has multiple gas purchase agreements that set forth the prices that it will receive for the oil and natural gas produced from the

Subject Interests.

There is a differential in the prices reflected in the market indices and the prices received and reported, because the prices received and reported vary by purchase agreement and are after deducting gathering, processing and

marketing costs for both gas and natural gas liquids.

These purchase agreements and costs are subject to a comprehensive audit process by professional accountants and consultants.

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 and the Bureau of Land Management have adopted regulations for the control of methane

emissions, which also include leak detection and repair requirements, from the oil and gas industry.

Additionally, President Biden has issued an executive order seeking to adopt 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, President Biden has declared that he supports federal government efforts to limit or prohibit hydraulic

fracturing and banning new leases for production of minerals on federal properties, including onshore lands.

Any of these actions could require Hilcorp to increase capital expenditures for the Subject Interests, decrease demand for oil and natural

gas production, or limit the Subject Interests ability to produce natural gas or oil production.

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

natural gas, 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 oil and natural gas drilling on federally owned land will impact the Subject Interests because as currently enacted, they do not impact current

Results of Operations for the Three Months Ended March 2022 and 2021

Royalty Income

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

September 30,

Nine Months Ended

September 30,

Royalty Income consists of 75% of the monthly Net Proceeds attributable to the Royalty.

Royalty Income for the three months ended

March 31, 2022 and 2021 was determined as shown in the following table:

Three Months Ended March 31,

Gross Proceeds from the Subject Interests:

Production Costs:

Severance tax gas

Severance tax natural 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, 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 related to audit exceptions and interest, and from

non-operated properties offset by Hilcorps true-ups and adjustments of non-operated revenue for the production months

November 2020 through October 2021.

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

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.

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.

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.

Includes $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, 2022,

was higher than that distributed during the same period of 2021 due primarily to higher natural gas prices.

The average natural gas price increased from $2.64 per Mcf for the three months ended March 31, 2021, to $4.79 per Mcf for the three

months ended March 31, 2022.

Production of natural gas from the Subject Interests increased from 5,703,850 Mcf for the three months ended March 31, 2021, to 6,231,076 Mcf for the three months ended March 31, 2022.

Gross Proceeds from Subject Interests.

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.

Total Gross Proceeds increased approximately $15.6 million or 100% for the three

months ended March 31, 2022, compared to the three months ended March 31, 2021.

The increase was primarily due to higher natural gas prices.

Capital Expenditures .

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.

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.

Capital expenditures by Hilcorp decreased approximately $142,400 for the three months ended March 31, 2022,

compared to the three months ended March 31, 2021.

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

As referenced above, on February 17, 2022, the Trust announced Hilcorps 2022 capital project plan for the Subject Interests (the

2022 Plan).

The 2022 Plan calls for total capital spending of $1.9 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.

Aggregate severance taxes increased approximately $3.1 million, or 374%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The percentage increase in the three-month period is

primarily attributable to increased revenue and by corrections made to June 2018 through December 2018 production months which reduced reported severance taxes in the three months ended March 31, 2021 by $1.4 million.

The corrections

included the reversal of severance tax estimates and tax only adjustments associated with the Jicarilla tribe.

Excluding these corrections, severance taxes represented approximately 13% of Gross Proceeds for the three months ended March 31,

2022, compared to approximately 14% for the same period of 2021.

Lease Operating Expenses and Property Taxes.

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

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.

Lease operating

expenses and property taxes increased $3.7 million, or 103%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The increased expenses include approximately $0.5 million in non-operated lease operating expense true-ups, the payment of approximately $1 million for year-end salaries and bonuses for

Hilcorp employees, and differences in the timing in the receipt and payment of these costs, offset by a $450,000 credit by Hilcorp to the Trust in 2021 due to the settlement of certain audit exceptions related to compressor maintenance services.

Trust and its consultants are conducting a detailed analysis of these expenses associated with the year-end salaries and bonuses for Hilcorp employees to determine if they comport with the Conveyance and other

operative agreements.

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

three months ended March 31, 2022, averaged approximately $2.5 million, compared to $1.2 million for the three months ended March 31, 2021.

Distributable Income

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Royalty income

Interest income

General and administrative expenses

Decrease in cash reserves

Expenditures General and Administrative

Distributable income

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Distributable Income .

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:

Distributable Income increased from $7.8 million ($0.166304 per Unit) for

the three months ended March 31, 2021, to $14.4 million ($0.308294 per Unit) for the three months ended March 31, 2022.

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 first quarter of 2022 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

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.

Interest income was lower for the three months ended March 31, 2022, as compared

to the same period in 2021 due primarily to lower yields on short-term investments.

General & Administrative

General and administrative expenses increased approximately 13%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The increase 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 September 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.

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.

Total cash reserves were $1.0 million as of

March 31, 2022.

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 2022, 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 its 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 the Unit Holders 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 Royalty Income from Hilcorp sufficient to pay its liabilities, 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 subsequent Royalty Income 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.

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

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)

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,

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

Royalty Income for the three months ended March 31, 2022, is associated with oil and natural gas production during November 2021 through

January 2022 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, 2022, and 2021 were as follows:

For the Three Months Ended March 31,

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.

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.

Based on Hilcorps reporting methodology, the Trust recognizes production during the month in which the

related Royalty Income is paid to the Trust.

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

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 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 capital expenditures,

the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty.

The fluctuations in natural gas production that have occurred during the three-month period

ended March 31, 2022 and 2021, respectively, generally resulted from non-operated true-ups in February and March 2022 for November 2020 thru October 2021

production, operated true-ups in January and February 2021 for June 2018 thru December 2018 production, 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

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

Part I, Item 1.

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, 2022.

Off-Balance Sheet

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.

Information Regarding Forward-Looking Information

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed

or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of

the Securities Exchange Act of 1934, as amended (the Exchange Act) and Section 27A of the Securities Act of 1933, as amended.

Such forward-looking statements may involve or may concern, among other things, the amount and variability

in capital expenditures by Hilcorp, drilling activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trusts activities, the differences

between Hilcorps estimated revenue and actual revenue, and regulatory matters.

Such forward-looking statements generally are accompanied by words such as may, will, based, estimate,

expect, predict, project, anticipate, believe, plan, intend, or other words that convey the uncertainty of future events or outcomes.

Such statements are based on

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

Financial Statements and Supplemental Data contained in the Trusts Annual Report on Form

10-K for the year ended December 31, 2021.

Information Regarding Forward-Looking

Certain information included in this Quarterly Report on Form 10-Q contains, and

other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of

Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) and Section 27A of the Securities Act of 1933, as amended.

Such forward-looking statements may involve or may concern, among other things, the

amount and variability in capital expenditures by Hilcorp, drilling activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trusts

activities, the differences between Hilcorps estimated revenue and actual revenue, and regulatory matters.

Such forward-looking statements generally are accompanied by words such as may, will, based,

estimate, expect, predict, project, anticipate, believe, plan, intend, or other words that convey the uncertainty of future events or outcomes.

statements are based on 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.

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

expected consequences to or effects on Hilcorps business and the Trust.

Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements.

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.

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

may not have the expected consequences to or effects on Hilcorps business and the Trust.

Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such

forward-looking statements.

The Trust undertakes no obligation to publicly update or revise any forward-looking statements, except as required by applicable law.

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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