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Item 1. Financial Statements

2022-11-14 compared with 2022-08-15 · 238 added, 214 removed, 271 unchanged (63% 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 $129,984,517 and $129,584,681 at June 30, 2022, and December 31, 2021, respectively)

amortization of $130,145,078 and $129,584,681 at September 30, 2022 and December 31, 2021, 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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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 June 30, 2022, and the distributable income and changes in trust corpus for the

three-month and six-month periods ended June 30, 2022 and 2021.

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

the three-month and nine-month periods ended September 30, 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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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.

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

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insufficient to cover such costs.

Depletion and any impairment are recorded as a reduction in trust corpus instead of an expense.

Depletion and any impairment are recorded as a reduction in trust corpus instead of as an expense.

The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because

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and amortization of the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense.

accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received, or expenses were

Because the Trusts financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trusts financial statements.

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charged directly to trust corpus instead of as an expense.

There was no impairment of the Trusts assets as of June 30, 2022.

There was no impairment of the Trusts assets as of September 30, 2022.

Federal Income Taxes

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

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.

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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 June 30, 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.

and Contingencies

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

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

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

As of September 30, 2022, the Trusts tax years 2018 and thereafter remain subject to examination.

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

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

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

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

recovery of costs.

Covid-19 Pandemic .

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

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

Hilcorp has informed

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

however, both the Trust and

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

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 the Trust.

However, the impact of the continued Covid-19 pandemic, including a resurgence of COVID-19 lockdowns in Asia, may extend

existing supply chain disruptions and order backlogs for materials or services needed to maintain production in the Subject Interest areas, or have other unknown impacts on Hilcorp and the Subject Interests, and any such impact could result in

actual results being different from Hilcorps expectations.

Hilcorp informed the Trust that it does not

have anything specifically to comment on regarding the Covid-19 pandemic.

Geo-Political Uncertainties .

Prices for goods

and services have risen over the last 12 months, and inflationary pressures have accelerated in the first half of 2022, as regional and global commodity prices have risen in response to the conflict in Ukraine.

The impact of ongoing or extended

conflict on Hilcorps ability to produce from the Subject Interests or on commodity prices is unknown.

Gross Proceeds and

Production Cost Estimates.

Hilcorps process of reconciling actual revenue 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.

As part of that review process, Hilcorp informed the Trust that it may reverse

and rebook revenue for certain 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

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 2021 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-ups of revenues for non-operated properties for

the 2021 distribution periods were completed in the February and March 2022 reporting months.

The amount of Gross Proceeds depends on the

volumes of natural gas and oil produced from the Subject Interests.

Under the terms of the Indenture, the Trust cannot acquire new natural gas and oil assets, and as a result, Royalty Income is dependent on the natural gas and oil 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;

Hilcorp has informed the Trust

that it is unable to estimate the productive life of the Subject Interests.

Hilcorp informed the Trust that it does not have anything specifically to comment on regarding the war in Ukraine.

Gross Proceeds and Production Cost Estimates .

Hilcorps process of reconciling actual revenue and severance taxes to previously

reported estimates (which the Trust refers to as true-ups) were still occurring and being reported in 2022.

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.

As part of that review process, Hilcorp informed the Trust

that it may reverse and rebook revenue for certain periods.

Thus, distributions to the Trust from Hilcorp in certain months during 2021 and 2022 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 2021 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-ups of revenues for non-operated properties for the 2021 distribution periods were completed in the February and March 2022 reporting months.

The amount of Gross Proceeds depends on the volumes of natural gas and oil produced from the

Subject Interests.

Under the terms of the Indenture, the Trust cannot acquire new natural gas and oil assets, and as a result, Royalty Income is dependent on the natural gas and oil 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;

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.

Lower commodity prices may also cause Hilcorp to reduce drilling operations, workover, and/or recompletions, thus reducing the volume of natural gas and oil

produced from the Subject Interests by Hilcorp.

Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to date in 2022.

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.

Lower commodity prices may also cause Hilcorp to reduce drilling operations, workover, and/or recompletions, thus reducing the volume of natural gas and oil produced from the Subject Interests by Hilcorp.

not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to date in 2022.

Settlements and Litigation

Subsequent Events

2022, the Trust announced a cash distribution of $6,766,905.11 or $0.145185 per Unit, based primarily upon production during the month of May 2022, which was paid on August 12, 2022.

On October 21, 2022, the Trust announced a cash distribution of $16,272,132.13 or $0.349121 per Unit, based primarily upon production

during the month of August 2022, which will be paid on November 15, 2022.

Hilcorp reported $26,014,687 of total revenue from the Subject Interests consisting of $15,653,743 of gas revenues, $282,139 of oil revenues, $21,790 of additional

interest related to prior months granted audit exceptions.

The Trust has been advised by Hilcorp that for the production month of August 2022, the operator of the Trusts subject interests, Hilcorp San Juan, L.P., reported to the Trust

gross profits of $21,815,782.

Included in this amount is $10,057,015 of other revenue and interest related to adjustments associated with Hilcorp process reviews of FY 2021 and YTD July 2022 data.

Items identified as part of these adjustments

include underpayment resulting from the treatment of keep whole reimbursements and overpayment resulting from contract settlement differences.

Interest related to the subject adjustments totaled $625,455.

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

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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 the Trust refers 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 natural gas and oil 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 of natural gas, from the Subject

Interests, by Hilcorp.

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.

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 natural gas and oil 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 of natural gas, from the Subject Interests, by Hilcorp.

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.

Natural Gas and Oil .

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

July 31, 2017.

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.

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 .

Hilcorps process of reconciling actual revenue 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.

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 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 2021 reporting month) and that it has reversed and rebooked revenue for certain prior

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

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

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

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.

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 certain months during 2021 and 2022 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 2021 reporting month) and that it has reversed and rebooked revenue for certain prior periods.

The true-ups of revenues for

non-operated properties for the 2021 distribution periods were completed in the February and March 2022 reporting months.

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

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

Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to date in 2022.

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 April 2021 estimated production with the April 2022 actual production on the June 2022

Distribution Report would reflect a decline of approximately 7.1%.

However, comparing the April 2021 actual production from the November 2021 Distribution Report actualization to April 2022 actual production would reflect an,increase of 14.7%.

reviewing the Distribution Reports on a year-to-date basis, the total MMBtu production was 14,689,896 as of June 2021 compared to the total MMBtu production of

13,672,177 as of June 2022, which results in a year-to-date decline of 6.93%

Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 but, Hilcorp provided the Trust

with its 2022 capital project plan for the Subject Interests, the (2022 Plan), and informed the Trust that its 2022 Plan will 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 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.

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 May 2021 estimated production with the May 2022 actual production on the

July 2022 Distribution Report would reflect a decline of approximately 25%.

However, comparing the May 2021 actual production from the August 2021 Distribution Report actualization to May 2022, actual production would reflect a decrease of 7.7%.

reviewing the Distribution Reports on a year-to-date basis, the total MMBtu production was 21,813,179 as of September 2021 compared to the total MMBtu production of

20,375,229 as of September 2022, which results in a year-to-date decline of 6.59%.

On February 17, 2022, the Trust announced that Hilcorp had provided the Trust with its 2022 capital project plan for the Subject

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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.

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 Proceeds .

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by Hilcorp may impact Net Proceeds.

Capital expenditures by Hilcorp decreased approximately $56,100, or 34.47%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, and decreased approximately

$198,500, or 51.61%, for the six months ended June 30, 2022, compared to the six months ended June 30, 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.

Capital expenditures by Hilcorp increased approximately $254,591, or 241.53%, from a credit of $(105,409) for the three-months ended September 30, 2021 to a cost of $149,182 for the three months ended

September 30, 2022.

The increase is due primarily to a credit of $171,049 received from Hilcorp in the third quarter of 2021 as a result of true-ups for capital costs for the production months of January

through April 2021.

Capital expenditures incurred for projects worked during the three months ended September 30, 2022 increased by 127% from $65,640 for the three months ended September 30, 2021 to $149,182 for the three months ended

September 30, 2022.

Capital expenditures incurred increased approximately $56,058, or 20.07%, to $335,325 for the nine months ended

September 30, 2022, compared to the nine months ended September 30, 2021.

The increase was primarily attributable to differences in timing in the payment of these expenditures and capital expenditures attributable to the prior years

Commodity Prices .

The Trusts income and monthly distributions

from the Subject Interests are heavily influenced by the price of natural gas and oil.

These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas and oil based on market uncertainty or a

variety of additional factors that are beyond the Trustees control.

Prices for goods and services have risen over the last 12 months, and inflationary pressures have accelerated in the first half of 2022, as regional and global commodity

prices have risen in response to the conflict in Ukraine.

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

the price of natural gas and oil.

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

Trustees control.

Prices for goods and services have risen over the last 12 months, and inflationary pressures have accelerated in the first three quarters of 2022, as regional and global commodity prices have risen in response to the conflict

The impact of ongoing or extended conflict on Hilcorps ability to produce from the Subject Interests or on commodity prices is unknown.

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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.

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

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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.

and oil and on Hilcorps ability to pay Royalty Income to the Trust.

Hilcorp previously informed the Trust that it does not believe

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

Results of Operations for the Three and Six Months Ended June 2022 and 2021

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

Results of Operations for the Three and Nine Months Ended September 2022 and

Royalty Income

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

Royalty Income for the three and six months ended June 30, 2022, and 2021 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, 2022, and 2021 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

Revenue of $97,895 prior period non-operated revenue actualizations and related interest, and $29,826 related

to audit exceptions and interest.

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 of $399,922 related to audit exceptions and interest, and $568,056 related to prior period

non-operated revenues and actualizations.

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.

Revenue with interest related to granted audit exceptions.

Estimated revenue from non-operated properties, granted audit

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

Revenue of $97,895 for prior period non-operated revenue true-ups and related interest, $29,826 related to granted audit exceptions and interest, 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.

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 Q1 2021 $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 both the three and six months ended June 30, 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 $2.77 per Mcf for the three months ended June 30, 2021, to $4.54 per Mcf for the three months ended June 30, 2022, and the average

natural gas price increased from $2.71 per Mcf for the six months ended June 30, 2021, to $4.67 per Mcf for the six months ended June 30, 2022.

Production of natural gas from the Subject Interests decreased from 7,517,056 Mcf for the three

months ended June 30, 2021, to 6,073,883 Mcf for the three months ended June 30, 2022, and decreased from 13,220,906 Mcf for the six months ended June 30, 2021, to 12,304,960 Mcf for the six months ended June 30, 2022.

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

The Royalty Income distributed to the Trust for both the three and nine months ended September 30, 2022, was higher than that distributed during the same

periods of 2021 due primarily to higher natural gas prices.

The average natural gas price increased from $2.74 per Mcf for the three months ended September 30, 2021, to $6.32 per Mcf for the three months ended September 30, 2022, and the

average natural gas price increased from $2.72 per Mcf for the nine months ended September 30, 2021, to $5.21 per Mcf for the nine months ended September 30, 2022.

Production of natural gas from the Subject Interests decreased from

6,410,955 Mcf for the three months ended September 30, 2021, to 6,032,747 Mcf for the three months ended September 30, 2022, and decreased from 19,631,861Mcf for the nine months ended September 30, 2021, to 18,337,706 Mcf for the nine

months ended September 30, 2022.

Gross Proceeds from Subject Interests .

Total Gross Proceeds increased approximately $6.8 million or 31.6% for the three

months ended June 30, 2022, compared to the three months ended June 30, 2021, and increased approximately $22.4 million, or 60% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

increase was primarily due to higher natural gas prices.

Total Gross Proceeds increased approximately

$20.5 million, or 107%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, and increased approximately $43 million, or 76%, for the nine months ended September 30,

2022, compared to the nine months ended September 30, 2021.

The increase was primarily due to higher natural gas prices.

Expenditures .

Hilcorp increased approximately $254,591, or 241.53%, from a credit of $(105,409) for the three-months ended September 30, 2021 to a cost of $149,182 for the three months ended September 30, 2022.

The increase is due

primarily to a credit of $171,049 received from Hilcorp in the third quarter of 2021 as a result of true-ups for capital costs for the production months of January through April 2021.

Capital expenditures

Capital expenditures by Hilcorp decreased

approximately $56,000 for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, and decreased approximately $198,500 for the six months ended June 30, 2022, compared to the six months ended

June 30, 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.

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

made for the months from March of the same calendar year through February of the following calendar year.

Hilcorps capital expenditures for 2021 were $0.3 million.

incurred for projects worked during the three months ended September 30, 2022 increased by 127% from $65,640 for the three months ended September 30, 2021 to $149,182 for the three months ended September 30, 2022.

Capital expenditures incurred increased approximately $56,058, or 20.07%, to $335,325 for

the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The increase was primarily attributable to differences in timing in the payment of these expenditures and capital expenditures attributable to

the prior years budget.

As referenced above, Hilcorp provided the Trust with its 2022 capital project plan for the Subject

Interests, the ( 2022 Plan), and informed the Trust that its 2022 Plan will 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 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.

Severance Taxes.

Aggregate severance taxes decreased approximately $204,000, or 5.3%,

for the three months ended June 30, 2022, compared to the three months ended June 30, 2022, and increased approximately $2.9 million, or 61%, for the six months ended June 30, 2022, compared to the six months ended June 30,

The decrease in severance taxes in the three-month period is primarily attributable to the overestimation of severance taxes of $1.0 million for the February to April 2021 production months which offset the increase in severance taxes

attributable to higher Gross Proceeds.

The increase in severance taxes in the six-month period was primarily attributable to higher Gross Proceeds and also to corrections made in the first quarter of 2021 to

the June 2018 through December 2018 production months, which reduced reported severance taxes for this period by $1.4 million.

The corrections included the reversal of severance tax estimates and tax only adjustments associated with the

Jicarilla Apache Nation.

Severance taxes represented approximately 13% of Gross Proceeds for the three months ended June 30, 2022, compared to approximately 18% for the same period of 2021.

Severance taxes represented approximately 13% of Gross

Proceeds for the six months ended June 30, 2022.

Excluding the $1.4 million correction in the first quarter of 2021, severance taxes were approximately 16% of Gross Proceeds for the six months ended June 30, 2021.

Aggregate severance taxes increased approximately $2.3 million, or 91.4%, for the three months ended

September 30, 2022, compared to the three months ended September 30, 2021, and increased approximately $5.2 million, or 72%, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The increase in severance taxes in the three-month period is primarily attributable to higher Gross Proceeds.

The increase in severance taxes in the nine-month period was primarily attributable to higher Gross Proceeds but also reflected corrections

made in the first quarter of 2021 to the June 2018 through December 2018 production months, which reduced reported severance taxes for this period by $1.4 million.

The corrections included the reversal of severance tax estimates and tax only

adjustments associated with the Jicarilla Apache Nation.

Severance taxes represented approximately 12% of Gross Proceeds for the three months ended September 30, 2022, compared to approximately 13% for the same period of 2021.

Severance taxes

represented approximately 13% of Gross Proceeds for the nine months ended September 30, 2022.

Excluding the $1.4 million correction in the first quarter of 2021, severance taxes were approximately 13% of Gross Proceeds for the nine months

ended September 30, 2021.

Lease Operating Expenses and Property Taxes .

Lease operating expenses and property taxes decreased $1.1 million, or 15%, for the

three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Lease operating expenses and property taxes decreased

$2.45 million, or 28.4%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The decrease is primarily due to decreased activity at the Subject Interests by Hilcorp.

Specifically, production decreased by 1,603,525 MMBtu, or 19.20%,

for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Lease operating expenses and property taxes increased $2.6 million, or 23% for the six months ended June 30, 2022, compared to the six

months ended June 30, 2021.

The increase is primarily due to increased expenses in the first quarter of 2022 which included 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.

The 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.

Specifically,

production decreased by 420,232 MMBtu, or 5.9%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The actual lease operating expenses for the three months ended September 30, 2021

include the application of a credit received from Hilcorp of $2,991,587 as a result of true-ups for the production months of January 2021 through April 2021.

Excluding the impact of these true-up credits, the reduction in the lease operating expenses for the three months ended September 30, 2022 would been $5.44 million or 46.9%.

Lease operating expenses and property taxes increased $167,842, or 0.85% for the nine months ended September 30, 2022, compared to the

nine months ended September 30, 2021.

The increase is primarily due to increased expenses in the first quarter of 2022, which included approximately $0.5 million in non-operated lease operating

expense true-ups, the payment of approximately $1.0 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.

The 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 for the Subject Interests, including property taxes, for the three months ended

June 30, 2022, averaged approximately $2.1 million, compared to $2.5 million for the three months ended June 30, 2021.

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

June 30, 2022, averaged $2.3 million, compared to an average of $1.9 million for the six months ended June 30, 2021.

September 30, 2022, averaged approximately $2.1 million, compared to $2.9 million for the three months ended September 30, 2021.

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

$2.2 million for both nine-month periods ended September 30, 2022, and 2021.

Distributable Income

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Royalty income

1 unchanged sentence

General and administrative expenses

Decrease in cash reserves

Distributable income

2 unchanged sentences

Distributable Income increased from $5.7 million ($0.121735 per Unit) for

the three months ended June 30, 2021, to $13.3 million ($0.286277 per Unit) for the three months ended June 30, 2022.

the three months ended September 30, 2021, to $21 million ($0.452950 per Unit) for the three months ended September 30, 2022.

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

Distributable Income

increased by approximately $12.8 million, or 86%, to $27.7 million (0.594571 per Unit) for the six months ended June 30, 2022, from $14.9 million ($0.320052 per Unit) for the six months ended June 30, 2021.

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 second quarter of 2022 were as follows:

Distributable

Income increased by approximately $28.2 million, or 137%, to $48.8 million (1.047521 per Unit) for the nine months ended September 30, 2022, from $20.6 million ($0.441787 per Unit) for the nine months ended September 30,

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 2022 were as follows:

Quarter Total

Interest Income .

Interest income was higher for the three and six months ended June 30, 2022, as

compared to the same periods in 2021 due primarily to higher yields on short-term investments.

Interest income was higher for the three and nine months ended September 30,

2022, as compared to the same periods in 2021 due primarily to increased funds available for investment and to higher yields on short-term investments.

General & Administrative Expenses .

administrative expenses decreased approximately 4.6 % for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, and increased approximately 4.9% for the six months ended June 30, 2022, compared

to the six months ended June 30, 2021.

General and administrative expenses decreased approximately 36% for the

three months ended September 30, 2022, compared to the three months ended September 30, 2021, and decreased approximately 7.8% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The changes for both periods were 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 June 30, 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.

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

20 unchanged sentences

Royalty Income for

the three months ended June 30, 2022, is associated with natural gas and oil production during February through April 2022 from the Subject Interests.

the three months ended September 30, 2022, is associated with natural gas and oil production during May through July 2022 from the Subject Interests.

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

months ended June 30, 2022, and 2021 were as follows:

For the Three Months Ended June 30,

months ended September 30, 2022, and 2021 were as follows:

For the Three Months Ended September 30,

Subject Interests

Average Price (per Mcf/Bbl)

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

Interests and the Royalty for the six months ended June 30, 2022, and 2021 were as follows:

For the Six Months Ended June 30,

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

the Subject Interests and the Royalty for the nine months ended September 30, 2022, and 2021 were as follows:

For the Nine Months Ended September 30,

Subject Interests

Average Price (per Mcf/Bbl)

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 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 natural gas and oil, 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 natural gas and oil 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 June 30, 2022, and 2021, 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, natural gas and oil sales attributable to the Royalty are based on an allocation formula dependent

on many factors, including natural gas and oil 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, 2022.

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 natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current calendar

consideration production taxes attributable to the Subject Interests.

Because the natural gas and oil 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.

fluctuations in natural gas production that have occurred during the three-month period ended September 30, 2022, and 2021, 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, natural gas and oil sales attributable to the Royalty are based on an allocation formula dependent on many factors, including natural gas and oil 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, 2022.

Off-Balance Sheet Arrangements

Critical Accounting Policies

and Estimates

Critical Accounting Policies and

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

23 unchanged sentences

Hilcorp Information

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

the Subject Interests, including the

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

factors and circumstances that have or may affect the foregoing.

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

and timely report information regarding Hilcorp and its affiliates;

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

reserves, drilling plans, drilling results and leasehold terms related to the Subject Interests;

and factors and circumstances that have or may affect the foregoing.

See Part I, Item 4.

Controls and Procedures.

For information on the Trusts exposure to market risk, please see Part II, Item 7A,

Quantitative and Qualitative Disclosures About Market Risk contained in the Trusts Annual Report on Form 10-K for the year ended December 31, 2021.

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

Market Risk contained in the Trusts Annual Report on Form 10-K for the year ended December 31, 2021.

Quantitative and Qualitative Disclosures about Market Risk.

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

What changed 10-Q

Item 1. Financial Statements