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Item 5. Market for Registrant’s Common Equity

2023-03-31 compared with 2022-03-31 · 133 added, 140 removed, 120 unchanged (69% of the section changed)

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Although the Trustee receives periodic updates from Hilcorp regarding activities which may relate to the Trust, the Trusts ability to timely report certain information required to be disclosed in the Trusts periodic reports is dependent

on Hilcorps timely delivery of the information to the Trust.

on Hilcorps timely and accurate delivery of the information to the Trust.

The principal asset of the Trust is the Royalty, which consists of a 75% net overriding royalty interest that burdens the Subject Interests

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Royalty Income .

The Royalty functions generally as a net profits interest in the

Subject Interests.

The Royalty Income paid to the Trust is 75% of Net Proceeds from the Subject Interests.

The term 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 (or any subsequent owner of the Subject Interests) from the sale of the production attributable to the Subject Interests, subject to

certain adjustments (e.g., fuel, gathering, and transportation).

The amount of Gross Proceeds attributable to the Subject Interests

depends on prevailing natural gas prices and, to a lesser extent, crude oil prices.

The Royalty functions generally as a net profits interest in the Subject Interests.

The Royalty Income paid to the

Trust is 75% of Net Proceeds from the Subject Interests.

The term 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 (or any subsequent owner of the Subject Interests) from the sale of the production attributable to the Subject Interests, subject to certain adjustments (e.g., fuel, gathering, and

transportation).

The amount of Gross Proceeds attributable to the Subject Interests depends on prevailing natural gas prices and, to a

lesser extent, crude oil prices.

As a result, commodity prices affect the amount of Royalty Income available for distribution to the Unit Holders.

During 2021, the price of natural gas Gross

Proceeds for production from the Subject Interests increased from an average price for natural gas of $1.51 per Mcf in 2020 to $3.20 per Mcf in 2021.

The price for oil Gross Proceeds increased from an average price of $31.47 per Bbl in 2020 to

$54.72 per Bbl in 2021.

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

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, and Hilcorp has informed the Trust that it is unable to estimate the productive life of the

During 2022, the price of natural gas Gross Proceeds for production from the Subject Interests

increased from an average price for natural gas of $3.20 per Mcf in 2021 to $5.54 per Mcf in 2022.

The price for oil Gross Proceeds increased from an average price of $54.72 per Bbl in 2021 to $86.73 per Bbl in 2022.

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

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.

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reduction in proved reserves.

Lower 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

On 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.

Hilcorp informed the Trust that its 2022 Plan will allocate approximately $1.5 million of the 2022 Plans budget towards 24 well

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.

Hilcorp did not conduct

any new drill projects within the Subject Interests in 2022 or 2021;

however, it did conduct eight recompletions and workovers in 2022.

On February 17, 2023, the Trust announced that Hilcorp had provided the Trust with its 2023 capital project plan for the Subject

Interests (the 2023 Plan), and Hilcorp has estimated its 2023 capital expenditures for the Subject Interests to be $4.4 million.

Hilcorp informed the Trust that its 2023 Plan will allocate approximately $3.7 million of the 2023 Plans budget toward 25 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 Hilcorp revises its assumptions underlying the 2022 Plan, and that actual capital costs may vary from these estimates.

Under the terms

of the Conveyance, production costs are deducted from Gross Proceeds in calculating 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.

Approximately $0.5 million of the 2023 Plans budget will be allocated to facilities projects related to natural gas

compression, and approximately $0.2 million will be spent for permitting costs for potential future new drill projects.

Hilcorp further informed the Trust that its planned project status for 2023 is subject to revision if Hilcorp revises its

assumptions underlying the 2023 Plan, in which event the actual capital costs may vary from these estimates.

Under the terms of the

Conveyance, production costs are deducted from Gross Proceeds in calculating 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.

For 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 generally 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 payment to

the Trust, but 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.

However, Hilcorp informed the Trust that, for wells operated by

Hilcorp, it generally 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 payment to the Trust,

but 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.

Distributable Income .

In addition to Royalty Income, the Trust receives

interest income, typically from interest paid on cash deposits.

General and administrative expenses constitute the Trusts primary expense and include, among other items, the Trustees fees, audit, consulting and legal fees and reporting

The Trustee is authorized to determine in its discretion the amount of cash reserves needed

to pay liabilities and contingencies of the Trust.

In addition to Royalty Income, the Trust receives interest

income, typically from interest paid on cash deposits.

General and administrative expenses constitute the Trusts primary expense and include, among other items, the Trustees fees, audit, consulting and legal fees and reporting costs.

The Trustee is authorized to determine in its discretion the amount of cash reserves needed to pay liabilities and contingencies of the

Total cash reserves were $1.0 million as of December 31, 2021 and 2022.

In August 2021, the Trust utilized cash reserves of $150,148 to pay Trust administrative expenses.

replenished its cash reserves by $150,148 in September 2021 to bring the cash reserve balance back to the previously established amount of $1.0 million.

The Trustee does not anticipate any increase or decrease to the cash reserves in 2023.

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

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) during fiscal years 2018 and 2020 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 would 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 has informed the Trust that it has completed its transition to its new accounting system that began in March 2021.

Therefore, revenue

and expenses for the production months of January through May 2021 were based on estimates, but Hilcorp began reporting actual revenue and expenses for operated wells beginning with the June 2021 production month.

As of December 31, 2021,

Hilcorp believes that all prior month actualizations have occurred, and does not expect to need to report any further actualizations in future distribution reports.

In 2021, Hilcorp made total actualizations and other adjustments resulting in an additional $4,650,061 Royalty Income paid to the Trust based

on the production months of June 2018 through December 2018, July 2020 through October 2020, and January 2021 through May 2021.

Gross Proceeds and Production Cost

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 has 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.

In 2022, Hilcorp made total actualizations and other adjustments resulting

in $10,951,453 additional Royalty Income paid to the Trust.

Of this amount, $1,391,619 was revenue related to prior period non-operated property true-ups, revenue for

granted audit exceptions, and interest, and $9,559,834 associated with Hilcorp process reviews and adjustments.

Hilcorp has continued to inform the Trustee that it has implemented additional controls to enhance the reporting process to reduce the

need for future corrections.

As of December 31, 2022, Hilcorp has informed the Trust that it believes that all prior month actualizations have occurred, and it does not expect to need to report any further actualizations in future distribution

However, 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 payments made by Hilcorp to the Trust, inclusive of sales revenues, production costs, capital expenditures, adjustments, actualizations, and recoupments.

The Trusts auditing process has also included detailed analysis of Hilcorps pricing and rates charged.

As previously disclosed in the Trusts filings, these revenues and costs (along with all costs) are the subject of the

Trusts ongoing comprehensive audit process by our professional consultants and outside counsel to ensure full compliance with all the underlying operative Trust agreements and evaluating all available potential remedies in the event there is

evidence of non-compliance.

Results of Operations

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Gross Proceeds from the Subject Interests:

Capital Expenditures

Production Costs:

Severance tax natural gas

Severance tax oil

Lease Operating Expenses and Property Taxes

Lease operating expense and property tax

Capital expenditures

Net overriding royalty interest

Royalty Income

Revenue and estimated revenue related to audit exceptions with interest, revenue from prior period non-operated revenue true-ups and related interest, revenue from non-operated properties offset by Hilcorps true-ups, adjustments of non-operated revenue for the production months November 2020 through October 2021, and revenue and interest related to a corrections associated with

Hilcorps process reviews.

Estimated revenue from non-operated properties and granted audit

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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 a reduction of $2.0 million in Other Gross Proceeds included in the December 2017 and January 2018 distribution months, and further offset by

Hilcorps true-ups and adjustments of non-operated revenue for the production months of August through December 2017, January through May 2018, February through

July 2019, October through November 2019, and March through June 2020.

Interest charges on excess production costs.

Gross Proceeds from Subject Interests.

Gross Proceeds increased $42 million, or 105%, to $82.1 million for the year ended

December 31, 2021 as compared to $40.1 million for the year ended December 31, 2020.

Gross Proceeds

increased $67.5 million, or 82%, to $149.6 million for the year ended December 31, 2022, as compared to $82.1 million for the year ended December 31, 2021.

The increase was due primarily to increased natural gas prices.

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For a summary of Hilcorps planned 2023 capital expenditures, see Liquidity and

Capital Resources 2022 Capital Expenditure Budget .

Capital expenditures increased approximately $54,000, or 21%, to

$0.31 million for the year ended December 31, 2021, as compared to $0.26 million for the year ended December 31, 2020.

Hilcorp allocated its 2021 capital spending primarily towards facilities projects related to natural gas

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

Capital Resources.

Capital expenditures increased approximately $0.7 million, or 214%, to $1.0 million for the year ended

December 31, 2022, as compared to $0.3 million for the year ended December 31, 2021.

Hilcorp allocated its 2022 capital spending primarily toward well recompletions and workovers, facilities projects related to natural gas

compression, and for permitting and surveying costs for future news drill projects.

Hilcorp did not conduct any new drill projects within the Subject Interests in 2022.

Severance Taxes.

Aggregate severance taxes increased $4.7 million, or 105%, to

$9.2 million for the year ended December 31, 2021, as compared to $4.5 million for the year ended December 31, 2020.

Aggregate severance taxes increased $7.9 million, or 86%, to $17.1 million for the year ended

December 31, 2022, as compared to $9.2 million for the year ended December 31, 2021.

The increase was primarily attributable to higher revenue in 2022.

Lease Operating Expenses and Property Taxes.

Lease operating expenses and property taxes decreased $1.0 million, or 4.6%, to

Lease operating expenses and property taxes increased $3.8 million, or 17%, to

$26.2 million for the year ended December 31, 2022, as compared to $22.5 million for the year ended December 31, 2021.

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approximately $2.2 million, compared to $1.9 million in 2021.

The decrease is primarily attributable to lower compression, contract pumper and well servicing expenses in addition to decreases across other cost categories as Hilcorp was

able to reduce operating costs in the current price environment.

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 The Trust and its consultants are conducting a detailed analysis of these expenses associated

with the 2021 year-end salaries and bonuses for Hilcorp employees to determine if they comport with the Conveyance and other operative agreements.

Distributable Income

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year ended December 31, 2022, as compared to $36 million ($0.771744 per Unit) for the year ended December 31, 2021.

The increase in Distributable Income from 2020 to 2021 was primarily attributable to higher natural gas prices and to

lower Royalty Income in 2020.

The Trust did not receive Royalty Income from Hilcorp for August 2021 due primarily to the true-ups of the January 2021 through May 2021 lease operating and capital expenditures and the May 2021 revenues.

The true-ups resulted in excess production costs for the

June 2021 production month, which led to no Distributable Income in August 2021.

Per the Trusts internal policies and procedures, the Trust applied the Royalty Income that it received in September 2021, after the payment of the excess

production costs, to the Trusts accumulated administrative expense that replenished cash reserves, with remaining funds distributed to Unit Holders.

The increase in Distributable Income from 2021 to 2022 was primarily attributable to higher natural gas prices, which

resulted in increased Royalty Income in 2022.

Interest Income.

Interest Income in 2021 decreased as compared to 2020 due to lower yields on short-term investments.

General & Administrative Expenses.

General and administrative expenses increased $0.2 million, or 16%, to

$1.65 million for the year ended December 31, 2021, as compared to $1.4 million for the year ended December 31, 2020.

The increase was primarily attributable to higher third-party compliance auditor costs and increased legal

expenses during the period of transition from BBVA USA to PNC Bank as the Trustee.

Cash Reserves.

Total cash reserves were

$1.0 million as of December 31, 2020 and 2021.

Liquidity and Capital Resources

Interest Income in 2022 increased as compared to 2021 due to an

increase in funds available for investment and to higher yields on short-term investments.

Administrative Expenses.

General and administrative expenses decreased $0.2 million, or 11%, to $1.5 million for the year ended December 31, 2022, as compared to $1.7 million for the year ended December 31, 2021.

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

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 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 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 for the following twelve-month period.

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

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 for the following 12-month period.

Cash Reserves.

Total cash reserves have not changed year over year as total

cash reserves were $1.0 million as of December 31, 2021 and 2022.

The Trustee is authorized to determine in its discretion the amount of cash reserves needed to pay liabilities and contingencies of the Trust.

The Trustee does not

anticipate increasing or decreasing the established amount of cash reserves in 2023, although it cannot predict whether it will need to utilize some portion of those cash reserves during 2023.

2023 Capital Expenditure Budget

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(the 2023 Plan), and Hilcorp has estimated its 2023 capital expenditures for the Subject Interests to be $4.4 million.