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Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 215 added, 301 removed, 208 unchanged (71% of the section changed)

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CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

September 30,

Cash and short-term investments

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

amortization of $130,145,078 and $129,584,681 at September 30, 2022 and December 31, 2021, respectively)

amortization of $130,417,436 and $130,306,821 at March 31, 2023 and December 31, 2022, respectively)

LIABILITIES AND TRUST CORPUS

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

Total liabilities

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Royalty income

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CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Trust corpus, beginning of period

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

Notes to Financial Statements included herein.

Notes to Condensed Financial Statements included herein.

Basis of Presentation

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

the three-month and nine-month periods ended September 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 March 31, 2023, and the distributable income and changes in trust corpus for the

three-month periods ended March 31, 2023 and 2022.

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

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the fourth month.

Net Proceeds for a calendar year are typically 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.

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

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insufficient to cover such costs.

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

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

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

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instead of when incurred;

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 when expenses

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

Most 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 paid.

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.

This comprehensive basis of accounting

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

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

This comprehensive basis of

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

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

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

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

charged directly to trust corpus instead of as an expense.

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

charged directly to the Trust corpus instead of as an expense.

There was no impairment of the Trusts assets as of March 31, 2023.

Federal Income Taxes

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

The Royalty constitutes an economic interest in natural gas and oil properties for federal income tax purposes.

The Royalty constitutes an economic interest in oil and natural gas properties for federal income tax purposes.

Unit Holders must

report their share of the production revenues of the Trust as ordinary income from natural gas and oil royalties and are entitled to claim depletion with respect to such income.

report their share of the production revenues of the Trust as ordinary income from oil and natural gas royalties and are entitled to claim depletion with respect to such income.

The Royalty is treated as a single property for depletion purposes.

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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 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.

Trustee is of the opinion that the material tax positions taken by the Trust related to the Trusts pass-through status and state tax positions would more likely than not be sustained by examination.

As of March 31, 2023, the Trusts

tax years 2019 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

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 .

Hilcorp informed the Trust that it does not

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

Geo-Political Uncertainties .

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

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.

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.

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

In January 2023, Hilcorp notified the Trust that the accounting project begun in 2021 to

review the production volume allocations for 2017 through 2020 had been completed.

These reallocations affected the volumes for many of the Trust properties and may result in revisions to revenues and severance taxes;

adjustments will be

On February 17, 2023, Hilcorp presented initial proposed adjustments for 2017 revenues, but these adjustments are still under review by the Trustee and Hilcorp.

The 2017 adjustments may result in additional revenues to the Trust.

Upon completion of the final adjustments for 2017 revenues, proposed adjustments for subsequent years will be presented by Hilcorp.

Hilcorp began transitioning to a new accounting system effective with January 2021 production (March 2021 reporting month), and it initially

reported estimated revenues and severance taxes on the distributions to the Trust.

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).

Hilcorps process of reconciling actual revenue and severance taxes to the previously reported estimates (which the Trust refers to as true-ups), and the reversal and rebooking of the actualized revenues for 2021 production months for non-operated properties, was completed in the February and

March 2022 reporting months.

During 2022, various adjustments were made for 2021 and 2022 production periods as a result

of Hilcorps process review of the new accounting system.

Hilcorp has informed the Trustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections.

Hilcorp has indicated that it

will coordinate with the Trustee on the timing of any further adjustments, following which the Trustee will communicate that timing to investors.

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.

Settlements and Litigation

Subsequent Events

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.

On April 18, 2023, the Trust announced a cash distribution of $4,838,334.88 or $0.103807 per Unit, based primarily upon production during

the month of February 2023, which was paid on May 12, 2023.

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

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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 Southland common stock 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 Southland common stock then held.

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.

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 primary function of

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

The amount of income distributable to Unit Holders, which the Trust refers to as

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The Trust has no employees, officers, or directors.

Trustee performs all administrative functions of the Trust.

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

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.

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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 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.

2023, Hilcorp notified the Trust that the accounting project begun in 2021 to review the production volume allocations for 2017 through 2020 had been completed.

These reallocations affected the volumes for many of the Trust properties and may result

in revisions to revenues and severance taxes;

adjustments will be forthcoming.

On February 17, 2023, Hilcorp presented initial proposed adjustments for 2017 revenues, but these adjustments are still under review by the Trustee and Hilcorp.

2017 adjustments may result in additional revenues to the Trust.

Upon completion of the final adjustments for 2017 revenues, proposed adjustments for subsequent years will be presented by Hilcorp.

Hilcorp began transitioning to a new accounting system effective with January 2021 production (March 2021 reporting month), and it initially

reported estimated revenues and severance taxes on the distributions to the Trust.

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).

2022 reporting months.

During 2022, various adjustments were made for 2021 and 2022 production periods as a result of Hilcorps

process review of the new accounting system.

Hilcorp has informed the Trustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections.

Hilcorp has indicated that it will coordinate with

the Trustee on the timing of any further adjustments, following which the Trustee will communicate that timing to investors.

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.

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 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

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 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

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 towards 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 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.

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, and actual capital costs may vary from these

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.

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

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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

The Trust and the Trustee have very limited authority to control the

amount and timing of Production Costs.

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by Hilcorp may impact Net Proceeds.

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

Hilcorps capital expenditures decreased approximately $45,800, or 58%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The decrease was primarily

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

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 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.

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

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

natural gas and oil.

Hilcorp has multiple gas purchase agreements that set forth the prices it will receive for the natural gas and oil 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 they are determined 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 natural gas and

oil 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 natural gas

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 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

Results of Operations for the Three Months Ended March 2023 and 2022

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

September 30,

Nine Months Ended

September 30,

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

Royalty Income for the three months ended March 31, 2023, and 2022 was determined as shown in the following table:

Three Months Ended March 31,

Gross Proceeds from the Subject Interests:

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Royalty Income

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.

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.

Revenue related to a February 2023 true-up for documented October 2022

revenues missing from the January 2023 revenue distribution, plus 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.

The Royalty Income distributed to the Trust for the three months ended March 31, 2023,

was higher than that distributed during the same period of 2022, due primarily to higher natural gas prices.

The average natural gas price increased from $4.79 per Mcf for the three months ended March 31, 2022, to $10.53 per Mcf for the three

months ended March 31, 2023.

Production of natural gas from the Subject Interests decreased from 6,231,076 Mcf for the three months ended March 31, 2022, to 5,863,499 Mcf for the three months ended March 31, 2023.

Gross Proceeds from Subject Interests.

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.

Total Gross Proceeds increased approximately $31.1 million, or 100%, for the three

months ended March 31, 2023, compared to the three months ended March 31, 2022.

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 .

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 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.

Hilcorps capital expenditures decreased approximately $45,800, or 58%, for the three months ended

March 31, 2023, compared to the three months ended March 31, 2022.

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

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 $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 and that actual capital costs may vary from these estimates.

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.

Aggregate severance taxes increased approximately $3.0 million, or 77%, for the three months ended March 31,

2023, compared to the three months ended March 31, 2022.

The increase was primarily attributable to higher revenue in 2023.

Severance taxes represented approximately 11% of Gross Proceeds for the three months ended March 31, 2023, compared

to approximately 13% for the same period of 2022.

Lease Operating Expenses and Property Taxes.

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 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

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.

Lease operating expenses and

property taxes decreased $0.6 million, or 8%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Expenses in the first quarter of 2023 were lower when compared to increased expenses in the

first quarter of 2022.

Expenses in the first quarter of 2022 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 of the receipt and payment for these expenditures.

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.

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

March 31, 2023, averaged approximately $2.3 million, compared to $2.5 million for the three months ended March 31, 2022.

Distributable Income

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Royalty Income

4 unchanged sentences

Distributable Income .

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

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 $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:

Distributable Income increased from $14.4 million

($0.308294 per Unit) for the three months ended March 31, 2022, to $36.0 million ($0.771771 per Unit) for the three months ended March 31, 2023.

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

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

quarter of 2023 were as follows:

Quarter Total

Interest Income.

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.

Interest income was higher for the three months ended March 31, 2023, as compared

to the same period in 2022, due to an increase in funds available for investment and to higher yields on short-term investments.

General & Administrative Expenses.

General and administrative expenses decreased approximately 8%, 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.

three months ended March 31, 2023, compared to the three months ended March 31, 2022.

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

Cash Reserves.

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

$1.0 million in 2022, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.

Liquidity and Capital

Total cash reserves were $1.0 million as of March 31, 2023.

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.

Liquidity and Capital Resources

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 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.

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.

Natural Gas and Oil Production

2 unchanged sentences

Royalty Income for

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

For the Nine Months Ended September 30,

the three months ended March 31, 2023, is associated with natural gas and oil production during November 2022 through January 2023 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 March 31, 2023, and 2022 were as follows:

For the Three Months Ended March 31,

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

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.

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.

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.

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.

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

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.

From time to time, changes to

the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and processing of production may be made.

The gas continues to be sold to creditworthy buyers at market related prices.

Off-Balance Sheet Arrangements

7 unchanged sentences

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;

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;

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.

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.

The Trust undertakes no

obligation to publicly update or revise any forward-looking statements, except as required by applicable law.

Hilcorp Information

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

and timely report information regarding Hilcorp and its affiliates;

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

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

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

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, 2022.

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