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Item 1. Financial Statements

2023-08-14 compared with 2023-05-15 · 176 added, 160 removed, 263 unchanged (56% of the section changed)

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

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

amortization of $130,462,877 and $130,306,821 at June 30, 2023 and December 31, 2022, respectively)

LIABILITIES AND TRUST CORPUS

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CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Royalty income

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CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Trust corpus, beginning of period

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

Notes to Condensed Financial Statements included herein.

Notes to 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 March 31, 2023, and the distributable income and changes in trust corpus for the

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

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, 2023, and the distributable income and changes in trust corpus for the

three-month and six-month periods ended June 30, 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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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

There was no impairment of the Trusts assets as of June 30, 2023.

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

A grantor trust is not subject to tax at the trust level.

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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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

As of June 30, 2023, the Trusts

tax years 2019 and thereafter remain subject to examination.

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Gross Proceeds and Production Cost Estimates.

Hilcorp began transitioning to a new accounting system effective with January 2021

production (March 2021 reporting month), and 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, 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 the 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.

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.

These reallocations affected the volumes for many of the Trust properties and may result in future revisions to previously reported revenues and severance taxes.

February 17, 2023, Hilcorp presented initial proposed adjustments for 2017 revenues.

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 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.

2023, the Trust announced a cash distribution of $475,477.18 or $0.010201 per Unit, based primarily upon production during the month of May 2023, which was paid on August 14, 2023.

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

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Gross Proceeds and Severance Tax Estimates .

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.

began transitioning to a new accounting system effective with January 2021 production (March 2021 reporting month), and 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, 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 the 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.

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.

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 future revisions to previously reported revenues and severance taxes.

On February 17, 2023, Hilcorp presented initial

proposed adjustments for 2017 revenues.

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.

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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by Hilcorp may impact Net Proceeds.

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

Hilcorps capital expenditures increased approximately $15,523, or 15%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, and decreased approximately

$30,280, or 16% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The variances in capital costs in the three-month and six-month periods were primarily

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

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

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

Royalty Income

Results of Operations for the Three and Six Months Ended June 2023 and 2022

Royalty Income.

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,

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

Royalty Income for the three and

six months ended June 30, 2023, and 2022 was determined as shown in the following table:

Three Months Ended

Six Months Ended

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.

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.

Estimated revenue of $399,922 related to audit exceptions and $568,056 related to prior period non-operated revenues and actualizations.

The Royalty Income distributed to the Trust

for the three months ended June 30, 2023, was lower than that distributed during the same period of 2022, due primarily to lower production quantities, exacerbated by lower natural gas prices.

The Royalty Income distributed to the Trust for the

six months ended June 30, 2023, was higher than that distributed during the same period of 2022 due primarily to higher natural gas prices in the first quarter of 2023.

The average natural gas price decreased from $4.54 per Mcf for the three

months ended June 30, 2022, to $3.69 per Mcf for the three months ended June 30, 2023, and the average natural gas price increased from $4.67 per Mcf for the six months ended June 30, 2022, to $7.19 per Mcf for the six months ended

June 30, 2023.

Production of natural gas from the Subject Interests decreased from 6,073,883 Mcf for the three months ended June 30, 2022, to 5,613,332 Mcf for the three months ended June 30, 2023, and decreased from 12,304,960 Mcf

for the six months ended June 30, 2022, to 11,476,831 Mcf for the six months ended June 30, 2023.

Gross Proceeds from Subject Interests.

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.

Total Gross Proceeds decreased approximately

$7.2 million, or 25%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The decrease was primarily due to lower production quantities, exacerbated by lower natural gas prices.

Gross Proceeds increased approximately $23.9 million, or 40%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The increase was primarily due to higher natural gas prices in the first quarter of

Capital Expenditures.

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.

The timing and size of capital expenditures by Hilcorp may impact Net Proceeds.

Hilcorps capital

expenditures increased approximately $15,523, or 15%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, and decreased approximately $30,280, or 16%, for the six months ended June 30, 2023

compared to the six months ended June 30, 2022.

The variances in capital costs in the three-month and six-month periods were primarily attributable to differences in timing of the payment for these

expenditures along with capital expenditures attributable to the prior years budget.

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 $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

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 estimates.

Severance Taxes.

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.

Aggregate severance taxes decreased approximately $1 million, or 28%, for the three months ended June 30,

2023 compared to the three months ended June 30, 2022.

The decrease was primarily attributable to lower Gross Proceeds.

Severance taxes increased approximately $1.98 million, or 26%, for the six months ended June 30, 2023 compared to

the six months ended June 30, 2022.

The increase was primarily attributable to higher Gross Proceeds in the first quarter of 2023.

Severance taxes represented approximately 12% of Gross Proceeds for the three months ended June 30, 2023

compared to approximately 13% for the same period of 2022.

Severance taxes represented approximately 11% of Gross Proceeds for the six months ended June 30, 2023 compared to approximately 13% for the same period of 2022.

Lease Operating Expenses and Property Taxes.

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.

Lease operating expenses and property taxes increased $0.78 million, or 12%, for the

three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Lease operating expenses and property taxes increased $0.18 million, or 1%, for the six months ended June 30, 2023 compared to the six months

ended June 30, 2022.

The six-month period increase was minimal because of 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.

Trustee 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 comply 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, 2023, averaged approximately $2.4 million compared to $2.1 million for the three months ended June 30, 2022.

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

both six-month periods ended June 30, 2023 and 2022 averaged $2.3 million.

Distributable Income.

Three Months Ended March 31,

Distributable Income for the three and six months ended June 30, 2023, and 2022 was determined as shown in

the following table:

Three Months Ended

Six Months Ended

Royalty Income

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Distributable Income per Unit (46,608,796 Units)

Distributable Income .

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:

Distributable Income decreased from $13.3 million ($0.286277 per Unit) for the three months ended

June 30, 2022, to $8.1 million ($0.173518 per Unit) for the three months ended June 30, 2023.

The decrease in Distributable Income was primarily attributable to lower production quantities, exacerbated by lower natural gas prices.

Distributable Income increased by approximately $16.4 million, or 59%, to $44.1 million (0.945289 per Unit) for the six months ended June 30, 2023, from $27.7 million ($0.594571 per Unit) for the six months ended June 30,

The increase in Distributable Income was primarily attributable to higher natural gas prices in the first quarter of 2023.

46,608,796 Units outstanding, the per-Unit distributions during the second quarter of 2023 were as follows:

Quarter Total

Interest Income.

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.

Interest income was higher for the three and six months ended June 30, 2023, as

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

General & Administrative Expenses.

General and administrative expenses decreased approximately 8%, 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 receipt and payment for certain expenses by the Trust.

Cash Reserves.

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.

General and administrative expenses increased approximately 30% for the

three months ended June 30, 2023 compared to the three months ended June 30, 2022, and increased approximately 8% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The increases for both

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

Total cash reserves were $1.0 million as of June 30, 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 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 12-month period.

Trusts principal source of liquidity and capital is Royalty Income.

The Trusts distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses.

The Trust is not liable for any Production Costs or

liabilities attributable to the Royalty.

If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such

amount, plus interest, at a rate specified in the Conveyance.

If the Trustee determines that the Trust does not have sufficient funds to pay its liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be

made to Unit Holders until such borrowings are repaid in full.

The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote of the Unit Holders of 75% of all of the Units outstanding;

however, the Trustee

may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period without the consent of the Unit Holders.

In the event the Trust does not receive Royalty Income from Hilcorp sufficient to pay its liabilities, the Trust believes it has sufficient

capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trusts operating expenses until its cash reserve can be replenished from subsequent Royalty Income payments from Hilcorp.

Natural Gas and Oil Production

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

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

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

Royalty Income for

the three months ended 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,

Royalty Income for the three months ended June 30, 2023, is associated with natural gas and oil production during February through

April 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 June 30, 2023, and 2022 were as follows:

For the Three Months Ended June 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.

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.

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, 2023, and 2022 were as follows:

For the Six Months Ended June 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

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 periods ended June 30, 2023, and 2022, 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 June 30, 2023.

Off-Balance Sheet Arrangements

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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.

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,

13 unchanged sentences

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, 2022.

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