What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-11-14 compared with 2023-08-14 · 246 added, 211 removed, 228 unchanged (67% of the section changed)

1 unchanged sentence

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

September 30,

Cash and short-term investments

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

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

amortization of $130,491,750 and $130,306,821 at September 30, 2023 and December 31, 2022, respectively)

LIABILITIES AND TRUST CORPUS

4 unchanged sentences

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Royalty income

5 unchanged sentences

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Trust corpus, beginning of period

8 unchanged sentences

The preceding condensed statement of assets, liabilities, and trust corpus as of December 31, 2022, which has been derived from audited

financial statements, and the unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

These condensed financial statements

should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the Trust) Annual Report on Form 10-K for the year ended

These condensed financial

statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the Trust) Annual Report on Form 10-K for the year ended

December 31, 2022.

1 unchanged sentence

the present owner of certain oil and gas interests (the Subject Interests) originally owned by Southland Royalty Company (Southland) in properties located in the San Juan Basin of northwestern New Mexico, all adjustments,

consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at June 30, 2023, and the distributable income and changes in trust corpus for the

three-month and six-month periods ended June 30, 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 September 30, 2023, and the distributable income and changes in trust corpus for

the three-month and nine-month periods ended September 30, 2023 and 2022.

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

2 unchanged sentences

generally accepted accounting principles (GAAP):

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

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

The Net Overriding Royalty Conveyance (as amended to date, the Conveyance) conveyed to the Trust a

75% net overriding royalty interest (the Royalty) that burdens the Subject Interests.

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

Net Proceeds, as used

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

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

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

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

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

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

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

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

Gross Proceeds means the amount received by Hilcorp from the sale of

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

Production Costs include both capital and non-capital costs incurred by

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

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

costs for prior months, which will affect the Royalty Income paid to the Trust and the distribution to Unit Holders for that month.

Although permitted under the Conveyance that transferred the Royalty to the Trust, Hilcorp has informed the Trust

32 unchanged sentences

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

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

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

Federal Income Taxes

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

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

A grantor trust is not

subject to tax at the trust level.

The Unit Holders are considered to own the Trusts income and principal as though no trust were in existence.

The income of the Trust is deemed to have been received or accrued by each

Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely

held fixed investment trust (WHFIT) classified as a non-mortgage widely held fixed investment trust (NMWHFIT) for federal income tax purposes.

The Trustee is the representative of the

Trust that will provide tax information in accordance with the applicable U.S.

The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time

such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment

trust (WHFIT) classified as a non-mortgage widely held fixed investment trust (NMWHFIT) for federal income tax purposes.

The Trustee is the representative of the Trust that will provide

tax information in accordance with the applicable U.S.

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

14 unchanged sentences

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 June 30, 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.

As of September 30, 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

24 unchanged sentences

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 Biden administration announced in September 2023 that it has moved to shut down future development of oil, gas and mining activity on

approximately 4,200 acres in Sandoval County, New Mexico for the next 50 years.

Hilcorp has informed the Trust that the proposed tracts are not within the production area of the Subject Interests or part of any future proposed development plans.

Settlements and Litigation

In the course of the most recent audit process by the Trustee, certain exceptions to the several different categories of expenses (specifically

offsite labor, overhead, operator-owned compressors and saltwater disposal facilities) for the years 2017 through 2020 (the 2017-2020 Disputed Expenses) were identified that the Trustee believed resulted in an underpayment of royalties

owed to the Trust for those years.

The Trustee engaged in extensive discussions with Hilcorp regarding these exceptions that culminated in Hilcorps payment of the sum of $1,037,093.45, which included the accumulated interest incurred as a

result of the underpayment.

The audit settlement payment was included in the September 2023 distribution to Unit Holders.

Subsequent Events

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.

On October 20, 2023, the Trust announced a cash distribution of $2,269,587.37 or $0.048694 per Unit, based primarily upon production

during the month of August 2023, which was paid on November 14, 2023.

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

13 unchanged sentences

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 to distribute the remaining available income to the Unit Holders.

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

Distributable Income, depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves.

On August 30, 2023, the Trustee entered into a First Amendment to the Conveyance (the Amendment).

The Amendment was

entered into (i) pursuant to the terms of the Compromise and Settlement Agreement entered into August 30, 2023, which resolved the 2017-2020 Disputed Expenses by payment to the Trust and (ii) to modify certain terms of the Conveyance

of the Royalty with respect to expenses associated with the operators saltwater disposal facilities.

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 Distributable Income, depends on the amount of Royalty Income and interest received by the Trust, as well as the

amount of expenses paid by the Trust and any change in cash reserves.

The Trust has no employees, officers, or directors.

The Trustee performs all administrative functions of the Trust.

Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with

the Trust, for marketing the oil and natural gas production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the

circumstances.

A very high percentage of the Royalty Income is attributable to the production and sale of natural gas, from the Subject Interests, by Hilcorp.

Accordingly, the market price and demand for natural gas produced and sold from the San

Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Agreement of Conditional Resignation and Special Meeting of Unit Holders

On September 12, 2023 the Trustee announced that it entered into an Agreement of Conditional Resignation with Argent Trust Company, a

Tennessee chartered trust company (Argent), pursuant to which the Trustee will be resigning as trustee of the Trust, and will nominate Argent as successor trustee.

The Trustees resignation as Trustee, and Argents appointment

as successor trustee, are subject to certain conditions set forth in the Agreement of Conditional Resignation, which include the Unit Holders approval of the appointment of Argent as successor trustee and the approval of an amendment to the

Indenture necessary to permit Argent to serve as successor trustee, together with two additional proposed amendments to the Indenture, at a special meeting of the Unit Holders expected to be held on December 1, 2023.

Hilcorp is the principal

operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with the Trust, for marketing the oil and natural gas production from such properties, either under existing sales contracts or under

future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances.

A very high percentage of the Royalty Income is attributable to the production and sale of natural gas, from the Subject

Interests, by Hilcorp.

Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Natural Gas and Oil.

The sale of San Juan Basin assets, including the Subject

Interests, from Burlington to Hilcorp closed on July 31, 2017.

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

July 31, 2017.

Under the terms of the sale, Hilcorp is required to make payments to Burlington if natural gas prices are above a certain price.

Hilcorp has confirmed that in accordance with the

Conveyance, Hilcorp will not charge the Trust any portion of such payments.

Hilcorp has confirmed that in accordance with the Conveyance, Hilcorp will not charge the Trust any

portion of such payments.

Gross Proceeds and Severance Tax Estimates .

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 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.

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.

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.

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.

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

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 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.

However, Hilcorp informed the Trust that for wells operated by

Hilcorp it did not intend to accrue lease operating expenses to the Trust.

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

the Trust is not otherwise liable for any Production Costs or other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom.

If at any time the Trust receives more than the amount due under the Royalty, it is

not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance.

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

amount and timing of Production Costs.

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 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 all payments made by Hilcorp to the Trust, including adjustments, true-ups, and recoupments.

In addition, the Trustee

continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

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.

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 remedies in the event there is evidence of non-compliance.

In the course of the most recent audit process by the Trustee, certain exceptions to the

several different categories of expenses (specifically offsite labor, overhead, operator-owned compressors and saltwater disposal facilities) for the years 2017 through 2020 were identified that the Trustee believed resulted in an underpayment of

royalties owed to the Trust for those years.

The Trustee engaged in extensive discussions with Hilcorp regarding these exceptions that culminated in Hilcorps payment of the sum of $1,037,093.45, which included the accumulated interest incurred

as a result of the underpayment.

The audit settlement payment was included in the September 2023 distribution to Unit Holders.

of Gross Proceeds also 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 reduce the volume of natural gas and oil produced from the Subject Interests by Hilcorp.

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 actual capital costs may vary from these estimates.

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

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

If production costs exceed Gross Proceeds in any month, the excess is recovered out of future Gross

Proceeds prior to the making of further payments to the Trust.

However, the Trust is not otherwise liable for any Production Costs or other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom.

If at any time

the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance.

The Trust and the Trustee have very limited authority to control the amount and timing of Production Costs.

The Trustee continues to

engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trusts third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments,

true-ups, and recoupments.

In addition, the Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal

Factors that Affect Net Proceeds.

Generally, Net Proceeds are affected by (a) disruptions caused by weather, particularly winter

storms that disrupt access to the production fields, (b) the timing and size of Hilcorps capital expenditures, and (c) commodity prices.

Generally, Net Proceeds are affected by (a) disruptions caused by weather,

particularly winter storms that disrupt access to the production fields, (b) the timing and size of Hilcorps capital expenditures, and (c) commodity prices.

Hilcorp has advised the Trust that it is possible for it to experience disruptions during the winter months that could impact

3 unchanged sentences

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.

Hilcorps capital expenditures increased approximately $290,196, or 194.53%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, and increased

approximately $259,917, or 77.51% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The increases in capital costs in the three-month and nine-month periods were primarily attributable to a

higher capital project spending budget for 2023 as compared to 2022, and to differences in timing of the payment for these expenditures along with capital expenditures attributable to the prior years budget.

Commodity Prices.

7 unchanged sentences

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

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

Results of Operations for the Three and Nine Months Ended September 2023 and 2022

Royalty Income.

1 unchanged sentence

Royalty Income for the three and

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

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

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Gross proceeds from the Subject Interests:

6 unchanged sentences

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 comprised of an audit settlement payment and related interest for the 2017 through 2020 disputed

expenses audit.

Revenue with interest related to granted audit exceptions.

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

revenues missing from the January 2023 revenue distribution, plus interest.

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.

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.

The Royalty Income distributed to the Trust for both the three-month and nine-month periods ended September 30, 2023, was lower than that

distributed during the same periods of 2022, due primarily to lower production quantities and lower natural gas prices.

The average natural gas price decreased from $6.32 per Mcf for the three months ended September 30, 2022, to $2.04 per Mcf

for the three months ended September 30, 2023.

The average natural gas price increased from $5.21 per Mcf for the nine months ended September 30, 2022, to $5.42 per Mcf for the nine months ended September 30, 2023.

The slight average

natural gas price increase in the nine-month period was due to higher natural gas pricing in the first quarter of 2023.

Production of natural gas from the Subject Interests decreased from 6,032,747 Mcf for the three months ended September 30,

2022, to 5,989,625 Mcf for the three months ended September 30, 2023, and decreased from 18,337,706 Mcf for the nine months ended September 30, 2022, to 17,466,457 Mcf for the nine months ended September 30, 2023.

Gross Proceeds from Subject Interests.

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.

Total Gross Proceeds decreased approximately $25.0 million, or 63.00%, for the three

months ended September 30, 2023, compared to the three months ended September 30, 2022, and decreased approximately $1.09 million, or 1.10%, for the nine months ended September 30, 2023, compared to the nine months ended

September 30, 2022.

The decrease was primarily due to lower production quantities and lower natural gas prices.

Expenditures.

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 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

expenditures increased approximately $290,196, or 194.52%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, and increased approximately $259,917, or 77.51%, for the nine months ended

September 30, 2023 compared to the nine months ended September 30, 2022.

The variances in capital costs in the three-month and nine-month periods were primarily due to a higher capital project spending budget for 2023 as compared to 2022

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

Severance Taxes.

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.

Aggregate severance taxes decreased approximately

$2.94 million, or 60.05%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Severance taxes decreased approximately $0.95 million, or 7.66%, for the nine months ended

September 30, 2023 compared to the nine months ended September 30, 2022.

The decrease in both periods was primarily attributable to lower Gross Proceeds.

Severance taxes represented approximately 13.30% of Gross Proceeds for the three

months ended September 30, 2023 compared to approximately 12.32% for the same period of 2022.

Severance taxes represented approximately 11.67% of Gross Proceeds for the nine months ended September 30, 2023 compared to approximately 12.50%

for the same period of 2022.

Lease Operating Expenses and Property Taxes.

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.

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

the following table:

Lease operating expenses and property taxes increased

$353,575, or 5.73%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Lease operating expenses and property taxes increased $537,218, or 2.69%, for the nine months ended September 30,

2023 compared to the nine months ended September 30, 2022.

Monthly lease operating expenses for the Subject Interests, including property taxes, for the three months ended September 30, 2023, averaged approximately

$2.18 million compared to $2.06 million for the three months ended September 30, 2022.

Monthly lease operating expenses of the Subject Interests, including property taxes, for the nine-month period ended September 30, 2023

averaged $2.28 million compared to $2.22 million for the nine-month period ended September 30, 2022.

Distributable

Distributable Income for the three and nine months ended September 30, 2023, and 2022 was determined as shown in the following table:

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Royalty income

3 unchanged sentences

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

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:

Distributable Income decreased approximately 81.30% from $21.1 million ($0.452950 per Unit) for the three

months ended September 30, 2022, to $3.9 million ($0.084685 per Unit) for the three months ended September 30, 2023.

Distributable Income decreased approximately 1.68% from $48.8 million ($1.047521 per Unit) for the nine months

ended September 30, 2022 to $48.0 million ($1.029974 per Unit) for the nine months ended September 30, 2023.

The decreases in Distributable Income were primarily attributable to lower production quantities, exacerbated by lower

natural gas prices.

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

third quarter of 2023 were as follows:

Quarter Total

Interest Income.

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.

Interest income was higher for the three-month and nine-month periods ended

September 30, 2023, as compared to the same periods in 2022 primarily due to higher yields on short-term investments.

General & Administrative Expenses.

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.

General and administrative expenses increased approximately 59.28% for

the three months ended September 30, 2023 compared to the three months ended September 30, 2022 and increased approximately 19.10% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

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

Cash Reserves.

Total cash reserves were $1.0 million as of September 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

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.

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 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

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

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

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

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,

Royalty Income for

the three months ended September 30, 2023, is associated with natural gas and oil production during May through July 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 September 30, 2023, and 2022 were as follows:

For the Three Months Ended September 30,

Subject Interests

Average Price (per Mcf/Bbl)

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

the Subject Interests and the Royalty for the six months ended June 30, 2023, and 2022 were as follows:

For the Six Months Ended June 30,

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

Interests and the Royalty for the nine months ended September 30, 2023, and 2022 were as follows:

For the Nine Months Ended September 30,

Subject Interests

7 unchanged sentences

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

fluctuations in natural gas production that have occurred during the three-month periods ended September 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.

2 unchanged sentences

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

Critical Accounting Policies and

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

Part I, Item 1.

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, 2023.

Off-Balance Sheet

Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that impact the Trusts

financial statements, see Part I, Item 1.

Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8.

Financial Statements and Supplemental Data contained in the Trusts Annual Report on Form 10-K for the

year ended December 31, 2022.

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

10-K for the year ended December 31, 2022.

Information Regarding Forward-Looking Information

3 unchanged sentences

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,

23 unchanged sentences

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