MESA ROYALTY TRUST The following review ofMesa Royalty Trust's (the "Trust") financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The discussion of net production attributable to theHugoton Royalty Properties andSan Juan Basin Royalty Properties (as each is defined below) represents production volumes that are to a large extent hypothetical as the Trust does not own and is not entitled to any specific production volumes. Any discussion of "actual" production volumes represents the hydrocarbons that were produced from the properties in which the Trust has an overriding royalty interest and reported by the Working Interest Owners. See Note 7 to the financial statements in the Trust's Annual Report on Form 10-K for the year endedDecember 31, 2019 . The Trust was created onNovember 1, 1979 and is now governed by the Mesa Royalty Trust Indenture (as amended, the "Trust Indenture"). Through a series of conveyances, assignments, and acquisitions, the Trust currently owns an overriding royalty interest (the "Royalty") equal to 11.44% of 90% of the Net Proceeds (as defined and described in an Overriding Royalty Conveyance dated as ofNovember 1, 1979 (the "Conveyance")) attributable to the specified interest in certain producing oil and gas properties located in the: º • ºHugoton field ofKansas (the "Hugoton Royalty Properties "); º •
º San Juan Basin field of
Properties"); and
º •
º San Juan Basin field of Colorado (the "San Juan Basin-Colorado
Properties ", and together with the San Juan Basin-New Mexico
Properties , the "San Juan Basin Royalty Properties ", and together with
the Hugoton Royalty Properties , the "Royalty Properties ").
On November 22, 2019 , Riviera completed the sale of its interest in its
remaining properties located in the Hugoton Basin under the Purchase and Sale
Agreement, dated August 28, 2019 (the "Purchase Agreement"), by and among
Riviera Upstream, LLC , Riviera Operating, LLC and Scout Energy Group V, LP
("Scout"). Pursuant to the Purchase Agreement, Riviera divested all of its
interest in oil and gas assets and contracts in the Hugoton Royalty Properties .
Since November 23, 2019 , Scout has operated the Hugoton Royalty Properties .
Pursuant to past conveyances, Scout, Hilcorp, BP and Red Willow are the
operators of certain portions of the Hugoton Royalty Properties and San Juan
Basin Royalty Properties (each of Scout, Hilcorp, BP and Red Willow being a
"Working Interest Owner", and together, the "Working Interest Owners"). As used
in this report, Scout refers to the current operator of the Hugoton Royalty
Properties , Hilcorp refers to the current operator of the San Juan Basin-New
Mexico Properties , and BP and Red Willow refer to the currents co-operators of
certain tracts of land included in the San Juan Basin-Colorado Properties ,
unless otherwise indicated.
The Trust is a passive entity whose purposes are limited to: (1) converting
the Royalties to cash, either by retaining them and collecting the proceeds of
production (until production has ceased or the Royalties are otherwise
terminated) or by selling or otherwise disposing of the Royalties; and
(2) distributing such cash, net of amounts for payments of liabilities to the
Trust, to the unitholders. The Trust has no sources of liquidity or capital
resources other than the revenues, if any, attributable to the Royalties and
interest on cash held by The Bank of New York Mellon Trust Company, N.A. ("the
Trustee") as a reserve for liabilities or for distribution. The Trust does not
undertake or control any capital projects or make capital expenditures. While
the Trust's Royalty income is net of capital
14
--------------------------------------------------------------------------------
expenditures, these capital expenditures are controlled and paid by the Working
Interests Owners, and the Trust receives Royalty income net of these expenses.
In addition, the Trust does not have any off-balance sheet arrangements or other
contingent obligations.
Note Regarding Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" about the Trust and
other matters discussed herein that are subject to risks and uncertainties that
are intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, statements under "Trustee's Discussion and Analysis of Financial
Condition and Results of Operations," including the Trust's or any Working
Interest Owner's future financial position, status in any insolvency proceeding,
business strategy, budgets, projected costs and plans and objectives for future
operations, information regarding target distributions, statements regarding
reconciliation and adjustment of estimated versus actual revenue and expense
amounts, statements pertaining to future development activities and costs,
statements regarding the number of development wells to be completed in future
periods, and information regarding production and reserve growth, are
forward-looking statements. Actual outcomes and results, which are substantially
all outside the Trust's control, may differ materially from those projected.
Forward-looking statements are generally accompanied by words such as
"estimate," "project," "predict," "believe," "expect," "anticipate,"
"potential," "possibly," "could," "may," "can," "foresee," "plan," "goal,"
"assume," "target," "should," "intend" or other words that convey the
uncertainty of future events or outcomes. These statements are based on certain
assumptions made by the Trust in light of its experience and perception of
historical trends, current conditions and expected future developments, as well
as other factors we believe are appropriate under the circumstances. The Trustee
relies on the Working Interest Owners for information regarding the Subject
Interests (as defined herein in "Note 1-Trust Organization and Provisions"), the
Royalty, and the Working Interest Owners themselves.
Although the information provided by the Working Interest Owners provides a
reasonable basis for the forward-looking statements contained herein, no
assurance can be given that such expectations will prove to be correct. However,
whether actual results and developments will conform with such expectations and
predictions is subject to a number of risks and uncertainties, including the
risk factors discussed in Part I, Item 1A of the Trust's Annual Report on
Form 10-K for the year ended December 31, 2019 , in Part II, Item 1A of the
Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 , the
risk factors discussed herein, and those set forth from time to time in the
Trust's filings with the Securities and Exchange Commission (the "SEC"), which
could affect the future results of the energy industry in general, and the Trust
and Working Interest Owners in particular, and could cause those results to
differ materially from those expressed in such forward-looking statements. The
actual results or developments anticipated may not be realized or, even if
substantially realized, they may not have the expected consequences to or
effects on the Working Interest Owners' businesses and the Trust. Such
statements are not guarantees of future performance and actual results or
developments may differ materially from those projected in such forward-looking
statements. The Trust undertakes no obligation to publicly update or revise any
forward-looking statements, except as required by applicable law.
15
--------------------------------------------------------------------------------
SUMMARY OF ROYALTY INCOME, PRODUCTION AND AVERAGE PRICES
(Unaudited)
Royalty income is computed after deducting the Trust's proportionate share
of capital costs, operating costs and interest on any cost carryforward from the
Trust's proportionate share of "Gross Proceeds," as defined in the Conveyance.
The Trust's Royalty income from the Royalty Properties and its distributions
to unitholders are heavily influenced by commodity prices. Commodity prices may
fluctuate widely in response to (i) relatively minor changes in the supply of
and demand for oil and natural gas, (ii) market uncertainty and (iii) a variety
of additional factors that are beyond the Trustee's control. Recently, there has
been a substantial decrease in oil and natural gas prices due in part to
significantly decreased demand as a result of the novel coronavirus ("COVID-19")
pandemic and an oversupply of crude oil. Both factors put substantial downward
pressure on the price of oil and natural gas in the second quarter of 2020, and
the Trust cannot guarantee that the above factors will not continue to
negatively impact natural gas commodity prices. The recent spread of the
COVID-19 pandemic, and the measures taken to mitigate the impact of the COVID-19
pandemic, are adversely affecting the business and operations of the Working
Interest Owners, which in turn are having an adverse effect on Trust
distributions.
The following summary illustrates the net effect of the components of the actual Royalty computation for the periods indicated.
Three Months Ended June 30,
2020 2019
Natural Natural Oil and Natural Natural Oil and
Gas Gas Liquids Condensate Gas Gas Liquids Condensate
The Trust's
proportionate
share of Gross
proceeds(1)(5) $ 734,577 $ 228,173 $ 11,997 $ 804,218 $ 323,342 $ 25,015
Less the
Trust's
proportionate
share of:
Capital costs
recovered (2,533 ) (2,047 ) (35 ) (8,262 ) (5,691 ) (640 )
Operating
costs (713,713 ) (140,907 ) (9,579 ) (383,953 ) (159,446 ) (10,380 )
Net
proceeds(2)
158,205
Royalty
income(2)
156,686
Average sales price$ 1.62 $ 10.96 $ 37.60 $ 2.47 $ 19.20 $ 42.61 Average production costs(3)$ 6.18 $ 18.39 $ 148.60 $ 2.32 $ 20.23 $ 33.56 (Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls) Net production volumes attributable to the Royalty paid(4) 115,904 7,774 65 168,934 8,162 328 16
--------------------------------------------------------------------------------
Six Months Ended June 30,
2020 2019
Natural Natural Oil and Natural Natural Oil and
Gas Gas Liquids Condensate Gas Gas Liquids Condensate
The Trust's
proportionate
share of Gross
proceeds(1)(5) $ 1,246,327 $ 438,765 $ 36,362 $ 1,822,387 $ 590,832 $ 31,044
Less the
Trust's
proportionate
share of:
Capital costs
recovered (19,856 ) (10,168 ) (1,792 ) (9,525 ) (6,223 ) (663 )
Operating
costs (930,454 ) (249,451 ) (24,699 ) (799,454 ) (302,032 ) (12,638 )
Net
proceeds(2)
Royalty
income(2)
Average sales price$ 1.52 $ 13.34 $ 41.79 $ 2.40 $ 19.13 $ 41.53 Average production costs(3)$ 3.12 $ 19.20 $ 111.59 $ 1.91 $ 20.99 $ 31.14 (Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls) Net production volumes attributable to the Royalty paid(4) 304,230 13,520 237 423,809 14,685 427
--------------------------------------------------------------------------------
º (1)
º Gross Proceeds from natural gas liquids attributable to each of the
Royalty Properties andSan Juan Basin Royalty Properties are reported by the Working Interest Owner net of a volumetric in-kind processing fee retained by Scout and Hilcorp, respectively. º (2)
º Royalty income is computed after deducting the Trust's proportionate share
of capital costs, operating costs and interest on any cost carryforward
from the Trust's proportionate share of Gross Proceeds. As a result of
excess production costs incurred in one monthly operating period and then
recovered in a subsequent monthly operating period, the Royalty income paid
to the Trust may not match the Trust's royalty interest in the Net Proceeds
(as defined in the Conveyance). The excess production costs may be
recovered by the Working Interest Owners before any distribution of Royalty
income will be made to the Trust.
San Juan Basin-New Mexico Properties . Excess production costs in the
amount of $11,903 and $1,709 as of June 30, 2020 and June 30, 2019 ,
respectively, were related to the San Juan Basin-New Mexico Properties formerly operated by XTO, currently operated by Hilcorp. Excess production
costs related to the
by XTO and currently operated by Hilcorp were approximately
respectively, for the three months ended
recovered prior period excess production costs of
operated by Hilcorp during the quarter ended
Excess production costs related to the
formerly operated by XTO and currently operated by Hilcorp were
approximately $6,582 and $0 , respectively, for the
17
--------------------------------------------------------------------------------
six months ended
excess production costs of
Properties formerly operated by XTO and currently operated by Hilcorp
during the six months ended
of
were related to the
Willow. Excess production costs related to the San Juan Basin-
Properties operated by Red Willow were approximately
respectively, for the three months ended
production costs related to the
by Red Willow were approximately
six months
Excess production costs in the amount of
and
June 30, 2020 and 2019, respectively, were related to theSan Juan Basin-Colorado Properties operated by BP.Hugoton Royalty Properties . Excess production costs in the amount of$156,135 and$0 as ofJune 30, 2020 andJune 30, 2019 , respectively, and
for the three and six months ended
were related to the
º (3)
º Average production costs attributable to the Royalty are calculated as
stated capital costs plus operating costs, divided by stated net production
volumes attributable to the Royalty paid. As noted above in footnote (2),
production costs may be incurred in one operating period and then recovered
in a subsequent operating period, which may cause Royalty income paid to
the Trust not to agree to the Trust's Royalty interest in the Net Proceeds.
º (4)
º Net production volumes attributable to the Royalty are determined by
dividing Royalty income by the average sales price received. Any
differences noted are due to rounding.
º (5)
º Following Hilcorp's acquisition of Conoco, Inc.'s ("ConocoPhillips") and
XTO's interests in the San Juan Basin-New Mexico Properties , there was a
transition period to transfer historical information, knowledge and
processes from one owner to the other. During this transition period,
Hilcorp recorded estimates of revenues and expenses and made payments tothe Trust based on historical amounts previously paid by ConocoPhillips,
and the Trust recognized such amounts in accordance with its accounting
practices. Accordingly, Hilcorp made an estimated payment of
Proceeds to the Trust from
2017 production month previously paid by ConocoPhillips. In
Hilcorp began to generate actual (instead of estimated) Net Proceeds due to
the Trust on a monthly basis. Hilcorp has informed the Trust that it will
utilize actual revenue and expense amounts and either add or subtract
reconciled historical amounts on a month-by-month basis, which will be
recognized over time by the Trust in accordance with the Trust's modified
cash basis of accounting. In
to the Trust in reconciling historical amounts for one accounting month.
For the three months ended
additional historical amounts for the accounting months of October through
for these months. For the three months ended June 30, 2020 , Hilcorp
reconciled one additional historical amount for the accounting month of
January 2018 , which resulted in a charge to the Trust of $3,699 .
18
--------------------------------------------------------------------------------
Until all estimated historical monthly amounts received by the Trust from
Proceeds from the
to actual current production and costs to account for historical monthly
reconciliations as they are completed. Because of anticipated future
adjustments, the amounts of Net Proceeds reported for the San Juan
Basin-New Mexico Properties during the quarter ended June 30, 2020 may notbe representative of Net Proceeds that will be received in future quarters.
Hilcorp has informed the Trust that significant incremental costs of
approximately
with respect to a newly drilled well in the San Juan Basin-
Properties. Incremental costs attributable to the Trust will reduce the
Trust's future Net Proceeds over a period of time as adjustments are made
by Hilcorp after considering actual revenues as well as costs for these
properties during the applicable time period. The potential impact to Net
Proceeds depends upon the results of all of the reconciliation work
currently being conducted by Hilcorp and is therefore uncertain. The Trust
will undertake a review of the reconciliation calculations by Hilcorp and
the amount of Net Proceeds calculated and paid and intends to engage third
party consultants when appropriate to assist in the Trust's review.
Pursuant to the Trust Indenture, the Trust is not required to pay to
Hilcorp any amounts that could be owed if the estimated revenue exceeded
actual revenue amounts or estimated expenses were less than actual expense
amounts in past periods. However, Hilcorp may recover such amounts by
withholding a portion or all of the Net Proceeds that would otherwise be
payable to the Trust in subsequent periods. This could result in a decrease
in Net Proceeds paid to the Trust and could result in future material
reductions in distributions to the Trust's unitholders. Net Proceeds from
the
revenue accounted for approximately 42% and 53%, respectively, of the total
Royalty income reported by the Trust. Because of anticipated future
adjustments, the amounts of Net Proceeds reported for the San Juan
not be representative of Net Proceeds that will be received in future
quarters.
Three Months Ended
Financial Review
Three Months Ended
June 30,
2020 2019
Royalty income $ 275,119 $ 588,481
Interest income 1,314 9,012
General and administrative expense (75,656 ) (50,166 )
Distributable income $ 200,777 $ 547,327
Distributable income per unit $ 0.1077 $ 0.2937
Units outstanding 1,863,590 1,863,590
19
--------------------------------------------------------------------------------
Royalty Income. The Trust's Royalty income was $275,119 for the quarter
ended June 30, 2020 , a decrease of approximately 53% as compared to $588,481 for
the quarter ended June 30, 2019 . The decrease was primarily a result of lower
natural gas, natural gas liquids and oil and condensate prices, decreased net
production of natural gas, natural gas liquids and oil and condensate, and an
increase in operating expenses for natural gas, offset in part by lower capital
expenditures in the quarter ended June 30, 2020 , as compared to the quarter
ended June 30, 2019 . Royalty income for the quarter ended June 30, 2020 included
Royalty income from Hugoton (Scout Energy) for February and March 2020 as this
Royalty income was not received by the Trust until April 2020 . If Royalty income
from Hugoton for February and March 2020 had been received by the Trust in the
quarter ended March 31, 2020 , the Trust's Royalty income for the quarter ended
June 30, 2020 would have been $127,226 , a decrease of approximately 78% as
compared to $588,481 for the quarter ended June 30, 2019 . This decrease was
primarily a result of zero Royalty income received from Hugoton related to the
quarter ended June 30,2020 as Scout's expenses exceeded the proceeds for the
quarter.
The Trust's interest income for the quarters ended June 30, 2020 and 2019
was $1,314 and $9,012 , respectively. In accordance with the Trust Indenture and
as explained below, interest on cash on hand was paid at a rate equivalent to a
3.25% annualized return from January 1, 2020 through March 2, 2020 , a 2.75%
annualized return from March 3, 2020 through March 14, 2020 and a 1.75%
annualized return from March 15, 2020 through June 30, 2020 .
General and Administrative Expense. General and administrative expense was
$75,656 and $50,166 for the three months ended June 30, 2020 and 2019,
respectively. The Trustee's fees are included in general and administrative
expense. The increase for the three months ended June 30, 2020 as compared to
June 30, 2019 was primarily a result of the timing of expenses received and paid
by the Trust.
For the quarter ended June 30, 2020 , the Trustee was due $118,750 for its
services. The Trust paid $108,288 of this amount to the Trustee, and $10,462 was
allocated to offset against interest due to the Trust under the Trust Indenture.
The Trust Indenture requires that cash being held by the Trustee earn interest
at 1.5% below the prime rate, which would have yielded the Trust a 3.25%
annualized return from January 1, 2020 through March 2, 2020 , a 2.75% annualized
return from March 3, 2020 through March 14, 2020 and a 1.75% annualized return
from March 15, 2020 through June 30, 2020 . However, due to the current interest
rate environment, the Trustee was unable to obtain an account in which such an
interest rate was available. In the event such an interest rate is unavailable
in the future, the Trustee intends to allocate certain of its fees due to the
Trust to meet the minimum interest rate payable under the Trust Indenture. In
future periods the Trustee will continue to allocate a portion of the fees
earned for its services to the Trust until all remaining interest due to the
Trust is fully offset.
Unreimbursed Expenses and the Contingent Reserve. The Working Interest
Owners partially reimburse the Trust each quarter for amounts paid in connection
with the Trustee's services. For the quarter ended June 30, 2020 , the Trustee's
fees were $108,288 and the Working Interest Owners reimbursed a sum of $95,897
to the Trustee, which was the same amount reimbursed for the quarter ended
June 30, 2019 . As of each of the quarters ended June 30, 2020 and 2019, there
were $0 and $0 , respectively, of unreimbursed expenses.
During 2011, the Trustee, acting pursuant to the Trust Indenture, withheld
20
--------------------------------------------------------------------------------
with respect to any reimbursement expenses. For the three months ended June 30,
2020 , the Trustee increased the Contingent Reserve by (1) $147,893 Royalty
income for February and March 2020 included in the March 2020 distribution to
unitholders but not received from Scout until April 2020 and (2) $583 for
interest earned on the Contingent Reserve in the second quarter of 2020. For the
three months ended June 30, 2020 , the Trustee decreased the Contingent Reserve
by (1) $22,268 of Royalty income received from BP in March 2020 after the
distribution to unitholders had been announced for the month of March 2020 ,
which Royalty income was included in the April 2020 distribution to unitholders
and (2) $2,303 which is the difference between the amount due to be paid to
unitholders in July 2020 and the amount currently in the Operating account.
For the six months ended June 30, 2020 , the Trustee increased the Contingent
Reserve by (1) $22,268 of Royalty income received from BP in March 2020 after
the distribution to unitholders had been announced for the month of March 2020 ,
which Royalty income was included in the April 2020 distribution to unitholders,
(2) $23,629 reimbursement not received from Scout until January 2020 but
included in the December 2019 distribution to unitholders, (3) $147,893 Royalty
income for February and March 2020 included in the March 2020 distribution to
unitholders but not received from Scout until April 2020 and (4) $583 for
interest earned on the Contingent Reserve in the second quarter of 2020.
For the six months ended June 30, 2020 , the Trustee decreased the Contingent
Reserve by (1) $844 due to an overpayment received in error from BP in December
2019 that was deducted from BP's January 2020 payment to the Trust, (2) $147,893
Royalty income for February and March 2020 included in the March 2020
distribution to unitholders but not received from Scout until April 2020 ,
(3) $22,268 of Royalty income received from BP in March 2020 after the
distribution to unitholders had been announced for the month of March 2020 ,
which Royalty income was included in the April 2020 distribution to unitholders
and (4) $2,303 which is the difference between the amount due to be paid to
unitholders in July 2020 and the amount currently in the Operating account.
Distributable Income Available for Distribution. The portion of the Trust's
distributable income available for distribution each period includes the Royalty
income received from the Working Interest Owners during such period, plus
interest income earned to the date of distribution (if any) and increases or
withdrawals from the Contingent Reserve (if any). Distributable income available
for distribution for the quarter ended June 30, 2020 was $76,872 , representing
$0.0412 per unit, compared to $604,003 , representing $0.3241 per unit, for the
quarter ended June 30, 2019 . Based on 1,863,590 units outstanding for the
quarters ended June 30, 2020 and 2019, respectively, the per unit distributions
for each month in such periods were as follows:
2020 2019
April $ 0.0176 $ 0.1254
May 0.0236 0.1044
June - 0.0943
$ 0.0412 $ 0.3241
Operational Review
The business of the Working Interest Owners is being adversely affected by
the COVID-19 pandemic and measures being taken to mitigate its impact. The oil
and gas industry has experienced a
21
--------------------------------------------------------------------------------
sharp and rapid decline in the demand for crude oil and natural gas worldwide.
The global economy and commodity prices are being severely negatively impacted,
as economic activity is curtailed in response to the COVID-19 pandemic, as well
as due to other geopolitical factors. Official restrictions on non-essential
activities, including "shelter in place" and "stay at home" orders, have been
introduced throughout the U.S. and the world, and in many places have been
extended into the summer of 2020 and beyond, which may impact the Working
Interest Owners' production activities. The length of time that such measures
are in place is likely to further adversely affect Trust distributions. Fewer
businesses than normal are open and fewer people are traveling to work, which
has greatly reduced the demand for oil and natural gas worldwide. Additionally,
the Working Interest Owners' reliance on third-party suppliers, contractors, and
service providers exposes them to possibility of delay or interruption of
operations. At this time, the full extent to which the COVID-19 pandemic will
negatively impact the global economy and the oil and gas industry is uncertain,
but the pandemic is having a material adverse effect on the Working Interest
Owners' business and financial condition, which is having an adverse effect on
Trust distributions.
Hugoton Royalty Properties
Natural gas and natural gas liquids production attributable to the Hugoton
Royalty Properties accounted for approximately 54% of the Royalty income of the
Trust during the second quarter of 2020.
Three Months Ended
June 30,
2020 2019
Royalty income attributable to Hugoton Royalty Properties $ 147,893 $ 162,600
Operating costs attributable to Hugoton Royalty Properties $ 584,064 $ 273,286
Capital expenditures attributable to Hugoton Royalty
Properties $ - $ 1
Royalty Income. Royalty income attributable to the Hugoton Royalty
Properties decreased to $147,893 in the second quarter of 2020 from $162,600 in
the second quarter of 2019 primarily due to decreases in natural gas and natural
gas liquids prices and higher operating costs, offset in part by increased net
natural gas and natural gas liquids production volumes, from the Hugoton Royalty
Properties in the second quarter of 2020 compared to the second quarter of 2019.
Hugoton Royalty income for the quarter ended June 30, 2020 included Royalty
income for February and March 2020 as this Royalty income was not received by
the Trust until April 2020 . If Royalty income from Hugoton for February and
March 2020 had been received by the Trust in the quarter ended March 31, 2020 ,
Hugoton's Royalty income for the quarter ended June 30, 2020 would have been $0
as Hugoton's expenses exceeded the proceeds for the quarter.
Operating Costs and Capital Expenditures. Operating costs were $584,064 in
the second quarter of 2020 as compared to $273,286 in the second quarter of
2019. The increase was primarily a result of reporting operating costs from
Hugoton for February and March 2020 in April 2020 as the associated Royalty
income was not received by the Trust until April 2020 . If operating costs were
reported for February and March in the quarter ended March 31, 2020 , the
operating costs would have been $362,041 in the second quarter of 2020, an
increase of 32% as compared to $273,286 in the second quarter of 2019. This
increase was primarily due to a current correction to billing for expenses
22--------------------------------------------------------------------------------
miscoded in prior months. Capital expenditures attributable to the
Three Months Ended June 30,
2020 2019
Natural Natural Gas Oil and Natural Natural Gas Oil and
Gas Liquids Condensate Gas Liquids Condensate
Average
sales price $ 2.83 $ 9.39 $ - $ 3.96 $ 22.73 $ -
(Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls)
Actual production volumes
attributable to the Royalty paid
for Hugoton Royalty Properties 173,732 8,948 - 86,493 4,115 -
Net production volumes
attributable to the Royalty paid
for Hugoton Royalty Properties 39,720 3,775 - 32,300 1,525 -
Average Sales Price. Average sales prices per thousand cubic feet ("Mcf")
of natural gas and barrel ("Bbl") for natural gas liquids for the Hugoton
Royalty Properties are directly dependent on the prices Scout realizes for
natural gas sold under short-term and multi-month contracts at market clearing
prices to multiple purchasers. Overall market prices received for natural gas
from Hugoton Royalty Properties were lower for the three months ended June 30,
2020 as compared to the three months ended June 30, 2019 .
Royalty income from theSan Juan Basin Royalty Properties is calculated and paid to the Trust on a state-by-state basis depending upon whether the property is situated inColorado orNew Mexico . A majority of theRoyalty income from theSan Juan Basin Royalty Properties is attributable to theSan Juan Basin-New Mexico Properties .
Three Months
Ended
June 30,
2020 2019$ 11,832 $ 113,775 Operating costs attributable to San Juan Basin-Colorado Properties$ 34,376 $ 25,093 Royalty Income.Royalty income from the San Juan Basin-Colorado Royalty Properties was$11,832 during the second quarter of 2020, compared to$113,775 during the second quarter of 2019. This decrease inRoyalty income was due primarily to lower market prices for natural gas, decreased net natural gas production volumes and an increase in operating costs in the second quarter of 2020 compared to the second quarter of 2019. 23 -------------------------------------------------------------------------------- Operating Costs. Operating costs on these properties were$34,376 in the second quarter of 2020, an increase of approximately 37% as compared to$25,093 in the second quarter of 2019. Three Months Ended June 30, 2020 2019 Natural Natural Oil and Natural Natural Oil and Gas Gas Liquids Condensate Gas Gas Liquids Condensate Average sales price$ 0.42 $ - $ -$ 1.92 $ - $ - (Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls) Actual production volumes attributable to theRoyalty paid for San Juan Basin-Colorado Properties 86,529 - - 65,583 - - Net production volumes attributable to theRoyalty paid for San Juan Basin-Colorado Properties 27,914 - - 55,429 - -San Juan Basin-New Mexico Properties Three Months Ended June 30, 2020 2019
$ 115,394
$ 245,759 $ 255,401 Capital expenditures attributable to San Juan Basin-New Mexico Properties$ 4,615 $ 14,593 Royalty Income.Royalty income from the San Juan Basin-New Mexico Properties was$115,394 during the second quarter of 2020 as compared withRoyalty income of$312,106 during the second quarter of 2019. This decrease inRoyalty income was due primarily to a decrease in natural gas, natural gas liquids and oil and condensate prices and decreased net production volumes for natural gas, natural gas liquids and oil and condensate, offset in part by a decrease in operating costs and capital expenditures for the second quarter of 2020 compared to the second quarter of 2019.
Operating Costs and Capital Expenditures. Operating costs were
24
--------------------------------------------------------------------------------
expenditures on these properties were $4,615 in the second quarter of 2020, a
decrease of approximately 68% as compared to $14,593 in the second quarter of
2019.
Three Months Ended June 30,
2020 2019
Natural Natural Oil and Natural Natural Oil and
Gas Gas Liquids Condensate Gas Gas Liquids Condensate
Average
sales
price $ 1.31 $ 12.43 $ 37.60 $ 2.19 $ 18.61 $ 42.61
(Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls)
Actual production volumes
attributable to the Royalty
paid for San Juan Basin-New
Mexico Properties 155,724 11,528 319 151,687 12,537 587
Net production volumes
attributable to the Royalty
paid for San Juan Basin-New
Mexico Properties 48,271 3,999 65 81,205 6,637 328
Following Hilcorp's acquisition of ConocoPhillips' and XTO's interests in
the San Juan Basin-New Mexico Properties , there was a transition period to
transfer historical information, knowledge and processes from one owner to the
other. During this transition period, Hilcorp recorded estimates of revenues and
expenses and made payments to the Trust based on historical amounts previously
paid by ConocoPhillips, and the Trust recognized such amounts in accordance with
its accounting practices. Accordingly, Hilcorp made an estimated payment of
$97,150 in Net Proceeds to the Trust from September 2017 to March 2019 based
upon the July 2017 production month previously paid by ConocoPhillips. In April
2019 , Hilcorp began to generate actual (instead of estimated) Net Proceeds due
to the Trust on a monthly basis. Hilcorp has informed the Trust that it will
utilize actual revenue and expense amounts and either add or subtract reconciled
historical amounts on a month-by-month basis, which will be recognized over time
by the Trust in accordance with the Trust's modified cash basis of accounting.
In December 2019 , Hilcorp made the first payment to the Trust in reconciling
historical amounts for one accounting month, which totaled $29,698 . For the
three months ended March 31, 2020 , Hilcorp reconciled three additional
historical amounts for the accounting months of October through December 2017 ,
in which the Trust received additional payments of $10,578 for these months. For
the three months ended June 30, 2020 , Hilcorp reconciled one additional
historical amount for the accounting month of January 2018 , which resulted in a
charge to the Trust of $3,699 .
Until all estimated historical monthly amounts received by the Trust from
September 2017 to March 2019 are fully reconciled and adjusted, Net Proceeds
from the San Juan-New Mexico Properties will reflect adjustments to actual
current production and costs to account for historical monthly reconciliations
as they are completed. Because of anticipated future adjustments, the amounts of
Net Proceeds reported for the San Juan Basin-New Mexico Properties during the
three months ended June 30, 2020 may not be representative of Net Proceeds that
will be received in future quarters.
Hilcorp has informed the Trust that significant incremental costs of
approximately
25
--------------------------------------------------------------------------------
Basin-New Mexico Properties . Incremental costs attributable to the Trust will
reduce the Trust's future Net Proceeds over a period of time as adjustments are
made by Hilcorp after taking into account actual revenues as well as costs for
these properties during the applicable time period. The potential impact to Net
Proceeds depends upon the results of all of the reconciliation work currently
being conducted by Hilcorp and is therefore uncertain. The Trust will undertake
a review of the reconciliation calculations by Hilcorp and the amount of Net
Proceeds calculated and paid and intends to engage third party consultants when
appropriate to assist in the Trust's review.
Pursuant to the Trust Indenture, the Trust is not required to pay to Hilcorp
any amounts that could be owed if the estimated revenue exceeded actual revenue
figures in past periods, plus any additional required costs. However, Hilcorp
may recover such amounts by withholding a portion or all of the Net Proceeds
that would otherwise be payable to the Trust in subsequent periods. This could
result in a decrease in Net Proceeds paid to the Trust and could result in
future material reductions in distributions to the Trust's unitholders.
Net Proceeds from the San Juan Basin-New Mexico Properties for the three
months ended June 30, 2020 and 2019 were $115,394 and $312,106 , respectively,
which revenue accounted for approximately 42% and 53%, respectively, of the
total Royalty income reported by the Trust during those periods. Because of
anticipated future adjustments, the amounts of Net Proceeds reported for the San
Juan Basin-New Mexico Properties during the three months ended June 30, 2020 may
not be representative of Net Proceeds that will be received in future quarters.
Six Months Ended
Financial Review
Six Months Ended
June 30,
2020 2019
Royalty income $ 653,403 $ 1,315,350
Interest income 5,642 16,983
General and administrative expense (93,295 ) (97,712 )
Distributable income $ 565,750 $ 1,234,621
Distributable income per unit $ 0.3036 $ 0.6625
Units outstanding 1,863,590 1,863,590
Royalty Income. The Trust's Royalty income was $653,403 for the six months
ended June 30, 2020 , a decrease of approximately 50% as compared to $1,315,350
for the six months ended June 30, 2019 primarily as a result of decreased
natural gas and natural gas liquids prices, decreased net production of natural
gas, natural gas liquids and oil and condensate, an increase in operating
expenses for natural gas and oil and condensate and an increase in capital
expenditures, offset in part by increased oil and condensate prices and a
decrease in operating expenses for natural gas liquids in the first six months
of 2020 as compared to the first six months of 2019. The Trust's interest income
for the six months ended June 30, 2020 and 2019 was $5,642 and $16,983 ,
respectively.
General and Administrative Expense. General and administrative expense was
26
--------------------------------------------------------------------------------
For the six months ended June 30, 2020 , the Trustee was due $237,500 for its
services. The Trust paid $216,576 of this amount to the Trustee, and $20,924 was
allocated to offset against interest due to the Trust under the Trust Indenture.
The Trust Indenture requires that cash being held by the Trustee earn interest
at 1.5% below the prime rate, which would have yielded the Trust a 3.25%
annualized return from January 1, 2020 through March 2, 2020 , a 2.75% annualized
return from March 3, 2020 through March 14, 2020 and a 1.75% annualized return
from March 15, 2020 through June 30, 2020 . However, due to the current interest
rate environment, the Trustee was unable to obtain an account in which such an
interest rate was available. In the event such an interest rate is unavailable
in the future, the Trustee intends to allocate certain of its fees due to the
Trust to meet the minimum interest rate payable under the Trust Indenture. In
future periods the Trustee will continue to allocate a portion of the fees
earned for its services to the Trust until all remaining interest due to the
Trust is fully offset.
Unreimbursed Expenses and the Contingent Reserve. The Working Interest
Owners partially reimburse the Trust each quarter for amounts paid in connection
with the Trustee's services. For the six months ended June 30, 2020 , the
Trustee's fees were $216,576 and the Working Interest Owners reimbursed a sum of
$191,794 to the Trustee, which was the same amount reimbursed for the six months
ended June 30, 2019 . As of each of the six-month periods ended June 30, 2020 and
2019, there were $0 and $0 , respectively, of unreimbursed expenses.
During 2011, the Trustee, acting pursuant to the Trust Indenture, withheld
$1.0 million for future unknown contingent liabilities and expenses (such
cumulative withholding, the "Contingent Reserve"). The Trustee reserves the
right to determine whether or not to release cash reserves in future periods
with respect to any reimbursement expenses.
For the six months ended June 30, 2020 , the Trustee increased the Contingent
Reserve by (1) $22,268 of Royalty income received from BP in March 2020 after
the distribution to unitholders had been announced for the month of March 2020 ,
which Royalty income was included in the April 2020 distribution to unitholders,
(2) $23,629 reimbursement not received from Scout until January 2020 but
included in the December 2019 distribution to unitholders, (3) $147,893 Royalty
income for February and March 2020 included in the March 2020 distribution to
unitholders but not received from Scout until April 2020 and (4) $583 for
interest earned on the Contingent Reserve in the second quarter of 2020.
For the six months ended June 30, 2020 , the Trustee decreased the Contingent
Reserve by (1) $844 due to an overpayment received in error from BP in December
2019 that was deducted from BP's January 2020 payment to the Trust, (2) $147,893
Royalty income for February and March 2020 included in the March 2020
distribution to unitholders but not received from Scout until April 2020 ,
(3) $22,268 of Royalty income received from BP in March 2020 after the
distribution to unitholders had been announced for the month of March 2020 ,
which Royalty income was included in the April 2020 distribution to unitholders
and (4) $2,303 which is the difference between the amount due to be paid to
unitholders in July 2020 and the amount currently in the Operating account.
Distributable Income Available for Distribution. The portion of the Trust's
distributable income available for distribution each period includes the Royalty
income received from the Working Interest Owners during such period, plus
interest income earned to the date of distribution (if any) and increases or
withdrawals from the Contingent Reserve (if any). Distributable income available
for distribution for the six months ended June 30, 2020 was $544,685 ,
representing $0.2922 per unit, compared to $1,273,303 , representing $0.6833 per
unit, for the six months ended June 30, 2019 .
27--------------------------------------------------------------------------------
Operational Review
The business of the Working Interest Owners is being adversely affected by
the COVID-19 pandemic and measures being taken to mitigate its impact. The oil
and gas industry has experienced a sharp and rapid decline in the demand for
crude oil and natural gas worldwide. The global economy and commodity prices are
being severely negatively impacted, as economic activity is curtailed in
response to the COVID-19 pandemic, as well as due to other geopolitical factors.
Official restrictions on non-essential activities, including "shelter in place"
and "stay at home" orders, have been introduced throughout the U.S. and the
world, and in many places have been extended into the summer of 2020 and beyond,
which may impact the Working Interest Owners' production activities. The length
of time that such measures are in place is likely to further adversely affect
Trust distributions. Fewer businesses than normal are open and fewer people are
traveling to work, which has greatly reduced the demand for oil and natural gas
worldwide. Additionally, the Working Interest Owners' reliance on third-party
suppliers, contractors, and service providers exposes them to possibility of
delay or interruption of operations. At this time, the full extent to which the
COVID-19 pandemic will negatively impact the global economy and the oil and gas
industry is uncertain, but the pandemic is having a material adverse effect on
the Working Interest Owners' business and financial condition, which is having
an adverse effect on Trust distributions.
Natural gas and natural gas liquids production attributable to the Hugoton
Royalty Properties accounted for approximately 38% of the Royalty income of the
Trust during the six months ended June 30, 2020 .
Six Months Ended
June 30,
2020 2019
Royalty income attributable to Hugoton Royalty Properties $ 248,445 $ 346,527
Operating costs attributable to Hugoton Royalty Properties $ 597,790 $ 618,876
Capital expenditures attributable to Hugoton Royalty
Properties $ - $ 1
Royalty Income. Royalty income attributable to the Hugoton Royalty
Properties decreased to $248,445 for the six months ended June 30, 2020 from
$346,527 for the same period in 2019 primarily due to decreased natural gas and
natural gas liquids prices, offset in part by increased net natural gas and
natural gas liquids production volumes and lower operating costs from the
Hugoton Royalty Properties in the first six months of 2020 compared to the first
six months of 2019.
Operating Costs and Capital Expenditures. Operating costs on these
properties were $597,790 during the six months ended June 30, 2020 , a decrease
of approximately 3% as compared to $618,876 during the six months ended June 30,
2019 . Capital expenditures attributable to the Hugoton Royalty
28--------------------------------------------------------------------------------
Properties were
Six Months Ended June 30,
2020 2019
Natural Natural Oil and Natural Natural Oil and
Gas Gas Liquids Condensate Gas Gas Liquids Condensate
Average
sales price $ 2.83 $ 10.68 $ - $ 4.14 $ 25.81 $ -
(Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls)
Actual production volumes
attributable to the Royalty paid
for Hugoton Royalty Properties 204,548 10,503 - 180,038 8,580 -
Net production volumes
attributable to the Royalty paid
for Hugoton Royalty Properties 66,635 5,635 - 66,047 2,845 -
Six Months Ended
June 30,
2020 2019$ 113,577 $ 365,269 Operating costs attributable to San Juan Basin-Colorado Properties$ 63,885 $ 56,666 Royalty Income.Royalty income from the San Juan Basin-Colorado Royalty Properties was$113,577 for the six months endedJune 30, 2020 , compared to$365,269 during the same period in 2019. This decrease inRoyalty income was due primarily to decreased natural gas prices, lower net production volumes for natural gas and an increase in operating costs in the first six months of 2020 compared to the first six months of 2019. 29 -------------------------------------------------------------------------------- Operating Costs. Operating costs on these properties were$63,885 during the six months endedJune 30, 2020 , an increase of approximately 13% as compared to$56,666 during the six months endedJune 30, 2019 . Six Months Ended June 30, 2020 2019 Natural Natural Oil and Natural Natural Oil and Gas Gas Liquids Condensate Gas Gas Liquids Condensate Average sales price$ 0.79 $ - $ -$ 2.05 $ - $ - (Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls) Actual production volumes attributable to theRoyalty paid for San Juan Basin-Colorado Properties 216,149 - - 205,100 - - Net production volumes attributable to theRoyalty paid for San Juan Basin-Colorado Properties 143,696 - - 177,956 - -San Juan Basin-New Mexico Properties Six Months Ended June 30, 2020 2019
$ 291,381
$ 542,929 $ 438,582 Capital expenditures attributable to San Juan Basin-New Mexico Properties$ 31,816 $ 16,411 Royalty Income.Royalty income from the San Juan Basin-New Mexico Properties was$291,381 for the six months endedJune 30, 2020 as compared to$603,555 during the same period in 2019. This decrease inRoyalty income was due primarily to decreased natural gas and natural gas liquids prices, a decrease in net production volumes for natural gas, natural gas liquids and oil and condensate and higher operating costs and capital expenditures in the six months endedJune 30, 2020 as compared to the same period in 2019, offset in part by an increase in oil and condensate prices in the six months endedJune 30, 2020 compared to the same period in 2019. Operating Costs and Capital Expenditures. Operating costs were$542,929 during the six months endedJune 30, 2020 , an increase of approximately 24% as compared to$438,582 during the six months endedJune 30, 2019 , due primarily to including theNovember 2017 through theFebruary 2018 true-up of historical amounts by Hilcorp in the six months endedJune 30, 2020 compared to the same period in 2019. Capital expenditures on these properties were$31,816 during the six months endedJune 30 , 30
-------------------------------------------------------------------------------- 2020, an increase of approximately 94% as compared to$16,411 during the six months endedJune 30, 2019 due primarily to including theNovember 2017 through theFebruary 2018 true-up of historical amounts by Hilcorp in the six months endedJune 30, 2020 compared to the same period in 2019. Six Months Ended June 30, 2020 2019 Natural Natural Oil and Natural Natural Oil and Gas Gas Liquids Condensate Gas Gas Liquids Condensate Average sales price$ 1.72 $ 15.25 $ 41.79 $ 2.10 $ 17.53 $ 41.53 (Mcf) (Bbls) (Bbls) (Mcf) (Bbls) (Bbls) Actual production volumes attributable to theRoyalty paid for San Juan Basin-New Mexico Properties 288,562 21,337 870 313,644 23,786 747 Net production volumes attributable to theRoyalty paid for San Juan Basin-New Mexico Properties 93,899 7,886 237 179,806 11,840 427
Off-Balance Sheet Arrangements
None.
Contractual Obligations
None.© Edgar Online, source
