Forward Looking Information
Certain information included in this report contains, and other materials filed or to be filed by the Trust with theSecurities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, production efforts and volumes, hydrocarbon prices and the results thereof, and regulatory matters. Although the Trustee believes that the expectations reflected in such forward-looking statements are reasonable, such expectations are subject to numerous risks and uncertainties and the Trustee can give no assurance that they will prove correct. There are many factors, none of which are within the Trustee's control, that may cause such expectations not to be realized, including, among other things, factors such as actual oil and gas prices and the recoverability of reserves, capital expenditures, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets. Such forward looking statements generally are accompanied by words such as "estimate," "expect," "predict," "anticipate," "goal," "should," "assume," "believe," or other words that convey the uncertainty of future events or outcomes.
Commodity Prices
The Trust's income and monthly distributions 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. In 2020, there was 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 driven by a dispute between members of theOrganization of Petroleum Exporting Countries ("OPEC") andRussia over production cuts; however, prices increased significantly beginning in 2021 and continued into the second quarter of 2022 before falling a bit in the third quarter 2022. Factors which may affect commodity prices are discussed below and under "Item 1A-Risk Factors" in the Trust's Form 10-K for the year endedDecember 31, 2021 . A combination of these factors resulted in the price of oil falling below zero to$(37.63) per barrel of oil onApril 20, 2020 , and recovering the following day to$10.01 per barrel of oil. As ofOctober 31, 2022 , the price of oil was$86.54 per barrel. Factors that may impact future commodity prices, including the price of oil and natural gas, include but are not limited to: 16
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• political conditions in major oil producing regions, especially in theMiddle East andRussia ; • worldwide economic conditions; • weather conditions; • trade barriers; • public health concerns, including the COVID 19 pandemic; • the supply and price of domestic and foreign crude oil or natural gas; • the level of consumer demand; • the price and availability of alternative fuels; • the proximity to, and capacity of, transportation facilities; • the effect of worldwide energy conservation measures; and • the nature and extent of governmental regulation and taxation. Although the Trustee cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, gas royalty income for a given period generally relates to production three months prior to the period and crude oil royalty income for a given period generally relates to production two months prior to the period and will generally approximate current market prices in the geographic region of the production at the time of production. When crude oil and natural gas prices decline, the Trust is affected in two ways. First, distributable income from theRoyalty Properties is reduced. Second, exploration and development activity by operators on theRoyalty Properties may decline as some projects may become uneconomic and are either delayed or eliminated. It is impossible to predict future crude oil and natural gas price movements, and this reduces the predictability of future cash distributions to Unit holders.
Three Months Ended
For the quarter endedSeptember 30, 2022 , royalty income received by the Trust amounted to$27,323,759 compared to royalty income of$3,344,086 during the third quarter of 2021. The increase in royalty income is primarily attributable to an increase in oil and gas pricing and an increase in oil and gas production. Average oil and gas prices were$108.75 and$6.60 , respectively, for the quarter endingSeptember 30, 2022 compared to$68.34 and$3.36 for the quarter endedSeptember 30, 2021 . 17
-------------------------------------------------------------------------------- Interest income for the quarter endedSeptember 30, 2022 was$11,452 compared to$1,273 during the third quarter of 2021. The increase in interest income is primarily attributable to substantially increased amounts of funds available for investment. Total expenses during the third quarter of 2022 amounted to$136,712 compared to$361,096 during the third quarter of 2021. The decrease in total expenses can be primarily attributed to decreased expense for professional services, printing expenses and the timing of payment of expenses. These transactions resulted in distributable income for the quarter endedSeptember 30, 2022 of$27,198,499 or$0.58 per Unit of beneficial interest. Distributions of$0.163979 ,$0.195923 and$0.223645 per Unit were made to Unit holders of record as ofJuly 29, 2022 ,August 31, 2022 , andSeptember 30, 2022 , respectively. For the third quarter of 2021, distributable income was$2,984,263 or$0.06 per Unit of beneficial interest.
Royalty income for the Trust for the third quarter of the calendar year is
associated with actual oil and gas production for the period of May, June and
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Three Months Ended September 30, 2022 2021 Royalties: Oil sales (Bbls) 468,501 264,235 Gas sales (Mcf) 2,580,493 920,432
Properties From Which The Royalties Were Carved:
Oil: Total oil sales (Bbls) 612,050 342,171 Average per day (Bbls) 6,801 3,802 Average price per Bbl$ 108.75 $ 68.34 Gas: Total gas sales (Mcf) 3,434,117 1,221,263 Average per day (Mcf) 38,157 13,420 Average price per Mcf$ 6.60 $ 3.36 The average received price of oil increased to an average price per barrel of$108.75 in the third quarter of 2022, compared to$68.34 per Bbl in the third quarter of 2021 due to worldwide market variables. The average price of gas (including natural gas liquids) increased from$3.36 per Mcf in the third quarter of 2021 to$6.60 (including pricing for gas liquids) per Mcf in the third quarter of 2022 due to change in overall market variables. Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Oil sales volumes increased and gas sales volumes increased from theUnderlying Properties (as defined in the Trust's Annual Report on Form 10-K for the year endedDecember 31, 2021 ) for the applicable period in 2022 compared to 2021. Capital expenditures for drilling, remedial and maintenance activities on theWaddell Ranch properties during the third quarter of 2022 totaled$34.7 million (gross) as compared to$26.8 million (gross) for the third quarter of 2021. Blackbeard has previously informed the Trustee that the Trust's portion of the 2022 capital expenditures budget for theWaddell Ranch properties is$92.6 million . 19 -------------------------------------------------------------------------------- The Trustee has been advised that there were 10.1 (net to the Trust) workover wells completed, 12.4 (net to the Trust) new wells completed, 4.5 (net to the Trust) new wells in progress and 2.6 (net to the Trust) workover wells in progress during the three months endedSeptember 30, 2022 , as compared to 13.9 (net to the Trust) workover wells completed and 7.1 (net to the Trust) new wells completed, 9.4 (net to the Trust) new wells in progress, and 12.6 (net to the Trust) workover wells in progress for the three months endedSeptember 30, 2021 , on theWaddell Ranch properties. There were various facility projects in progress for the third quarter of 2022. Lease operating expenses and property taxes totaled$11.5 million (gross) for the third quarter of 2022, compared to$6.6 million (gross) for the same period in 2021 on theWaddell Ranch properties due to increased maintenance work.
Nine Months Ended
For the nine months endedSeptember 30, 2022 , royalty income received by the Trust amounted to$39,032,624 compared to royalty income of$8,409,389 for the nine months endedSeptember 30, 2021 . The increase in royalty income is primarily attributable to an increase in oil and gas pricing, also by an increase in oil and gas production, as compared to the nine months endedSeptember 30, 2021 .The Waddell Ranch properties did not contribute to royalty income for the nine months of 2021 due to excess costs. Average oil and gas prices were$96.49 and$5.56 for the nine months endedSeptember 30, 2022 compared to$58.79 and$2.92 for the nine months endedSeptember 30, 2021 . Interest income for the nine months endedSeptember 30, 2022 , was$14,470 compared to$3,859 during the nine months endedSeptember 30, 2021 . The increase in interest income is primarily attributable to substantially increased amounts of funds available for investment. Total expenses during the nine months endedSeptember 30, 2022 , amounted to$755,594 compared to$931,140 during the nine months endedSeptember 30, 2021 . The decrease in total expenses can be primarily attributed to decreased expenses for professional services, printing expenses and the timing expenses, including lack of contribution to the expense reserve in the current quarter. These transactions resulted in distributable income for the nine months endedSeptember 30, 2022 of$38,291,500 , or$0.82 per Unit. For the nine months endedSeptember 30, 2021 , distributable income was$7,482,108 , or$0.16 per Unit. Royalty income for the Trust for the nine months endedSeptember 30, 2022 , is associated with actual oil and gas production for the periodNovember 2021 throughJuly 2022 from the properties from which the Royalties were carved. Oil and gas sales attributable to the Royalties and the properties from which the Royalties were carved are as follows: 20 --------------------------------------------------------------------------------
Nine Months Ended 2022 2021 Royalties: Oil sales (Bbls) 1,254,088 647,695 Gas sales (Mcf) 6,653,864 2,646,613
Properties From Which The Royalties Were Carved:
Oil: Total oil sales (Bbls) 1,634,583 833,399 Average per day (Bbls) 9,031 4,604 Average price per Bbl$ 96.49 $ 58.79 Gas: Total gas sales (Mcf) 8,849,731 3,509,450 Average per day (Mcf) 48,894 19,389 Average price per Mcf$ 5.56 $ 2.92 The average received price of oil increased during the nine months endedSeptember 30, 2022 to$96.49 per barrel compared to$58.79 per barrel for the same period in 2021 due to worldwide market variables. The increase in the average price of gas (including natural gas liquids) from$2.92 per Mcf for the nine months endedSeptember 30, 2021 , to$5.56 per Mcf for the nine months endedSeptember 30, 2022 was due to change in overall market variables. Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Oil volume increased and gas sales volumes increased from the properties from which the Royalties are carved for the applicable period of 2022 compared to 2021. Capital expenditures for drilling, remedial and maintenance activities on theWaddell Ranch properties for the nine months endedSeptember 30, 2022 totaled$87.3 million (gross) compared to$46.8 million (gross) to the Trust for the same period in 2021. Blackbeard has previously advised the Trustee that the 2022 capital expenditures budget for theWaddell Ranch properties is$92.6 million (gross). As ofAugust 31, 2022 , approximately$62 million or 67% of the$92 million budget for 2022 has been expended, with the remaining 33% to be incurred through the remainder of the year. 21 -------------------------------------------------------------------------------- The Trustee has been advised that 30.4 (net to the Trust) workover wells were completed and 2.6 (net to the Trust) workover wells were in progress, along with 30 (net to the Trust) new drill wells completed and 4.5 (net to the Trust) waiting on completion on theWaddell Ranch properties during the nine months endedSeptember 30, 2022 , as compared to 32.3 (net to the Trust) workover wells completed and 25.6 (net to the Trust) workover wells in progress, along with 15.4 (net to the Trust) new wells completed and 16.9 (net to the Trust) waiting on completion, on theWaddell Ranch properties during the nine months endedSeptember 30, 2020 . All new wells drilled in 2022 have been fracturized, both vertical and horizontal, both oil and gas. There were various facility projects in progress for the first nine months of 2022. Lease operating expenses and property taxes totaled$31.3 million for the nine months endedSeptember 30, 2022 , compared to$13.3 million for the same period in 2021. The increase in lease operating expense is primarily attributable to increased spending on facilities and maintenance.
Calculation of Royalty Income
The Trust's royalty income is computed as a percentage of the net profit from the operation of the properties in which the Trust owns net overriding royalty interests. The royalty income received and recorded by the Trust was determined by the operator as noted below. These percentages of net profits are 75% and 95% in the case of theWaddell Ranch properties and the Texas Royalty properties, respectively. Royalty income received by the Trust for the three months endedSeptember 30, 2022 and 2021, respectively, were computed as shown in the table below: 22
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THREE MONTHS ENDED SEPTEMBER 30 2022 2021 WADDELL TEXAS WADDELL TEXAS RANCH ROYALTY RANCH ROYALTY PROPERTIES PROPERTIES PROPERTIES PROPERTIES Gross proceeds of sales from theUnderlying Properties Oil proceeds$ 60,385,100 $ 6,174,254 $ 19,713,038 $ 3,672,468 Gas proceeds 22,274,172 385,270 3,863,742 243,784 Other (adjustment) - - 10,589,056 (1) - Total 82,659,272 6,559,524 34,165,836 3,916,252 Less: Severance tax: Oil 2,714,747 230,721 908,600 144,455 Gas 1,391,246 22,867 69,456 11,706 Other 3,824,716 - - - Lease operating expense and property tax: Oil and gas 11,236,250 240,000 6,396,277 240,000 Capital expenditures 37,744,153 - 26,791,503 - Total 53,911,112 493,588 34,165,836 396,161 Net profits 28,748,160 6,065,936 - 3,520,091 Net overriding royalty interests 75 % 95 % 75 % 95 % Royalty income$ 21,561,120 5,762,639 $ - (1) 3,344,086
(1) Due to the NPI deficit, the
Royalty income for the three months endedSeptember 30, 2021 . As ofSeptember 30, 2022 , the cumulative NPI deficit was fully recovered. 23
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Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust's financial statements is included in Item 7 of the Trust's Annual Report on Form 10-K for the year endedDecember 31, 2021 . There have been no significant changes to the critical accounting policies during the nine months endedSeptember 30, 2022 .
Distributable Income Per Unit
Basic distributable income per Unit is computed by dividing distributable income by the weighted average of Units outstanding. Distributable income per Unit assuming dilution is computed by dividing distributable income by the weighted average number of Units and equivalent Units outstanding. The Trust had no equivalent Units outstanding for any period presented. Therefore, basic distributable income per Unit and distributable income per Unit assuming dilution are the same.
New Accounting Pronouncements
There are no new accounting pronouncements that are expected to have significant impact on the Trust's financial statements.
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