Liquidity and Capital Resources

The Trust makes monthly distributions to the holders of Units of the excess of the preceding month's royalty income received over expenses incurred. Upon receipt, royalty income is invested in short-term investments until its subsequent distribution. In accordance with the Trust Agreement, the Trust's only long-term assets consist of royalty interests in producing and proved undeveloped oil and gas properties. Although the Trust is permitted to borrow funds if necessary to continue its operations, borrowings are not anticipated in the foreseeable future.



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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 the Organization of Petroleum Exporting Countries ("OPEC") and Russia over production cuts; however, prices increased significantly beginning in 2021 and continuing into the first quarter of 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 ended December 31, 2021. A combination of these factors resulted in the price of oil falling below zero to $(37.63) per barrel of oil on April 20, 2020, and recovering the following day to $10.01 per barrel of oil. As of May 2, 2022, the price of oil was $105.18 per barrel. Factors that may impact future commodity prices, including the price of oil and natural gas, include but are not limited to:



     •    political conditions in major oil producing regions, especially in the
          Middle East and Russia;



  •   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 we 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 the Royalty Properties is reduced. Second, exploration and development activity by operators on the Royalty 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.



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Results of Operations

Distributable income consists of royalty income plus interest income plus any decrease in cash reserves established by the Trustee less general and administrative expenses of the Trust less any increase in cash reserves established by the Trustee. Distributable income for the three months ended March 31, 2022 was $23,014,480, or $1.58 per unit. Royalty income for the three months ended March 31, 2022 amounted to $23,930,315 while interest income was $2,748. General and administrative expenses totaled $918,583 for the three months ended March 31, 2022.

Distributions during the period were $0.876810, $0.374350, and $0.467170 per Unit payable to Unit holders of record on January 18, February 15, and March 15, 2022, respectively.

Royalty income for the quarter ended March 31, 2022 increased approximately $14,188,000 or 146% compared with the first quarter of 2021. This increase was primarily the result of higher prices for both oil and natural gas ($9.9 million) and higher production for oil and natural gas ($5.2 million). These increases were offset somewhat by higher taxes due mainly to the increase in revenues ($0.9 million). Included in the above increases were approximately $5.4 million in gross royalty income that was the result of 16 new horizontal wells in Panola County, Texas in the Haynesville shale zone. This would reflect an additional 850,000 Mcf of gas newly produced for this quarter compared to the first quarter of 2021.

Compared to the preceding quarter ended December 31, 2021, royalty income increased approximately $206,000 or 1%, due mainly to an increase in the price of both oil and natural gas ($4.9 million) along with lower taxes and operating expenses ($1.5 million) due mainly to the timing of payment of ad valorem taxes. These increases were offset somewhat by lower production for both oil and natural gas ($6.2 million).

The following table illustrates average prices received for the periods discussed above and the related oil and gas production volume:



                                              Quarter Ended
                               March 31,       March 31,       December 31,
                                 2022            2021              2021
              Production
              Oil (Bbls)          151,540         148,967            175,937
              Gas (Mcfs)        3,016,260       2,021,199          3,909,962
              Average Price
              Oil (per Bbl)   $     72.70     $     43.22     $        57.95
              Gas (per Mcf)   $      5.00     $      2.28     $         3.18



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Gas royalty income received for the three months ended March 31, 2022, related primarily to production for October through December 2021. The average price of gas reported by the Henry Hub for the same time period was $4.28 per Mcf. The average price of gas for the Henry Hub was $4.20 per Mcf for January through March 2022. Oil royalty income for the three months ended March 31, 2022 related primarily to production for November 2021 through January 2022. The average price of oil as reported by NYMEX for that time period was $77.82 per barrel. The average price of oil was $95.18 per barrel for January through March 2022. As of May 2, 2022, the average price of gas for the Henry Hub was $6.57 per Mcf and the average price of oil reported by NYMEX was $105.18 per barrel. It is difficult to estimate future prices of oil and gas, and any assumptions concerning future prices may prove to be incorrect.

Interest income for the quarter ended March 31, 2022 increased $1,400 compared with the first quarter of 2021. Compared to the preceding quarter ended December 31, 2021, interest income increased $1,200. Changes in interest income are the result of changes in interest rates and funds available for investment.

General and administrative expenses for the quarter ended March 31, 2022 increased by approximately $133,600 compared to the same quarter of 2021 primarily due the timing and payment of legal and professional services of approximately $142,300 and an increase in the Escrow Agent/Trustee fees of approximately $4,300. These increases were offset somewhat by a decrease due to the timing of payment of printing and unitholder information services of approximately $12,100.

Compared to the previous quarter ended December 31, 2021, general and administrative expenses increased approximately $154,300 primarily due to the timing of payment of the New York Stock Exchange listing fee of $74,000, the timing of payment of legal and professional services of approximately $50,300, the timing of payment of printing and unitholder services of approximately $26,900, and an increase in the Escrow Agent/Trustee fees of approximately $2,000.

The financial statements of the Trust differ from financial statements prepared in conformity with accounting principles generally accepted in the United States of America because of the following:



    •     Royalty income is recognized in the month received, pending verification
          of ownership and title, rather than in the month of production.



    •     Expenses other than those expected to be paid on the following monthly
          record date are not accrued.



    •     Amortization of the Royalties is shown as a reduction to Trust corpus and
          not as a charge to operating results.



    •     Reserves may be established for contingencies that would not be recorded
          under accounting principles generally accepted in the United States of
          America.

This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

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 ended December 31, 2021. There have been no significant changes to the critical accounting policies during the three months ended March 31, 2022.

Distributable Income per Unit

Basic distributable income per Unit is computed by dividing distributable income by the weighted average number 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 pronouncements that are expected to have a significant impact on the Trust's financial statements.



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Forward Looking Statements

This Report includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor created thereby. All statements other than statements of historical fact included in this Report are forward-looking statements. 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 is within the Trustee's control, that may cause such expectations not to be realized, including, among other things, factors identified in the Trust's most recent Annual Report on Form 10-K affecting oil and gas prices and the recoverability of reserves, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets.

The Trust has an Internet website and has made available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act at http://www.sbr-sabine.com as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC.

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