Introduction
The following discussion and analysis is intended to help the reader understand
the financial condition, results of operations, liquidity and capital resources
of SandRidge Mississippian Trust I (the "Trust"). This discussion and analysis
should be read in conjunction with the Trust's unaudited interim financial
statements and the accompanying notes included in this Quarterly Report and the
Trust's audited financial statements and the accompanying notes included in the
2020 Form 10-K. All information regarding operations has been provided to the
Trustee by SandRidge.
Overview
The Trust is a statutory trust created under the Delaware Statutory Trust Act.
The business and affairs of the Trust are administered by the Trustee and, as
necessary, the Delaware Trustee. The Trust's purpose is to hold the Royalty
Interests, to distribute to the Trust unitholders cash that the Trust receives
in respect of the Royalty Interests and to perform certain administrative
functions in respect of the Royalty Interests and the Trust units. Other than
the foregoing activities, the Trust does not conduct any operations or
activities. The Trustee has no involvement with, control or authority over, or
responsibility for, any aspect of the operations on or relating to the
properties in which the Trust has an interest. Prior to the sale of the Royalty
Interests on April 22, 2021 as discussed below under "-Early Termination of the
Trust," the Trust derived all or substantially all of its income and cash flow
from the Royalty Interests. The Trust is treated as a partnership for federal
income tax purposes.
Early Termination of the Trust. The trust agreement requires the Trust to
dissolve and commence winding up of its business and affairs if cash available
for distribution for any four consecutive quarters, on a cumulative basis, is
less than $1.0 million. As cash available for distribution for the four
consecutive quarters ended September 30, 2020, on a cumulative basis, totaled
approximately $815,000, the Trust will be required to dissolve and commence
winding up beginning as of the close of business on November 13, 2020.
Accordingly, the Trustee is required to sell all of the Trust's assets, either
by private sale or public auction, and distribute the net proceeds of the sale
to the Trust unitholders after payment, or reasonable provision for payment, of
all Trust liabilities, which is expected to include the establishment of cash
reserves in such amounts as the Trustee in its discretion deems appropriate for
the purpose of making reasonable provision for all claims and obligations of the
Trust, including any contingent, conditional or unmatured claims and
obligations, in accordance with the Delaware Statutory Trust Act. Among such
contingent, conditional or unmatured claims for which the Trustee expects it
will need to make provision out of the net proceeds of the sale are the Trust's
potential liabilities with respect to the Securities Litigation described under
"Legal Proceedings" in Note 5 to the unaudited interim financial statements
contained in Part I, Item 1 of this Quarterly Report. Such a reserve could
reduce or eliminate the amount of, or delay the timing of payment of, sale
proceeds that may be distributed to unitholders. Additionally, the sale process
will involve costs that will reduce the amounts of any distributions to
unitholders during the winding up period.
As required by the trust agreement, the Trustee engaged a third-party advisor to
assist with the marketing and sale of the Trust's assets. The advisor conducted
a bid solicitation process that concluded in February 2021, and the Trustee,
with the assistance of the advisor, after considering the proposed price,
financing conditions and other terms of each bid, selected what was determined
to be the strongest bid received. As provided in the trust agreement, SandRidge
has a right of first refusal with respect to any sale of assets to a third
party, and on March 29, 2021, the Trustee provided notice to SandRidge of the
third-party offer to purchase the assets of the Trust for a purchase price of
$4,850,000. On April 7, 2021, SandRidge notified the Trustee that SandRidge
would exercise its right of first refusal and would purchase the assets from the
Trust for the same purchase price. On April 22, 2021, the Trust and SandRidge
Exploration and Production, LLC (the "Purchaser"), a wholly owned subsidiary of
SandRidge, entered into a Purchase and Sale Agreement (the "Agreement") for the
sale of all of the Royalty Interests held by the Trust for a purchase price of
$4,850,000. The sale closed on April 22, 2021, with an effective date of April
1, 2021. Accordingly, because the Agreement entitles the Purchaser to the
revenues from the oil and natural gas production attributable to the Royalty
Interests since April 1, 2021, the Trust will not receive any further proceeds
from such production and therefore will not make any further regular quarterly
cash distributions to the Trust unitholders following the distribution to be
made on or before May 28, 2021 as described in "Liquidity and Capital
Resources-Future Trust Distributions to Unitholders" below.
Under the trust agreement, the Trustee is required to distribute to the Trust
unitholders on the quarterly cash distribution date in August 2021 the net
proceeds of the sale, after payment of expenses related to the sale, and less
any amounts withheld as cash reserves in such amounts as the Trustee in its
discretion deems appropriate for the purpose of making reasonable provision for
all claims and obligations of the Trust, including any contingent, conditional
or unmatured claims and obligations, as discussed above. As part of the winding
up process, the Trustee expects to file a Form 15 with the SEC to suspend the
Trust's reporting obligations under the Securities Exchange Act of 1934, as
amended, following the filing of the Trust's Quarterly Report on Form 10-Q for
the period ending June 30, 2021 in the third quarter of 2021. As a result, the
Trust's general and administrative expenses in periods after
12
--------------------------------------------------------------------------------
September 30, 2021 are expected to be substantially less than in prior periods.
However, as a result of the Trustee's establishment of a provision for the
Trust's potential liabilities under the Securities Litigation, the Trustee does
not expect that there will be cash available for distribution until the
Securities Litigation has been resolved. The Trust will remain in existence
until the filing of a certificate of cancellation with the Secretary of State of
the State of Delaware following the completion of the winding up process.
Impairment of Investment in Royalty Interests. During the three-month period
ended March 31, 2021, the Trust recorded an impairment to the carrying value of
the Investment in Royalty Interests of $0.9 million. The impairment resulted in
a non-cash charge to trust corpus and did not affect the Trust's distributable
income. During the three-month period ended March 31, 2020, the Trust recorded
an impairment to the carrying value of the Investment in Royalty Interests of
$3.3 million. See "Impairment of Investment in Royalty Interests" in Note 2 to
the unaudited interim financial statements contained in Part I, Item 1 of this
Quarterly Report for further discussion of the impairments.
Properties. As of March 31, 2021, the Trust's properties consisted of Royalty
Interests in oil and natural gas wells located in Alfalfa, Garfield, Grant and
Woods counties in Oklahoma.
Distributions. The Trust makes quarterly cash distributions of substantially all
of its cash receipts, after deducting amounts for the Trust's administrative
expenses and cash reserves withheld by the Trustee, on or about the 60th day
following the completion of each quarter.
Pursuant to Internal Revenue Code ("IRC") Section 1446, withholding tax on
income effectively connected to a United States trade or business allocated to
non-U.S. persons ("ECI") should be made at the highest marginal rate. Under IRC
Section 1441, withholding tax on fixed, determinable, annual, periodic income
from United States sources allocated to non-U.S. persons should be made at a 30%
rate unless the rate is reduced by treaty. This is intended to be a qualified
notice to nominees and brokers as provided for under Treasury Regulation
Section 1.1446-4(b) by the Trust, and while specific relief is not specified for
IRC Section 1441 income, this disclosure is intended to suffice. Nominees and
brokers should withhold at the highest marginal rate on the distribution made to
non-U.S. persons. The Tax Cuts and Jobs Act (the "TCJA") enacted in December
2017 treats a non-U.S. holder's gain on the sale of Trust units as ECI to the
extent such holder would have had ECI if the Trust had sold all of its assets at
fair market value on the date of the sale of such units. The TCJA also requires
a transferee of units to withhold 10% of the amount realized on the sale or
exchange of such units (generally, the purchase price) unless the transferor
certifies that it is not a nonresident alien individual or foreign corporation
or another exemption is available. Pursuant to final Treasury Regulations issued
on October 7, 2020, this new withholding obligation will become applicable to
transfers of units in publicly traded partnerships such as the Trust (which is
classified as a partnership for federal and state income tax purposes) occurring
on or after January 1, 2022.
Litigation. As described in more detail in Note 5 to the unaudited interim
financial statements contained in Part I, Item 1 of this Quarterly Report,
claims were brought against the Trust, SandRidge and others in a putative class
action during 2015. Regardless of the outcome of the litigation, the Trust may
incur expenses in defending the litigation, and any such expenses may increase
the Trust's administrative expenses significantly. Further, any costs incurred
by the Trust in connection with any settlement of or judgment in the litigation
could increase the Trust's administrative expenses significantly. As discussed
above under "-Early Termination of The Trust," the Trustee has established a
provision for the Trust's potential liabilities under the Securities Litigation,
as required by the Delaware Statutory Trust Act in connection with the early
termination of the Trust.
13
--------------------------------------------------------------------------------
Results of Trust Operations
The primary factors affecting the Trust's revenues and costs are the quantity of
oil, natural gas and NGL production attributable to the Royalty Interests and
the prices received for such production. Royalty income, post-production
expenses and certain taxes are recorded on a cash basis when net revenue
distributions are received by the Trust from SandRidge. Information regarding
the Trust's production, pricing and costs for the three-month periods ended
March 31, 2021 and 2020 is presented below.
Three Months Ended March 31,
2021(1) 2020(2)
Production Data
Oil (MBbls) 5 9
NGL (MBbls) 17 15
Natural gas (MMcf) 186 261
Total volumes (MBoe) 54 68
Average daily combined equivalent volumes (MBoe/d) 0.6 0.7
Well Data
Initial and Trust Development Wells producing - average 74 83
Revenues (in thousands)
Royalty income $ 732 $ 1,147
Total revenue 732 1,147
Expenses (in thousands)
Post-production expenses 128 190
Production taxes 44 69
Trust administrative expenses 377 477
Cash reserves withheld for current Trust expenses, net of amounts
used
103 (56)
Total expenses 652 680
Distributable income available to unitholders $ 80 $ 467
Average Prices
Oil (per Bbl) $ 38.06 $ 54.68
NGL (per Bbl) $ 10.62 $ 16.83
Natural gas (per Mcf) $ 1.83 $ 1.52
Total (per Boe) $ 13.58 $ 16.82
Average Prices - including impact of post-production expenses
Natural gas (per Mcf) $ 1.15 $ 0.79
Total (per Boe) $ 11.21 $ 14.01
Expenses (per Boe)
Post-production $ 2.37 $ 2.81
Production taxes $ 0.81 $ 1.03
____________________
1.Production volumes and related revenues and expenses for the three-month
period ended March 31, 2021 (included in SandRidge's February 2021 net revenue
distribution to the Trust) represent production from September 1, 2020 to
November 30, 2020.
2.Production volumes and related revenues and expenses for the three-month
period ended March 31, 2020 (included in SandRidge's February 2020 net revenue
distribution to the Trust) represent production from September 1, 2019 to
November 30, 2019.
14
--------------------------------------------------------------------------------
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31,
2020
Revenues
Royalty Income. Royalty income is a function of production volumes sold
attributable to the Royalty Interests and associated prices received. Royalty
income received during the three-month period ended March 31, 2021 totaled $0.7
million compared to $1.1 million received during the three-month period ended
March 31, 2020. The approximate $0.4 million decrease in royalty income
consisted of approximately $0.3 million attributable to a decrease in total
volumes produced and approximately $0.1 million attributable to a decrease in
prices received. The average number of producing wells in the three-month period
ended March 31, 2021 decreased by 9 from 83 in the three-month period ended
March 31, 2020 because wells that could not economically produce due to
continued declining production and current pricing were shut-in.
Expenses
Production Taxes. Production taxes are calculated as a percentage of oil and
natural gas revenues, net of any applicable tax credits. Production taxes for
the three-month period ended March 31, 2021 totaled approximately $0.1 million,
or $0.81 per Boe, and were approximately 5.9% of royalty income. Production
taxes for the three-month period ended March 31, 2020 totaled approximately $0.1
million, or $1.03 per Boe, and were approximately 6.0% of royalty income.
Distributable Income
Distributable income for the three-month period ended March 31, 2021 was
approximately $80,000, which included a net addition to the cash reserve for
payment of future Trust expenses of approximately $103,000, reflecting
approximately $480,000 withheld from the February 2021 cash distribution to
unitholders partially offset by approximately $377,000 used to pay Trust
expenses during the period. Distributable income for the three-month period
ended March 31, 2020 was approximately $467,000, which included a net reduction
to the cash reserve for payment of future Trust expenses of approximately
$56,000, reflecting approximately $421,000 withheld from the February 2020 cash
distribution to unitholders partially offset by approximately $477,000 used to
pay Trust expenses during the period.
Liquidity and Capital Resources
Following the sale of the Royalty Interests on April 22, 2021 as described above
under "Overview-Early Termination of the Trust," the Trust has no source of
liquidity or capital resources other than borrowings to fund administrative
expenses, including any amounts borrowed under SandRidge's loan commitment
described in Note 5 to the unaudited interim financial statements contained in
Part I, Item 1 of this Quarterly Report. The Trust's primary uses of cash are
distributions to Trust unitholders, including, if applicable, payment of Trust
administrative expenses, including any reserves established by the Trustee for
future liabilities, payment of applicable taxes and payment of expense
reimbursements to SandRidge for out-of-pocket expenses incurred on behalf of the
Trust. The Trust does not have any capital requirements related to drilling
wells or any other operating or capital costs related to the wells.
Administrative expenses include payments to the Trustee and the Delaware Trustee
as well as a quarterly fee of $50,000 to SandRidge pursuant to an administrative
services agreement. Each quarter, the Trustee determines the amount of funds
available for distribution. Available funds are the excess cash, if any,
received by the Trust from the sale of production attributable to the Royalty
Interests that quarter over the Trust's expenses for the quarter. If at any time
the Trust's cash on hand (including available cash reserves) is not sufficient
to pay the Trust's ordinary course administrative expenses as they become due,
the Trust may borrow funds from the Trustee or other lenders, including
SandRidge, to pay such expenses. The Trustee does not intend to lend funds to
the Trust. If such funds are borrowed, no further distributions will be made to
unitholders (except in respect of any previously determined quarterly
distribution amount) until the borrowed funds have been repaid. No such loan was
outstanding at March 31, 2021 or December 31, 2020.
Commencing with the distribution to unitholders paid in the first quarter of
2019, the Trustee withheld the greater of $35,000 or 3.5% of the funds otherwise
available for distribution each quarter to gradually increase cash reserves for
the payment of future known, anticipated or contingent expenses or liabilities
by a total of $425,000. In 2019, the Trustee withheld an aggregate of
approximately $152,000 from the funds otherwise available for distribution. In
2020, the Trustee withheld an aggregate of approximately $124,000 from the funds
otherwise available for distribution. In February 2021, in light of the early
termination of the Trust, the Trustee withheld approximately $96,000 from the
funds otherwise available for distribution, which was the remaining amount
needed to reach its targeted cash reserve.
15
--------------------------------------------------------------------------------
The Trust is highly dependent on its Trustor, SandRidge, for multiple services,
including administrative services such as accounting, tax preparation,
bookkeeping and informational services performed on behalf of the Trust, and
potentially for loans to pay Trust administrative expenses. The ability to
provide these services depends on the Trustor's future financial condition and
economic performance, access to capital, and other factors, many of which are
out of the control of the Trustor. The reduced demand for crude oil in the
global market resulting from the economic effects of the COVID-19 pandemic, and
the actions taken by the members of OPEC regarding production levels, have had,
and are likely to continue to have, a negative impact on the Trustor's financial
condition. This negative impact could affect the Trustor's ability to provide
services to the Trust.
Trust Distributions to Unitholders. During the three-month period ended
March 31, 2021, the Trust's distributions to unitholders totaled $0.1 million,
or $0.0029 per unit. See Note 3 to the unaudited interim financial statements
contained in Part 1, Item 1 of this Quarterly Report accompanying unaudited
financial statements for additional discussion of this distribution.
Future Trust Distributions to Unitholders. During the three-month production
period from December 1, 2020 to February 28, 2021, average oil prices increased
compared to the three-month period ended November 30, 2020. On April 26, 2021,
the Trust declared a cash distribution of $0.0110 per unit covering production
for the period. See "Distribution to Unitholders" in Note 6 to the unaudited
interim financial statements contained in Part I, Item 1 of this Quarterly
Report for additional discussion of this future distribution. As discussed above
under "Overview- Early Termination of the Trust," because the Agreement entitles
the Purchaser to the revenues from the oil and natural gas production
attributable to the Royalty Interests since April 1, 2021, the Trust will not
receive any further proceeds from such production and therefore will not make
any further regular quarterly cash distributions to the Trust unitholders
following the distribution to be made on or before May 28, 2021. See also
"Overview-Early Termination of the Trust" for discussion of the future
distribution, if any, of the net proceeds of the sale of the Trust's assets.
© Edgar Online, source Glimpses
SANDRIDGE MISSISSIPPIAN TRUST I 
