Introduction
The following discussion and analysis are intended to help the reader understand
the financial condition, results of operations, liquidity and capital resources
of SandRidge Permian Trust (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 was provided to the Trustee by Avalon.
Overview
The Trust is a statutory trust formed under the Delaware Statutory Trust Act
pursuant to a trust agreement, as amended and restated (the "Trust Agreement"),
by and among SandRidge Energy, Inc. ("SandRidge"), as Trustor, The Bank of New
York Mellon Trust Company, N.A., as Trustee (the "Trustee"), and The Corporation
Trust Company, as Delaware Trustee (the "Delaware Trustee").
The Trust holds overriding royalty interests (the "Royalty Interests") in
specified oil and natural gas properties located in Andrews County, Texas (the
"Underlying Properties"). The Royalty Interests were conveyed by SandRidge to
the Trust concurrent with the initial public offering of the Trust's common
units ("Trust Units") in August 2011 pursuant to the terms set forth in
conveyancing documents effective April 1, 2011 (the "Conveyances"). As
consideration for conveyance of the Royalty Interests, the Trust remitted the
proceeds of the offering, along with 4,875,000 Trust units and 13,125,000
subordinated units of the Trust ("subordinated units") to certain wholly-owned
subsidiaries of SandRidge.
Pursuant to a development agreement between the Trust and SandRidge, SandRidge
was obligated to drill, or cause to be drilled, 888 development wells within an
area of mutual interest located in Andrews County, Texas by March 31, 2016.
SandRidge fulfilled this obligation in November 2014. As no additional
development wells will be drilled, the production attributable to the Royalty
Interests is expected to decline each quarter during the remainder of its life.
As a result of SandRidge fulfilling its drilling obligation, in accordance with
the terms of the Trust Agreement, the subordinated units converted to Trust
units in January 2016. At October 31, 2018, SandRidge owned 13,125,000 Trust
units, or 25% of all Trust units.
On November 1, 2018, SandRidge sold all of its interests in the Underlying
Properties and all of its Trust units (the "Sale Transaction") to Avalon Energy
LLC, a Texas limited liability company ("Avalon"). The Conveyances permitted
SandRidge to sell all or any part of its interest in the Underlying Properties,
where the Underlying Properties were sold subject to and burdened by the Royalty
Interests. In connection with the Sale Transaction, Avalon and its affiliates
assumed all of SandRidge's obligations under the Conveyances and the Trust
Agreement and the administrative services agreement between SandRidge and the
Trust (the "Administrative Services Agreement") pursuant to which SandRidge and
Avalon have provided accounting, tax preparation, bookkeeping and informational
services to the Trust. In addition, SandRidge assigned its rights to Avalon
under the registration rights agreement between SandRidge and the Trust. As of
March 31, 2021, Avalon holds 13,125,000 Trust units, or 25% of all Trust units.
In connection with the Sale Transaction, Avalon obtained a revolving line of
credit from Washington Federal Bank, National Association, formerly known as
Washington Federal, National Association ("WaFed") pursuant to the terms of a
Loan Agreement and related security documents (the "WaFed Loan"). Avalon used
the proceeds of the WaFed Loan to fund a portion of the purchase price for the
interests in the Underlying Properties and Trust units acquired in the Sale
Transaction. The WaFed Loan is secured by a first lien mortgage on Avalon's
interest in the Underlying Properties and a pledge of the Avalon Trust units
(the "WaFed Collateral"). The Royalty Interests are not part of the WaFed
Collateral.
The Trust is passive in nature and neither the Trust nor the Trustee has any
control over, or responsibility for, any operating or capital costs related to
the Underlying Properties. The business and affairs of the Trust are
administered by the Trustee. The Trust Agreement generally limits the Trust's
business activities to owning the Royalty Interests and activities reasonably
related thereto, including activities required or permitted by the terms of the
Conveyances.
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The Trust makes quarterly cash distributions of substantially all of its cash
receipts, after deducting amounts for the Trust's administrative expenses,
property tax and Texas franchise tax and cash reserves withheld by the Trustee,
on or about the 60th day following the completion of each calendar quarter. Due
to the timing of the payment of production proceeds to the Trust attributable to
the Royalty Interests, each distribution covers production from a three-month
period consisting of the first two months of the most recently ended calendar
quarter and the final month of the previous calendar quarter.
Early Termination of the Trust and Going Concern
As discussed under "The May 2020 Quarterly Payment" below, during April 2020, as
a result of increased production costs necessary to operate the Underlying
Properties, coupled with the sharp decline in oil prices since the beginning of
2020, Avalon informed the Trustee that Avalon would be unable to pay on a timely
basis the quarterly distribution amount it owed to the Trust for the three-month
period ended March 31, 2020 and believed it would be unable to generate
sufficient cash for quarterly payments to the Trust for the foreseeable future
(based on then current oil and gas prices). As a result of improving oil prices,
the Trust was able to make quarterly distributions for the three-month periods
ended June 30, 2020 (which primarily relates to production attributable to the
Trust's Royalty Interests from March 1, 2020 to May 31, 2020) and September 30,
2020 (which primarily relates to production attributable to the Trust's Royalty
Interests from June 1, 2020 to August 31, 2020) of approximately $652,000 and
$1,732,000. There was no distribution for the three-month period ended
December 31, 2020 (which relates to production attributable to the Royalty
Interests from September 1, 2020 to November 30, 2020) as costs, charges and
expenses attributable to the Underlying Properties exceeded the revenue received
from the sale of oil, natural gas and other hydrocarbons produced from the
Underlying Properties. Although the Trust has announced a quarterly distribution
for the three-month period ended March 31, 2021 (which relates in part to
production attributable to the Royalty Interests from December 1, 2020 to
February 28, 2021) of approximately $1,470,000 (of which approximately $143,000
relates to production) to be paid as a part of the distribution to be made on or
before May 28, 2021 (the "May Distribution"), there is no assurance that Avalon
will be able to make payments to the Trust attributable to the Royalty Interests
in subsequent calendar quarters or pay the quarterly payment amount it owes the
Trust for the three-month period ended March 31, 2020 as discussed in "-The
May 2020 Quarterly Payment" below.
Avalon's Financial Condition. As previously reported in the Trust's Form 8-K
filed on April 23, 2020, Avalon informed the Trustee that during 2019, Avalon
repaired 29 producing Trust Wells (although not required to do so under the
terms of the Conveyances) to increase production. Avalon reported that the
working capital expended in this effort, combined with higher-than-expected
lease operating expenses ("LOE") and declining oil prices, contributed to an
operating loss for Avalon in 2019 and in 2020. Despite Avalon's efforts to
reduce LOE (including shutting in some oil and gas wells subject to the Royalty
Interests ("Trust Wells") that were not capable of producing oil and natural gas
in paying quantities, as permitted under the Conveyances, alternating production
to reduce electrical and other field operating costs, and staff lay-offs).
Furthermore, Avalon informed the Trustee that it was likely to shut in
additional Trust Wells, to further reduce LOE. The reduced demand for crude oil
in the global market resulting from the economic effects of the COVID-19
pandemic and the dramatic reduction from mid-February to late April 2020 in the
benchmark price of crude oil has had a further negative impact on Avalon's
financial condition resulting in Avalon shutting in additional non-economic
Trust Wells (which were not necessary to hold the leasehold interests burdened
by the Trust's Royalty Interests). Avalon shut in 139 Trust Wells and 114 Trust
Wells during the twelve-month periods ended December 31, 2019 and 2020,
respectively. No Trust Wells were shut in during the three-month period ended
March 31, 2021.
Given Avalon's financial condition, in early 2020 the Board of Managers of
Avalon decided to explore strategic alternatives with respect to its assets,
including the Underlying Properties and the Avalon Trust units. After a number
of discussions regarding a possible transaction with potential strategic
partners during the first half of 2020, on July 30, 2020, Avalon entered into a
letter agreement with Montare Resources I, LLC, a Texas limited liability
company ("Montare"), agreeing to negotiate exclusively with Montare regarding a
possible sale of Avalon assets, including the Underlying Properties, to Montare
and supporting Montare in any transaction negotiated with the Trust with respect
to the acquisition of all Trust units not owned by Montare. On the same date,
Avalon and WaFed entered into an amendment to the WaFed Loan that extended the
date on which Avalon was obligated to provide a reserve report to WaFed
(regarding the redetermination of the borrowing base) to September 15, 2020 and
required Avalon to pay off the WaFed Loan by October 15, 2020. In addition,
WaFed and Montare entered into a Participation Agreement with respect to the
WaFed Loan whereby Montare purchased an undivided participation interest in the
WaFed Loan and has the right to purchase the WaFed Loan in the event Avalon does
not meet the conditions of the amended WaFed Loan. As a result of its operating
loss in 2020 and 2019, Avalon's independent public accounting firm included a
going concern qualification in its audit report on Avalon's financial statements
for the fiscal year ended December 31, 2020.
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The May 2020 Quarterly Payment. In April 2020, Avalon also informed the Trustee
that Avalon had been using its commercially reasonable efforts to preserve the
oil and gas leases burdened by the Royalty Interests so that in the future,
assuming that oil prices returned to a profitable level, the Trust would still
hold its Royalty Interests, and Trust unitholders might have the opportunity to
receive future quarterly distributions. Avalon also informed the Trustee that it
believed that continuing production from those Trust Wells required to preserve
such leases was preferable to stopping production, as the failure to continue
production would result in a termination of Avalon's working interest in such
Trust Wells and, therefore, the Royalty Interests, which would have a material
adverse effect on the Trust's financial condition. Avalon reported to the
Trustee that Avalon therefore used revenues it received during the production
period from December 1, 2019 to February 29, 2020 to pay the operating expenses
necessary to maintain production from the Trust Wells and to pay oil and gas
lessor royalties, as the proceeds attributable to Avalon's net revenue interest
in the Underlying Properties was insufficient to cover all such costs. Avalon
had anticipated that revenues from production during the quarterly production
period commencing March 1, 2020 would be sufficient to fund the quarterly
payment to the Trust for the quarter ended March 31, 2020 in the amount of
approximately $4.65 million (the "May 2020 Quarterly Payment"); however,
revenues from production during that quarterly production period were
insufficient to generate the cash needed to make the May 2020 Quarterly Payment
to the Trust due to the sharp drop in crude oil prices during the first quarter
of 2020. Consequently, the Trustee was unable to make any quarterly distribution
to unitholders at the end of May 2020. In accordance with Section 5.02 of the
Conveyances, the unpaid May 2020 Payment amount due and owing to the Trust has
been accruing interest since May 15, 2020 at the rate of interest per annum
publicly announced from time to time by The Bank of New York Mellon Trust
Company, N.A. as its "prime rate" in effect at its principal office in New York
City until paid to the Trust. The accrued interest from May 15, 2020 to
March 31, 2021 was approximately $129,500.
On March 1, 2021, the Trust and Avalon entered into a repayment agreement
setting forth the terms by which Avalon has agreed to pay the May 2020 Quarterly
Payment to the Trust, together with accrued interest (the "Repayment
Agreement"). Beginning with the quarterly distribution paid to Trust unitholders
on or about February 26, 2021 (the "February Distribution"), Avalon will apply
towards the payment of the May 2020 Quarterly Payment the full amount of each
quarterly cash distribution, if any, to which Avalon, as a unitholder of the
Trust, is entitled (each such cash distribution, a "Company Distribution
Amount"), until the May 2020 Quarterly Payment, together with accrued interest,
has been paid in full to the Trust, subject to any obligations Avalon may have
to repay the revolving line of credit Avalon had previously obtained from WaFed
pursuant to the terms of the WaFed Loan as provided in the Agreement. Promptly
following the February Distribution, Avalon deposited its portion of the
February Distribution, which was $984,375, into a repayment account established
by the Trustee on behalf of the Trust (the "Repayment Account"), as an initial
payment toward the May 2020 Quarterly Payment, and that amount is included in
the calculation of the quarterly distribution for the May Distribution.
The Repayment Agreement also provides that if any third party agrees to acquire
Avalon, whether pursuant to a merger, consolidation, purchase of all or
substantially all of the assets of Avalon, or other similar transaction or
series of transactions (an "Avalon Sale Transaction"), then, subject to any
obligations Avalon may have to repay the WaFed Loan in connection with any such
transaction that are not waived as provided in the Repayment Agreement, Avalon
will pay to the Trust from cash received in an Avalon Sale Transaction an amount
equal to (i) the difference between (A) the aggregate amounts deposited in the
Repayment Account pursuant to the Agreement at the time the Avalon Sale
Transaction is consummated and (B) the then outstanding balance of the May 2020
Quarterly Payment together with all accrued and unpaid interest thereon to the
date of payment of such outstanding balance (the "Balance Amount") or (ii) where
the amount of cash received in the Avalon Sale Transaction is less than the
Balance Amount, all of the cash received in the Avalon Sale Transaction. Avalon
agrees that it will pay such amount to the Trust promptly, but in no event later
than the next business day, after the closing of any such Avalon Sale
Transaction. If Avalon is unable to pay the Balance Amount in full upon the
closing of an Avalon Sale Transaction, Avalon has agreed, subject to any
obligations Avalon may have to repay the WaFed Loan in connection with any such
transaction that are not waived as provided in the Repayment Agreement, to
pledge to the Trust, to secure the payment of the outstanding portion of the
Balance Amount, any non-cash consideration that Avalon receives from such Avalon
Sale Transaction or similar transaction.
Sale of Assets by Avalon to Montare. On August 26, 2020, Montare, Avalon and
certain of their respective affiliates entered into a Contribution and Support
Agreement, pursuant to which Avalon, among other things, (i) agreed, subject to
certain conditions, to contribute all of the assets held by Avalon and its
affiliates, including the Underlying Properties and the Avalon Trust units, to
Montare in exchange for interests in Montare or an affiliate thereof (the
"Contribution Transaction"), (ii) agreed to support Montare's acquisition of all
of the issued and outstanding Trust units not owned by Avalon by means of a
transaction with the Trust or as otherwise determined by Montare in its sole
discretion (the "Montare Transaction"), and any related actions taken by Montare
with respect to the Montare Transaction, including by exercising any of Avalon's
rights under the Trust Agreement, (iii) granted exclusivity and an irrevocable
proxy to Montare to vote all Trust units beneficially owned by Avalon in
connection with the Montare Transaction, and (iv) to not take any action that,
directly or indirectly, is detrimental to or hinders Montare's ability to
consummate the Montare Transaction. The consummation of the Contribution
Transaction is subject to certain conditions, including Montare's determination
in its sole and absolute discretion that all conditions necessary for the
consummation of the Montare Transaction have been satisfied or waived. After
preliminary discussions between Montare and the Trust regarding the Montare
Transaction ended (as previously reported by Avalon and Montare in Amendment
No. 3 to their joint Schedule 13D filed on September 8, 2020 and by the Trust in
its Form 8-K filed on September 8, 2020), Montare and Avalon amended the
Contribution and Support Agreement effective October 12, 2020. As amended, the
Contribution and Support Agreement contemplates a sale of Avalon assets having a
value of less than $5.0 million, in accordance with the terms of the Trust
Agreement, to Montare free from and unburdened by the applicable portion of the
Royalty Interests held by the Trust.
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On October 12, 2020, Montare and Avalon entered into a Purchase and Sale
Agreement, effective as of September 1, 2020, whereby Avalon sold wells and
related assets associated with certain Underlying Properties to Montare,
unburdened by the applicable portion of the Royalty Interests held by the Trust,
for approximately $4.9 million in accordance with Avalon's contractual rights
set forth in the Trust Agreement and the Conveyances (the "Montare Sale"). Prior
to the Montare Sale, Avalon engaged an independent petroleum engineering firm to
determine the fair value of substantially all wells burdened by the Trust's
Royalty Interests (the "Trust Wells"). A copy of the independent petroleum
engineering firm's valuation report has been provided to the Trustee. Avalon
informed the Trustee that Avalon then sold to Montare those Trust Wells having a
collective value of approximately $4.9 million, retaining ownership of the 65
most valuable Trust Wells burdened by Royalty Interests. The wells sold to
Montare include 483 shut-in wells and 338 other wells with negative present
value and 428 wells with positive present value. The wells sold to Montare
represented approximately 76% of production attributable to the Trust's Royalty
Interests for the month ended May 31, 2020 (the most recent month prior to the
sale for which production data was available). The Royalty Interests released by
the Trust in connection with the Montare Sale represented approximately 32% of
the fair value of the Royalty Interests at September 1, 2020.
As previously reported by the Trust in its Form 8-K filed October 14, 2020,
Avalon notified the Trust of the Montare Sale on October 13, 2020. As required
by the terms of the Trust Agreement, an officer of Avalon certified to the Trust
that (i) the gross purchase price received by Avalon for the sale of the
specified Trust Wells was less than $5 million and (ii) the cash proceeds
received by the Trust in respect of the Royalty Interests to be released in
connection with such sale represents Fair Value (as defined in the Trust
Agreement) to the Trust for such Royalty Interests. The Montare Sale was
completed on October 13, 2020, and all of the approximately $4.9 million of
proceeds that Avalon received from such sale were paid to the Trust as fair
value for the Royalty Interests required to be released by the Trustee in
connection with the Montare Sale in accordance with Section 3.02 of the Trust
Agreement. On February 26, 2021, the Trust distributed net sales proceeds of
approximately $3.9 million, which represented the amount paid to the Trust by
Avalon as fair value for the Royalty Interests required to be released less
approximately $884,000 withheld by the Trustee toward its targeted cash reserve,
to Trust unitholders in accordance with the terms of the Conveyances granting
the Royalty Interests to the Trust. As provided in the Trust Agreement, the
sales proceeds of approximately $4.9 million received by the Trust from Avalon
is not included in the calculation of the cash available for distribution from
royalty payments by Avalon and, therefore, did not affect the timing of the
dissolution of the Trust.
On October 30, 2020, Avalon and WaFed entered into the third amendment to the
WaFed Loan that (i) extends the date by which Avalon is required to provide a
reserve report of an independent petroleum engineer to WaFed (regarding the
redetermination of the WaFed Loan borrowing base) to April 15, 2021,
(ii) requires Avalon to pay off the WaFed Loan by April 15, 2021, and
(iii) provides a partial release of Trust Wells located on certain of the
Underlying Properties in connection with the Montare Sale. In addition, WaFed
and Montare modified the Participation Agreement, and Montare purchased an
additional interest in the WaFed Loan.
Effective April 15, 2021, Avalon and WaFed entered into a fourth amendment to
the WaFed Loan. This amendment (i) extends the date by which Avalon is obligated
to provide a reserve report of an independent petroleum engineer to WaFed
(regarding the redetermination of the borrowing base) to December 15, 2021,
(ii) provides a partial waiver of violations of financial covenants to
December 15, 2021, and (iii) requires Avalon to pay off the loan on the earlier
to occur of the date that the Contribution and Support Agreement by and between
Montare and Avalon is consummated or December 15, 2021. In addition, Montare and
WaFed modified the Participation Agreement with Montare purchasing an additional
interest in the WaFed Loan and agreeing to further purchases of additional
interests in the future.
Liquidation 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 $5.0 million. Cash available for distribution for the four consecutive
quarters ended December 31, 2020, on a cumulative basis, totaled approximately
$2.4 million, due in part to Avalon's inability to make the distribution payment
for the three-month period ended March 31, 2020 (which primarily relates to
production attributable to Royalty Interests from December 1, 2019 to
February 29, 2020) (the "May 2020 Quarterly Payment") to the Trust. Because
Avalon's inability to make the May 2020 Quarterly Payment contributed to the
insufficient cumulative cash available for distribution over the four-quarter
period, the Trustee and Avalon submitted to an arbitration panel, in accordance
with the Trust Agreement, the question of whether the Trust nonetheless remains
required to dissolve following the end of that period. On February 25, 2021, the
arbitration panel determined that the existence of the unpaid May 2020 Quarterly
Payment does not alter the requirement of the Trust to terminate under the
provisions of the Trust Agreement. As a result, the Trust was required to
dissolve and commence winding up beginning as of the close of business on
February 26, 2021, which raises substantial doubt regarding the Trust's ability
to continue as a going concern within one year from the issuance of these
financial statements.
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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. The sale
process will involve costs that will reduce the amounts of any distributions to
Trust unitholders during the winding up period. As required by the Trust
Agreement, the Trustee has engaged a third-party advisor to assist with the
marketing and sale of the Royalty Interests. As provided in the Trust Agreement,
Avalon has a right of first refusal with respect to any sale of Royalty
Interests to a third party. The Trustee expects to complete the sale of the
Royalty Interests by the end of the third quarter of 2021 and distribute the net
proceeds of the sale to the Trust unitholders on the following quarterly payment
date, and the Trust units are expected to be canceled shortly thereafter.
Pending the sale or sales of the Royalty Interests, and subject to the effective
date and other terms of such sale or sales, the Trust will continue to
distribute income, if any, received from Avalon attributable to the Royalty
Interests and will continue to make quarterly distributions to Trust unitholders
to the extent there is available cash after payment of Trust expenses and
additions to cash reserves, if any, as well as any payments received from Avalon
in satisfaction of the May 2020 Quarterly Payment. 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.
Properties. As of March 31, 2021, the Trust's assets consisted of Royalty
Interests that burden the Trust Wells, all of which are located in Andrews
County, Texas.
Distributions.The Trust makes quarterly cash distributions of substantially all
of its cash receipts, after deducting amounts for the Trust's administrative
expenses, property tax and Texas franchise tax and cash reserves withheld by the
Trustee, on or about the 60th day following the completion of each quarter.
Trust unitholders are responsible for all federal and state tax liabilities
associated with distributions they receive from the Trust.
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 Trust units. The
TCJA also requires a transferee of Trust 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 non-resident alien individual
or foreign corporation or another exception 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.
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Results of Trust Operations
Historically, the primary factors affecting the Trust's revenues and costs are
the quantity of oil, natural gas and NGL production from the Trust Wells, the
prices received for such production and post-production costs (primarily
transportation). Royalty income, post-production expenses and certain taxes are
recorded on a cash basis when net revenue distributions attributable to the
Royalty Interests are received by the Trust from Avalon. Information regarding
the revenue from the production and sale of oil, natural gas and NGL
attributable to the Royalty Interests, the prices received by Avalon from
marketing such hydrocarbons and the costs associated with the production of such
hydrocarbons 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) 17 93
NGL (MBbls) 2 10
Natural gas (MMcf) 6 39
Combined equivalent volumes (MBoe) 20 110
Average daily combined equivalent volumes (MBoe/d) 0.2 1.2
Well Data
Trust Wells producing - average 63 1,025
Revenues (in thousands)
Royalty income $ 666 $ 5,289
Total revenue 666 5,289
Expenses (in thousands)
Post-production expenses 1 15
Production taxes 32 254
Property taxes (3) (343 ) 1,676
Trust administrative expenses 380 708
Cash reserves used (withheld) for current Trust expenses,
net of amounts withheld (used)
1,534 (1,574 )
Total expenses 1,604 1,079
Proceeds derived from sale of Trust assets 4,874 -
Distributable income available to unitholders $ 3,936 $ 4,210
Average Prices
Oil (per Bbl) $ 36.18 $ 53.93
NGL (per Bbl) $ 16.41 $ 19.48
Natural gas (per Mcf) $ 1.06 $ 0.92
Total (per Boe) $ 33.01 $ 47.89
Average Prices - including impact of post-production
expenses
Natural gas (per Mcf) $ 0.82 $ 0.53
Total (per Boe) $ 32.94 $ 47.76
Expenses (per Boe)
Post-production production $ 0.07 $ 0.14
Production taxes $ 1.57 $ 2.31(1) Production volumes and related revenues and expenses for the three-month
period ended March 31, 2021 (included in Avalon'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 Avalon's February 2020 net revenue
distribution to the Trust) represent production from September 1, 2019 to
November 30, 2019.
(3) Represents portion of 2020 Ad Valorem Tax attributable to the assets sold by
Avalon to Montare in October 2020 reimbursed by Montare in February 2021.
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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 by
Avalon attributable to the Royalty Interests and associated prices received.
Royalty income received during the three-month period ended March 31, 2021
totaled approximately $0.7 million compared to $5.3 million received during the
three-month period ended March 31, 2020. The approximate $4.6 million decrease
in royalty income consisted of approximately $4.3 million attributable to a
decrease in total volumes produced and approximately $0.3 million attributable
to a decrease in prices received. Sales volumes were lower than the previous
period primarily due to the sale of certain assets by Avalon to Montare in
October 2020.
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 $1.57 per Boe, and were approximately 4.7% of royalty income. Production
taxes for the three-month period ended March 31, 2020 totaled approximately $0.3
million, or $2.31 per Boe, and were approximately 4.8% of royalty income.
Trust Administrative Expenses. Trust administrative expenses generally consist
of fees paid to the Trustee and the Delaware Trustee, administrative services
fees paid to Avalon, tax return and related form preparation fees, legal and
accounting fees, and other expenses incurred as a result of being a publicly
traded entity. Trust administrative expenses for the three-month period ended
March 31, 2021 totaled approximately $0.4 million compared to approximately $0.7
million for the three-month period ended March 31, 2020. The decrease during the
2021 period primarily relates to the timing of administrative expense payments.
Distributable Income
Distributable income for the three-month period ended March 31, 2021 was $3.9
million, which included a net addition of approximately $1.5 million to the cash
reserve for the payment of future Trust expenses, reflecting approximately $1.6
million withheld from the February 2021 cash distribution to unitholders
partially offset by approximately $0.4 million used to pay Trust expenses during
the period. Distributable income for the three-month period ended March 31, 2020
was $4.2 million, which included a net reduction of approximately $1.6 million
to the cash reserve for the payment of future Trust expenses, reflecting
approximately $2.4 million used to pay Trust expenses during the period
partially offset by approximately $0.8 million withheld from the February 2020
cash distribution to unitholders.
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other than cash flow
generated from the Royalty Interests and borrowings to fund administrative
expenses, including any amounts borrowed under Avalon's loan commitment
described in Note 6 to the unaudited interim financial statements contained in
Part I, Item 1 of this report. The Trust's primary uses of cash are
distributions to Trust unitholders, the payment of Trust administrative
expenses, establishing reserves (as determined by the Trustee) for future
liabilities, the payment of applicable taxes and the payment of expense
reimbursements to Avalon for out-of-pocket expenses incurred on behalf of the
Trust. The Trust does not have any obligation to pay any costs associated with
the operation of the Trust Wells.
Administrative expenses include payments to the Trustee and the Delaware Trustee
as well as a quarterly fee of $75,000 paid to Avalon pursuant to the
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 less related production expenses and taxes during 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 Avalon, to pay such expenses.
The Trustee does not intend to lend funds to the Trust. Pursuant to the Trust
Agreement, 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, Avalon (as the assignee of SandRidge) will, at the
Trustee's request, loan funds to the Trust necessary to pay such expenses. Any
funds loaned by Avalon pursuant to this commitment will be limited to the
payment of current accounts payable or other obligations to trade creditors in
connection with obtaining goods or services or the payment of other current
liabilities arising in the ordinary course of the Trust's business, and may not
be used to satisfy Trust indebtedness, or to make distributions. If Avalon loans
funds pursuant to this commitment, no further distributions will be made to
unitholders (except in respect of any previously determined quarterly cash
distribution amount) until such loan is repaid in full, with interest, unless
Avalon consents to any further distributions. Any such loan will be on an
unsecured basis, and the terms of such loan will be substantially the same as
that which would be obtained in an arm's length transaction between Avalon and
an unaffiliated third party. No such loan was outstanding at March 31, 2021 or
December 31, 2020, and given Avalon's current financial condition, as further
discussed under "Early Termination of the Trust and Going Concern-Avalon's
Financial Condition" above, it is unlikely such loan could be made.
21
Commencing with the distribution to unitholders paid in the first quarter of
2019, the Trustee withheld the greater of $190,000 or 3.5% of the funds
otherwise available for distribution to Trust unitholders each quarter to
gradually increase cash reserves for the payment of future known, anticipated or
contingent expenses or liabilities by a total of approximately $3,275,000. In
light of the fact that there would be no distribution from production for the
three-month period ended December 31, 2020 (with respect to production
attributable to the Trust's royalty interests from September 1, 2020 to
November 30, 2020), the Trustee elected to withhold approximately $884,000, the
remaining amount needed to reach its targeted cash reserve, in connection with
the distribution made in February 2021. Cash held in reserve will be invested as
required by the Trust Agreement. Any cash reserved in excess of the amount
necessary to pay or provide for the payment of future known, anticipated or
contingent expenses or liabilities of the Trust eventually will be distributed
to unitholders, together with interest earned on the funds. The Trustee may
increase or decrease the targeted cash reserve amount at any time, and may
increase or decrease the rate at which it withholds funds to build the cash
reserve at any time, without advance notice to Trust unitholders.
Reliance on Avalon. The Trust is highly dependent on Avalon for multiple
services, including the operation of the Trust Wells, remittance of net proceeds
from the sale of associated production to the Trust, administrative services
such as accounting, tax preparation, bookkeeping, regulatory filings and
information services performed on behalf of the Trust, and potentially for loans
to pay Trust administrative expenses. Avalon is a relatively new oil and gas
company formed in August 2018 with no prior operating history. Avalon's ability
to continue operating the Underlying Properties depends on its future financial
condition and economic performance, access to capital, and other factors, many
of which are out of Avalon's control. If the reduced demand for crude oil in the
global market resulting from the economic effects of the COVID-19 pandemic and a
low benchmark price of crude oil persist for the near term or longer, such
factors are likely to have a negative impact on Avalon's financial condition.
This negative impact could affect Avalon's ability to operate the Trust Wells
and provide services to the Trust.
2021 Trust Distributions to Unitholders. On February 28, 2021, the Trust paid a
cash distribution of $0.075 per Trust unit reflecting the fair value to the
Trust, less cash reserves withheld by the Trustee, received by the Trust for the
portion of the Trust's Royalty Interests required to be released in connection
with the Montare Sale. There was no distribution paid for the three-month period
ended December 31, 2020, which primarily related to production attributable to
the Trust's royalty interests from September 1, 2020 to November 30, 2020, as
costs, charges and expenses attributable to the Underlying Properties were more
than the revenue received from the sale of oil, natural gas and other
hydrocarbons produced from such properties, as reported by Avalon.
Repayment Agreement. On March 1, 2021, as previously disclosed, the Trust and
Avalon entered into the Repayment Agreement. Beginning with the
February Distribution, Avalon will apply towards the payment of the May 2020
Quarterly Payment the full amount of each quarterly cash distribution, if any,
to which Avalon, as a unitholder of the Trust, is entitled (each such cash
distribution, a "Company Distribution Amount") until the May 2020 Quarterly
Payment, together with accrued interest, has been paid in full to the Trust,
subject to any obligations Avalon may have to repay the revolving line of credit
Avalon had previously obtained from WaFed pursuant to the terms of the WaFed
Loan as provided in the Agreement. Promptly following the February Distribution,
Avalon deposited its portion of the February Distribution, which was $984,375,
into the Repayment Account, as an initial payment toward the May 2020 Quarterly
Payment, and that amount is included in the calculation of the quarterly
distribution for the three-month period ended March 31, 2021. In addition,
Avalon will deposit a Company Distribution Amount relating to the
May Distribution, or $367,500, into the Repayment Account, promptly, but in no
event later than the next business day, after the Company's receipt thereof, and
that amount will be included in the calculation of the quarterly distribution
for the three-month period ending June 30 2021. As of April 30, 2021, the
outstanding balance of the May 2020 Quarterly Payment, together with accrued
interest, that Avalon owes the Trust is $3,809,325.
22
Future Trust Distributions to Unitholders. During the three-month production
period from December 1, 2020 to February 28, 2021, combined sales volumes were
significantly lower than the previous comparable period due in large part to a
significant reduction in the number of oil and gas wells burdened by Royalty
Interests due to the Montare Sale. On April 27, 2021, the Trust declared a
quarterly distribution for the three-month period ended March 31, 2021 of
approximately $1.5 million, or $0.028 per unit. This distribution relates in
part to oil and gas production attributable to the Royalty Interests for the
period, as well as to (1) a reimbursement by Montare of a portion of property
taxes attributable to assets sold by Avalon to Montare in October 2020 and
(2) the distribution Avalon received in February 2021 and returned to the Trust
pursuant to the terms of the Repayment Agreement. The distribution will be paid
on or about May 28, 2021 to record unitholders as of May 14, 2021 and was
calculated as follows (in thousands, except for unit and per unit amounts):
Revenues
Royalty income $ 620
Total revenues 620
Expenses
Post-production expenses 1
Production taxes 30
Cash reserves withheld by Trustee (1) 446
Total expenses 477
Distributable income $ 143
Ad Valorem Tax Reimbursement (2) 343
Company Distribution Amount (3) 984
Distributable income available to unitholders $ 1,470
Distributable income per unit (52,500,000 units issued and outstanding) $ 0.028
(1) Includes amounts withheld for payment of future Trust administrative
expenses.
(2) Represents that portion of 2020 Ad Valorem Tax attributable to the assets
sold by Avalon to Montare in October 2020 reimbursed by Montare in
February 2021.
(3) Represents Avalon's deposited portion of the February Distribution as part
of the Repayment Agreement.
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SANDRIDGE PERMIAN TRUST 
