UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

for the Quarterly Period Ended March 31, 2023

or

for the transition period from _____ to _____

Commission File No. 001-08032

SAN JUAN BASIN ROYALTY TRUSTSAN JUAN BASIN ROYALTY TRUST

(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)

PNC Bank, National Association

PNC Asset Management Group

2200 Post Oak Blvd, Floor 18

Houston, Texas 77056

(Address of principal executive offices) (Zip Code)

(866) 809-4553

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Number of Units of beneficial interest outstanding at November 14, 2022:May 15, 2023: 46,608,796

Table of Contents

SAN JUAN BASIN ROYALTY TRUST

PART I

FINANCIAL INFORMATION

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

1. Basis of Presentation

The preceding condensed statement of assets, liabilities and trust corpus as of December 31, 2021,2022, which has been derived from audited financial statements, and the unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2021.2022. In the opinion of PNC Bank, National Association, the trustee of the Trust (“PNC Bank” or the “Trustee”), and based upon information provided to the Trust by Hilcorp San Juan L.P. (“Hilcorp”), the present owner of certain oil and gas interests (the “Subject Interests”) originally owned by Southland Royalty Company (“Southland”) in properties located in the San Juan Basin of northwestern New Mexico, all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at September 30, 2022,March 31, 2023, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2022March 31, 2023 and 2021.2022. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

The financial statements of the Trust are prepared on the following basis and are not intended to present the financial position and results of operations of the Trust in conformity with U.S. generally accepted accounting principles (“GAAP”):

The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for liabilities and contingencies, which would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid, instead of when incurred; and amortization of the Royalty is calculated on a unit-of-production basis and is charged directly to trustthe Trust corpus instead of as an expense. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received, or when expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements. This comprehensive basis of accounting corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

The Trustee routinely reviews the Trust’s royalty interests in oil and natural gas and oil properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is charged directly to trustthe Trust corpus instead of as an expense. There was no impairment of the Trust’s assets as of September 30, 2022.March 31, 2023.

2. Federal Income Taxes

For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment trust (“WHFIT”) classified as a non-mortgage widely held fixed investment trust (“NMWHFIT”) for federal income tax purposes. The Trustee is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.

The Royalty constitutes an “economic interest” in oil and natural gas and oil properties for federal income tax purposes. Unit Holders must report their share of the production revenues of the Trust as ordinary income from oil and natural gas and oil royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.

Under present law, the Trust’s production and sale of natural gas from Coal Seam Wells does not qualify for tax credit under Section 45K of the Code (the “Section 45 Tax Credit”). Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trust’s current production for such credit has been enacted. No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.

The classification of the Trust’s income, for purposes of the passive loss rules, may be important to a Unit Holder. Royalty Income, such as that derived through the Trust, will generally be treated as portfolio income that may not be offset or reduced by passive losses.

TaxThe Trustee is of the opinion that the material tax positions taken by the Trust related to the Trust’s pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that the material tax positions it has taken would more likely than not be sustained by examination. As of September 30, 2022,March 31, 2023, the Trust’s tax years 20182019 and thereafter remain subject to examination.

Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holder’s interest in the Trust.

3. Commitments and Contingencies

Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders. See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to recovery of costs.

Covid-19 Pandemic. Hilcorp informed the Trust that it does not have anything specifically to comment on regarding the Covid-19 pandemic.

Geo-Political Uncertainties. Hilcorp informed the Trust that it does not have anything specifically to comment on regarding the war in Ukraine.

Gross Proceeds and Production Cost EstimatesEstimates.. Hilcorp’s process In January 2023, Hilcorp notified the Trust that the accounting project begun in 2021 to review the production volume allocations for 2017 through 2020 had been completed. These reallocations affected the volumes for many of reconciling actual revenuethe Trust properties and may result in revisions to revenues and severance taxes; adjustments will be forthcoming. On February 17, 2023, Hilcorp presented initial proposed adjustments for 2017 revenues, but these adjustments are still under review by the Trustee and Hilcorp. The 2017 adjustments may result in additional revenues to the Trust. Upon completion of the final adjustments for 2017 revenues, proposed adjustments for subsequent years will be presented by Hilcorp.

Hilcorp began transitioning to a new accounting system effective with January 2021 production (March 2021 reporting month), and it initially reported estimated revenues and severance taxes to previously reported estimates (whichon the Trust refers to as “true-ups”) were still occurring and being reported in 2022. At the beginning of 2021, Hilcorp informed the Trust that it planned to refine further its estimating and reporting processes and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods. As part of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain periods. Thus, distributions to the Trust from Hilcorp in certain months during 2021 and 2022 were subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

Trust. Hilcorp informed the Trust that it completed the transition to its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August 2021 reporting month). Hilcorp’s process of reconciling actual revenue and that it has reversedseverance taxes to the previously reported estimates (which the Trust refers to as “true-ups”), and rebooked revenuethe reversal and rebooking of the actualized revenues for certain prior periods. As of December 31, 2021 Hilcorp believes that all prior month true-ups have been completed for operated wells. The true-ups of revenuesproduction months for non-operated properties, for the 2021 distribution periods werewas completed in the February and March 2022 reporting months.

The amount of Gross Proceeds depends on the volumes of natural gasDuring 2022, various adjustments were made for 2021 and oil produced from the Subject Interests. Under the terms of the Indenture, the Trust cannot acquire new natural gas and oil assets, and2022 production periods as a result Royalty Income is dependent on the natural gas and oil volumes attributable to the Subject Interests. Although Hilcorp and other operatorsof Hilcorp’s process review of the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets;new accounting system. Hilcorp has informed the TrustTrustee that it is unablehas implemented additional controls to estimateenhance the productive lifereporting process and reduce the need for future corrections. Hilcorp has indicated that it will coordinate with the Trustee on the timing of any further adjustments, following which the Trustee will communicate that timing to investors.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust’s third-party compliance auditors continue to audit payments made by Hilcorp to the Trust, inclusive of sales revenues, production costs, capital expenditures, adjustments, actualizations, and recoupments. The Trust’s auditing process has also included detailed analysis of Hilcorp’s pricing and rates charged. As previously disclosed in the Trust’s filings, these revenues and costs (along with all costs) are the subject of the Subject Interests. The reduction in proved reserve quantities is a common measure of depletion. Hilcorp’s (or a future operator’s) capital investmentsTrust’s ongoing comprehensive audit process by our professional consultants and outside counsel to ensure full compliance with all the underlying operative Trust agreements and evaluating all available potential remedies in the Subject Interests will affect the quantity event there is evidence of proved reserves and can offset any reduction in proved reserves. Lower commodity prices may also cause Hilcorp to reduce drilling operations, workover, and/or recompletions, thus reducing the volume of natural gas and oil produced from the Subject Interests by Hilcorp. Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to date in 2022.non-compliance.

4. Settlements and Litigation

None.

5. Subsequent Events

On October 21, 2022,April 18, 2023, the Trust announced a cash distribution of $16,272,132.13$4,838,334.88 or $0.349121$0.103807 per Unit, based primarily upon production during the month of August 2022,February 2023, which will bewas paid on November 15, 2022. Hilcorp reported $26,014,687 of total revenue from the Subject Interests consisting of $15,653,743 of gas revenues, $282,139 of oil revenues, $21,790 of additional interest related to prior month’s granted audit exceptions. The Trust has been advised by Hilcorp that for the production month of August 2022, the operator of the Trust’s subject interests, Hilcorp San Juan, L.P., reported to the Trust gross profits of $21,815,782. Included in this amount is $10,057,015 of other revenue and interest related to adjustments associated with Hilcorp process reviews of FY 2021 and YTD July 2022 data. Items identified as part of these adjustments include underpayment resulting from the treatment of keep whole reimbursements and overpayment resulting from contract settlement differences. Interest related to the subject adjustments totaled $625,455.May 12, 2023.

Overview

The Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980, between Southland and The Fort Worth National Bank (the “Original Indenture”). The Original Indenture was amended and restated on September 30, 2002, and further amended and restated on December 12, 2007, which the Trust refers to as the “Indenture” in this Quarterly Report on Form 10-Q. As a result of a series of mergers and other transactions, the current Trustee of the Trust is PNC Bank.

The Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance effective November 1, 1980, Southland conveyed the Royalty that burdens the Subject Interests in properties located in the San Juan Basin of northwestern New Mexico to the Trust. Subsequent to the Conveyance of the Royalty, through a series of sales, assignments and mergers, Southland’s successor became Hilcorp, which acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (“Burlington”), an indirect wholly ownedwholly-owned subsidiary of ConocoPhillips, on July 31, 2017.

The Royalty constitutes the principal asset of the Trust. The beneficial interest in the Royalty is divided into 46,608,796 units (the “Units”), representing undivided fractional interests in the beneficial interest of the Trust equal to the number of shares of Southlandthe common stock of Southland outstanding as of the close of business on November 3, 1980. Each stockholder of Southland of record at the close of business on November 3, 1980, received one freely tradable Unit for each share of the Southland common stock of Southland then held. Holders of Units in the Trust are referred to herein as “Unit Holders.”

The Trustee

The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust, and to distribute the remaining available income to the Unit Holders. The amount of income distributable to Unit Holders, which the Trust refers to as “Distributable Income,” depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves. The Trust has no employees, officers, or directors. The Trustee performs all administrative functions of the Trust.

Hilcorp

Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with the Trust, for marketing the oil and natural gas and oil production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances. A very high percentage of the Royalty Income is attributable to the production and sale of natural gas, from the Subject Interests, by Hilcorp. Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Natural Gas and OilOil. . The sale of San Juan Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017. Under the terms of the sale, Hilcorp is required to make payments to Burlington if natural gas prices are above a certain price. Hilcorp has confirmed that in accordance with the Conveyance, Hilcorp will not charge the Trust any portion of such payments.

Gross Proceeds and Severance Tax Estimates. Hilcorp’s processIn January 2023, Hilcorp notified the Trust that the accounting project begun in 2021 to review the production volume allocations for 2017 through 2020 had been completed. These reallocations affected the volumes for many of reconciling actual revenuethe Trust properties and may result in revisions to revenues and severance taxes; adjustments will be forthcoming. On February 17, 2023, Hilcorp presented initial proposed adjustments for 2017 revenues, but these adjustments are still under review by the Trustee and Hilcorp. The 2017 adjustments may result in additional revenues to the Trust. Upon completion of the final adjustments for 2017 revenues, proposed adjustments for subsequent years will be presented by Hilcorp.

Hilcorp began transitioning to a new accounting system effective with January 2021 production (March 2021 reporting month), and it initially reported estimated revenues and severance taxes to previously reported estimates (whichon the Trust refers to as “true-ups”) were still occurring and being reported in 2021 and 2022. At the beginning of 2021, Hilcorp informed the Trust that it planned to refine further its estimating and reporting processes, and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods. As part of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in certain months during 2021 and 2022 were subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

Trust. Hilcorp informed the Trust that it completed the transition to its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August 2021 reporting month). Hilcorp’s process of reconciling actual revenue and that it has reversedseverance taxes to the previously reported estimates (which the Trust refers to as “true-ups”), and rebooked revenuethe reversal and rebooking of the actualized revenues for certain prior periods. The true-ups of revenues2021 production months for non-operated properties for the 2021 distribution periods werewas completed in the February and March 2022 reporting months.

During 2022, various adjustments were made for 2021 and 2022 production periods as a result of Hilcorp’s process review of the new accounting system. Hilcorp has informed the Trustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections. Hilcorp has indicated that it will coordinate with the Trustee on the timing of any further adjustments, following which the Trustee will communicate that timing to investors.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust’s third-party compliance auditors continue to audit payments made by Hilcorp to the Trust, inclusive of sales revenues, production costs, capital expenditures, adjustments, actualizations, and recoupments. The Trust’s auditing process has also included detailed analysis of Hilcorp’s pricing and rates charged. As previously disclosed in the Trust’s filings, these revenues and costs (along with all costs) are the subject of the Trust’s ongoing comprehensive audit process by our professional consultants and outside counsel to ensure full compliance with all the underlying operative Trust agreements and evaluating all available potential remedies in the event there is evidence of non-compliance.

The amount of Gross Proceeds also depends on the volumes of natural gas and oil produced from the Subject Interests. Under the terms of the Indenture, the Trust cannot acquire new natural gas and oil assets, and as a result, Royalty Income is dependent on the natural gas and oil volumes attributable to the Subject Interests. Although Hilcorp and other operators of the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets; Hilcorp has informed the Trust that it is unable to estimate the productive life of the Subject Interests. The reduction in proved reserve quantities is a common measure of depletion. Hilcorp’s (or a future operator’s) capital investments in the Subject Interests will affect the quantity of proved reserves and can offset any reduction in proved reserves. Lower commodity prices may also reduce the volume of natural gas and oil produced from the Subject Interests by Hilcorp.

On February 17, 2023, the Trust announced that Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 but, Hilcorphad provided the Trust with its 20222023 capital project plan for the Subject Interests the (“2022(the “2023 Plan”), and Hilcorp has estimated its 2023 capital expenditures for the Subject Interests to be $4.4 million. Hilcorp informed the Trust that its 20222023 Plan will allocate approximately $1.5$3.7 million of the 20222023 Plan’s budget towards 2425 well recompletions and workovers scheduled to be completed in the Mesaverde, Pictured Cliffs and Fruitland Coal formations. Approximately $300,000$0.5 million of the 20222023 Plan’s budget will be allocated to facilities projects related to natural gas compression, and approximately $100,000$0.2 million will be spent for permitting andcosts for potential future new drill projects. Hilcorp further informed the Trust that its planned project status for 20222023 is subject to revision if itHilcorp revises its assumptions underlying the 20222023 Plan, and that in any event actual capital costs may vary from these estimates.

Relatedly, because of Hilcorp’s prior process of providing production estimates rather than actual production, a simple year-over-year comparison from the prior distribution reports from Hilcorp will not reflect the actual comparable production amounts. For example, a comparison of the May 2021 estimated production with the May 2022 actual production on the July 2022 Distribution Report would reflect a decline of approximately 25%. However, comparing the May 2021 actual production from the August 2021 Distribution Report actualization to May 2022, actual production would reflect a decrease of 7.7%. In reviewing the Distribution Reports on a year-to-date basis, the total MMBtu production was 21,813,179 as of September 2021 compared to the total MMBtu production of 20,375,229 as of September 2022, which results in a year-to-date decline of 6.59%.

On February 17, 2022, the Trust announced that Hilcorp had provided the Trust with its 2022 capital project plan for the Subject Interests (the “2022 Plan”), and Hilcorp has estimated its 2022 capital expenditures for the Subject Interests to be $1.9 million. The objective of this capital project plan is to address the natural depletion of oil and gas assets. Specifically, Hilcorp informed the Trust that its 2022 Plan will allocate approximately $1.5 million of the 2022 Plan’s budget towards 24 well recompletions and workovers scheduled to be completed in the Mesaverde, Pictured Cliffs and Fruitland Coal formations. Approximately $300,000 of the 2022 Plan’s budget will be allocated to facilities projects related to natural gas compression, and approximately $100,000 will be spent for permitting and surveying costs for future new drill projects that are being considered for 2023 and 2024. Hilcorp further informed the Trust that its planned project status for 2022 is subject to revision if it revises its assumptions underlying the 2022 Plan, and that in any event actual capital costs may vary from these estimates.

Under the terms of the Conveyance, production costs are deducted from Gross Proceeds in calculating Net Proceeds, which is multiplied by 75% to calculate Royalty Income. “Production Costs” generally means costs incurred on an accrual basis by Hilcorp in operating the Subject Interests, including both capital and non-capital costs. For example, these costs include development drilling, production and processing costs, applicable taxes and operating charges. However, Hilcorp informed the Trust that for wells operated by Hilcorp it did not intend to accrue lease operating expenses to the Trust. If production costs exceed Gross Proceeds in any month, the excess is recovered out of future Gross Proceeds prior to the making of further payments to the Trust. However, the Trust is not otherwise liable for any Production Costs or other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. The Trust and the Trustee hashave very limited authority to control the amount and timing of Production Costs.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust’s third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments, true-ups, and recoupments. In addition, the Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

Factors that Affect Net ProceedsProceeds. . Generally, Net Proceeds are affected by (a) disruptions caused by weather, particularly winter storms that disrupt access to the production fields, (b) the timing and size of Hilcorp’s capital expenditures, and (c) commodity prices.

Weather. Hilcorp has advised the Trust that it is possible for it to experience disruptions during the winter months that could impact Hilcorp’s ability to access fields and maintain production.

Capital ExpendituresExpenditures.. The timing and size of capital expenditures by Hilcorp may impact Net Proceeds. CapitalHilcorp’s capital expenditures by Hilcorp increaseddecreased approximately $254,591,$45,800, or 241.53%58%, from a credit of $(105,409) for the three-months ended September 30, 2021 to a cost of $149,182 for the three months ended September 30, 2022. The increase is due primarilyMarch 31, 2023, compared to a credit of $171,049 received from Hilcorp in the third quarter of 2021 as a result of true-ups for capital costs for the production months of January through April 2021. Capital expenditures incurred for projects worked during the three months ended September 30, 2022 increased by 127% from $65,640 for the three months ended September 30, 2021 to $149,182 for the three months ended September 30,March 31, 2022.

Capital expenditures incurred increased approximately $56,058, or 20.07%, to $335,325 for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increasedecrease was primarily attributable to differences in timing inof the payment offor these expenditures andalong with capital expenditures attributable to the prior year’s budget.

Commodity PricesPrices.. The Trust’s income and monthly distributions from the Subject Interests are heavily influenced by the price of natural gas and oil. These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas and oil based on market uncertainty or a variety of additional factors that are beyond the Trustee’s control. Prices for goods and services have risen over the last 12 months, and inflationary pressures have accelerated in the first three quarters of 2022, as regional and global commodity prices have risen in response to the conflict in Ukraine. The impact of ongoing or extended conflict on Hilcorp’s ability to produce from the Subject Interests or on commodity prices is unknown.

Hilcorp has multiple gas purchase agreements that set forth the prices that it will receive for the natural gas and oil produced from the Subject Interests. There is a differential in the prices reflected in the market indices and the prices received and reported because the prices received and reported vary by purchase agreement, and they are determined after deducting gathering, processing, and marketing costs for both gas and natural gas liquids. These purchase agreements and costs are subject to a comprehensive audit process by professional accountants and consultants.

On January 20, 2021, President Biden signed an executive order that reversed the United States’ withdrawal from the Paris Agreement, and the United States formally rejoined the Paris Agreement on February 19, 2021. At the federal regulatory level, both the Environmental Protection Agency and the Bureau of Land Management have adopted regulations for the control of methane emissions, which also include leak detection and repair requirements, from the oil and gas industry. Additionally, President Biden has issued an executive order seeking to adopt new regulations and policies to address climate change and suspend, revise or rescind prior agency actions that are identified as conflicting with the Biden administration’s climate policies. In addition, President Biden has declared that he supports federal government efforts to limit or prohibit hydraulic fracturing and banning new leases for production of minerals on federal properties, including onshore lands. Any of these actions could require Hilcorp to increase capital expenditures for the Subject Interests, decrease demand for natural gas and oil production, or limit the Subject Interests’ ability to produce natural gas or oil production. The Trust is unable to determine what, if any, the effects of such actions will have on the Subject Interests’ ability to produce natural gas and oil and on Hilcorp’s ability to pay Royalty Income to the Trust.

Hilcorp previously informed the Trust that it does not believe that recent actions undertaken by the Biden administration to curtail future leases for natural gas and oil drilling on federally owned land will impact the Subject Interests because, as currently enacted, they do not impact current leases.

The Royalty Income distributed to the Trust for both the three and nine months ended September 30, 2022,March 31, 2023, was higher than that distributed during the same periodsperiod of 20212022, due primarily to higher natural gas prices. The average natural gas price increased from $2.74$4.79 per Mcf for the three months ended September 30, 2021,March 31, 2022, to $6.32$10.53 per Mcf for the three months ended September 30, 2022, and the average natural gas price increased from $2.72 per Mcf for the nine months ended September 30, 2021, to $5.21 per Mcf for the nine months ended September 30, 2022.March 31, 2023. Production of natural gas from the Subject Interests decreased from 6,410,9556,231,076 Mcf for the three months ended September 30, 2021,March 31, 2022, to 6,032,7475,863,499 Mcf for the three months ended September 30, 2022, and decreased from 19,631,861Mcf for the nine months ended September 30, 2021, to 18,337,706 Mcf for the nine months ended September 30, 2022.March 31, 2023.

Gross Proceeds from Subject InterestsInterests. . Total Gross Proceeds increased approximately $20.5$31.1 million, or 107%100%, for the three months ended September 30, 2022,March 31, 2023, compared to the three months ended September 30, 2021, and increased approximately $43 million, or 76%, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.March 31, 2022. The increase was primarily due to higher natural gas prices.

Capital Expenditures. Hilcorp increasedHilcorp’s capital expenditures decreased approximately $254,591,$45,800, or 241.53%58%, from a credit of $(105,409) for the three-months ended September 30, 2021 to a cost of $149,182 for the three months ended September 30, 2022. The increase is due primarilyMarch 31, 2023, compared to a credit of $171,049 received from Hilcorp in the third quarter of 2021 as a result of true-ups for capital costs for the production months of January through April 2021. Capital expenditures incurred for projects worked during the three months ended September 30, 2022 increased by 127% from $65,640 for the three months ended September 30, 2021 to $149,182 for the three months ended September 30,March 31, 2022.

Distributable Income. Distributable Income increased from $5.7$14.4 million ($0.1217350.308294 per Unit) for the three months ended September 30, 2021,March 31, 2022, to $21$36.0 million ($0.4529500.771771 per Unit) for the three months ended September 30, 2022.March 31, 2023. The increase in Distributable Income was primarily attributable to higher natural gas prices. Distributable Income increased by approximately $28.2 million, or 137%, to $48.8 million (1.047521 per Unit) for the nine months ended September 30, 2022, from $20.6 million ($0.441787 per Unit) for the nine months ended September 30, 2021. The increase in Distributable Income was primarily attributable to higher natural gas prices.

Production of natural gas and oil and related average sales prices attributable to each of the Subject Interests and the Royalty for the nine months ended September 30, 2022, and 2021 were as follows:

Based on Hilcorp’s reporting methodology, the Trust recognizes production during the month in which the related Royalty Income is paid to the Trust. Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current calendar year. Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of natural gas and oil, respectively, by the prices received for sales of such volumes from the Subject Interests, taking into consideration production taxes attributable to the Subject Interests. Because the natural gas and oil sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including capital expenditures, the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty.

The fluctuations in natural gas production that have occurred during the three-month period ended September 30, 2022, and 2021, respectively, generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve. Also, productionProduction from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin. As noted above, natural gas and oil sales attributable to the Royalty are based on an allocation formula dependent on many factors, including natural gas and oil prices and capital expenditures.

Marketing

There were noFrom time to time, changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and processing of production during the three months ended September 30, 2022.may be made. The gas continues to be sold to creditworthy buyers at market related prices.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that impact the Trust’s financial statements, see Part I, Item 1. Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8. Financial Statements and Supplemental Data contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.

Information Regarding Forward-Looking Information

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Trust with the SEC (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 (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may involve or may concern, among other things, the amount and variability in capital expenditures by Hilcorp, drilling activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trust’s activities, the differences between Hilcorp’s estimated revenue and actual revenue, and regulatory matters. Such forward-looking statements generally are accompanied by words such as “may,” “will,” “based,” “estimate,” “expect,” “predict,” “project,” “anticipate,” “believe,” “plan,” “intend”“intend,” or other words that convey the uncertainty of future events or outcomes. Such statements are based on certain assumptions of the Trustee and by Hilcorp, with respect to future events; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Hilcorp; and involve risks and uncertainties. However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and Hilcorp in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to, or effects on, Hilcorp’s business and the Trust. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements, except as required by applicable law.

For information on the Trust’s exposure to market risk, please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.

None.

The Trust maintains a system of internal disclosure controls and procedures that is designed to ensure that the information required to be disclosed in the Trust’s filings under the Exchange Act is recorded, processed, summarized, and reported within the times specified in the SEC’s rules and forms. In its evaluation of its disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by Hilcorp, the owner of the properties. Consequently, the Trust’s ability to timely and accurately disclose relevant information in its periodic reports is dependent upon Hilcorp’s timely delivery of accurate oil and gas revenue and Production Costproduction cost information and, therefore, the Royalty Income owed to the Trust.

The Conveyance that transferred the Royaltyroyalty to the Trust obligates Hilcorp to provide the Trust with certain financial and operational information, including information concerning calculations of Royalty Income owed to the Trust. Once the Trust receives the financial information from Hilcorp, the Trust engages independent public accountants, compliance auditors, attorneys and petroleum engineers in order to assist the Trustee to ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic reports. These outside professionals advise the Trustee in its review and compilation of this information for inclusion in this AnnualQuarterly Report on Form 10-K10-Q and the other periodic reports provided by the Trust to the SEC.

During 2022, various adjustments were made for 2021 and 2022 production periods as a result of Hilcorp’s process review of reconciling Gross Proceeds and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) during fiscal years 2018 and 2020 were still occurring and being reported in 2021.new accounting system. Hilcorp has informed the TrustTrustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections. Hilcorp has indicated that it will coordinate with the Trustee on the timing of any further adjustments and will communicate that timing to investors.

The Trustee continues to refine furtherengage with Hilcorp regarding its estimatingongoing accounting and reporting processes. As part of that review process, Hilcorp informed the Trust that it would reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust, fromand the Trust’s third-party compliance auditors continue to audit payments made by Hilcorp to the Trust, inclusive of sales revenues, production costs, capital expenditures, adjustments, actualizations, and recoupments. The Trust’s auditing process has also included detailed analysis of Hilcorp’s pricing and rates charged. As previously disclosed in any given monththe Trust’s filings, these revenues and costs (along with all costs) are the subject of the Trust’s ongoing comprehensive audit process by our professional consultants and outside counsel to ensure full compliance with all the underlying operative Trust agreements and evaluating all available potential remedies in 2022 may include adjustments for the reversal and rebooking event there is evidence of prior months’ revenue, plus interest.non-compliance.

The Trustee has evaluated the Trust’s internal disclosure controls and procedures as of September 30, 2022,March 31, 2023, and has concluded that such disclosure controls and procedures are effective, at the “reasonable assurance” level (as such term is used in Rule 13a-15(f) of the Exchange Act), to ensure that material information received from Hilcorp is gathered on a timely basis to be included in the Trust’s periodic reports and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Additionally, during the three months ended September 30, 2022,March 31, 2023, there were no changes in the Trust’s internal control over financial reporting (as such term is used in Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. Because the Trust does not have, nor does the Indenture provide for, officers, a board of directors or an independent audit committee, the Trustee has reviewed neither the Trust’s disclosure controls and procedures nor the Trust’s internal control over financial reporting in concert with management, a board of directors or an independent audit committee.

None.

None.

Not applicable.

None.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 14, 2022May 15, 2023

(The Trust has no directors or executive officers.)

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