Hugoton Royalty Trust: Form 10-Q for the period ended Mar 31, 2024

The following discussion should be read in conjunction with the Trustee’s discussion and analysis contained in the Trust’s 2023 Annual Report on Form 10-K, as well as the condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The Trust’s Annual Report on Form 10-K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8-K and all amendments to those reports are available on the Trust’s website at www.hgt-hugoton.com (http://www.hgt-hugoton.com).

Distributable Income

For the quarter ended March 31, 2024, net profits income was $0 compared to $10,459,753 for first quarter 2023. This was primarily the result of lower gas and oil prices ($12.7 million), decreased gas production ($0.8 million), increased production expenses ($0.6 million), and increased overhead ($0.2 million), partially offset by decreased taxes, transportation and other costs ($2.0 million), decreased development costs ($0.9 million), increased oil production ($0.6 million), and net excess costs activity ($0.3 million). See “Net Profits Income” below.

After adding interest income of $4,678, deducting administration expense of $228,423, and utilizing $223,745 of the cash reserve for the payment of Trust expenses, distributable income for the quarter ended March 31, 2024, was $0 or $0.000000 per unit of beneficial interest. Administration expense for the quarter decreased $73,114 compared to the prior year quarter, primarily related to the timing of receipt and payment of Trust expenses and terms of professional services. Changes in interest income are attributable to fluctuations in net profits income, cash reserve and interest rates. For first quarter 2023, distributable income was $10,175,760 or $0.254394 per unit.

Distributions to unitholders for the quarter ended March 31, 2024, were:

Net Profits Income

Net profits income is recorded when received by the Trust, which is the month following receipt by XTO Energy, and generally two months after oil and gas production. Net profits income is generally affected by three major factors:

1. oil and gas sales volumes,

2. oil and gas sales prices, and

3. costs deducted in the calculation of net profits income.

The following is a summary of the calculation of net profits income received by the Trust:

(a) Because of the two-month interval between time of production and receipt of net profits income by the Trust, gas and oil sales for the quarter ended March 31 generally represent production for the period November through January.

(b) Gas and oil sales volumes are allocated to the net profits interests by dividing Trust net cash inflows by average sales prices. As gas and oil prices change, the Trust’s allocated production volumes are impacted as the quantity of production necessary to cover expenses changes inversely with price. As such, the underlying property production volume changes may not correlate with the Trust’s allocated production volumes in any given period. Therefore, comparative discussion of gas and oil sales volumes is based on the underlying properties.

(c) See Note 4 to Condensed Financial Statements.

The following are explanations of significant variances on the underlying properties from first quarter 2023 to first quarter 2024:

Sales Volumes

Gas

Gas sales volumes decreased 11 percent for first quarter 2024 primarily because of timing of cash receipts and natural production decline, partially offset by gas sales from new wells in Major County, Oklahoma.

Oil

Oil sales volumes increased 25 percent for first quarter 2024 primarily because of oil sales from new wells in Major County, Oklahoma, partially offset by timing of cash receipts and natural production decline.

The estimated rate of natural production decline on the underlying oil and gas properties is approximately six to eight percent a year.

Sales Prices

Gas

The first quarter 2024 average gas price was $3.80 per Mcf, down 64 percent from the first quarter 2023 average gas price of $10.56 per Mcf.

Oil

The first quarter 2024 average oil price was $72.17 per Bbl, down 9 percent from the first quarter 2023 average oil price of $79.00 per Bbl.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs decreased 51 percent for first quarter 2024 primarily because of decreased gas production taxes and gas deductions due to lower revenues.

Production Expense

Production expense increased 16 percent for first quarter 2024 primarily because of increased labor costs, plug and abandonment expenses, and pipeline costs, partially offset by decreased repairs and maintenance costs and field costs.

Development Costs

Development costs decreased 69 percent for first quarter 2024 primarily due to the timing of drilling costs related to non-operated wells in Major County, Oklahoma. Changes in oil or natural gas prices could impact future development plans on the underlying properties.

As previously disclosed, XTO Energy advised the Trustee that it elected to participate in the development of four non-operated wells in Major County, Oklahoma. XTO Energy advised the Trustee that the total development costs for the four non-operated wells was anticipated to be approximately $10 million underlying ($8 million net to the Trust). Two wells were completed in second quarter of 2023, the third was completed in fourth quarter 2023, and the fourth was completed in first quarter 2024. No assurances can be made as to the estimated costs of the non-operated wells or timing of receipt of costs for completing the wells.

Overhead

Overhead increased 9 percent for first quarter 2024. Overhead is charged by XTO Energy and other operators for administrative expenses incurred to support operations of the underlying properties. Overhead fluctuates based on changes in the active well count and drilling activity on the underlying properties, as well as an annual cost level adjustment based on an industry index.

Excess Costs

If monthly costs exceed revenues for any conveyance, these excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net profits income from another conveyance. Underlying cumulative excess costs for the Kansas, Oklahoma and Wyoming conveyances remaining as of March 31, 2024, totaled $4.3 million ($3.4 million net to the Trust), including accrued interest of $0.4 million ($0.3 million net to the Trust). For further information on excess costs, see Note 4 to Condensed Financial Statements.

Contingencies

For information on contingencies, see Note 3 to Condensed Financial Statements.

Forward-Looking Statements

Certain information included in this Quarterly Report and other materials filed, or to be filed, by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by XTO Energy or the Trustee) contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, relating to the Trust, operations of the underlying properties and the oil and gas industry. Such forward-looking statements may concern, among other things, excess costs, continuation of the Trust as a going-concern, or alternatives to a going-concern, reserve-to-production ratios, future production, development activities and associated operating expenses, future development plans by area, increased density drilling, maintenance projects, development, production, regulatory and other costs, oil and gas prices and expectations for future demand, the impact of inflation and economic downturns on economic activity, government policy and its impact on oil and gas prices and future demand, the development and competitiveness of alternative energy sources, pricing differentials, proved reserves, future net cash flows, production levels, expense reserve budgets, availability of financing, arbitration, litigation, liquidity, financing, political and regulatory matters, such as tax and environmental policy, climate policy, trade barriers, sanctions, competition, war and other political or security disturbances. Such forward-looking statements are based on XTO Energy’s and the Trustee’s current plans, expectations, assumptions, projections and estimates and are identified by words such as “may,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “should,” “could,” “would,” and similar words that convey the uncertainty of future events. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, including those detailed in Part I, Item 1A of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023, which is incorporated by this reference as though fully set forth herein. Therefore, actual financial and operational results may differ materially from expectations, estimates or assumptions expressed in, implied in, or forecasted in such forward-looking statements. XTO Energy and the Trustee assume no duty to update these statements as of any future date.

As of the end of the period covered by this report, the Trustee carried out an evaluation of the effectiveness of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded that the Trust’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 and are effective in ensuring that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Trustee to allow timely decisions regarding required disclosure. In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy. There has not been any change in the Trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.

There have been no material changes in the risk factors disclosed under Part I, Item 1A of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023.