HUGOTON ROYALTY TRUST The following discussion should be read in conjunction with the Trustee's discussion and analysis contained in the Trust's 2021 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. Distributable Income Quarter For the quarter endedSeptember 30, 2022 , net profits income was$9,440,853 as compared to$0 for third quarter 2021 primarily due to higher oil and gas prices ($11.4 million ), and net excess costs activity ($4.4 million ), partially offset by decreased oil and gas production ($4.4 million ), increased production expenses ($1.0 million ), increased taxes, transportation and other costs ($0.7 million ), increased development costs ($0.2 million ), and increased overhead ($0.1 million ). See "Net Profits Income" below. After adding interest income of$3,364 , increasing the expense reserve$347,549 , and deducting administration expense of$132,309 , distributable income for the quarter endedSeptember 30, 2022 was$8,964,359 , or$0.224109 per unit of beneficial interest. Administration expense for the quarter decreased$111,815 as 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 third quarter 2021, distributable income was$0 , or$0.000000 per unit.
Distributions to unitholders for the quarter ended
Distribution
Record Date Payment Date per Unit
July 29, 2022 August 12, 2022 $ 0.068699
August 31, 2022 September 15, 2022 0.096808
September 30, 2022 October 17, 2022 0.058602
$ 0.224109
14
--------------------------------------------------------------------------------
Table of Contents
Nine Months
For the nine months endedSeptember 30, 2022 , net profits income was$11,644,580 compared with$0 for the same 2021 period primarily due to higher oil and gas prices ($24.3 million ), increased oil production ($1.4 million ), and decreased development costs ($1.1 million ), partially offset by net excess costs activity ($9.1 million ), increased production expenses ($2.2 million ), decreased gas production ($2.1 million ), increased taxes, transportation and other costs ($1.4 million ), increased overhead ($0.3 million ), and decreased other proceeds ($0.1 million ). See "Net Profits Income" below. After adding interest income of$3,364 , paying off the outstanding payable toSimmons Bank of$1,217,857 , establishing an expense reserve of$1,000,000 , and deducting administration expense of$465,728 , distributable income for the nine months endedSeptember 30, 2022 was$8,964,359 , or$0.224109 per unit of beneficial interest. Administration expense for the nine months endedSeptember 30, 2022 decreased$206,070 as compared to the same 2021 period, 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 the nine months endedSeptember 30, 2021 , distributable income was$0 , or$0.000000 per unit. Net Profits Income
Net profits income is recorded when received by the Trust, which is the month
following receipt by
- oil and gas sales volumes,
- oil and gas sales prices, and
- costs deducted in the calculation of net profits income.
15
--------------------------------------------------------------------------------
Table of Contents
The following is a summary of the calculation of net profits income received by
the Trust:
Three Months Nine Months
Ended September 30 (a) Increase Ended September 30 (a) Increase
2022 2021 (Decrease) 2022 2021 (Decrease)
Sales Volumes
Gas (Mcf) (b)
Underlying properties 2,457,484 2,762,949 (11%) 7,285,730 7,657,510 (5%)
Average per day 26,712 30,032 (11%) 26,688 28,049 (5%)
Net profits interests 1,064,656 - - 1,433,170 - -
Oil (Bbls) (b)
Underlying properties 51,005 80,514 (37%) 200,002 179,269 12%
Average per day 554 875 (37%) 733 657 12%
Net profits interests 25,397 - - 29,129 - -
Average Sales Prices
Gas (per Mcf) $ 7.73 $ 3.82 102% $ 6.93 $ 3.61 92%
Oil (per Bbl) $104.54 $62.18 68% $83.09 $55.61 49%
Revenues
Gas sales $ 18,995,538 $ 10,553,160 80% $ 50,474,576 $ 27,611,443 83%
Oil sales 5,332,099 5,006,440 7% 16,618,651 9,968,732 67%
Total Revenues 24,327,637 15,559,600 56% 67,093,227 37,580,175 79%
Costs
Taxes, transportation and other 3,636,208 2,724,804 33% 9,370,157 7,655,683 22%
Production expense 4,738,010 3,452,989 37% 12,711,259 10,006,271 27%
Development costs 239,373 39,707 503% 1,419,416 2,755,774 (48%)
Overhead 3,151,184 3,050,109 3% 9,502,285 9,085,356 5%
Excess costs (c) 761,796 6,299,933 (88%) 19,534,417 8,174,040 139%
Total Costs 12,526,571 15,567,542 (20%) 52,537,534 37,677,124 39%
Other Proceeds - 7,942 - 32 96,949 (100%)
Net Proceeds 11,801,066 - - 14,555,725 - -
Net Profits Percentage 80% 80% 80% 80%
Net Profits Income $ 9,440,853 $ - - $ 11,644,580 $ - -
(a) Because of the two-month interval between time of production and receipt of
net profits income by the Trust, (1) gas and oil sales for the quarter ended
and (2) gas and oil sales for the nine months ended
represent production for the period November through July.
(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.
16--------------------------------------------------------------------------------
Table of Contents
The following are explanations of significant variances on the underlying properties from third quarter 2021 to third quarter 2022 and from the first nine months of 2021 to the comparable period in 2022:
Sales Volumes
Gas
Gas sales volumes decreased 11% for third quarter primarily because of natural production decline, and timing of cash receipts. Gas sales volumes decreased 5% for the nine-month period as compared with the same 2021 periods primarily because of natural production decline, partially offset by timing of cash receipts, and decreased downtime.
Oil
Oil sales volumes decreased 37% for third quarter primarily because of timing of cash receipts, and natural production decline. Oil sales volumes increased 12% for the nine-month period as compared with the same 2021 periods primarily because of timing of cash receipts, and decreased downtime, partially offset by natural production decline.
The estimated rate of natural production decline on the underlying oil and gas properties is approximately 6% to 8% a year.
Sales Prices
Gas
The third quarter 2022 average gas price was$7.73 per Mcf, up 102% from the third quarter 2021 average gas price of$3.82 per Mcf. For the nine-month period, the average gas price increased 92% to$6.93 per Mcf in 2022 from$3.61 per Mcf in 2021. Oil
The third quarter 2022 average oil price was
Costs
Taxes, Transportation and Other
Taxes, transportation and other costs increased 33% for the third quarter and 22% for the nine-month period primarily because of increased production and property taxes, and gas deductions, partially offset by receipt of production tax refunds. Production Expense Production expense increased 37% for the third quarter and 27% for the nine-month period primarily because of increased repairs and maintenance, and plug and abandonment expense, partially offset by decreased labor costs, and timing of the annualOklahoma Senate Bill 168 fee. 17
--------------------------------------------------------------------------------
Table of Contents
Development Costs
Development costs increased 503% for the third quarter primarily due to
equipment purchases in
XTO Energy has advised the Trustee that it has elected to participate in the development of a non-operated well inMajor County, Oklahoma . The well was proposed byComanche Exploration Co. LLC under a joint operating agreement.XTO Energy has advised the Trustee that development costs for the well are anticipated to be approximately$5 million underlying ($4 million net to the Trust), and that drilling has begun and is expected to be completed in the first quarter of 2023. No assurances can be made as to the estimated costs or timing to complete the well. Overhead Overhead increased 3% for the third quarter and 5% for the nine-month period. Overhead is charged byXTO 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. There are no cumulative excess costs balances remaining for any conveyance as ofSeptember 30, 2022 . 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 theSecurities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made byXTO 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, potential asset sales or termination of the Trust, excess costs, 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 onXTO 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 endedDecember 31, 2021 , 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. 18
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
