SANDRIDGE MISSISSIPPIAN TRUST I Introduction
The following discussion and analysis is intended to help the reader understand the Trust's business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with other sections of this report, including: "Business" in Item 1 and "Financial Statements and Supplementary Data" in Item 8. The discussion and analysis relate to the following subjects:
•Recent Developments;
•Results of Trust Operations;
•Liquidity and Capital Resources;
•Critical Accounting Policies and Estimates; and
•Off-Balance Sheet Arrangements.
Trust Termination and Overview
The following is a brief overview of certain matters discussed more thoroughly elsewhere in this report.
The trust agreement requires the Trust to dissolve and commence winding up of its business and affairs if cash available for distribution for any four consecutive quarters, on a cumulative basis, is less than$1.0 million . As cash available for distribution for the four consecutive quarters endedSeptember 30, 2020 , on a cumulative basis, totaled approximately$815,000 , the Trust was required to dissolve and commence winding up beginning as of the close of business onNovember 13, 2020 . Accordingly, the Trustee is required to sell all of the Trust's assets, either by private sale or public auction, and distribute the net proceeds of the sale to the Trust unitholders after payment, or reasonable provision for payment, of all Trust liabilities, which is expected to include the establishment of cash reserves in such amounts as the Trustee in its discretion deems appropriate for the purpose of making reasonable provision for all claims and obligations of the Trust, including any contingent, conditional or unmatured claims and obligations, in accordance with the Delaware Statutory Trust Act. Among such contingent, conditional or unmatured claims for which the Trustee expects it will need to make provision out of the net proceeds of the sale are the Trust's potential liabilities with respect to the Securities Litigation described under "Legal Proceedings" in Note 5 to the financial statements included in Item 8 of this report. Such a reserve could reduce or eliminate the amount of, or delay the timing of payment of, sale proceeds that may be distributed to unitholders. The sale process will involve costs that will reduce the amounts of any distributions to unitholders during the winding up period. As required by the trust agreement, the Trustee has engaged a third-party advisor to assist with the marketing and sale of the Trust's assets. As provided in the trust agreement, SandRidge has a right of first refusal with respect to any sale of assets to a third party. The Trustee expects to complete the sale of the Trust's assets and distribute the net proceeds of the sale to the Trust unitholders by the end of the third quarter of 2021 and to distribute the net proceeds of the sale to the Trust unitholders on the following quarterly payment date. 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 anticipates that it will continue to receive income from the royalty interests and will continue to make quarterly distributions to unitholders to the extent there is available cash after payment of Trust expenses and additions to cash reserves. The Trust will remain in existence until the filing of a certificate of cancellation with the Secretary of State of theState of Delaware following the completion of the winding up process. The Trust's reserves and quarterly cash distributions are highly dependent upon the prices realized from the sale of oil, natural gas and NGL. The markets for these commodities are volatile, as demonstrated by significant price swings experienced during 2019 and in 2020 attributable primarily to the economic effects of the COVID-19 pandemic and the dispute over production levels betweenRussia and the members ofOPEC . Crude oil reached a closing NYMEX price low of negative$37.63 per barrel inApril 2020 . A buildup in inventories, lower global demand, or other factors could cause prices forU.S. oil, natural gas and NGL to weaken further. 42 --------------------------------------------------------------------------------
Results of Trust Operations
Results of the
The primary factors affecting the Trust's revenues and costs are the quantity of oil, natural gas and NGL production attributable to the Royalty Interests and the prices received for such production. Royalty income, post-production expenses and certain taxes are recorded on a cash basis when the Trust receives net revenue distributions from SandRidge. Information regarding the Trust's revenues, expenses, production and pricing for the years endedDecember 31, 2020 and 2019 is presented below.
Year Ended
2020 (1) 2019 (2)
Production data
Oil (MBbls) 29 39
NGL (MBbls) 74 83
Natural gas (MMcf) 920 1,178
Combined equivalent volumes (MBoe)(3) 256 318
Average daily total volumes (MBoe/d) 0.7 0.9
Well data
Initial and Trust Development Wells producing - average 80 91
Revenues (in thousands)
Royalty income $ 3,272 $ 6,393
Total revenue 3,272 6,393
Expenses (in thousands)
Post-production expenses 677 864
Production taxes 190 401
Trust administrative expenses 1,207 1,394
Cash reserves withheld for current Trust expenses, net of amounts used
455 303
Total expenses 2,529 2,962
Distributable income available to unitholders $ 743 $ 3,431
Average prices
Oil (per Bbl) $ 44.04 $ 56.92
NGL (per Bbl) $ 10.67 $ 19.82
Natural gas (per Mcf) $ 1.30 $ 2.12
Total (per Boe) $ 12.73 $ 19.94Average prices - including impact of post-production expenses
Natural gas (per Mcf) $ 0.57 $ 1.39
Total (per Boe) $ 10.09 $ 17.22
Expenses (per Boe)
Post-production $ 2.65 $ 2.72
Production taxes $ 0.74 $ 1.26
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(1) Production volumes and related revenues and expenses for the year ended
December 31, 2020 (included in SandRidge's 2020 net revenue distributions to the
Trust) represent oil, natural gas and NGL production from September 1, 2019 to
August 31, 2020 .
(2) Production volumes and related revenues and expenses for the year ended
December 31, 2019 (included in SandRidge's 2019 net revenue distributions to the
Trust) represent oil, natural gas and NGL production from September 1, 2018 to
August 31, 2019 .
(3) Barrel of oil equivalent, determined using the ratio of six Mcf of natural
gas to one Bbl of oil, which approximates the relative energy content of oil as
compared to natural gas.
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Comparison of Results of the
Revenues Royalty Income. Royalty income is a function of production volumes sold attributable to the Royalty Interests and associated prices received. Royalty income received during the year endedDecember 31, 2020 totaled$3.3 million compared to$6.4 million received during the year endedDecember 31, 2019 . The approximate$3.1 million decrease in royalty income consisted of approximately$1.3 million attributable to the decrease in total volumes produced, and approximately$1.8 million attributable to a decrease in prices received. The average number of producing wells decreased by 11 during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 as wells that could not economically produce due to continued depressed pricing were shut-in.
Expenses
Post-Production Expenses. The Trust bears post-production expenses attributable to production from the Royalty Interests. Post-production expenses generally consist of costs incurred to gather, store, compress, transport, process, treat, dehydrate and market the natural gas produced. Post-production expenses totaled approximately$0.7 million in the year endedDecember 31, 2020 compared to approximately$0.9 million in the year endedDecember 31, 2019 . The decrease in post-production expense is attributable to the decrease in total volumes produced. Production Taxes. Production taxes are calculated as a percentage of oil, natural gas and NGL revenues, excluding the effects of derivative settlements and net of any applicable tax credits. Production taxes for the year endedDecember 31, 2020 totaled$0.2 million , or$0.74 per Boe, and were approximately 5.8% of royalty income. Production taxes for the year endedDecember 31, 2019 totaled$0.4 million , or$1.26 per Boe, and were approximately 6.3% of royalty income. Trust Administrative Expenses. Trust administrative expenses for the year endedDecember 31, 2020 totaled approximately$1.2 million compared to approximately$1.4 million for the year endedDecember 31, 2019 . Trust administrative expenses were lower during 2020 compared to 2019 due to invoice payment timing.
Distributable Income
Distributable income for the year endedDecember 31, 2020 was$0.7 million , which included a net addition of approximately$0.5 million to the cash reserve for the payment of future Trust expenses reflecting approximately$1.7 million withheld in aggregate from 2020 cash distributions to unitholders partially offset by approximately$1.2 million used to pay Trust expenses during the period. Distributable income for the year endedDecember 31, 2019 was$3.4 million , which included a net addition of approximately$0.3 million to the cash reserve for the payment of future Trust expenses reflecting approximately$1.7 million withheld in the aggregate from 2019 cash distributions to unitholders partially offset by approximately$1.4 million used to pay Trust expenses during the period.
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 SandRidge's loan commitment described in Note 5 to the financial statements included in Item 8 of this report. The Trust's primary uses of cash are distributions to Trust unitholders, payment of Trust administrative expenses, including any reserves established by the Trustee for future liabilities, and payment of expense reimbursements to SandRidge for out-of-pocket expenses incurred on behalf of the Trust. See Item 3 of this report for a description of the impact of legal proceedings on the Trust's administrative expenses. The Trust is not obligated to pay any operating expenses or capital costs related to the wells. Administrative expenses include payments to the Trustee and the Delaware Trustee as well as a quarterly fee of$50,000 to SandRidge pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the sale of production attributable to the Royalty Interests that quarter, over the Trust's expenses for the quarter. If at any time the Trust's cash on hand (including available cash reserves) is not sufficient to pay the Trust's ordinary course administrative expenses as they become due, the Trust may borrow funds from the Trustee or other lenders, including SandRidge, to pay such expenses. The Trustee has not loaned and does not intend to lend funds to the Trust. If such funds are borrowed, no further distributions will be made to Trust unitholders (except in respect of any previously determined quarterly distribution amount) until the borrowed funds have been repaid. There was no such loan outstanding at eitherDecember 31, 2020 or 2019. 44 -------------------------------------------------------------------------------- Commencing with the distribution to unitholders paid in the first quarter of 2019, the Trustee has withheld, the greater of$35,000 or 3.5% of the funds otherwise available for distribution each quarter to gradually increase cash reserves for the payment of future known, anticipated or contingent expenses or liabilities by a total of$425,000 . In 2019, the Trustee withheld an aggregate of approximately$152,000 from the funds otherwise available for distribution. In 2020, the Trustee withheld an aggregate of approximately$124,000 from the funds otherwise available for distribution. InFebruary 2021 , in light of the early termination of the Trust, the Trustee withheld approximately$96,000 from the funds otherwise available for distribution, which was the remaining amount needed to reach its targeted cash reserve. The Trust is highly dependent on its Trustor, SandRidge, 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 and informational services performed on behalf of the Trust. The ability to operate the properties depends on the Trustor's future financial condition and economic performance, access to capital, and other factors, many of which are out of the control of the Trustor. If the reduced demand for crude oil in the global market as a result of the economic effects of the COVID-19 pandemic persists for the near future or longer, such factors could have a negative impact on the financial condition and economic performance of SandRidge, which could affect SandRidge's ability to operate the Trust wells and provide services to the Trust.
Trust Distributions to Unitholders. During the years ended
Covered Production Total
Period Date Declared Date Paid Distribution Paid
Calendar Quarter 2020
September 1, 2019 -
First Quarter November 30, 2019 January 23, 2020 February 28, 2020 $ 456,400
December 1, 2019 -
Second Quarter February 29, 2020 April 23, 2020 May 27, 2020 $ 358,400
March 1, 2020 - May 31,
Third Quarter 2020 July 23, 2020 N/A -
June 1, 2020 -
Fourth Quarter August 31, 2020 October 23, 2020 N/A -
Calendar Quarter 2019
September 1, 2018 -
First Quarter November 30, 2018 January 24, 2019 February 22, 2019 $ 1,229,200
December 1, 2018 -
Second Quarter February 28, 2019 April 25, 2019 May 24, 2019 $ 1,027,600
March 1, 2019 - May 31,
Third Quarter 2019 July 25, 2019 August 23, 2019 $ 733,600
June 1, 2019 -
Fourth Quarter August 31, 2019 October 24, 2019 November 22, 2019 $ 380,800
On February 26, 2021 , the Trust paid a cash distribution of $0.0029 per Trust
unit covering production for the three-month period from September 1, 2020 to
November 30, 2020 . The distribution totaled approximately $80,000 and was made
to Trust unitholders of record as of February 12, 2021 .
Continued relatively low oil, natural gas and NGL prices will reduce proceeds to
which the Trust is entitled and may ultimately reduce the amount of oil, natural
gas and NGL that is economic to produce from the Underlying Properties . As the
Trust cannot acquire or cause additional wells to be drilled on its behalf, the
production from the Underlying Properties attributable to the Royalty Interests
is expected to decline each quarter during the remainder of the Trust's life.
Contractual Obligations. Pursuant to the terms of the administrative services
agreement with SandRidge, the Trust is obligated to pay SandRidge an annual
administrative services fee of $200,000 for accounting, tax preparation,
bookkeeping and informational services to be performed by SandRidge on behalf of
the Trust throughout the life of the Trust. Pursuant to the trust agreement, the
Trust pays the Trustee an annual administrative fee, which prior to January 1,
2017 was $150,000 . The annual fee can be adjusted for inflation by no more than
3% in any year through 2030. The annual administrative fee, which was adjusted
for inflation in April 2020 , currently is approximately $163,000 . In addition,
under the trust agreement the Trust is obligated to pay the Delaware Trustee an
annual fee of $2,300 , throughout the life of the Trust.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The financial statements of the Trust are significantly affected by its basis of accounting and estimates related to the Royalty Interests and proved reserves, as summarized below. Basis of Accounting. The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") as the Trust records revenues when cash is received (rather than when earned) and expenses when paid (rather than when incurred) and may also establish cash reserves for contingencies, which would not be accrued in financial statements prepared in accordance with GAAP. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by theSEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts. Amortization of investment in royalty interests, calculated on a unit-of-production basis, and any impairment are charged directly to trust corpus. Distributions to unitholders are recorded when declared. Because the Trust's financial statements are prepared on a modified cash basis, most accounting pronouncements are not applicable to the Trust's financial statements. Proved Reserves. The proved oil, natural gas and NGL reserves attributable to the Royalty Interests are estimated by independent petroleum engineers. Estimates of proved reserves are based on the quantities of oil, natural gas and NGL that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions; however, there are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future revenues, rates of production and timing of development expenditures, including many factors beyond the Trust's control. Estimating reserves is very complex and relies on assumptions and subjective interpretations of available geologic, geophysical, engineering and production data, and the accuracy of reserve estimates is a function of the quality and quantity of available data, engineering and geological interpretation and judgment. In addition, as a result of volatility of changing market conditions, commodity prices will vary from period to period, causing estimates of proved reserves to vary, as well as causing estimates of future net revenues to vary. Estimates of proved reserves are key components of the Trust's most significant financial estimates as discussed further below. Amortization of Investment in Royalty Interests. Amortization of investment in royalty interests is calculated on a units-of-production basis, whereby the Trust's cost basis is divided by the proved reserves attributable to the Royalty Interests to derive an amortization rate per reserve unit. The rate used to record amortization is dependent upon the estimate of total proved reserves attributable to the Royalty Interests, which incorporates various assumptions and future projections. If the estimates of total proved reserves decline significantly, the rate at which the Trust records amortization would increase, reducing trust corpus. Such a decline in reserves may result from lower commodity prices, which may make it uneconomic for SandRidge to produce from theUnderlying Properties , or from other factors, including changes to estimates for other reasons. Changes in reserve quantity estimates are dependent on future economic and operational conditions and cannot be predicted. Impairment of Investment in Royalty Interests. The investment in royalty interests is assessed to determine whether net capitalized cost is impaired whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Potential impairments of the investment in royalty interests are determined by comparing the net capitalized costs of investment in royalty interests to undiscounted future net revenues attributable to the Trust's interest in the proved oil, natural gas and NGL reserves of theUnderlying Properties . The Trust provides a write-down to the extent that the net capitalized costs exceed the fair value of the Royalty Interests, which is determined using future cash flows of the oil, natural gas and NGL reserves attributable to the Royalty Interests, discounted at a rate based upon the weighted average cost of capital of publicly traded royalty trusts. Different pricing assumptions or discount rates could result in a different calculated impairment. ForDecember 31, 2020 as the Trust assets now meet the criteria for Held for Sale, the impairment was determined by taking the estimated fair value less the estimated cost to sell the assets. Fair value was derived from relevant market pricing related to the sale of a similar asset that was sold recently pursuant to a sale process conducted by a third-party advisor. The Trust recorded impairments in the carrying value of the Investment in Royalty Interests of$4.7 million and$9.4 million during the years endedDecember 31, 2020 and 2019, respectively. The impairments resulted in non-cash charges to trust corpus and did not affect the Trust's distributable income.
Refer to Note 2 to the financial statements included in Item 8 of this report for the Trust's significant accounting policies.
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