Introduction
The following discussion and analysis is intended to help the reader understand the financial condition, results of operations, liquidity and capital resources ofSandRidge Mississippian Trust I (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 has been provided to the Trustee by SandRidge. Overview The Trust is a statutory trust created under the Delaware Statutory Trust Act. The business and affairs of the Trust are administered by the Trustee and, as necessary, the Delaware Trustee. The Trust's purpose is to hold the Royalty Interests, to distribute to the Trust unitholders cash that the Trust receives in respect of the Royalty Interests and to perform certain administrative functions in respect of the Royalty Interests and the Trust units. Other than the foregoing activities, the Trust does not conduct any operations or activities. The Trustee had no involvement with, control or authority over, or responsibility for, any aspect of the operations on or relating to the properties in which the Trust has an interest. Prior to the sale of the Royalty Interests onApril 22, 2021 as discussed below under "-Early Termination of the Trust," the Trust derived all or substantially all of its income and cash flow from the Royalty Interests. The Trust is currently in the process of winding up its affairs, as discussed below in "-Early Termination of the Trust; Sale of Trust Assets." The Trust is treated as a partnership for federal income tax purposes. Early Termination of the Trust; Sale of Trust Assets. 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 was 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, including 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 has made 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 unaudited interim financial statements contained in Part I, Item 1 of this Quarterly 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. Additionally, the sale process involved costs that reduce the amount of distributable income to unitholders. As discussed in "Early Termination of the Trust; Sale of Trust Assets" in Note 1 to the unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report, winding up procedures for the Trust commenced at the close of business onNovember 13, 2020 . Accordingly, the Trustee was required to sell all of the Trust's assets, either by private sale or public auction. As required by the trust agreement, the Trustee engaged a third-party advisor to assist with the marketing and sale of the Trust's assets. The advisor conducted a bid solicitation process that concluded inFebruary 2021 , and the Trustee, with the assistance of the advisor, after considering the proposed price, financing conditions and other terms of each bid, selected what was determined to be the strongest bid received. As provided in the trust agreement, SandRidge had a right of first refusal with respect to any sale of assets to a third party, and onMarch 29, 2021 , the Trustee provided notice to SandRidge of the third-party offer to purchase the assets of the Trust for a purchase price of$4,850,000 . OnApril 7, 2021 , SandRidge notified the Trustee that SandRidge would exercise its right of first refusal and would purchase the assets from the Trust for the same purchase price. OnApril 22, 2021 , the Trust andSandRidge Exploration and Production, LLC (the "Purchaser"), a wholly owned subsidiary of SandRidge, entered into a Purchase and Sale Agreement (the "Agreement") for the sale of all of the Royalty Interests held by the Trust for a purchase price of$4,850,000 . The sale closed onApril 22, 2021 , with an effective date ofApril 1, 2021 . Accordingly, because the Agreement entitles the Purchaser to the revenues from the oil and natural gas production attributable to the Royalty Interests sinceApril 1, 2021 , the Trust will not receive any further proceeds from such production and therefore will not make any further regular quarterly cash distributions to the Trust unitholders following the distribution that was made on or beforeMay 28, 2021 as described in "Liquidity and Capital Resources- Trust Distributions to Unitholders" below. Because of the statutory requirement to provide for the Trust's potential liabilities with respect to the Securities Litigation described in Note 5 to the unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report, the Trustee is withholding as part of its cash reserve the net proceeds from the Asset Sale. As part of the winding up process, the Trustee expects to 11 -------------------------------------------------------------------------------- file a Form 15 with theSEC to suspend the Trust's reporting obligations under the Securities Exchange Act of 1934, as amended, following the filing of this Quarterly Report on Form 10-Q. As a result, the Trust's general and administrative expenses in periods afterSeptember 30, 2021 are expected to be substantially less than in prior periods. However, as a result of the Trustee's establishment of a provision for the Trust's potential liabilities under the Securities Litigation, there will not be cash available for distribution until the Securities Litigation has been resolved. Moreover, any such cash available for distribution will be reduced by the Trust's general and administrative expenses as well as by any amounts required to be paid by the Trust in connection with resolving the Securities Litigation. 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. Impairment of Investment in Royalty Interests. During the six-month period endedJune 30, 2021 , the Trust recorded an impairment to the carrying value of the Investment in Royalty Interests of$0.9 million . The impairment resulted in a non-cash charge to trust corpus and did not affect the Trust's distributable income. During the six-month period endedJune 30, 2020 , the Trust recorded an impairment to the carrying value of the Investment in Royalty Interests of$3.3 million . See "Impairment of Investment in Royalty Interests" in Note 2 to the unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report for further discussion of the impairments. Properties. As ofJune 30, 2021 , the Trust did not hold any Royalty Interests in oil and natural gas wells located inAlfalfa ,Garfield ,Grant andWoods counties inOklahoma . See "-Early Termination of the Trust; Sale of Trust Assets" below.
Distributions. Prior to the Asset Sale, the Trust made quarterly cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust's administrative expenses and cash reserves withheld by the Trustee, on or about the 60th day following the completion of each quarter.
Pursuant to Internal Revenue Code ("IRC") Section 1446, withholding tax on income effectively connected to aUnited 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 fromUnited 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 inDecember 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 units. The TCJA also requires a transferee of 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 nonresident alien individual or foreign corporation or another exemption is available. Pursuant to final Treasury Regulations issued onOctober 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 afterJanuary 1, 2022 . Litigation. As described in more detail in Note 5 to the unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report, claims were brought against the Trust, SandRidge and others in a putative class action during 2015. Regardless of the outcome of the litigation, the Trust may incur expenses in defending the litigation, and any such expenses may increase the Trust's administrative expenses significantly. Further, any costs incurred by the Trust in connection with any settlement of or judgment in the litigation could increase the Trust's administrative expenses significantly. As discussed above under "-Early Termination of The Trust; Sale of Trust Assets," the Trustee is withholding as part of its cash reserve the net proceeds from the Asset Sale to provide for the Trust's potential liabilities under the Securities Litigation, as required by the Delaware Statutory Trust Act in connection with the early termination of the Trust. 12 --------------------------------------------------------------------------------
Results of Trust Operations
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 net revenue distributions are received by the Trust from SandRidge. Information regarding the Trust's production, pricing and costs for the three- and six-month periods endedJune 30, 2021 and 2020 is presented below. Three Months Ended June 30, Six Months Ended June 30, 2021(1) 2020(2) 2021(3) 2020(4) Production Data Oil (MBbls) 4 8 10 17 NGL (MBbls) 16 20 34 35 Natural gas (MMcf) 183 240 369 501 Total volumes (MBoe) 51 68 105 136 Average daily combined equivalent volumes (MBoe/d) 0.6 0.8 0.6 0.8 Well Data Initial and Trust Development Wells producing - average 73 81 74 82 Revenues (in thousands) Royalty income $ 875$ 1,022 $ 1,607 $ 2,169 Proceeds from sale of Trust assets 4,850 - 4,850 - Total revenue 5,725 1,022 6,457 2,169 Expenses (in thousands) Post-production expenses 128 176 256 366 Production taxes 54 62 97 131 Trust administrative expenses 581 308 958 785 Sale of Trust assets expenses 350 - 350 - Cash reserves withheld for current Trust expenses, net of amounts used (546) 113 (443) 58 Total expenses 567 659 1,218 1,340 Distributable income available to unitholders$ 5,158 $ 363 $ 5,239 $ 829 Average Prices Oil (per Bbl)$ 49.69 $ 55.07 $ 43.27 $ 54.87 NGL (per Bbl)$ 16.91 $ 12.30 $ 13.66 $ 14.25 Natural gas (per Mcf) $ 2.09$ 1.37 $ 1.96 $ 1.45 Total (per Boe)$ 17.12 $ 14.97 $ 15.31 $ 15.89 Average Prices - including impact of post-production expenses Natural gas (per Mcf) $ 1.39$ 0.64 $ 1.27 $ 0.72 Total (per Boe)$ 14.61 $ 12.38 $ 12.87 $ 13.19 Expenses (per Boe) Post-production $ 2.51$ 2.58 $ 2.44 $ 2.70 Production taxes $ 1.05$ 0.91 $ 0.92 $ 0.97 ____________________ 1.Production volumes and related revenues and expenses for the three-month period endedJune 30, 2021 (included in SandRidge'sMay 2021 net revenue distribution to the Trust) represent production fromDecember 1, 2020 toFebruary 28, 2021 . 2.Production volumes and related revenues and expenses for the three-month period endedJune 30, 2020 (included in SandRidge'sMay 2020 net revenue distribution to the Trust) represent production fromDecember 1, 2019 toFebruary 29, 2020 . 3.Production volumes and related revenues and expenses for the six-month period endedJune 30, 2021 (included in SandRidge's February andMay 2021 net revenue distributions to the Trust) represent production fromSeptember 1, 2020 toFebruary 28, 2021 . 4.Production volumes and related revenues and expenses for the six-month period endedJune 30, 2020 (included in SandRidge's February andMay 2020 net revenue distributions to the Trust) represent production fromSeptember 1, 2019 toFebruary 29, 2020 . 13 --------------------------------------------------------------------------------
Three Months Ended
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 three-month period endedJune 30, 2021 totaled$0.9 million compared to$1.0 million received during the three-month period endedJune 30, 2020 . The approximate$0.1 million decrease in royalty income consisted of approximately$0.3 million attributable to a decrease in total volumes produced offset by approximately$0.2 million attributable to an increase in prices received. The average number of producing wells in the three-month period endedJune 30, 2021 decreased by 8 from 81 in the three-month period endedJune 30, 2020 because wells that could not economically produce due to continued declining production and current pricing were shut-in.
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 endedJune 30, 2021 totaled approximately$0.1 million , or$1.05 per Boe, and were approximately 6.1% of royalty income. Production taxes for the three-month period endedJune 30, 2020 totaled approximately$0.1 million , or$0.91 per Boe, and were approximately 6.1% of royalty income.
Distributable Income
Distributable income for the three-month period ended
Six Months Ended
Revenues
Royalty Income. Royalty income received during the six-month period endedJune 30, 2021 totaled$1.6 million compared to$2.2 million received during the six-month period endedJune 30, 2020 . The approximate$0.6 million decrease in royalty income consisted of approximately$0.6 million attributable to a decrease in total volumes produced. The average number of producing wells in the six-month period endedJune 30, 2021 decreased by 8 from 82 in the six-month period endedJune 30, 2020 because wells that could not economically produce due to continued declining production and current pricing were shut-in.
Expenses
Production Taxes. Production taxes for the six-month period endedJune 30, 2021 totaled approximately$0.1 million , or$0.92 per Boe, and were approximately 6.0% of royalty income. Production taxes for the six-month period endedJune 30, 2020 totaled approximately$0.1 million , or$0.97 per Boe, and were approximately 6.1% of royalty income.
Distributable Income
Distributable income for the six-month period endedJune 30, 2021 was approximately$5.2 million . Distributable income for the six-month period endedJune 30, 2020 was approximately$0.8 million , which included a net addition to the cash reserve for payment of future Trust expenses of approximately$58,000 , reflecting approximately$843,000 withheld from theFebruary 2020 andMay 2020 cash distributions to unitholders partially offset by approximately$785,000 used to pay Trust expenses during the period. 14 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Following the sale of the Royalty Interests onApril 22, 2021 as described above under "Overview-Early Termination of the Trust; Sale of Trust Assets," the Trust has no source of liquidity or capital resources other than borrowings to fund administrative expenses, including any amounts borrowed under SandRidge's loan commitment described in Note 5 to the unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report. The Trust's primary uses of cash are distributions to Trust unitholders, including, if applicable, payment of Trust administrative expenses, including any reserves established by the Trustee for future liabilities, payment of applicable taxes and payment of expense reimbursements to SandRidge for out-of-pocket expenses incurred on behalf of the Trust. The Trust does not have any capital requirements related to drilling wells or any other operating 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 does not intend to lend funds to the Trust. If such funds are borrowed, no further distributions will be made to unitholders (except in respect of any previously determined quarterly distribution amount) until the borrowed funds have been repaid. No such loan was outstanding atJune 30, 2021 orDecember 31, 2020 . Commencing with the distribution to unitholders paid in the first quarter of 2019, the Trustee 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$96,000 from the funds otherwise available for distribution, which was the remaining amount needed to reach its targeted cash reserve. The Trust is highly dependent on its Trustor, SandRidge, for multiple services, including administrative services such as accounting, tax preparation, bookkeeping and informational services performed on behalf of the Trust, and potentially for loans to pay Trust administrative expenses. The ability to provide these services depends on the Trustor's future financial condition and economic performance, access to capital, and other factors, many of which are out of the control of the Trustor. The reduced demand for crude oil in the global market resulting from the economic effects of the COVID-19 pandemic, and the actions taken by the members ofOPEC regarding production levels, have had, and are likely to continue to have, a negative impact on the Trustor's financial condition. This negative impact could affect the Trustor's ability to provide services to the Trust.
Trust Distributions to Unitholders. During the three-month period ended
Total Covered Distribution Production Period Date Declared Date Paid PaidCalendar Quarter 2021 First Quarter September 1, 2020 - November 30, 2020 January 28, 2021 February 26, 2021$ 80,000 Second Quarter December 1, 2020 - February 28, 2021 April 28, 2021 May 28, 2021$ 308,000 Future Trust Distributions to Unitholders. OnJuly 27, 2021 , the Trust announced that because of the statutory requirement to provide for the Trust's potential liabilities with respect to the Securities Litigation described in Note 5 to the unaudited interim financial statements contained in Part I, Item 1 of this Quarterly Report, the Trust will not be distributing the net proceeds from the Asset Sale inAugust 2021 . Instead, the Trustee is withholding such net proceeds as part of its cash reserve. After the Securities Litigation has been resolved, the Trustee will distribute any remaining cash reserves following the payment of the Trust's estimated remaining expenses and liabilities. In addition, as discussed above under "Overview- Early Termination of the Trust; Sale of Trust Assets," as of the effective date of the Asset Sale, the Trust no longer receives any income derived from theUnderlying Properties . Therefore, there will be no further quarterly cash distributions to Trust unitholders reflecting quarterly revenues generated from theUnderlying Properties . 15
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