WHITING USA TRUST II References to the "Trust" in this document refer toWhiting USA Trust II . References to "Whiting" in this document refer toWhiting Petroleum Corporation and its subsidiaries. References to "Whiting Oil and Gas" in this document refer toWhiting Oil and Gas Corporation , a 100%-owned subsidiary ofWhiting Petroleum Corporation . The following review of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as the Trustee's discussion and analysis contained in the Trust's 2020 Annual Report on Form 10-K. 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 theSEC's website www.sec.gov.
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation the statements under "Trustee's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words "believes," "expects," "anticipates," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:
? the effect of changes in commodity prices and conditions in the capital
markets;
? the effect, impact, potential duration or other implications of the novel
strain of coronavirus ("COVID-19") pandemic;
? uncertainty of estimates of oil and natural gas reserves and production;
? risks incidental to the operation and drilling of oil and natural gas wells;
? future production and development costs, which include capital expenditures;
? the inability to access oil and natural gas markets due to market conditions or
operational impediments;
? failure of the underlying properties to yield oil or natural gas in
commercially viable quantities;
? the effect of existing and future laws and regulatory actions;
? competition from others in the energy industry and other forms of energy;
? inflation or deflation; and
? other risks described under the caption "Risk Factors" in Item 1A of the
Trust's 2020 Annual Report on Form 10-K.
All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or the Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Trust Termination and Overview
Trust Termination. After the NPI termination date ofDecember 31, 2021 , it is anticipated that the Trust will make a final quarterly distribution, if any, no later thanMarch 1, 2022 , to the Trust unitholders of record on the 50th day followingDecember 31, 2021 , and the Trust will wind up its affairs and terminate. After the termination of the Trust, it will pay no further distributions. Trust Overview. The Trust does not conduct any operations or activities. The Trust's purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives pursuant to the NPI, and to perform certain administrative functions with respect to the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties until the NPI terminates onDecember 31, 2021 . Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI proceeds are based on the oil and gas production for which Whiting has received payment within on month following the end of the most recent fiscal quarter. However, in accordance with the terms of the NPI, any NPI proceeds received by the Trust after the NPI termination date ofDecember 31, 2021 will only include proceeds for oil and gas production received by Whiting prior toDecember 31, 2021 . 11
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Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated throughSeptember 30, 2021 . TheAugust 2021 distribution was mainly affected byApril 2021 throughJune 2021 oil prices andMarch 2021 throughMay 2021 natural gas prices. The expectedNovember 2021 distribution is mainly affected byJuly 2021 throughSeptember 2021 oil prices andJune 2021 throughAugust 2021 natural gas prices. The final distribution, if any, in the first quarter of 2022 will be mainly affected byOctober 2021 throughNovember 2021 oil prices andSeptember 2021 throughOctober 2021 natural gas prices. 2019 2020 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Crude oil$ 54.90 $ 59.83 $ 56.45 $ 56.96 $ 46.08 $ 27.85 $ 40.94 $ 42.67 $ 57.80 $ 66.06 $ 70.55 Natural gas$ 3.00 $ 2.58 $ 2.29 $ 2.44 $ 1.88 $ 1.66 $ 1.89 $ 2.51 $ 2.56 $ 2.74 $ 3.95 Although demand for oil and natural gas products improved during the second and third quarters of 2021, which resulted in improved oil and natural gas prices, there remain uncertainties related to the future demand and supply for oil and natural gas products. Demand may be impacted as the effects of the COVID-19 pandemic on the world economy continue to play out, and the supply of oil may fluctuate due to uncertainty around output restraints on oil production agreed upon by theOrganization of Petroleum Exporting Countries and other oil exporting nations. Reductions in the demand or increases in the supply of oil and natural gas products may result in lower market prices for oil and natural gas during the remainder of 2021. Low oil and gas prices realized with respect to production from the underlying properties could cause a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders. All costless collar hedge contracts terminated as ofDecember 31, 2014 and no additional hedges are allowed to be placed on the Trust assets. Consequently, there are no further cash settlement gains or losses on commodity derivatives for inclusion in the Trust's computation of net proceeds (or net losses, as the case may be), and the Trust therefore has increased exposure to oil and natural gas price volatility. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in operating and capital expenditures, which contributed to the lack of distributions to Trust unitholders for the second, third and fourth quarters of 2020, and the first quarter of 2021.
Capital Expenditure Activities
The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in commercially paying amounts, if any, that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator's historical drilling success rate, or result in production from the underlying properties or sales proceeds to the NPI prior to the termination of the NPI. Based on the year-end 2020 reserve report, the underlying properties do not have any planned capital expenditures through the NPI termination date ofDecember 31, 2021 , based upon the economic inputs utilized to prepare such report. However, with respect to fields for which Whiting is not the operator, Whiting has limited control over the timing and amount of capital expenditures relative to such fields and it is possible that capital expenditures will be incurred during the remainder of 2021. The possibility for capital expenditures is increased on properties subject to enhanced oil recovery techniques where expenditures may be incurred for CO2 that is injected into the field to recover hydrocarbons. An operator may conclude it is more costly or infeasible to temporarily shut-in the field as compared to operating the properties at a loss, or may conclude such losses will be offset by future income from such properties, including periods after the termination of the NPI. Substantially all of the capital expenditures incurred as part of theFebruary 2021 net loss and the May andAugust 2021 distributions were related to non-operated properties. Please refer to the risk factor "Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust unitholders" included in Item 1A, Risk Factors, in the Trust's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . The following table presents the underlying properties' aggregate capital expenditures attributable to theFebruary 2021 net loss and the May andAugust 2021 distributions (in thousands): 12
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2021
Capital
Region Expenditures
Rocky Mountains $ 814
Permian Basin 144
Gulf Coast (2)
Mid-Continent -
Total $ 956
Annual capital expenditure amount limitation. The capital expenditures included
in the net proceeds attributable to the underlying properties are subject to an
annual limitation which became effective January 1, 2018 . As a result, the sum
of the capital expenditures and amounts reserved for development, maintenance or
operating costs of the underlying properties or related activities for each year
beginning in 2018 may not exceed the average annual capital expenditure amount.
The "average annual capital expenditure amount" means the quotient of (x) the
sum of the capital expenditures and amounts reserved for approved capital
expenditure projects with respect to the three years ended December 31, 2017 ,
divided by (y) three, which amount equaled $3.9 million and is increased
annually by 2.5% to account for expected increased costs due to inflation.
Therefore, the capital expenditures included in the net proceeds attributable to
the underlying properties and amounts reserved for expenditures cannot exceed
$4.3 million during the year ending December 31, 2021 .
Farm-out agreements. In an effort to develop the underlying properties while
limiting additional capital expenditures for the Trust, Whiting Oil and Gas
entered into three farm-out agreements with various third-party partners
covering (i) 5,127 gross acres in eight leasehold sections within the Keystone
South field in Winkler, Texas in April 2016 , as amended in July 2020 (the
"Keystone South farm-out"), (ii) 9,740 gross acres in approximately 15 units
(which unit size is determined by the lateral well length) within the Signal
Peak field in Howard County, Texas in February 2017 , as amended in May 2018 ,
September 2019 and February 2020 (the "Signal Peak farm-out") and (iii) 640
gross acres in one leasehold section within the Flying W, SE field in Winkler
County, Texas in March 2017 (the "Flying W farm-out").
These farm-out agreements provide the third-party partner with the option, but
not the obligation, to drill one well in each of the leasehold sections or
units, as the case may be, subject to the applicable farm-out agreement, whereby
the partner will pay 100% of the related drilling and well completion costs to
earn a 75% working interest. As a result, the applicable underlying properties
will consist of (i) 25% of the original working interest in these properties and
(ii) an overriding royalty interest equal to the difference between 25% and the
lease burdens of record. Upon completion of one well in each section or unit, as
the case may be, pursuant to the terms of the applicable agreements, the partner
has the option to drill (i) up to 15 additional wells under the Keystone South
farm-out, (ii) up to 12 additional wells under the Signal Peak farm-out and
(iii) one additional well under the Flying W farm-out. For each of these
additional optional wells, the partner is required to pay 85% of the drilling
and well completion costs otherwise ascribed to the underlying properties for a
75% working interest. Given the Trust's interest in the NPI, the Trust would be
responsible for 13.5% of the underlying properties' remaining drilling and well
completion costs at the 90% NPI, subject to the average annual capital
expenditure amount limitation discussed above.
The third-party partner drilled and completed the first three wells pursuant to
the terms of the Keystone South farm-out agreement during 2017, a fourth well
was drilled and completed during the second quarter of 2018, a fifth well was
drilled and completed during the fourth quarter of 2019, and a sixth well was
drilled and completed during the third quarter of 2021, whereby the partner
earned a 75% working interest in each of the underlying properties' respective
leasehold sections. The partner has no obligation to drill and complete any
additional wells, and the Keystone South farm-out agreement will terminate
during the fourth quarter of 2021 if no additional drilling has commenced by
that time.
During the fourth quarter of 2019, the third-party partner drilled and completed
the first well under the Signal Peak farm-out, whereby the partner earned a 75%
working interest in the underlying properties' respective leasehold section. The
partner has no obligation to drill and complete any additional wells, and the
Signal Peak farm-out will terminate during the fourth quarter of 2021 if no
additional drilling has commenced by that time.
In addition, the third-party partner drilled and completed the first well under
the Flying W farm-out during the second quarter of 2018, whereby the partner
earned a 75% working interest in the underlying properties' respective leasehold
section.
In February 2021 , Whiting entered into an additional farm-out agreement with a
third-party partner, which agreement covers 1,091 gross acres within the Agua
Dulce field in Nueces County, Texas . The agreement provides the partner with the
option, but not the obligation, to drill one well in each of the two leasehold
sections subject to the farm-out agreement, whereby the partner will pay 100% of
the
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related drilling and well completion costs to earn a 90% working interest, which results in the underlying properties retaining (i) a 10% working interest and (ii) an overriding royalty interest equal to the difference between 24% and the lease burdens of record, without incurring any capital costs for these wells. The third-party partner completed the first well pursuant to the agreement during the second quarter of 2021, whereby the partner earned a 90% working interest in the underlying properties' leasehold section. The well is currently shut-in while facilities are constructed. The third-party partner began drilling a second well pursuant to the agreement duringOctober 2021 . Pursuant to the terms of the agreement, the partner can elect to receive a 10% working interest or a 5% carried working interest in the second well. Upon completion of the second well, the partner has the option, but not the obligation, to drill subsequent wells in either section where the underlying properties can retain a 10% working interest (if such option was elected for the respective second well) or can receive a 5% working interest or a 2.5% carried working interest. During the three and nine months endedSeptember 30, 2021 , farm-out wells contributed$0.4 million and$0.5 million , respectively, to the income from the net profits interest. During the three and nine months endedSeptember 30, 2020 , farm-out wells contributed$0.1 million and$1.3 million , respectively, to the income from net profits interest. No assurance can be given that existing farm-out wells will generate any net profits in future periods, or that new wells drilled under farm-out agreements will result in production in commercially paying amounts or sales remitted to Whiting by the respective operators prior to the termination of the NPI. 14
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Table of Contents Results of Trust Operations
Comparison of results of the Trust for the nine months ended
The following is a summary of income from net profits interest and distributable income received by the Trust for the nine months endedSeptember 30, 2021 and 2020 (dollars in thousands, except per Bbl, per Mcf and per BOE amounts): Nine Months Ended September 30, 2021 2020 Sales volumes: Oil from underlying properties (Bbl)(1) 586,604 (3) 601,228 (4) Natural gas from underlying properties (Mcf) 561,953 (3) 706,523 (4) Total production (BOE) 680,263 718,982 Average sales prices: Oil (per Bbl)(1)$ 47.51 $ 38.22 Natural gas (per Mcf)(2)$ 3.03 $ 1.46 Cost metrics: Lease operating expenses (per BOE)$ 29.13 $
29.48
Production tax rate (percent of total revenues) 5.0 % 4.7 % Revenues: Oil sales(1)$ 27,868 (3)$ 22,977 (4) Natural gas sales 1,702 (3) 1,032 (4) Total revenues 29,570 24,009 Costs: Lease operating expenses 19,816 21,195 Production taxes 1,491 1,124 Development costs 956 1,119 Reserve for expenditures - - Total costs 22,263 23,438 Net proceeds 7,307 571 Net profits percentage 90 % 90 % Income from net profits interest 6,576
514
Provision for estimated Trust expenses (1,501)
(1,100)
Montana state income tax withheld (10)
(6)
Accumulated net losses (repaid to) funded by Whiting (220)
860
Distributable income $ 4,845 $ 268
__________
(1) Oil includes natural gas liquids.
A portion of the natural gas volumes produced and sold from the underlying
properties during the nine months ended
the NYMEX natural gas price for the nine months ended
primarily due to the depressed liquids prices during such period.
Oil and gas sales volumes and related revenues for the nine months ended
production from
from
Oil and gas sales volumes and related revenues for the nine months ended
oil production from
from
Income from net profits interest. Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI proceeds are based on the oil and gas production for which Whiting has received payment within one month following the end of the most recent fiscal quarter. However, in accordance with the terms of the NPI, any NPI proceeds received by the Trust after the NPI termination date ofDecember 31, 2021 will only include proceeds for oil and gas production received by Whiting prior toDecember 31, 2021 . Whiting receives payment for its crude oil sales generally within 30 days following the month in which it is produced and sold, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced and sold. However, payments for crude oil and natural gas sales on non-operated and farm-out properties may be remitted to 15
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Whiting after significantly longer periods of time. Income from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes, development costs and reserve for expenditures as follows:
Revenues. Oil and natural gas revenues increased$5.6 million (or 23%) during the nine months endedSeptember 30, 2021 as compared to the same 2020 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The increase in revenue between periods was primarily due to increases in crude oil and natural gas average realized sales prices, which were partially offset by declines in crude oil and natural gas production volumes between periods. The crude oil average realized sales price increased by 24% between periods primarily as a result of an increase in NYMEX oil prices which was slightly offset by higher oil differentials. The natural gas average realized sales price increased by 108% between periods primarily as a result of significantly improved gas differentials and an increase in NYMEX gas prices. Crude oil production volumes decreased by 15 MBbl (or 2%) and natural gas production volumes decreased by 145 MMcf (or 20%) between periods. The declines in oil and gas volumes between periods was primarily related to (i) normal field decline, (ii) wells temporarily shut-in for equipment failures in the Keystone South andAgua Dulce fields and (iii) reduced production in theLake Como field as a result of a facility closure. These decreases were partially offset by differences in the timing of receiving revenues on certain farm-out properties. Based on theDecember 31, 2020 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 12.5% for oil and 12.0% for gas from 2020 through theDecember 31, 2021 NPI termination date. Lease operating expenses. Lease operating expenses decreased$1.4 million (or 7%) during the first nine months of 2021 compared to the same 2020 period primarily due to lower oilfield goods and services costs, which was due, in part, to reduced workover activity, and lower ad valorem taxes. LOE on a per BOE basis decreased 1% between periods from$29.48 during the nine months endedSeptember 30, 2020 to$29.13 for the same period in 2021 primarily due to the lower overall costs discussed above and a proportionate decline in sales volumes between periods. Production taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues increased from 4.7% for the nine months endedSeptember 30, 2020 to 5.0% for the same period in 2021. Overall production taxes for the nine months endedSeptember 30, 2021 increased$0.4 million as compared to the same period in 2020. Development costs. Development costs for the nine months endedSeptember 30, 2021 were$0.2 million (or 15%) lower as compared to the same 2020 period primarily due to a planned reduction in CO2 volumes in the Rangely Weber Sand Unit starting at the end of the second quarter 2021, slightly offset by increased workover and repair costs in the Keystone South field. Reserve for expenditures. As provided in the terms of the NPI, a$1.6 million reserve for future development, maintenance or operating expenses was established and subsequently utilized and applied against qualifying expenses incurred during the nine months endedSeptember 30, 2020 . No such reserve was established or utilized during the nine months endedSeptember 30, 2021 , and no such reserve remained as ofSeptember 30, 2021 . Provision for estimated Trust expenses. The provision for estimated Trust expenses increased$0.4 million to$1.5 million during the nine months endedSeptember 30, 2021 compared to the same 2020 period. During the nine months endedSeptember 30, 2020 , the Trustee established a provision for Trust expenses to enable it to pay the Trust's expenses for approximately 12 months in case future income from the NPI were to be insufficient to pay the Trust's expenses. The increase in the provision for estimated Trust expenses that was established during the nine months endedSeptember 30, 2020 was due to extremely depressed commodity prices during the period and uncertainty regarding the impact of the COVID-19 pandemic on demand for oil and natural gas commodities and their related market prices. The prior year increase in the provision for Trust expenses was subsequently utilized by the Trustee to pay certain Trust administrative expenses during the remainder of 2020 and beginning of 2021. During the nine months endedSeptember 30, 2021 , the Trustee established an incremental$1.0 million provision for Trust expenses to ensure that the Trust has sufficient cash available to pay its general and administrative expenses through its termination date, which includes periods after the termination of the net profits interest when no net proceeds will be generated. The Trustee may increase or decrease this reserve at any time without advance notice to the unitholders. It is expected that any such reserve that exceeds the Trust's actual general and administrative expenses in future periods will be returned to Trust unitholders in a future distribution. Accumulated net losses (repaid to) funded by Whiting. During the nine months endedSeptember 30, 2020 , the net profits interest generated accumulated net losses of$0.9 million attributable to the Trust primarily due to the decline in oil and natural gas prices, which lower commodity prices caused production and development costs on the underlying properties to exceed the proceeds from production. Approximately$0.6 million of accumulated net losses generated during the nine months endedSeptember 30, 2020 were repaid to Whiting during the fourth quarter of 2020, and$0.4 million of accumulated net losses were repaid to Whiting during the second quarter 16
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of 2021 (which included approximately
Comparison of results of the Trust for the three months ended
The following is a summary of income from net profits interest and distributable income received by the Trust for the three months endedSeptember 30, 2021 and 2020 (dollars in thousands, except per Bbl, per Mcf and per BOE amounts): Three Months EndedSeptember 30, 2021 2020 Sales volumes: Oil from underlying properties (Bbl)(1) 205,721 (3)
186,554 (4)
Natural gas from underlying properties (Mcf) 188,289 (3) 242,503 (4) Total production (BOE) 237,103 226,971 Average sales prices: Oil (per Bbl)(1)$ 59.51 $ 20.64 Natural gas (per Mcf)(2)$ 3.32 $ 0.92 Cost metrics: Lease operating expenses (per BOE)$ 28.20 $
27.37
Production tax rate (percent of total revenues) 5.0 % 3.3 % Revenues: Oil sales(1)$ 12,242 (3)$ 3,851 (4) Natural gas sales 624 (3) 223 (4) Total revenues 12,866 4,074 Costs: Lease operating expenses 6,686 6,212 Production taxes 649 135 Development costs 448 308 Reserve for expenditures (utilized) - (1,625) Total costs 7,783 5,030 Net proceeds (losses) 5,083 (956) Net profits percentage 90 % 90 % Income (loss) from net profits interest 4,575
(860)
Provision for estimated Trust expenses (1,250)
-
Montana state income tax withheld (6)
-
Accumulated net losses funded by Whiting - 860 Distributable income$ 3,319 $ - __________
(1) Oil includes natural gas liquids.
A portion of the natural gas volumes produced and sold from the underlying
properties during the three months ended
the NYMEX natural gas price for the three months ended
primarily due to the depressed liquids prices during such period.
Oil and gas sales volumes and related revenues for the three months ended
(3)
Trust) generally represent oil production from
and natural gas production from
Oil and gas sales volumes and related revenues for the three months ended
(4)
represent oil production from
production from
Income (loss) from net profits interest. Income (loss) from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI proceeds are based on the oil and gas production for which Whiting has received payment within one month following the end of the most recent fiscal quarter. However, in accordance with the terms of the NPI, any NPI proceeds received by the Trust after the NPI termination date ofDecember 31, 2021 will only include proceeds for oil and gas production received by Whiting prior toDecember 31, 2021 . Whiting receives payment for its crude oil sales generally within 30 days following the month in which it is produced and sold, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced and sold. However, payments for crude oil and natural gas sales on non-operated and farm-out properties may be 17
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remitted to Whiting after significantly longer periods of time. Income from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes, development costs and reserve for expenditures as follows:
Revenues. Oil and natural gas revenues increased$8.8 million (or 216%) during the three months endedSeptember 30, 2021 as compared to the same 2020 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The increase in revenue between periods was primarily due to increases in average realized sales prices and sales volumes of crude oil, and an increase in average realized sales prices of natural gas. The crude oil average realized sales price increased by 188% between periods primarily as a result of higher NYMEX oil prices. Natural gas average realized sales price increased by 261% between periods primarily due to significantly improved gas differentials and an increase in NYMEX gas prices. Crude oil production volumes increased by 19 MBbl (or 10%) and natural gas production volumes decreased by 54 MMcf (or 22%) between periods. The oil volume increase between periods was primarily related to increased collection of revenues for non-operated farm-out properties during the three months endedSeptember 30, 2021 . The decline in gas volumes between periods was primarily related to wells temporarily shut-in for equipment failures in the Keystone South and Warmsly South fields. Based on theDecember 31, 2020 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 12.5% for oil and 12.0% for gas from 2020 through theDecember 31, 2021 NPI termination date. Lease operating expenses. Lease operating expenses increased$0.5 million (or 8%) during the third quarter of 2021 compared to the same 2020 period primarily due to lower oilfield goods and services costs, slightly offset by lower ad valorem taxes. The increase in overall LOE combined with only a slight increase in sales volumes between periods resulted in an increase in LOE on a per BOE basis of 3% between periods from$27.37 during the three months endedSeptember 30, 2020 to$28.20 for the same period in 2021. Production taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues increased from 3.3% for the three months endedSeptember 30, 2020 to 5.0% for the same period in 2021. Production taxes during the three months endedSeptember 30, 2020 were lower as a result of certain wells within the Garland Unit being granted a "stripper well" production tax exemption, which reduced the tax rate for production volumes from this unit and resulted in the receipt of tax refunds in 2020 which related to prior periods. Overall production taxes for the third quarter of 2021 increased$0.5 million as compared to the same 2020 period primarily due to the aforementioned "stripper well" refunds included in the 2020 period. Development costs. Development costs for the three months endedSeptember 30, 2021 were$0.1 million (or 45%) higher as compared to the same 2020 period primarily due to an increase in CO2 costs in theCedar Hills unit and increased capital workover costs in the Keystone South field. Reserve for expenditures (utilized). As provided in the terms of the NPI, a$1.6 million reserve for future development, maintenance or operating expenses was established and subsequently utilized and applied against qualifying expenses incurred during the three months endedSeptember 30, 2020 . No such reserve was established or utilized during the three months endedSeptember 30, 2021 , and no such reserve remained as ofSeptember 30, 2021 . Provision for estimated Trust expenses. The provision for estimated Trust expenses increased$1.3 million during the three months endedSeptember 30, 2021 compared to the same 2020 period. During the three months endedSeptember 30, 2021 , the Trustee established an incremental$1.0 million provision for Trust expenses to ensure that the Trust has sufficient cash available to pay its general and administrative expenses through its termination date, which includes periods after the termination of the net profits interest when no net proceeds will be generated. The Trustee may increase or decrease this reserve at any time without advance notice to the unitholders. It is expected that any such reserve that exceeds the Trust's actual general and administrative expenses in future periods will be returned to Trust unitholders in a future distribution.
Accumulated net losses funded by Whiting. During the three months ended
Liquidity and Capital Resources
Overview. The Trust has no source of liquidity or capital resources other than
cash flows from the NPI. Other than Trust administrative expenses, including any
reserves established by the Trustee for future liabilities, the Trust's only use
of cash is for distributions to Trust unitholders. Administrative expenses
include payments to the Trustee and the Delaware Trustee, a quarterly fee paid
to Whiting pursuant to an administrative services agreement and expenses in
connection with the discharge of the Trustee's duties, including third-party
engineering, audit, accounting and legal fees. Each quarter, the Trustee
determines the amount of funds available for distribution to
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unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust's expenses for that quarter. Available funds are reduced by (i) any accumulated net losses to be recovered by Whiting, plus accrued interest and (ii) any cash the Trustee decides to hold as a reserve against future liabilities. If the NPI generates net losses or limited net proceeds (which was the case during each quarter of 2020 and the first quarter of 2021), the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust's administrative expenses. The Trust may borrow the amount of funds required to pay its liabilities if the Trustee determines that the cash on hand and the cash to be received, which is dependent on future net proceeds, are insufficient to cover the Trust's liabilities. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid. The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust's liquidity or the availability of capital resources. As ofOctober 31, 2021 , the Trust had cash reserves of$1.2 million remaining for the payment of its administrative expenses. The Trust is highly dependent on Whiting for multiple services, including the operation of wells, remittance of net proceeds generated by the NPI and administrative services performed on behalf of the Trust. Whiting's continued ability to operate wells, including those with interests held by the NPI, depends on its future financial condition, access to capital and other factors outside of its control. OnApril 1, 2020 , Whiting and certain of its direct and indirect subsidiaries, includingWhiting Oil and Gas (collectively, the "Debtors") commenced voluntary cases under chapter 11 ofthe United States Bankruptcy Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "). OnJune 30, 2020 , the Debtors filed the Joint Chapter 11 Plan of Reorganization ofWhiting Petroleum Corporation and its Debtor affiliates (as amended, modified and supplemented, the "Plan"). OnAugust 14, 2020 , theBankruptcy Court confirmed the Plan. OnSeptember 1, 2020 , the Debtors emerged from the Chapter 11 Cases and the Plan became effective in accordance with its terms. Letter of credit. InJune 2012 , Whiting established a$1.0 million letter of credit for the Trustee in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust in the event that Whiting should fail to lend funds to the Trust, if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and if the Trustee were to draw on the letter of credit or were to borrow funds from Whiting or other entities, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust. Such letter of credit will expireDecember 31, 2021 . As ofSeptember 30, 2021 andDecember 31, 2020 , the Trust had no borrowings under the letter of credit. Reserve for expenditures. As provided in the terms of the NPI, Whiting established a reserve for expenditures of$1.6 million during the nine months endedSeptember 30, 2020 for future development, maintenance or operating expenses. Such reserve was subsequently utilized and applied against qualifying expenses incurred during the remainder of 2020. Accordingly, there is no remaining reserve for expenditures to offset future development, maintenance or operating expenses on the underlying properties and related activities. No such reserve was established during the nine months endedSeptember 30, 2021 . Plugging and abandonment. Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the nine months endedSeptember 30, 2021 , Whiting incurred$0.4 million of costs related to plugging and abandonment charges on the underlying properties. Such costs were immaterial during the three months endedSeptember 30, 2021 . Plugging and abandonment costs were not charged to the unitholders of the Trust.
Future Trust Payment Periods
OnNovember 4, 2021 , the Trustee announced the Trust's distribution of net profits for the third quarterly payment period in 2021. Unitholders of record onNovember 19, 2021 are expected to receive a distribution of$0.218464 per Trust unit, which is payable on or beforeNovember 29, 2021 . This aggregate distribution to all Trust unitholders is expected to consist of net cash proceeds of$4.3 million paid by Whiting to the Trust, less a provision of$0.3 million for estimated Trust expenses and$4,037 forMontana state income tax withholdings. Although oil and gas prices have improved since the lows experienced during 2020, oil and gas prices have historically been volatile and may fluctuate widely in the future. The Trust is unable to predict future commodity prices or future performance and distributions to unitholders are significantly impacted by low oil and natural gas prices and may be reduced to zero, as was the case during the second, third and fourth quarters of 2020 and first quarter of 2021. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in operating and capital expenditures and commodity price differentials. If the NPI generates net losses or limited net proceeds, the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust's administrative expenses, which expenses may be in excess of the provision for Trust expenses. 19
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Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust's financial statements is included in Item 7 of the Trust's Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes to the critical accounting policies during the nine months endedSeptember 30, 2021 .
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