Portions of the production numbers and average sales prices in the table above for the three
and six months ended June 30, 2018 consist of estimated oil and natural gas gross proceeds and
true-ups.
For a discussion of the gross proceeds estimates and
true-ups,
see the sections entitled
Gross Proceeds and Severance Tax
True-ups
and
Outstanding Months to be
Reconciled/Trued-up
in Part I, Item 1, Note 3 Commitments and Contingencies and Item 4 of Part I of this Quarterly Report on Form
10-Q
entitled Controls
and Procedures for a more detailed explanation of the
true-up
process for net income reporting and distributions to Unit Holders.
The Trust recognizes production during the month in which the related net proceeds attributable to the Royalty are paid to the Trust by
Hilcorp, based upon estimated oil and natural gas production. Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of
the current calendar year. Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oil and natural gas, respectively, by the prices received by Hilcorp for sales of such volumes from
the Subject Interests, taking into consideration production taxes attributable to the Subject Interests. Because the oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price
and cost, including Hilcorps capital expenditures and the timing of Hilcorps actualization of prior reported estimated oil and natural gas production data, the aggregate sales amounts from the Subject Interests may not provide a
meaningful comparison to sales attributable to the Royalty. Future
true-ups
will impact future royalty proceeds, but will not change the reported amounts due to the accounting basis used.
The fluctuations in natural gas production that have occurred during the three-month and
six-month
periods ended June 30, 2018 and 2017, respectively, generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as
offset by the natural production decline curve. Also, production from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin. As noted above, oil and natural gas sales attributable to
the Royalty are based on an allocation formula dependent on many factors, including oil and natural gas prices and capital expenditures.
Marketing
There were no changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and
processing of production during the second quarter of 2018.
Off-Balance Sheet
Arrangements
None.
Critical Accounting Policies and
Estimates
For a discussion of significant accounting policies and estimates that impact the Trusts financial statements, see
Part I, Item 1. Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8. Financial Statements and Supplemental Data contained in the Trusts Annual Report on Form
10-K
for the
year ended December 31, 2017.
Information Regarding Forward-Looking Information
Certain information included in this Quarterly Report on Form
10-Q
contains, and other materials filed
or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may be or may concern, among other things, capital expenditures, drilling
activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trusts activities, and regulatory matters. Such forward-looking statements generally
are accompanied by words such as may, will, estimate, expect, predict, project, anticipate, goal, should, assume,
believe, plan, intend, or other words that convey the uncertainty of future events or outcomes. Such statements are based on certain assumptions of Compass Bank, the Trustee and by Hilcorp, the owner of the
working interest through the reporting period, with respect to future events; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Hilcorp; and involve risks and uncertainties. However, whether
actual results and developments will conform with such expectations and predictions is subject to a
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