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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
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[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2022
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OR |
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[
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE |
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SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from |
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to |
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Commission File Number: 001-36386 |
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Gulf Coast Ultra Deep Royalty Trust |
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(Exact name of registrant as specified in its charter) |
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Delaware |
46-6448579 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer Identification No.) |
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The Bank of New York Mellon Trust Company, N.A., as trustee
601 Travis Street, 16th Floor |
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Houston, Texas |
77002 |
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(Address of principal executive offices) |
(Zip Code) |
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(512) 236-6555 |
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(Registrant's telephone number, including area code) |
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Securities registered pursuant to Section
12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
o
Yes
o
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting company
þ
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Emerging growth company
o
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
o
Yes
þ
No
On August 9, 2022, there were 230,172,696 royalty trust units
outstanding representing beneficial interests in the
registrant.
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GULF COAST ULTRA DEEP ROYALTY TRUST |
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TABLE OF CONTENTS |
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Page |
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Part I. FINANCIAL INFORMATION
Item 1. Financial
Statements.
GULF COAST ULTRA DEEP ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
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June 30, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
(unaudited) |
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(audited) |
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Operating cash |
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$ |
581,632 |
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$ |
756,449 |
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Reserve fund cash and short-term investments |
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1,054,758 |
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1,054,524 |
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Overriding royalty interests in subject interests, net |
389,840 |
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463,307 |
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Total assets |
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$ |
2,026,230 |
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$ |
2,274,280 |
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LIABILITIES AND TRUST CORPUS |
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Reserve fund liability |
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$ |
1,054,758 |
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$ |
1,054,524 |
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Trust corpus (230,172,696 royalty trust units authorized, issued
and |
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outstanding as of June 30, 2022 and December 31, 2021) |
971,472 |
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1,219,756 |
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Total liabilities and trust corpus |
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$ |
2,026,230 |
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$ |
2,274,280 |
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The accompanying notes are an integral part of these financial
statements.
GULF COAST ULTRA DEEP ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)
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Three Months Ended |
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Six Months Ended, |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Royalty income |
$ |
525,689 |
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$ |
213,382 |
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$ |
976,719 |
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$ |
451,565 |
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Interest income and other |
366 |
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8 |
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383 |
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16 |
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Administrative expenses |
(211,923) |
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(165,391) |
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(396,090) |
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(370,993) |
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Income in excess of administrative expenses (Note 4) |
$ |
314,132 |
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$ |
47,999 |
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$ |
581,012 |
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$ |
80,588 |
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Distributable income (Note 4) |
$ |
305,382 |
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$ |
47,999 |
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$ |
563,512 |
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$ |
80,588 |
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Distributable income per royalty trust unit |
$ |
0.001327 |
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$ |
0.000209 |
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$ |
0.002448 |
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$ |
0.000350 |
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Royalty trust units outstanding at end of period |
230,172,696 |
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230,172,696 |
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230,172,696 |
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230,172,696 |
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The accompanying notes are an integral part of these financial
statements.
GULF COAST ULTRA DEEP ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)
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Three Months Ended |
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Six Months Ended, |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Trust corpus, beginning of period |
$ |
950,816 |
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$ |
847,831 |
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$ |
1,219,756 |
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$ |
931,058 |
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Amortization of overriding royalty interests in subject
interests |
(35,346) |
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(30,712) |
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(73,467) |
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(75,276) |
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Income in excess of administrative expenses |
314,132 |
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47,999 |
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581,012 |
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80,588 |
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Distributions paid |
(258,130) |
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(32,589) |
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(755,829) |
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(103,841) |
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Trust corpus, end of period |
$ |
971,472 |
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$ |
832,529 |
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$ |
971,472 |
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$ |
832,529 |
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The accompanying notes are an integral part of these financial
statements.
GULF COAST ULTRA DEEP ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF ACCOUNTING AND SIGNIFICANT ACCOUNTING
POLICIES
The financial statements of Gulf Coast Ultra Deep Royalty Trust
(the Royalty Trust) are prepared on the modified cash basis of
accounting and are not intended to present the Royalty
Trust’s
financial position and results of operations in conformity with
United States (U.S.) generally accepted accounting principles
(GAAP). This other comprehensive basis of accounting corresponds to
the accounting permitted for royalty trusts by the U.S. Securities
and Exchange Commission (SEC), as specified by Staff Accounting
Bulletin Topic 12:E,
Financial Statements of Royalty Trusts.
The accompanying unaudited financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include
all required
information and disclosures.
Therefore, this information should be read in conjunction with the
Royalty Trust’s financial statements and notes contained in its
annual report on Form 10-K for the year ended December 31,
2021. The information furnished herein reflects all adjustments
that are, in the opinion of The Bank of New York Mellon Trust
Company, N.A. (the Trustee), necessary for a fair statement of the
results for the interim periods reported. All such adjustments are,
in the opinion of the Trustee, of a normal recurring nature.
Operating results for the three- and six-month periods ended
June 30, 2022, are not necessarily indicative of the results
that may be expected for the year ending December 31,
2022.
The Royalty Trust was created to hold a 5% gross overriding royalty
interest (collectively, the overriding royalty interests) in future
production from specified Inboard Lower Tertiary/Cretaceous
exploration prospects, located in the shallow waters of the Gulf of
Mexico and onshore in South Louisiana that existed as of
December 5, 2012 (collectively, the subject
interests).
Royalties are recorded in royalty income on the statements of
distributable income when received under the modified cash basis of
accounting.
2. OVERRIDING ROYALTY INTERESTS
The onshore Highlander subject interest is the only producing
subject interest in which the Royalty Trust holds an overriding
royalty interest, and began commercial production on
February 25, 2015. Prior to this date there had been no
commercial production of hydrocarbons from any of the subject
interests. Amortization charges related to production volumes
associated with the onshore Highlander subject interest reduced the
carrying value of the overriding royalty interests by $35,346 and
$73,467 during the three- and six-month periods ended June 30,
2022, respectively, and $30,712 and $75,276 during the three- and
six-month periods ended June 30, 2021, respectively.
Accumulated amortization was $6,366,860 and $6,293,393 at
June 30, 2022, and December 31, 2021,
respectively.
Highlander Oil & Gas Assets LLC (HOGA) has a 72 percent working
interest and an approximate 48 percent net revenue interest in the
onshore Highlander subject interest. The Royalty Trust holds a 3.6
percent overriding royalty interest in the onshore Highlander
subject interest. HOGA is the operator of the onshore Highlander
subject interest.
3. RELATED PARTY TRANSACTIONS
Royalty Income.
In accordance with the terms of the master conveyance, royalties
are paid to the Royalty Trust on the last day of the month
following the month in which production payments are received by
HOGA. As of June 30, 2022, only the onshore Highlander subject
interest had established commercial production. The Royalty Trust
received royalties of $525,689 and $976,719 during the three- and
six-month periods ended June 30, 2022, respectively, and
$213,382 and $451,565 during the three- and six-month periods ended
June 30, 2021, respectively. Royalties received by the Royalty
Trust must first be used to (i) satisfy Royalty Trust
administrative expenses and (ii) reduce Royalty Trust indebtedness.
The Royalty Trust had no indebtedness outstanding as of
June 30, 2022.
Each quarter, the trustee will determine the amount of funds
available for distribution to the Royalty Trust unitholders.
Available funds will equal the excess cash received by the Royalty
Trust from the royalty interests and other sources during that
quarter over the Royalty Trust’s liabilities for that quarter.
Available funds will be reduced by any cash the trustee decides to
hold as a reserve against future liabilities. As of June 30,
2022, the Trustee has established a minimum cash reserve of
$276,250.
Commencing with the distribution to unitholders in the first
quarter of 2022, the Trust has been withholding, and in the future
intends to withhold, $8,750 from the funds otherwise available for
distribution each quarter to gradually
build a cash reserve of approximately $350,000. This cash is
reserved for the payment of future known, anticipated or contingent
expenses or liabilities of the Trust. The Trustee may increase or
decrease the targeted cash reserve amount at any time, and may
increase or decrease the rate at which it is withholding funds to
build the cash reserve at any time, without advance notice to the
unitholders. Cash held in reserve will be invested as required by
the royalty trust agreement. Any cash reserved in excess of the
amount necessary to pay or provide for the payment of future known,
anticipated or contingent expenses or liabilities eventually will
be distributed to unitholders, together with interest earned on the
funds. For additional information regarding distributions to
Royalty Trust unitholders, see Note 4.
Funding of Administrative Expenses.
Pursuant to the royalty trust agreement, Freeport-McMoRan Inc.
(FCX) has agreed to pay annual trust expenses up to a maximum
amount of $350,000, with no right of repayment or interest due, to
the extent the Royalty Trust lacks sufficient funds to pay
administrative expenses. No such contributions were made during the
three- and six-month periods ended June 30, 2022 or 2021. In
addition to such annual contributions, FCX has agreed to lend
money, on an unsecured, interest-free basis, to the Royalty Trust
to fund the Royalty Trust's ordinary administrative expenses as set
forth in the royalty trust agreement. No loans were outstanding at
June 30, 2022 or December 31, 2021.
Pursuant to the royalty trust agreement, FCX agreed to provide and
maintain a $1.0 million stand-by reserve account or an equivalent
letter of credit for the benefit of the Royalty Trust to enable the
Trustee to draw on such reserve account or letter of credit to pay
obligations of the Royalty Trust if its funds are inadequate to pay
its obligations at any time. Currently, with the consent of the
Trustee, FCX may reduce the reserve account or substitute a letter
of credit with a different face amount for the original letter of
credit or any substitute letter of credit. In connection with this
arrangement, FCX provided $1.0 million to the Royalty Trust. The
$1.0 million, plus interest collected thereon, is reflected as
reserve fund cash, with a corresponding reserve fund liability in
the accompanying Statements of Assets, Liabilities and Trust
Corpus. As of June 30, 2022, the Royalty Trust had not drawn
any funds from the reserve account, and FCX had not requested a
reduction of such reserve account.
Administration.
HOGA performs all administrative and reporting responsibilities
with respect to the Royalty Trust, including those described in
Article III of the royalty trust agreement.
Compensation of the Trustee.
The Trustee receives annual compensation of $200,000. Additionally,
the Trustee receives reimbursement for its reasonable out-of-pocket
expenses incurred in connection with the administration of the
Royalty Trust. The Trustee’s compensation is paid out of the
Royalty Trust's assets. The Trustee has a lien on the Royalty
Trust’s assets to secure payment of its compensation and any
indemnification expenses and other amounts to which it is entitled
under the royalty trust agreement.
Royalty Trust Units Held by FCX and HOGA.
At June 30, 2022, the Royalty Trust had 230,172,696 royalty
trust units outstanding, HOGA held 31,143,150 royalty trust units,
and FCX, through its indirect wholly owned subsidiary McMoRan, held
31,143,149 royalty trust units. FCX and HOGA each hold 13.5% of the
outstanding royalty trust units.
4. DISTRIBUTIONS
Natural gas sales volumes (measured in thousands of cubic feet, or
“Mcf”), average sales price and net cash proceeds available for
distribution for the three- and six-month periods ended
June 30, 2022 and 2021, are set forth in the table
below.
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Three Months Ended |
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Six Months Ended, |
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June 30, |
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June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Natural gas sales volumes (Mcf)
(a)
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107,110 |
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76,780 |
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222,627 |
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188,190 |
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Natural gas average sales price (per Mcf) |
$ |
5.30 |
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$ |
3.24 |
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$ |
4.78 |
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$ |
2.81 |
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Gross proceeds |
568,076 |
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248,875 |
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1,064,902 |
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529,045 |
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Post-production costs and specified taxes |
(42,387) |
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(35,493) |
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(88,183) |
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(77,480) |
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Royalty income |
525,689 |
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213,382 |
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976,719 |
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451,565 |
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Interest and dividend income |
366 |
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8 |
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383 |
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16 |
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Administrative expenses |
(211,923) |
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(165,391) |
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(396,090) |
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(370,993) |
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Income in excess of administrative expenses |
314,132 |
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47,999 |
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581,012 |
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80,588 |
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Adjustment to minimum cash reserve |
(8,750) |
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— |
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(17,500) |
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— |
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Net cash proceeds available for distribution |
$ |
305,382 |
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$ |
47,999 |
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$ |
563,512 |
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$ |
80,588 |
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(a) Attributable to the onshore Highlander
subject interest, which is the only subject interest with
commercial production.
A summary of quarterly per unit distributions for the three-month
periods ended March 31, 2022 and 2021, and for the
three-month
periods ended June 30, 2022 and 2021, is set forth in the
table below.
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2022 |
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2021 |
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Amount |
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Per Unit Amount |
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Record Date |
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Payment Date |
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Amount |
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Per Unit Amount |
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Record Date |
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Payment Date |
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$ |
258,130 |
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$0.001121 |
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4/29/2022 |
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5/13/2022 |
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$ |
32,589 |
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$0.000142 |
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4/30/2021 |
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5/14/2021 |
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$ |
305,382 |
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$0.001327 |
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7/29/2022 |
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8/12/2022 |
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$ |
47,999 |
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$0.000209 |
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7/30/2021 |
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8/13/2021 |
These distributions are not necessarily indicative of future
distributions.
5. CONTINGENCIES AND OTHER COMMITMENTS
Litigation.
There are currently no pending legal proceedings to which the
Royalty Trust is a party.
6. SUBSEQUENT EVENTS
On July 14, 2022, the Royalty Trust declared a cash distribution of
$0.001327 per unit payable on August 12, 2022, to Royalty
Trust unitholders of record on July 29, 2022. For additional
information, see Note 4.
The Royalty Trust evaluated all other events subsequent to
June 30, 2022, and through the date the Royalty
Trust’s
financial statements were issued, and determined that all events or
transactions occurring during this period requiring recognition or
disclosure were appropriately addressed in these financial
statements.
Item 2.
Trustee's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
You should read the following discussion in conjunction with the
financial statements of Gulf Coast Ultra Deep Royalty Trust (the
Royalty Trust) and the related Trustee’s Discussion and Analysis of
Financial Condition and Results of Operations and the discussion of
its Business and Properties in the Royalty Trust's Annual Report on
Form 10-K for the year ended December 31, 2021 (2021 Form
10-K), filed with the United States (U.S.) Securities and Exchange
Commission (SEC). The results of operations reported and summarized
below are not necessarily indicative of future operating results.
Unless otherwise specified, all references to “Notes” refer to the
Notes to Financial Statements located in Part I, Item I. “Financial
Statements” of this Form 10-Q. Also see the 2021 Form 10-K for a
glossary of definitions for some of the oil and gas industry terms
used in this Form 10-Q. Additionally, please refer to the section
entitled “Cautionary Statement” on page 13 of this Form 10-Q. The
information below has been furnished to the Trustee by Highlander
Oil & Gas Assets LLC (HOGA).
COVID-19 Pandemic and Market Conditions Update
The COVID-19 pandemic and related economic repercussions have
created significant volatility, uncertainty, and turmoil in the oil
and natural gas industry. As the global economy continues to
recover from the effects of the COVID-19 pandemic, economic
indicators have continued to strengthen. However, the economy has
begun to experience elevated inflation levels as a result of global
supply and demand imbalances and current geopolitical events.
Inflationary pressures and labor shortages could result in
increases to the Royalty Trust’s operating costs and the current
increase in natural gas prices may not be sustained for any
significant period of time.
Business Overview
On June 3, 2013, Freeport-McMoRan Inc. (FCX) and McMoRan
Exploration Co. (MMR) completed the transactions contemplated by
the Agreement and Plan of Merger, dated as of December 5, 2012
(the merger agreement), by and among MMR, FCX, and INAVN Corp., a
Delaware corporation and indirect wholly owned subsidiary of FCX
(Merger Sub). Pursuant to the merger agreement, Merger Sub merged
with and into MMR, with MMR surviving the merger as an indirect
wholly owned subsidiary of FCX (the merger).
FCX's oil and gas assets are held through its wholly owned
subsidiary, FCX Oil & Gas LLC (FM O&G). As a result of the
merger, MMR and McMoRan Oil & Gas LLC (McMoRan) are both
indirect wholly owned subsidiaries of FM O&G.
The Royalty Trust is a statutory trust created as contemplated by
the merger agreement by FCX under the Delaware Statutory Trust Act
pursuant to a trust agreement entered into on December 18,
2012 (inception), by and among FCX, as depositor, Wilmington Trust,
National Association, as Delaware trustee, and certain officers of
FCX, as regular trustees. On May 29, 2013, Wilmington Trust,
National Association, was replaced by BNY Trust of Delaware, as
Delaware trustee (the Delaware Trustee), through an action of the
depositor. Effective June 3, 2013, the regular trustees were
replaced by The Bank of New York Mellon Trust Company, N.A., a
national banking association, as trustee (the
Trustee).
The Royalty Trust was created to hold a 5% gross overriding royalty
interest (collectively, the overriding royalty interests) in future
production from specified Inboard Lower Tertiary/Cretaceous
exploration prospects located in the shallow waters of the Gulf of
Mexico and onshore in South Louisiana that existed as of
December 5, 2012, the date of the merger agreement
(collectively, the subject interests). The subject interests were
“carved out” of the mineral interests that were acquired by FCX
pursuant to the merger and were not considered part of FCX's
purchase consideration of MMR. McMoRan has informed the Trustee
that it has no plans to pursue, has relinquished, has allowed to
expire or has sold all of its subject interests.
In connection with the merger, on June 3, 2013, (1) FCX, as
depositor, McMoRan, as grantor, the Trustee and the Delaware
Trustee entered into the amended and restated royalty trust
agreement to govern the Royalty Trust and the respective rights and
obligations of FCX, the Trustee, the Delaware Trustee, and the
Royalty Trust unitholders with respect to the Royalty Trust (the
royalty trust agreement); and (2) McMoRan, as grantor, and the
Royalty Trust, as grantee, entered into the master conveyance of
overriding royalty interests (the master conveyance) pursuant to
which McMoRan conveyed to the Royalty Trust the overriding royalty
interests in future production from the subject
interests. Other than (a) its formation, (b) its receipt of
contributions and loans from FCX for administrative and other
expenses as provided for in the royalty trust agreement, (c) its
payment of such administrative and other expenses, (d) its
repayment of loans from FCX, (e) its receipt of the conveyance of
the overriding royalty interests from McMoRan pursuant to the
master conveyance, (f) its receipt of royalties from McMoRan and
HOGA, and (g) its cash distributions to Royalty Trust unitholders,
the Royalty Trust has not conducted any activities. The Trustee has
no involvement with, control over, or responsibility for, any
aspect of any operations on or relating to the subject
interests.
The Trustee receives annual compensation of $200,000. Additionally,
the Trustee receives reimbursement for its reasonable out-of-pocket
expenses incurred in connection with the administration of the
Royalty Trust. The Trustee’s compensation is paid out of the
Royalty Trust's assets. The Trustee has a lien on the Royalty
Trust’s assets to secure payment of its compensation and any
indemnification expenses and other amounts to which it is entitled
under the royalty trust agreement.
As of June 30, 2022, only the onshore Highlander subject
interest had established commercial production. On February 5,
2019, McMoRan completed the sale of all of its rights, title and
interest in and to the onshore Highlander subject interest pursuant
to a purchase and sale agreement with HOGA (the Highlander Sale).
The onshore Highlander subject interest was sold subject to the
overriding royalty interest in future production held by the
Royalty Trust. As a result of the Highlander Sale, HOGA has a 72
percent working interest and an approximate 48 percent net revenue
interest in the onshore Highlander subject interest. The Royalty
Trust continues to hold a 3.6 percent overriding royalty interest
in the onshore Highlander subject interest. HOGA is the operator of
the onshore Highlander subject interest. McMoRan has informed the
Trustee that it has no plans to pursue, has relinquished, has
allowed to expire or has sold all of its subject
interests.
In connection with the Highlander Sale, McMoRan sold its interests
in substantially all of its oil and gas leases associated with the
Highlander subject interest to HOGA. At June 30, 2022, HOGA
owned interests in approximately 131 gas leases onshore in South
Louisiana, covering approximately 9,000 gross acres (6,476 acres
net to HOGA's interest) associated with the onshore Highlander
subject interest. McMoRan has informed the Trustee that it has no
plans to pursue, has relinquished, has allowed to expire or has
sold all of its subject interests. Whether or not HOGA maintains
the acreage associated with the onshore Highlander subject interest
is determined by HOGA's current and future plans, over which the
Royalty Trust has no control.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the royalty trust agreement, FCX has agreed to pay
annual trust expenses up to a maximum amount of $350,000, with no
right of repayment or interest due, to the extent the Royalty Trust
lacks sufficient funds to pay administrative expenses. No such
contributions by FCX were made during the three- and six-month
periods ended June 30, 2022 or 2021. In addition to such
annual contributions, FCX has agreed to lend money, on an
unsecured, interest-free basis, to the Royalty Trust to fund the
Royalty Trust's ordinary administrative expenses as set forth in
the royalty trust agreement. No loans were outstanding as of
June 30, 2022, or December 31, 2021. All funds the
Trustee borrows to cover expenses or liabilities, whether from FCX
or from any other source, must be repaid before the Royalty Trust
unitholders receive any distributions.
Pursuant to the royalty trust agreement, FCX agreed to provide and
maintain a $1.0 million stand-by reserve account or an equivalent
letter of credit for the benefit of the Royalty Trust to enable the
Trustee to draw on such reserve account or letter of credit to pay
obligations of the Royalty Trust if its funds are inadequate to pay
its obligations at any time. Currently, with the consent of the
Trustee, FCX may reduce the reserve account or substitute a letter
of credit with a different face amount for the original letter of
credit or any substitute letter of credit. In connection with this
arrangement, FCX provided $1.0 million to the Royalty Trust. The
$1.0 million, plus interest collected thereon, is held in reserve
fund cash. As of June 30, 2022, the Royalty Trust had not
drawn any funds from the reserve account, and FCX had not requested
a reduction of such reserve account.
In connection with the completion of the Highlander Sale, HOGA
assumed all administrative and reporting responsibilities with
respect to the Royalty Trust, including those described in Article
III of the royalty trust agreement.
In accordance with the terms of the master conveyance, royalties
are paid to the Royalty Trust on the last day of the month
following the month in which production payments are received by
HOGA. As of June 30, 2022, only the onshore Highlander subject
interest had established commercial production. The Royalty Trust
received royalties of
$525,689 and $976,719 during the three- and six-month periods ended
June 30, 2022, respectively, and $213,382 and $451,565 during
the three- and six-month periods ended June 30, 2021,
respectively.
Royalties received by the Royalty Trust must first be used to (i)
satisfy Royalty Trust administrative expenses and (ii) reduce
Royalty Trust indebtedness. The Royalty Trust had no indebtedness
outstanding as of June 30, 2022.
Each quarter, the trustee will determine the amount of funds
available for distribution to the Royalty Trust unitholders.
Available funds will equal the excess cash received by the Royalty
Trust from the royalty interests and other sources during that
quarter over the Royalty Trust’s liabilities for that quarter.
Available funds will be reduced by any cash the trustee decides to
hold as a reserve against future liabilities. As of June 30,
2022, the Trustee has established a minimum cash reserve of
$276,250.
Commencing with the distribution to unitholders in the first
quarter of 2022, the Trust has been withholding, and in the future
intends to withhold, $8,750 from the funds otherwise available for
distribution each quarter to gradually build a cash reserve of
approximately $350,000. This cash is reserved for the payment of
future known, anticipated or contingent expenses or liabilities of
the Trust. The Trustee may increase or decrease the targeted cash
reserve amount at any time, and may increase or decrease the rate
at which it is withholding funds to build the cash reserve at any
time, without advance notice to the unitholders. Cash held in
reserve will be invested as required by the royalty trust
agreement. Any cash reserved in excess of the amount necessary to
pay or provide for the payment of future known, anticipated or
contingent expenses or liabilities eventually will be distributed
to unitholders, together with interest earned on the
funds.
Distributable income totaled $305,382 and $563,512 during the
three- and six-month periods ended June 30, 2022,
respectively, and $47,999 and $80,588 during the three- and
six-month periods ended June 30, 2021, respectively. On July
14, 2022, the Royalty Trust declared a cash distribution of
$0.001327 per unit payable on August 12, 2022, to Royalty
Trust unitholders of record on July 29, 2022. These
distributions are not necessarily indicative of future
distributions. The Royalty Trust's only other sources of liquidity
are mandatory annual contributions, any loans and the required
standby reserve account or letter of credit from FCX. As a result,
any material adverse change in FCX's, McMoRan's or HOGA's financial
condition or results of operations could materially and adversely
affect the Royalty Trust and the underlying royalty trust
units.
OFF-BALANCE SHEET ARRANGEMENTS
The Royalty Trust has no off-balance sheet arrangements. The
Royalty Trust has not guaranteed the debt of any other party, nor
does the Royalty Trust have any other arrangements or relationships
with other entities that could potentially result in unconsolidated
debt, losses or contingent obligations.
RESULTS OF OPERATIONS
Royalty Income.
As of June 30, 2022, only the onshore Highlander subject
interest had established commercial production. In accordance with
the terms of the master conveyance, during the three-month period
ended June 30, 2022, the Royalty Trust received royalties of
$525,689 related to 107,110 thousand cubic feet (Mcf) of natural
gas production with average post-production costs of $0.40 per Mcf
and an average sales price of $5.30 per Mcf. During the three-month
period ended June 30, 2021, the Royalty Trust received
royalties of $213,382 related to 76,780 Mcf of natural gas
production attributable to the onshore Highlander subject interest
with average post-production costs of $0.46 per Mcf and an average
sales price of $3.24 per Mcf.
During the six-month period ended June 30, 2022, the Royalty
Trust received royalties of $976,719 related to 222,627 Mcf of
natural gas production attributable to the onshore Highlander
subject interest with average post-production costs of $0.40 per
Mcf and an average sales price of $4.78 per Mcf. During the
six-month period ended June 30, 2021, the Royalty Trust
received royalties of $451,565 related to 188,190 Mcf of natural
gas production attributable to the onshore Highlander subject
interest with average post-production costs of $0.41 per Mcf and an
average sales price of $2.81 per Mcf.
Royalty income was higher during the three- and six-month periods
ended June 30, 2022, as compared to the corresponding 2021
periods, primarily due to higher natural gas prices and higher
production.
Administrative Expenses.
Administrative expenses consist primarily of audit, legal and
trustee expenses incurred in connection with the administration of
the Royalty Trust. During the three-month periods ended
June 30, 2022 and
2021, the Royalty Trust paid administrative expenses of $211,923
and $165,391, respectively. During the six-month periods ended
June 30, 2022 and 2021, the Royalty Trust paid administrative
expenses of $396,090 and $370,993, respectively. Administrative
expenses were higher for the three- and six-month periods ended
June 30, 2022, as compared to the corresponding 2021 periods,
primarily due to the timing of payments for professional
services.
NEW ACCOUNTING STANDARDS
None.
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains 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). Forward-looking statements
are all statements other than statements of historical facts, such
as any statements regarding the future financial condition of the
Royalty Trust or the trading market for the royalty trust units,
all statements regarding the respective plans of McMoRan or HOGA
for the subject interests, the potential results of any drilling on
the subject interests by the applicable operator, anticipated
interests of McMoRan or HOGA and the Royalty Trust in any of the
subject interests, HOGA's geologic models and the nature of the
geologic trend onshore in South Louisiana discussed in this Form
10-Q, the amount and date of quarterly distributions to Royalty
Trust unitholders, and all statements regarding any belief or
understanding of the nature or potential of the subject interests.
The words “anticipates,” “may,” “can,” “plans,” “believes,”
“estimates,” “expects,” “projects,” “intends,” “likely,” “will,”
“should,” “to be,” “potential,” and any similar expressions and/or
statements that are not historical facts are intended to identify
those assertions as forward-looking statements.
Forward-looking statements are not guarantees or assurances of
future performance and actual results may differ materially from
those anticipated, projected or assumed in the forward-looking
statements. Important factors that may cause actual results to
differ materially from those anticipated by the forward-looking
statements include, but are not limited to, the future plans of FCX
and HOGA for their remaining oil and gas properties; the risk that
the subject interests will not produce additional hydrocarbons;
general economic and business conditions; variations in the market
demand for, and prices of, oil and natural gas; drilling results;
changes in oil and natural gas reserve expectations; the potential
adoption of new governmental regulations; decisions by FCX, McMoRan
or HOGA not to develop and/or transfer the subject interests; any
inability of FCX, McMoRan or HOGA to develop the subject interests;
damages to facilities resulting from natural disasters or
accidents; fluctuations in the market price, volume and frequency
of the trading market for the royalty trust units; the amount of
cash received or expected to be received by the Trustee from the
underlying subject interests on or prior to a record date for a
quarterly cash distributions; the economic effects of the COVID-19
pandemic and federal, state and local governmental actions in
response to the pandemic; and other factors described in Part I,
Item 1A. “Risk Factors” in the 2021 Form 10-K, as updated by the
Royalty Trust’s subsequent filings with the SEC. Any differences in
actual cash receipts by the Royalty Trust could affect the amount
of quarterly cash distributions.
Investors are cautioned that current production rates may not be
indicative of future production rates or of the amounts of
hydrocarbons that a well may produce, and that many of the
assumptions upon which forward-looking statements are based are
likely to change after such forward-looking statements are made,
which the Royalty Trust cannot control. The Royalty Trust cautions
investors that it does not intend to update its forward-looking
statements, notwithstanding any changes in assumptions, changes in
business plans, actual experience, or other changes, and the
Royalty Trust undertakes no obligation to update any
forward-looking statements except as required by law.
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk.
As a smaller reporting company, the Royalty Trust is not required
to provide the information required by this Item.
Item 4.
Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures.
The Royalty Trust has no employees, and, therefore, does not have a
principal executive officer or principal financial officer.
Accordingly, the Trustee is responsible for making the evaluations,
assessments and conclusions required pursuant to this Item 4. The
Trustee has evaluated the effectiveness of the Royalty Trust's
“disclosure controls and procedures” (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this Form 10-Q. Based on this evaluation, the Trustee
has concluded that the Royalty Trust's disclosure controls and
procedures are effective as of the end of the period covered by
this Form 10-Q.
Due to the nature of the Royalty Trust as a passive entity and in
light of the contractual arrangements pursuant to which the Royalty
Trust was created, including the provisions of (i) the amended and
restated royalty trust agreement and (ii) the master conveyance,
the Royalty Trust's disclosure controls and procedures necessarily
rely on (A) information provided by FCX or HOGA, including
information relating to results of operations, the costs and
revenues attributable to the subject interests and other operating
and historical data, plans for future operating and capital
expenditures, reserve information, information relating to
projected production, and other information relating to the status
and results of operations of the subject interests and the
overriding royalty interests, and (B) conclusions and reports
regarding reserves by the Royalty Trust's independent reserve
engineers.
(b)
Changes in internal control over financial
reporting.
During the quarter ended June 30, 2022, there has been no
change in the Royalty Trust's internal control over financial
reporting that has materially affected, or is reasonably likely to
materially affect, the Royalty Trust's internal control over
financial reporting. The Trustee notes for purposes of
clarification that it has no authority over, and makes no statement
concerning, the internal control over financial reporting of FCX or
HOGA.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
There are currently no pending legal proceedings to which the
Royalty Trust is a party.
Item 1A.
Risk Factors.
Please refer to Part I, Item 1A. “Risk Factors” in the 2021 Form
10-K. Any of these factors could result in a significant or
material adverse effect on the Royalty Trust's results of
operations or financial condition. There have been no material
changes to the Royalty Trust’s risk factors since the 2021 Form
10-K.
Item 6. Exhibits.
The following exhibits are filed or furnished as part of this
quarterly report on Form 10-Q:
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Incorporated by Reference |
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Exhibit Title |
Form 10-Q |
Form |
File No. |
Date Filed |
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10-Q |
333-185742 |
August 14, 2013 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
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Gulf Coast Ultra Deep Royalty Trust |
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By: |
The Bank of New York Mellon |
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Trust Company, N.A., as Trustee
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By: |
/s/ Sarah C. Newell |
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Sarah C. Newell |
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Vice President
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Date: August 12, 2022 |
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The Registrant, Gulf Coast Ultra Deep Royalty Trust, has no
principal executive officer, principal financial officer,
controller or chief accounting officer, board of directors or
persons performing similar functions. Accordingly, no additional
signatures are available and none have been provided. In signing
the report above, the Trustee does not imply that it has performed
any such function or that any such function exists pursuant to the
terms of the amended and restated royalty trust agreement, dated
June 3, 2013, under which it serves.
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