8-K: Hugoton Royalty Trust Announces No June Cash Distribution Due to Excess Costs

Hugoton Royalty Trust will not declare a cash distribution for June 2024 due to excess costs across all three of its net profits interest conveyances.

Summary

• Hugoton Royalty Trust has announced that there will be no cash distribution for June 2024.
• This decision is due to excess cost positions on all three of the Trust's net profits interest conveyances.
• The Trust's cash reserve was reduced by $7,000 for expenses.
• The Trustee intends to replenish the cash reserve before future distributions.
• Underlying gas sales for the current month were 724,000 Mcf at an average price of $2.16 per Mcf.
• Underlying oil sales for the current month were 19,000 Bbls at an average price of $77.86 per Bbl.
• XTO Energy has deducted $544,000 in development costs, $2,011,000 in production expenses, and $1,122,000 in overhead related to two new wells in Oklahoma.
• Excess costs increased by $109,000 on Kansas properties, $438,000 on Oklahoma properties, and $709,000 on Wyoming properties.
• Cumulative excess costs are $1,311,000 for Kansas, $2,120,000 for Oklahoma, and $4,570,000 for Wyoming.
• The Trust has incurred $9.9 million in development costs for four non-operated wells in Oklahoma, with $7.9 million net to the Trust.
• The arbitration panel ruled that the Trust is responsible for its share of a $48 million settlement related to the Chieftain class action lawsuit, estimated to be $14.6 million net to the Trust.
• The reduction in net proceeds from the Chieftain settlement will likely result in no distributions under the Oklahoma conveyance while these excess costs are recovered.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the lack of a cash distribution, increased excess costs, and the financial impact of the Chieftain settlement. While the trustee is working to replenish the cash reserve, the immediate outlook is poor for unitholders.

Positives

• The Trustee intends to replenish the cash reserve before future distributions.
• The arbitration related to the Chieftain settlement is complete.
• The Trust and XTO Energy will continue to provide material updates on the four non-operated wells.

Negatives

• There will be no cash distribution for June 2024.
• The Trust's cash reserve was reduced by $7,000.
• Excess costs have increased across all three conveyances.
• The Trust is responsible for $14.6 million net of the Chieftain settlement as a production cost.
• The reduction in net proceeds from the Chieftain settlement will likely result in no distributions under the Oklahoma conveyance while these excess costs are recovered.

Risks

• Future distributions are dependent on replenishing the cash reserve and receiving net profits income.
• Fluctuations in gas and oil prices could impact future net profits.
• The recovery of excess costs may delay future distributions.
• Development costs for non-operated wells could further impact the Trust's finances.
• The Chieftain settlement will significantly reduce the Trust's net proceeds.

Future Outlook

The Trustee anticipates replenishing the cash reserve prior to declaring any future distributions to unitholders. Future results could differ materially due to changes in natural gas and oil prices and other economic conditions.

Management Comments

• Argent Trust Company, as Trustee of the Hugoton Royalty Trust, announced today there would not be a cash distribution to the holders of its units of beneficial interest for June 2024.
• The Trustee anticipates replenishing the cash reserve prior to declaring any future distributions to unitholders.
• XTO Energy has advised the Trustee that it has included underlying sales volumes of approximately 6,000 Bbls and 43,000 Mcf from two new non-operated wells drilled in Major County, Oklahoma.
• XTO Energy has advised the Trustee that excess costs increased by $109,000 on properties underlying the Kansas net profits interests.
• XTO Energy has advised the Trustee that excess costs increased by $438,000 on properties underlying the Oklahoma net profits interests.
• XTO Energy has advised the Trustee that excess costs increased by $709,000 on properties underlying the Wyoming net profits interests.
• XTO Energy and the Trustee are in the process of determining the portion of the $48 million that is allocable to Trust properties to be charged as an excess cost to the Trust, but estimate it to be approximately $14.6 million net to the Trust.

Industry Context

The announcement reflects the challenges faced by royalty trusts in the oil and gas sector, particularly with fluctuating commodity prices and the impact of development costs and legal settlements on distributions. The increase in excess costs and the impact of the Chieftain settlement are significant factors affecting the Trust's ability to provide distributions to unitholders.

Comparison to Industry Standards

• Many royalty trusts face similar challenges with fluctuating commodity prices and operational costs.
• The impact of the Chieftain settlement is a unique event that has significantly impacted the Hugoton Royalty Trust.
• Other royalty trusts may have different cost structures and legal obligations, making direct comparisons difficult.
• The level of detail provided by Hugoton Royalty Trust regarding excess costs and development costs is more transparent than some other trusts.
• The lack of a distribution is not uncommon in the royalty trust sector when costs exceed revenue.

Legal Proceedings

• The arbitration related to the Chieftain settlement is complete, with the Trust being responsible for approximately $14.6 million net of the settlement as a production cost.
• Other Trustee claims related to disputed amounts on the computation of the Trusts net proceeds for 2014 through 2019 and 2021 were bifurcated from the initial arbitration and the final hearing regarding the remaining dispute over net proceeds was cancelled.

Stakeholder Impact

• Shareholders will not receive a cash distribution for June 2024.
• Shareholders may experience a decrease in the value of their units due to the lack of distribution and increased costs.
• The Trust's ability to provide future distributions is dependent on replenishing the cash reserve and receiving net profits income.

Next Steps

• The Trustee will work to replenish the cash reserve.
• XTO Energy and the Trustee will continue to provide material updates on the four non-operated wells.
• XTO Energy and the Trustee will continue to provide material updates on the remaining arbitration dispute over net proceeds.

Key Dates

Keywords

Royalty Trust, Cash Distribution, Excess Costs, Net Profits, Oil and Gas, XTO Energy, Arbitration, Chieftain Settlement, Production Costs, Development Costs