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

Hugoton Royalty Trust will not declare a cash distribution for March 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 March 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 $179,000 to cover expenses.
• The Trustee plans to replenish the cash reserve before future distributions are made.
• Underlying gas sales for the current month were 604,000 Mcf at an average price of $3.68 per Mcf, and oil sales were 14,000 Bbls at an average price of $61.96 per Bbl.
• XTO Energy has included sales volumes from two new wells in Oklahoma, but also deducted significant development, production, and overhead costs.
• Excess costs have increased by $45,000 in Kansas, $404,000 in Oklahoma, and $347,000 in Wyoming.
• The Trust is also facing a potential $14.6 million charge related to the Chieftain settlement, which could further impact distributions.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the lack of a cash distribution, significant excess costs, and the potential impact of the Chieftain settlement. The document highlights several financial challenges for the trust.

Positives

• XTO Energy has included sales volumes from two new non-operated wells in Oklahoma.
• The arbitration panel has ruled that the Trust is not obligated to pay the $32 million in legal fees from the Chieftain settlement.

Negatives

• The Trust will not be making a cash distribution for March 2024.
• The Trust's cash reserve was reduced by $179,000.
• Excess costs have increased significantly across all three conveyances.
• The Trust faces a potential $14.6 million charge related to the Chieftain settlement.
• The average oil price was negatively impacted by revenue adjustments, although this did not affect the current month distribution.

Risks

• The Trust's ability to make future distributions is dependent on replenishing the cash reserve and reducing excess costs.
• The $14.6 million charge from the Chieftain settlement could significantly impact future distributions.
• Fluctuations in gas and oil prices could affect the Trust's revenue and profitability.
• Development costs for new wells could be higher than anticipated.
• The timing of cash receipts can cause fluctuations in sales volumes from month to month.

Future Outlook

The Trustee anticipates replenishing the cash reserve before declaring any future distributions. 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 March 2024.
• To the extent net profits income is received in future months, 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 4,000 Bbls and 25,000 Mcf from two new non-operated wells drilled in Major County, Oklahoma and has deducted development costs of $338,000, production expense of $1,934,000 and overhead of $1,128,000 in determining the royalty calculation for the Trust for the current month.
• XTO Energy has advised the Trustee that the current month distribution oil price was negatively impacted by revenue adjustments that were offset by severance tax expenses.
• XTO Energy has advised the Trustee that excess costs increased by $45,000 on properties underlying the Kansas net profits interests.
• XTO Energy has advised the Trustee that excess costs increased by $404,000 on properties underlying the Oklahoma net profits interests.
• XTO Energy has advised the Trustee that excess costs increased by $347,000 on properties underlying the Wyoming net profits interests.
• XTO Energy has also advised the Trustee that the development costs for this well are anticipated to be approximately $1.3 million underlying ($1.0 million net to the Trust), and that drilling commenced in 2023 and is expected to be completed in first quarter 2024.

Industry Context

The announcement reflects the challenges faced by royalty trusts in the current environment of fluctuating oil and gas prices and increasing development costs. The impact of the Chieftain settlement is a specific issue for this trust, but legal and cost disputes are not uncommon in the oil and gas industry.

Comparison to Industry Standards

• The lack of a distribution is a negative signal for a royalty trust, as investors typically expect regular income.
• Other royalty trusts may be facing similar challenges with excess costs and fluctuating commodity prices, but the specific impact of the Chieftain settlement is unique to Hugoton.
• The level of excess costs and the potential $14.6 million charge from the Chieftain settlement are significant and could be worse than what some other trusts are experiencing.
• Companies like Sabine Royalty Trust (SBR) and Permian Basin Royalty Trust (PBT) are comparable in that they are also royalty trusts, but their specific financial situations and cost structures will vary.

Legal Proceedings

• The Trust is involved in an arbitration with XTO Energy regarding the Chieftain settlement.
• The arbitration panel has ruled that the Trust is obligated to pay its share of the $48 million received by the plaintiffs in the Chieftain lawsuit, but not the $32 million in legal fees.

Stakeholder Impact

• Shareholders will not receive a cash distribution for March 2024.
• The lack of a distribution may negatively impact shareholder confidence.
• The Trust's ability to make future distributions is uncertain due to excess costs and the Chieftain settlement.

Next Steps

• The Trustee will focus on replenishing the cash reserve.
• The Trustee and XTO Energy will continue to provide material updates on the four non-operated wells.
• XTO Energy and the Trustee will continue to determine the portion of the $48 million that is allocable to Trust properties to be charged as an excess cost to the Trust.
• The Trustee and XTO Energy will provide material updates on the remaining dispute over net proceeds from 2014 through 2019 and 2021 as they become available.

Key Dates

Keywords

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