SAN JUAN BASIN ROYALTY TRUST - Quarter Report: 2017 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

for the Quarterly Period Ended June 30, 2017

or

for the transition period from              to             

Commission File No. 1-8032

SAN JUAN BASIN ROYALTY TRUST

(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)

Compass Bank

300 W. 7^th Street, Suite B

Fort Worth, Texas 76102

(Address of principal executive offices)

(Zip Code)

(866) 809-4553

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Number of Units of beneficial interest outstanding at August 9, 2017: 46,608,796

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SAN JUAN BASIN ROYALTY TRUST

PART I

FINANCIAL INFORMATION

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

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CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

The condensed financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of Compass Bank, the trustee of the Trust (the “Trustee”), all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at June 30, 2017 and December 31, 2016 and the distributable income and changes in trust corpus for the three-month periods and the six-month periods ended June 30, 2017 and 2016. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

The financial statements of the Trust are prepared on the following basis and are not intended to present the financial position and results of operations of the Trust in conformity with U.S. generally accepted accounting principles (“GAAP”):

The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for liabilities and contingencies which would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid instead of when incurred; and amortization of the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements. This comprehensive basis of accounting corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

The Trustee routinely reviews its royalty interests in oil and natural gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is charged directly to trust corpus instead of as an expense. There was no impairment of the assets as of June 30, 2017.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

For federal income tax purposes, the Trust constitutes a fixed investment trust which is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment trust (“WHFIT”) classified as a non-mortgage widely held fixed investment trust (“NMWHFIT”) for federal income tax purposes. The Trustee is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.

The Royalty constitutes an “economic interest” in oil and natural gas properties for federal income tax purposes. Unit Holders must report their share of the production revenues of the Trust as ordinary income from oil and natural gas royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.

Sales of natural gas production from certain coal seam wells drilled prior to January 1, 1993, qualified for federal income tax credits under Section 29 (now Section 45K) of the Internal Revenue Code of 1986, as amended (the “Code”), through 2002 but not thereafter. Accordingly, under present law, the Trust’s production and sale of natural gas from coal seam wells does not qualify for tax credit under Section 45K of the Code (the “Section 45 Tax Credit”). Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trust’s current production for such credit has been enacted. No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.

The classification of the Trust’s income for purposes of the passive loss rules may be important to a Unit Holder. Royalty income such as that derived through the Trust will generally be treated as portfolio income that may not be offset or reduced by passive losses.

Tax positions taken by the Trust related to the Trust’s pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that material positions taken would more likely than not be sustained by examination. As of June 30, 2017, the Trust’s tax years 2013 and thereafter remain subject to examination.

Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holder’s interest in the Trust.

Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders. See Note 1 Basis of Presentation, for a summary of the terms of the conveyance with respect to recovery of costs, and Note 4 Settlements and Litigation, for a discussion of the status of pending litigation matters.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

On July 31, 2014, the Trustee filed a lawsuit (the “2014 Litigation”) against Burlington in New Mexico State Court. The Trust asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing, and seeks a declaratory judgment arising out of a number of unresolved revenue and expense audit exceptions asserted by the Trust’s third party compliance auditors. More particularly, the Trust claims that Burlington failed to properly account for and pay net overriding royalty interests to the Trust with respect to oil and natural gas production from numerous properties in the San Juan Basin of northwestern New Mexico. The Trust seeks monetary relief (including actual and punitive damages, costs, expenses, interest and attorney fees) in excess of $12 million, along with specific performance of certain contractual obligations, declaratory relief and a judgment for other relief to which it may show itself to be justly entitled.

Although the case is currently set for non-jury trial on January 16, 2018, the parties have preliminarily agreed on settlement terms and are attempting to negotiate a formal settlement agreement to be executed by the parties. If a formal settlement agreement is agreed upon and executed, then the 2014 Litigation will be dismissed. For more information about the 2014 Litigation, see Part I, Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2016.

In a July 31, 2017 news release, ConocoPhillips announced that the sale of its San Juan Basin assets to Hilcorp San Juan LP (“Hilcorp”), which includes the Subject Interests, closed on July 31, 2017. ConocoPhillips informed the Trust that the last production month that ConocoPhillips is responsible for is July 2017.

Burlington accrues and withholds from Distributable Income funds that it estimates will be needed to cover capital expenses. The July 2017 distribution of Distributable Income to Unit Holders included a $1 million gross credit based on a reversal of accrued capital expenses.

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Overview

The Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980 between Southland Royalty Company (“Southland”) and The Fort Worth National Bank. Effective as of September 30, 2002, the original indenture was amended and restated and, effective as of December 12, 2007, the restated indenture was amended and restated, which we refer to as the “Indenture.” As a result of a series of mergers and other transactions, the current Trustee of the Trust is Compass Bank, which is a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaira, S.A.

The Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance (the “Conveyance”) effective November 1, 1980, Southland conveyed to the Trust a 75% net overriding royalty interest (the “Royalty”) that burdens certain of Southland’s oil and natural gas interests (the “Subject Interests”) in properties located in the San Juan Basin of northwestern New Mexico. Subsequent to the Conveyance of the Royalty, through a series of assignments and mergers, Southland’s successor became Burlington Resources Oil & Gas Company LP (“Burlington”), which is an indirect wholly-owned subsidiary of ConocoPhillips.

The Royalty constitutes the principal asset of the Trust. The beneficial interest in the Royalty is divided into 46,608,796 units (the “Units”) representing undivided fractional interests in the beneficial interest of the Trust equal to the number of shares of the common stock of Southland outstanding as of the close of business on November 3, 1980. Each stockholder of Southland of record at the close of business on November 3, 1980 received one freely tradable Unit for each share of the common stock of Southland then held. Holders of Units are referred to herein as “Unit Holders.”

The Trustee

The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining available income to the Unit Holders. The amount of income distributable to Unit Holders, which we refer to as “Distributable Income,” depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves. The Trust has no employees, officers or directors. All administrative functions of the Trust are performed by the Trustee.

ConocoPhillips

Affiliates of ConocoPhillips are the principal operators of the majority of the Subject Interests. Burlington also is responsible, subject to the terms of an agreement with the Trust, for marketing the production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable in the circumstances. A very high percentage of the Royalty Income is attributable to the production and sale by Burlington of natural gas from the Subject Interests. Accordingly, the market price for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Sale of Burlington’s Interest in the San Juan Basin

In a July 31, 2017 news release, ConocoPhillips announced that the sale of its San Juan Basin assets to Hilcorp, which includes the Subject Interests, closed on July 31, 2017. ConocoPhillips informed the Trust that the last production month that ConocoPhillips is responsible for is July 2017.

Results of Operations – Three and Six Months Ended June 30, 2017 and 2016

Royalty Income

Royalty Income consists of monthly net proceeds attributable to the Royalty. Royalty Income for the three and six months ended June 30, 2017 and 2016 was determined as shown in the following table:

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The Royalty Income distributed to the Trust for the three and six months ended June 30, 2017 was higher than that distributed during the same periods of 2016 primarily due to higher natural gas prices. The average natural gas price increased from $1.43 per Mcf and $1.61 per Mcf for the three and six months ended June 30, 2016, respectively, to $2.63 per Mcf and $2.78 per Mcf for the three and six months ended June 30, 2017, respectively.

Gross Proceeds from Subject Interests. Gross proceeds increased $7.0 million or 70% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 and increased $13.7 million or 59% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Such increases for these periods were primarily attributable to higher natural gas and oil prices offset by lower production volumes.

Capital Expenditures. Capital expenditures decreased $0.19 million or 71% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 and decreased $0.6 million or 68% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Such decreases for these periods were primarily attributable to the challenging price environment for natural gas and natural gas liquids along with fewer maintenance and facility projects.

Severance Taxes. Aggregate severance taxes increased $0.7 million or 61% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 and increased $1.3 million or 54% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Such increases were primarily attributable to higher gross proceeds during these periods. Severance taxes represented 10.3% of gross proceeds for the three months ended June 30, 2017 compared to 10.9% for the same period of 2016. Severance taxes represented 10.3% of gross proceeds for the six months ended June 30, 2017 compared to 10.6% for the same period of 2016.

Lease Operating Expenses and Property Taxes. Lease operating expenses and property taxes increased $0.03 million or 0.04% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 and decreased $1.1 million or 8% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Lease operating expenses increased slightly during the second quarter of 2017 compared to second quarter of 2016. The decrease in lease operating expenses over the six month period of 2017 compared to the same period in 2016 was primarily attributable to 1) Burlington’s efforts to reduce contracted maintenance and repair costs; and 2) Burlington’s efforts to reduce costs on compression equipment. Property taxes decreased $41,277 in the second quarter of 2017 compared to the second quarter of 2016 and decreased $243,188 in the first half of 2017 compared to the first half of 2016 because actual taxes for 2016 were less than accrued, which resulted in a decrease in the current accruals based on a new estimate of ad valorem taxes for 2017.

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Monthly lease operating expenses of the Subject Interests, including property taxes, in second quarter 2017 averaged approximately $2.2 million, as compared to $2.2 million in the second quarter of 2016. Monthly lease operating expenses of the Subject Interests, including property taxes, in the first half of 2017 averaged approximately $2.1 million, as compared to $2.3 million in the first half of 2016.

Distributable Income

Distributable Income. Distributable Income increased by approximately $5.6 million or 1,287% to $6 million ($0.128333 per Unit) for the three months ended June 30, 2017 from $0.4 million ($0.009251 per Unit) for the three months ended June 30, 2016. Distributable income increased $11.9 million or 537% to $14.1 million ($0.303129 per Unit) for the six months ended June 30, 2017 from $2.2 million ($0.047586 per Unit) for the six months ended June 30, 2016. Such increases in Distributable Income were primarily attributable to an increase in Royalty Income over these periods and decreased general and administrative expenses directly related to audit and legal costs incurred in the 2014 Litigation.

Based on 46,608,796 Units outstanding, the per-Unit distributions during the second quarter of 2017 were as follows:

Interest Income. Interest income was higher for the three and six months ended June 30, 2017 as compared to the three and six month periods ended June 30, 2016 primarily due to increased funds available for investment.

General & Administrative Expenses. General and administrative expenses decreased $0.4 million or 47% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 and decreased $1.0 million or 51% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Such decreases were primarily due to decreased audit costs and legal costs incurred related to the 2014 Litigation.

Cash Reserves. Total cash reserves for litigation expenses were $1.0 million as of June 30, 2017. The Trustee did not increase the cash reserves during the first half of 2017 and does not anticipate any increases in 2017.

Liquidity and Capital Resources

The Trust’s principal source of liquidity and capital is Royalty Income. The Trust’s distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses. The Trust is not liable for any production costs or liabilities attributable to the Royalty. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. If the Trustee determines that the Trust does not have sufficient funds to pay its liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be made to Unit Holders until such borrowings are repaid in full. The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote the Unit Holders of 75% of all of the Units outstanding; however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period without the consent of the Unit Holders.

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2017 Capital Expenditure Budget

Burlington has informed the Trust that its 2017 budget for capital expenditures for the Subject Interests is estimated to be $1.7 million. Burlington reports that, based on its actual capital requirements, the pace of regulatory approvals, the mix of projects and swings in the price of natural gas, the actual capital expenditures for 2017 are subject to change.

Burlington’s announced 2017 capital plan for the Subject Interests anticipates capital expenditures of $1.7 million, of which $0.64 million is allocated to 10 maintenance and facilities projects, $0.42 million is allocated to three well recompletions, and $0.64 million is allocated to 10 facilities projects attributable to the budgets for prior years. Primarily due to depressed pricing for natural gas, Burlington has not allocated any capital expenditures for 2017 to its drilling program in the San Juan Basin. Existing wells will continue to be operated.

Following the sale to Hilcorp, the budget for capital expenditures for the Subject Interests for the remainder of 2017 is subject to change, which could include increases to capital expenditures and that may adversely affect Distributable Income.

Oil and Natural Gas Production

Royalty Income for the quarter ended June 30, 2017 is associated with actual oil and natural gas production during February 2017 through April 2017 from the Subject Interests. Royalty Income for the six months ended June 30, 2017 is associated with actual gas and oil production during November 2016 through April 2017 from the Subject Interests.

Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended June 30, 2017 and 2016 were as follows:

Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the six months ended June 30, 2017 and 2016 were as follows:

The Trust recognizes production during the month in which the related net proceeds attributable to the Royalty are paid to the Trust. Royalty Income for a calendar year is based on the actual natural gas and oil production during the

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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 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 capital expenditures, the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty.

The fluctuations in natural gas production that have occurred during the three-month and six-month periods ended June 30, 2017 and 2016, 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 ConocoPhillips sells production from the Subject Interests and for the gathering and processing of production during the first half of 2017.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that impact the Trust’s 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 our Annual Report on Form 10-K for the year ended December 31, 2016.

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 Trust’s 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 ConocoPhillips, 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 ConocoPhillips; and involve risks and uncertainties. However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and ConocoPhillips in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on ConocoPhillips’s business and the Trust. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements, expect as required by applicable law.

ConocoPhillips Information

As a holder of a net overriding royalty interest, the Trust relies on ConocoPhillips for information regarding ConocoPhillips and its affiliates, including Burlington; the Subject Interests, including the operations, acreage, well and

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completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling plans, drilling results and leasehold terms related to the Subject Interests, and factors and circumstances that have or may affect the foregoing. See Part I, Item 4. Controls and Procedures.

In a July 31, 2017 news release, ConocoPhillips announced that the sale of its San Juan Basin assets to Hilcorp, which includes the Subject Interests, closed on July 31, 2017. ConocoPhillips informed the Trust that the last production month that ConocoPhillips is responsible for is July 2017 and therefore the last monthly distribution report that the Trust will receive from ConocoPhillips will be in September 2017. Commencing in October 2017, the Trust will receive distribution reports from Hilcorp (relating to August 2017 production). Hilcorp’s reporting of revenue and expenses may differ from ConocoPhillips’ reporting.

There have been no material changes to our market risk during 2017. For information on our exposure to market risk, please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

The Trust maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in the Trust’s filings under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Due to the pass-through nature of the Trust, ConocoPhillips provides much of the information disclosed in this Form 10-Q and the other periodic reports filed by the Trust with the SEC. Consequently, the Trust’s ability to timely disclose relevant information in its periodic reports is dependent upon ConocoPhillips’s delivery of such information. Accordingly, the Trust maintains disclosure controls and procedures designed to ensure that ConocoPhillips accurately and timely accumulates and delivers such relevant information to the Trustee and those who participate in the preparation of the Trust’s periodic reports to allow for the preparation of such periodic reports and any decisions regarding disclosure.

The Indenture does not require Burlington to update or provide information to the Trust. However, the Conveyance transferring the Royalty to the Trust obligates Burlington to provide the Trust with certain information, including information concerning calculations of net proceeds owed to the Trust. Pursuant to the settlement of litigation in 1996 between the Trust and Burlington, Burlington agreed to newer, more formal financial reporting and audit procedures as compared to those provided in the Conveyance. In connection with the Hilcorp transaction, the Trust and its third party compliance auditors have been coordinating with Hilcorp to transition these controls and procedures.

In order to help ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic reports, the Trust engages independent public accountants, compliance auditors, marketing consultants, attorneys and petroleum engineers. These outside professionals advise the Trustee in its review and compilation of this information for inclusion in this Form 10-Q and the other periodic reports provided by the Trust to the SEC.

The Trustee has evaluated the Trust’s disclosure controls and procedures as of June 30, 2017 and has concluded that such disclosure controls and procedures are effective, at the “reasonable assurance” level (as such term is used in Rule 13a-15(f) of the Exchange Act), to ensure that material information related to the Trust is gathered on a timely basis to be included in the Trust’s periodic reports and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In reaching its conclusion, the Trustee has considered the Trust’s dependence on ConocoPhillips to deliver timely and accurate information to the Trust.

Additionally, during the quarter ended June 30, 2017 there were no changes in the Trust’s internal control over financial reporting (as such term is used in Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. Because the Trust does not have, nor does the Indenture provide for, officers, a board of directors or an independent audit committee, the Trustee has reviewed neither the Trust’s disclosure controls and procedures nor the Trust’s internal control over financial reporting in concert with management, a board of directors or an independent audit committee.    

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PART II

OTHER INFORMATION

For a discussion of legal proceedings, see Part I, Item 1. Unaudited Financial Statements, Note 4 Settlements and Litigation, which is incorporated by reference into this Part II. Item 1, as well as the discussion in Part I, Item 3. Legal Proceedings, of our Annual Report on Form 10-K for the year ended December 31, 2016.

Reference is made to Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, 2016 for a discussion of additional risk factors which could materially affect the Trust’s business, financial condition or future results.

Hilcorp completed its acquisition of the Subject Interests from ConocoPhillips, which may result in certain administrative disruptions for the Trust, may increase costs and expenses or may adversely affect Distributable Income.

Prior to July 31, 2017, Burlington, a wholly-owned subsidiary of ConocoPhillips, was the principal operator of the Subject Interests. On July 31, 2017, Hilcorp announced that it completed its acquisition of the Subject Interests from ConocoPhillips, and as a result, Hilcorp or its affiliate(s) will replace Burlington as the principal operator of the Subject Interests. Although ConocoPhillips, on behalf of Burlington, must require Hilcorp to assume Burlington’s obligations with respect to the Subject Interests, the Hilcorp acquisition may not necessarily be in the best interests of the Trust and the Unit Holders. The Subject Interests will continue to be subject to the Royalty following the Hilcorp transaction, but the Distributable Income will now be calculated and paid by Hilcorp. The Trust is in the process of transitioning certain reporting processes and procedures to Hilcorp, which transition could result in administrative disruptions for the Trust. Hilcorp may lack Burlington’s experience in the Subject Interests or its creditworthiness. Furthermore, the Hilcorp acquisition may increase the Trust’s general and administrative expenses in the form of increased accounting, audit, legal, and administrative costs. Hilcorp may also increase the budget for capital expenditures for the Subject Interests, which may adversely affect Distributable Income.

None.

None.

Not applicable.

None.

The information required by this Part II, Item 6 is set forth in the Index to the Exhibits accompanying this Quarterly Report on Form 10-Q and is incorporated by reference into this Part II, Item 6.

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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.

Date: August 9, 2017

(The Trust has no directors or executive officers.)

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EXHIBIT INDEX