Hugoton Royalty Trust Declares No November Cash Distribution

Rhea-AI Summary

On November 19, 2021, Simmons Bank, Trustee of the Hugoton Royalty Trust (OTCQB:HGTXU), announced no cash distribution for November 2021 due to excess cost issues. Underlying gas sales volumes for the month were 842,000 Mcf, a slight decrease from 853,000 Mcf in the prior month, with an average price per Mcf at $4.86. The Trust continues to face significant excess costs totaling $3.58 million in Kansas and $16.67 million in Oklahoma. Additionally, a purchase and sale agreement with XTO Energy for $6.6 million remains pending, requiring unit holder approval by December 10, 2021.

Positive

• Underlying gas sales were substantial at 842,000 Mcf despite no distribution.
• The Trust has a purchase and sale agreement with XTO Energy for $6.6 million, pending approval.

Negative

• No cash distribution declared for November 2021 due to excess costs.
• Cumulative excess costs amount to $3.58 million in Kansas and $16.67 million in Oklahoma, affecting future distributions.
• The Trust's expense reserve is depleted, with Simmons Bank covering expenses without obligation.

DALLAS, Nov. 19, 2021 /PRNewswire/ -- Simmons Bank, as Trustee of the Hugoton Royalty Trust (OTCQB:HGTXU) (the "Trust"), today declared there would not be a cash distribution to the holders of its units of beneficial interest for November 2021 due to the excess cost positions on all three of the Trust's conveyances of net profits interests. The following table shows underlying gas sales and average prices attributable to the net overriding royalty for both the current month and prior month. Underlying gas sales volumes attributable to the current month were primarily produced in September.

		Underlying Gas Sales
		Volumes (Mcf) (a)				Average Gas
		Total		Daily		Price per Mcf
Current Month		842,000		28,000		$4.86
Prior Month		853,000		28,000		$4.81
(a)   Sales volumes are recorded in the month the Trust receives the related net profits income.  Because of this, sales volumes may fluctuate from month to month based on the timing of cash receipts.

XTO Energy has advised the Trustee that it has included oil sales volumes of approximately 6,000 barrels from the new horizontal wells drilled in Major County, Oklahoma and has deducted development costs of $146,000, production expense of $1,479,000 and overhead of $1,002,000 in determining the royalty calculation for the Trust for the current month.

Agreement to Sell Trust Assets
On July 2, 2021 the Trustee announced that it has entered into a purchase and sale agreement with XTO Energy pursuant to which XTO Energy would acquire for $6,600,000 in cash the net overriding royalty interest created pursuant to the net profits interest conveyances held by the Trust and certain other assets constituting substantially all of the assets of the Trust.

The consummation of the sale of the assets is subject to the satisfaction of customary closing conditions, including approval of the sale from holders of units of beneficial interest in the Trust ("Units") holding Units representing eighty percent (80%) or more of all the Units outstanding, or a final judicial determination authorizing the Trustee to consummate the sale of the assets.  The Trustee has called a special meeting of Unit holders on December 10, 2021 for the purpose of approving the sale of assets.

Execution of the purchase and sale agreement followed a process previously announced by the Trust whereby the Trustee had engaged a third party to market the Trust's assets.  

Expense Reserve
The expense reserve used to pay administrative expenses in the absence of current month distributions was depleted in October 2020. As a result, Simmons Bank, the Trustee, is currently paying the expenses for the Trust, subject to its rights to be indemnified and reimbursed pursuant to the terms of the Trust indenture. However, there is nothing in the Trust indenture that requires Simmons Bank to pay the expenses for the Trust. The right to indemnification would include proceeds received from a sale of the Trust's assets, if any.

Excess Costs
XTO Energy has advised the Trustee that $15,000 of excess costs were recovered on properties underlying the Kansas net profits interests. However, after the partial recovery, there were no remaining proceeds from the properties underlying the Kansas net profits interests to be included in the current month's distribution. Underlying cumulative excess costs remaining on the Kansas net profits interests total $3,580,000, including accrued interest of $432,000.

XTO Energy has advised the Trustee that $1,548,000 of excess costs were recovered on properties underlying the Oklahoma net profits interests. However, after the partial recovery, there were no remaining proceeds from the properties underlying the Oklahoma net profits interests to be included in the current month's distribution. Underlying cumulative excess costs remaining on the Oklahoma net profits interests total $16,667,000, including accrued interest of $2,338,000. This balance does not include the portion of the Chieftain settlement the Panel determined could be charged as a production cost. XTO Energy has estimated the amount to be approximately $14.6 million (net to the Trust).

XTO Energy has advised the Trustee that $285,000 of excess costs were recovered on properties underlying the Wyoming net profits interests. However, after the partial recovery, there were no remaining proceeds from the properties underlying the Wyoming net profits interests to be included in the current month's distribution. Underlying cumulative excess costs remaining on the Wyoming net profits interests total $2,375,000, including accrued interest of $288,000.

Arbitration
As previously disclosed, XTO Energy advised the Trustee that it reached a settlement with the plaintiffs in the Chieftain class action royalty case. On July 27, 2018 the final plan of allocation was approved by the court. Based on the final plan of allocation, XTO Energy advised the Trustee that it believes approximately $24.3 million in additional production costs should be allocated to the Trust. On May 2, 2018, the Trustee submitted a demand for arbitration seeking a declaratory judgment that the Chieftain settlement is not a production cost and that XTO Energy is prohibited from charging the settlement as a production cost under the conveyance or otherwise reducing the Trust's payments now or in the future as a result of the Chieftain litigation. The Trust and XTO Energy conducted the interim hearing on the claims related to the Chieftain settlement on October 12-13, 2020. In the arbitration, the Trustee contended that the approximately $24.3 million allocation related to the Chieftain settlement was not a production cost and, therefore, there should not be a related adjustment to the Trust's share of net proceeds. However, XTO Energy contended that the approximately $24.3 million was a production cost and should reduce the Trust's share of net proceeds. 

On January 20, 2021, the arbitration panel issued its Corrected Interim Final Award (i) "reject[ing] the Trust's contention that XTO has no right under the Conveyance to charge the Trust with amounts XTO paid under section 1.18(a)(i) as royalty obligations to settle the Chieftain litigation" and (ii) stating "[t]he next phase will determine how much of the Chieftain settlement can be so charged, if any of it can be, in the exercise of the right found by the Panel." Following briefing by both parties, on May 18, 2021, the Panel issued its second interim final award over the amount of XTO Energy's settlement in the Chieftain class action lawsuit that can be charged to the Trust as a production cost. The Panel in its decision has ruled that out of the $80 million settlement, the "Trust is obligated to pay its share under the Conveyance of the $48 million that was received by the plaintiffs in the Chieftain lawsuit by virtue of the settlement of that litigation. The Trust is not obligated by the Conveyance to pay any share of the $32 million received by the lawyers for the plaintiffs in the Chieftain lawsuit by virtue of the settlement." 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.

The Oklahoma conveyance is already currently subject to excess costs that will need to be recovered prior to any distribution to unitholders. Therefore, the reduction in the Trust's share of net proceeds from the portion of the settlement amount the Panel has ruled may be charged against the Oklahoma conveyance would result in additional excess costs under the Oklahoma conveyance that would likely result in no distributions under the Oklahoma conveyance for several additional years while these additional excess costs are recovered. This award completes the portion of the arbitration related to the Chieftain settlement.

Other Trustee claims related to disputed amounts on the computation of the Trust's net proceeds for 2014 through 2016 were bifurcated from the initial arbitration and will be heard at a later date, which is still to be determined should the arbitration proceed. Pursuant to the purchase and sale agreement entered into between the Trustee and XTO Energy, the parties have agreed to stay the arbitration from the date of execution of the purchase and sale agreement to the earlier of the termination of the purchase and sale agreement or closing date of the sale of assets. The Panel has stayed proceedings.

For more information on the Trust, please visit our web site at www.hgt-hugoton.com.

Statements made in this press release regarding future events or conditions are forward looking statements. Actual future results, including closing of the sale, development costs and future net profits, could differ materially due to the ability to obtain Unit holder or court approval of the sale, changes in natural gas prices and other economic conditions affecting the gas industry and other factors described in Part I, Item 1A of the Trust's Annual Report on Form 10-K for the year ended December 31, 2020.

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SOURCE Hugoton Royalty Trust

FAQ

Why was there no cash distribution for Hugoton Royalty Trust in November 2021?

The Hugoton Royalty Trust declared no cash distribution for November 2021 due to excess cost positions on its conveyances.

What were the underlying gas sales volumes for Hugoton Royalty Trust in November 2021?

The underlying gas sales volumes for November 2021 were 842,000 Mcf, slightly down from 853,000 Mcf in the prior month.

What is the purchase agreement involving XTO Energy and Hugoton Royalty Trust?

Simmons Bank announced a purchase and sale agreement with XTO Energy for $6.6 million, pending approval from unit holders by December 10, 2021.

What are the cumulative excess costs facing Hugoton Royalty Trust?

The cumulative excess costs total $3.58 million in Kansas and $16.67 million in Oklahoma, impacting future distributions.

When is the special meeting for Hugoton Royalty Trust unit holders?

A special meeting of unit holders is scheduled for December 10, 2021, to approve the sale of assets.