WHITING USA TRUST II This document contains forward-looking statements, which include expectations or forecasts of future events. Please refer to "Forward-Looking Statements" which follows the Table of Contents of this Form 10-K for an explanation of these types of statements.
Overview and Trust Termination
The Trust does not conduct any operations or activities. The Trust's purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives pursuant to the NPI, and to perform certain administrative functions with respect to the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties until the Trust terminates onDecember 31, 2021 . Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated throughDecember 31, 2020 . The 2020 NPI distributions are mainly affected byOctober 2019 throughSeptember 2020 oil prices andSeptember 2019 throughAugust 2020 natural gas prices. 2018 2019 2020 Q1 Q2 Q3 Q4 Q1 Q2
Q3 Q4 Q1 Q2 Q3 Q4
Crude oil
Oil prices declined sharply during 2020 primarily in response toSaudi Arabia's announcement of plans to abandon previously agreed upon output restraints and the economic effects of the coronavirus ("COVID-19") pandemic on the demand for oil and natural gas. While prices began to recover in the second half of 2020, uncertainties related to demand for oil and natural gas products remain as the pandemic continues to impact the world economy. Continued low oil and gas prices on production from the underlying properties could cause (i) a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders, (ii) a reduction in the amount of oil, natural gas and natural gas liquids that are economic to produce from the underlying properties, and (iii) the recognition of impairment charges on the NPI. All costless collar hedge contracts terminated as ofDecember 31, 2014 and no additional hedges are allowed to be placed on the Trust assets. Consequently, there are no further cash settlement gains or losses on commodity derivatives for inclusion in the Trust's computation of net proceeds (or net losses, as the case may be), and the Trust therefore has increased exposure to oil and natural gas price volatility. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in operating and capital expenditures. Trust Termination. The Trust will wind up its affairs and terminate shortly after the NPI termination date, which isDecember 31, 2021 . After the NPI termination date ofDecember 31, 2021 , it is anticipated that the Trustee will make a final quarterly cash distribution, if any, no later thanMarch 1, 2022 , to the Trust unitholders of record on the 50th day followingDecember 31, 2021 , and the Trust will terminate. After the termination of the Trust, it will pay no further distributions.
Since the assets of the Trust are depleting assets, a portion of each cash distribution paid, if any, on the Trust units is a return of capital to investors, with the remainder being considered as a return on investment or yield. As a result, the market price of the Trust units will decline to zero at the termination of the Trust.
Capital Expenditure Activities
The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in commercially paying amounts, if any, or that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator's historical drilling success rate. Per the reserve report, the underlying properties do not have any planned capital expenditures through the trust termination date ofDecember 31, 2021 based upon the economic inputs utilized to prepare the reserves report. However, with respect to fields for which Whiting is not the operator, Whiting has limited control over the timing and amount of capital expenditures relative to such fields and it is possible that unbudgeted capital expenditures will be incurred during 2021. The possibility for unbudgeted capital expenditures is increased on non-operated properties subject to enhanced oil recovery techniques where expenditures may be incurred for CO2 that is injected into the field to recover hydrocarbons. An operator may believe it is more costly or infeasible to temporarily shut-in the field as compared to operating the 40
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properties at a loss, or may believe such losses will be offset by future income from such properties, including periods after the termination of the NPI. Refer to the risk factor entitled "Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust unitholders" in Item 1A of this Annual Report on Form 10-K. Annual capital expenditure limitation. The capital expenditures included in the net proceeds attributable to the underlying properties are subject to an annual limitation which became effectiveJanuary 1, 2018 . As a result, the sum of the capital expenditures and amounts reserved for approved capital expenditure projects for each year beginning in 2018 may not exceed the average annual capital expenditure amount. The "average annual capital expenditure amount" means the quotient of (x) the sum of the capital expenditures and amounts reserved for approved capital expenditure projects with respect to the three years endedDecember 31, 2017 , divided by (y) three, which amount equals$3.9 million and will be increased annually by 2.5% to account for expected increased costs due to inflation. The capital expenditures incurred during 2020 and 2019 did not exceed this annual limitation, and capital expenditures included in the net proceeds attributable to the underlying properties cannot exceed$4.3 million during the year endingDecember 31, 2021 . Farm-out agreements. In an effort to develop the underlying properties while limiting additional capital expenditures for the Trust, prior toDecember 31, 2020 ,Whiting Oil and Gas entered into three farm-out agreements with a third-party partner covering (i) 5,127 gross acres in eight leasehold sections within the Keystone South field inWinkler, Texas inApril 2016 , as amended inJuly 2020 (the "Keystone South farm-out"), (ii) 9,740 gross acres in approximately 15 units (which unit size is determined by the lateral well length) within the Signal Peak field inHoward County, Texas inFebruary 2017 , as amended inMay 2018 ,September 2019 andFebruary 2020 (the "Signal Peak farm-out") and (iii) 640 gross acres in one leasehold section within the Flying W, SE field inWinkler County, Texas inMarch 2017 (the "Flying W farm-out"). These farm-out agreements provide the third-party partner with the option, but not the obligation, to drill one well in each of the leasehold sections or units, as the case may be, subject to the applicable farm-out agreement, whereby the partner will pay 100% of the related drilling and well completion costs to earn a 75% working interest. As a result, the applicable underlying properties will consist of (i) 25% of the original working interest in these properties and (ii) an overriding royalty interest equal to the difference between 25% and the lease burdens of record. Upon completion of one well in each section or unit, as the case may be, pursuant to the terms of the applicable agreements, the partner has the option to drill (i) up to 15 additional wells under the Keystone South farm-out, (ii) up to 12 additional wells under the Signal Peak farm-out and (iii) one additional well under the Flying W farm-out. For each of these additional optional wells, the partner is required to pay 85% of the drilling and well completion costs otherwise ascribed to the underlying properties for a 75% working interest. Given the Trust's interest in the NPI, the Trust would be responsible for 13.5% of the underlying properties' remaining drilling and well completion costs at the 90% NPI, subject to the average annual capital expenditure amount limitation discussed above. The third-party partner drilled and completed the first three wells pursuant to the terms of the Keystone South farm-out agreement during 2017, a fourth well was drilled and completed during the second quarter of 2018, a fifth well was drilled and completed during the fourth quarter of 2019, and a sixth well was drilled in the first quarter of 2021 which is scheduled for completion before the second quarter of 2021, whereby the partner earned a 75% working interest in each of the underlying properties' respective leasehold sections. The partner has no obligation to drill and complete any additional wells, and the Keystone South farm-out agreement will terminate during the fourth quarter of 2021 if no additional drilling has commenced by that time. During the fourth quarter of 2019, the third-party partner drilled and completed the first well under the Signal Peak farm-out, whereby the partner earned a 75% working interest in the underlying properties' respective leasehold section. The partner has no obligation to drill and complete any additional wells, and the Signal Peak farmout will terminate during the fourth quarter of 2021 if no additional drilling has commenced by that time. In addition, the partner drilled and completed the first well under the Flying W farm-out during the second quarter of 2018, whereby the partner earned a 75% working interest in the underlying properties' respective leasehold section. Additionally, inFebruary 2021 , Whiting entered into an additional farm-out agreement with a third-party partner, which agreement covers 1,091 gross acres within theAgua Dulce field inNueces County, Texas . The agreement provides the partner with the option, but not the obligation, to drill one well in each of the two leasehold sections subject to the farm-out agreement, whereby the partner will pay 100% of the related drilling and well completion costs to earn a 90% working interest, which results in the underlying properties retaining (i) a 10% working interest and (ii) an overriding royalty interest equal to the difference between 24% and the lease burdens of record, without incurring any capital costs for these wells. Pursuant to the terms of the agreement, within 365 days of the completion of either well in either section, the partner has the option to drill a second well in the respective section where the underlying properties can elect 41
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to receive a 10% working interest or a 5% carried working interest. Upon completion of a second well in either section, the partner has the option to drill subsequent wells in either section where the underlying properties can retain a 10% working interest (if such option was elected for the respective second well) or can receive a 5% working interest or a 2.5% carried working interest.
Results of Trust Operations
The following is a summary of income from net profits interest and distributable
income received by the Trust for each respective period (dollars in thousands,
except per Bbl, per Mcf and per BOE amounts):
Trust Results
Year Ended December 31,
2020 2019 2018
Sales volumes:
Oil from underlying properties (MBbl)(1) 789 (4) 917 (5) 955 (6)
Natural gas from underlying properties (MMcf) 917 (4) 1,111 (5) 1,307 (6)
Total production (MBOE) 942 1,103 1,173
Average sales prices:
Oil (per Bbl)(1) $ 37.47 $ 48.40 $ 54.28
Natural gas (per Mcf)(2) $ 1.50 $ 2.30 $ 3.29
Cost metrics:
Lease operating expenses (per BOE) $ 28.48 $ 29.52 $ 24.64
Production tax rate (percent of total revenues) 4.8 % 5.0 % 5.1 %
Revenues:
Oil sales(1)$ 29,558 (4)$ 44,407 (5)$ 51,827 (6) Natural gas sales 1,371 (4) 2,558 (5) 4,296 (6) Total revenues 30,929 46,965 56,123 Costs: Lease operating expenses 26,815 32,555 28,900 Production taxes 1,473 2,327 2,887 Development costs 1,358 1,951 3,309 Cash settlements on commodity derivatives(3) - - - Total costs 29,646 36,833 35,096 Net proceeds 1,283 10,132 21,027 Net profits percentage 90 % 90 % 90 % Income from net profits interest 1,155 9,119 18,924 Provision for estimated Trust expenses (1,100) (800) (800) Montana state income tax withheld (7) (15) (15) Accumulated net losses funded by Whiting 220 - - Distributable income$ 268 $ 8,304 $ 18,109 ____________
(1) Oil includes natural gas liquids.
The average sales price of natural gas for the gas production months within
the year ended
same months within the period due to the "liquids rich" content of a portion (2) of the natural gas volumes produced by the underlying properties. While the
gas volumes produced by the underlying properties during the years ended 2020
and 2019 are still "liquids rich," such liquids content did not result in a
premium to the NYMEX natural gas price due to depressed realized liquids
prices during those periods.
As discussed in "Quantitative and Qualitative Disclosures About Market Risk"
in Item 7A of this Annual Report on Form 10-K, all costless collar hedge
(3) contracts terminated as of
allowed to be placed on Trust assets. Consequently, there are no further cash
settlements on commodity hedges, and the Trust will have increased exposure
to oil and natural gas price volatility.
Oil and gas sales volumes and related revenues for the year ended
generally represent crude oil production from October 2019 through
September 2020 and natural gas production from September 2019 through
August 2020 .
Oil and gas sales volumes and related revenues for the year ended
crude oil production from
production from
Oil and gas sales volumes and related revenues for the year ended December
31, 2018 (consisting of Whiting's
production from October 2017 through September 2018 and natural gas
production from September 2017 through August 2018 .
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Comparison of Results of the
Income from Net Profits Interest. Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI proceeds are based on the oil and gas production for which Whiting has received payment within one month following the end of the most recent fiscal quarter. Whiting receives payment for its crude oil sales generally within 30 days following the month in which it is produced, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced. Income from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes and development costs as follows: Revenues. Oil and natural gas revenues were$16 million (or 34%) lower in 2020 compared to 2019. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decrease in revenue between periods was primarily due to lower realized oil prices and a decline in oil production volumes. The average sales price realized decreased for crude oil and natural gas by 23% and 35%, respectively, between periods primarily as a result of lower NYMEX oil and gas prices, which were partially offset by improved oil and gas differentials. Crude oil production volumes decreased by 129 MBbls (or 14%) between periods and natural gas volumes decreased by 194 MMcf (or 17%) in 2020 compared to 2019. The decrease in oil and gas volumes between periods were primarily related to (i) normal field production decline, (ii) the permanent shutdown of the third-party operated Chatom Gas Plant inNovember 2019 , which impacts wells located in theLake Como field and (iii) the partial year shut-in of the Garland field and other wells in response to depressed oil and gas pricing for a portion of 2020. Based on theDecember 31, 2020 reserve report, overall production attributable to the underlying properties is expected to decline at a year-over-year rate of approximately 12.5% for oil and 12.0% for gas from 2020 through the NPI termination date ofDecember 31, 2021 . Lease Operating Expenses. LOE decreased$5.7 million (or 18%) during the year endedDecember 31, 2020 compared to the same 2019 period primarily due to a$3.9 million decrease in oilfield goods and services, which includes a decrease of$1.9 million in workover costs between periods and a$1.8 million decrease due to lower labor and other operating costs. The decrease in overall LOE coupled with the decline in overall production volumes resulted in a decrease in LOE on a per BOE basis of 4% from$29.52 during 2019 to$28.48 for 2020. Production Taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues decreased from 5.0% during 2019 to 4.8% during 2020. Additionally, overall production taxes in 2020 decreased$0.9 million (or 37%) as compared to 2019 primarily due to lower oil and natural gas revenues between periods. Development Costs. Development costs were$0.6 million (or 30%) lower in 2020 as compared to 2019. Development costs decreased primarily due to reduced drilling and capital workover costs in the Justis,Mary Two , Garland and Keystone South fields. Provision for estimated Trust expenses. The provision for estimated Trust expenses increased$0.3 million during 2020 compared to the same 2019 period due to the expected impacts of (i) the sharp decline in oil prices that occurred inMarch 2020 which oil prices remained depressed at the time the expenses were estimated inAugust 2020 and (ii) the COVID-19 pandemic. In consideration of the anticipated impacts, the Trustee increased the provision for Trust expenses to enable it to pay the Trust's future liabilities for approximately 12 months from the time at which it was established. Accumulated Net Losses Funded by Whiting. During the year endedDecember 31, 2020 , the net profits interest generated accumulated net losses of$0.2 million attributable to the Trust primarily due to the decline in oil and natural gas prices, which lower commodity prices caused production and development costs on the underlying properties to exceed the proceeds from production. Neither the Trust nor the unitholders are liable for any net losses that are generated by the net profits interest. Whiting funds the payment of any such net losses until the accumulated net losses, plus accrued interest at the money market interest rate, are recovered from future NPI net profits. All accumulated net losses, plus accrued interest, must be repaid to Whiting before any further distributions will be made to Trust unitholders. There were no accumulated net losses during the year endedDecember 31, 2019 .
Comparison of Results of the
For a discussion of the Trust's financial performance in the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , refer to Part II, Item 7 "Trustee's Discussion and Analysis of Financial Condition and Results of Operations" of the 2019 Annual Report on Form 10-K filed with theSEC onMarch 24, 2020 under the subheading "Results of Trust Operations - Comparison of Results of theTrust for the Years Ended December 31, 2019 and 2018." 43
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Liquidity and Capital Resources
Overview. The Trust has no source of liquidity or capital resources other than cash flows from the NPI. Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trust's only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee, a quarterly fee paid to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustee's duties, including third-party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines the amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust's expenses for that quarter. Available funds are reduced by (i) any cash the Trustee decides to hold as a reserve against future liabilities and (ii) any accumulated net losses to be recovered by Whiting, plus accrued interest. If the NPI generates net losses or limited net proceeds (which was the case during the first and fourth quarters of 2019 and each quarter of 2020), the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust's administrative expenses. The Trust may borrow the amount of funds required to pay its liabilities if the Trustee determines that the cash on hand and the cash to be received, which is dependent on future net proceeds, are insufficient to cover the Trust's liabilities. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid. The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust's liquidity or the availability of capital resources. As ofFebruary 28, 2021 , the Trust had cash reserves of$0.3 million for the payment of its administrative expenses. The Trust is highly dependent on Whiting for multiple services, including the operation of wells, remittance of net proceeds generated by the NPI and administrative services performed on behalf of the Trust. Whiting's continued ability to operate wells, including those with interests held by the NPI, depends on its future financial condition, access to capital and other factors outside of its control. OnApril 1, 2020 , Whiting and certain of its direct and indirect subsidiaries, includingWhiting Oil and Gas (collectively, the "Debtors") commenced voluntary cases under chapter 11 ofthe United States Bankruptcy Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "). OnJune 30, 2020 , the Debtors filed the Joint Chapter 11 Plan of Reorganization of Whiting Petroleum Corporation and its Debtor affiliates (as amended, modified and supplemented, the "Plan"). OnAugust 14, 2020 , theBankruptcy Court confirmed the Plan. OnSeptember 1, 2020 , the Debtors emerged from the Chapter 11 Cases and the Plan became effective in accordance with its terms. Administrative Services Fee. Under the terms of the administrative services agreement, the Trust is obligated to pay a quarterly administration fee of$50,000 to Whiting 60 days following the end of each calendar quarter. General and administrative expenses in the Trust's statements of distributable income for the years endedDecember 31, 2020 , 2019 and 2018 includes$200,000 in each period for quarterly administrative fees paid to Whiting. Trustee Administrative Fee. Under the terms of the Trust agreement, the Trust pays an annual administrative fee to the Trustee of$175,000 , which is paid in four quarterly installments and is billed in arrears. Starting in 2017, such fee escalated by 2.5% each year and therefore, the annual administrative fee paid to the Trustee for 2020, 2019 and 2018 services was$193,167 ,$188,456 and$183,859 , respectively. Accordingly, the escalated quarterly administrative fee of$48,292 was paid by the Trust starting in the second quarter of 2020. General and administrative expenses in the Trust's statements of distributable income for the years endedDecember 31, 2020 , 2019 and 2018 include$191,989 ,$187,307 and$182,738 , respectively, for administrative fees paid to the Trustee. Letter of Credit. InJune 2012 , Whiting established a$1.0 million letter of credit for the Trust in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust, in the event that Whiting should fail to lend funds to the Trust, if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and if the Trustee were to draw on the letter of credit or were to borrow funds from Whiting or other entities, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust. Such letter of credit will expireDecember 31, 2021 . As ofDecember 31, 2020 and 2019, the Trust had no borrowings under the letter of credit. Reserve for Expenditures. Whiting may reserve from the gross proceeds amounts up to a total of$2.0 million at any time for future development, maintenance or operating expenses. Whiting did not fund such reserve during the year endedDecember 31, 2019 . Instead, Whiting deducted from the Trust's gross proceeds only actual costs paid for development, maintenance and operating expenses. During the second quarter of 2020, Whiting established a reserve for future expenditures of$1.6 million in response to the expectation that future gross proceeds from the underlying properties may be insufficient to cover the future operating costs of the underlying properties due to (i) the sharp decline in oil prices inMarch 2020 which oil prices remained depressed at the time the reserve was established inMay 2020 and (ii) the impacts of the COVID-19 pandemic. In the third quarter of 2020, the$1.6 million reserve was released and 44
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applied by Whiting to qualifying expenses incurred during the period. Accordingly, there is no remaining reserve for expenditures to offset future development, maintenance or operating expenses on the underlying properties and related activities. Plugging and Abandonment. Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the year endedDecember 31, 2020 , Whiting incurred$2.4 million of plugging and abandonment charges on the underlying properties, and these costs were not charged to the unitholders of the Trust.. New Accounting Pronouncements
There were no accounting pronouncements issued during the year ended
Critical Accounting Policies and Estimates
The financial statements of the Trust are significantly affected by its basis of accounting and estimates related to its oil and gas properties and proved reserves, as summarized below.
Basis of Accounting. The Trust's financial statements are prepared on a modified cash basis, which is a comprehensive basis of accounting other than GAAP. This method of accounting is consistent with reporting of taxable income to the Trust unitholders. The most significant differences between the Trust's financial statements and those prepared in accordance with GAAP are:
Income from net profits interest is recognized when NPI distributions are
a. received by the Trust rather than accrued in the month of production that they
are earned;
b. Distributions to Trust unitholders are recorded when paid by the Trust rather
than accrued when owed;
Trust general and administrative expenses (which include the Trustee's fees as
c. well as administrative, accounting, engineering, legal, and other professional
fees) are recorded when paid by the Trust rather than when incurred; and
d. Cash reserves for Trust expenses may be established by the Trustee for certain
expenditures that would not be recorded as contingent liabilities under GAAP.
While these statements differ from financial statements prepared in accordance with GAAP, the modified cash basis of reporting revenues and distributions is considered to be the most meaningful for the Trust and its results because quarterly distributions to the Trust unitholders are based on net cash receipts. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by theSEC , as specified by FASB ASC Topic 932, Extractive Activities - Oil and Gas: Financial Statements of Royalty Trusts. For additional information regarding the Trust's basis of accounting, refer to Note 2 to the Financial Statements included in Item 8 of this Annual Report on Form 10-K. All amounts included in the Trust's financial statements are based on cash amounts received or disbursed, or on the carrying value of the net profits interests, which was derived from the historical cost of the interests at the date of their transfer from Whiting less accumulated amortization and impairment charges to date. Oil and Gas Reserves. The proved oil and gas reserves for the underlying properties are estimated by independent petroleum engineers. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof. Estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices and production costs, may justify revision of such estimates. Accordingly, oil and gas quantities ultimately recovered and the timing of production may be substantially different from estimates, and the Trust is unable to predict changes in reserve quantity estimates as such quantities are dependent on future economic and operational conditions. The standardized measure of discounted future net cash flows is prepared using assumptions made pursuant to FASB andSEC guidelines. Such assumptions include using average fiscal-year oil and gas prices (calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month reporting period) and year-end costs for estimated future production and development expenditures. Discounted future net cash flows are calculated using a 10% discount rate. Changes in any of these assumptions could have a significant impact on the standardized measure. The standardized measure does not necessarily result in an estimate of the current fair market value of proved reserves. 45
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Amortization of Net Profits Interest. The investment in net profits interest is amortized using the units-of-production method. The rate of recording amortization is dependent upon the Trust's estimates of total proved reserves, which incorporates various assumptions and future projections. If the estimates of total proved reserves decline significantly, the rate at which amortization expense is recorded would increase, reducing Trust corpus. Impairment of Investment in Net Profits Interest. The value of the investment in net profits interest is reviewed whenever the Trustee judges that events and circumstances indicate that the recorded carrying value of the investment in net profits interest may not be recoverable. Potential impairments of the investment in net profits interest are determined by comparing future net undiscounted cash flows based on the oil and gas reserves attributable to the underlying properties to the net book value at the end of each period. If the net capitalized cost exceeds undiscounted future cash flows, the cost of the investment in net profits interest is written down to "fair value," which is determined using net discounted future cash flows from the net profits interest. Different pricing assumptions, discount rates, or oil and gas reserve estimates could result in a different calculated impairment.
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