Gulf Coast Ultra Deep Royalty Trust

Previous wording

You should read the following discussion in conjunction with Part II, Item 8. “Financial Statements and Supplementary Data” and Part I, Items 1. and 2. “Business and Properties” of this Form 10-K. The results of operations reported and summarized below are not necessarily indicative of future operating results. Unless otherwise specified, all references to “Notes” refer to Notes to Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K. A glossary of definitions for some of the oil and gas industry terms used in this Form 10-K is provided beginning on page 2. Additionally, please refer to the section above entitled “Forward-Looking Statements” in this Form 10-K. The information below has been furnished to the Trustee by Highlander Oil & Gas Assets LLC (HOGA).

Current wording

You should read the following discussion in conjunction with Part II, Item 8. “Financial Statements and Supplementary Data” and Part I, Items 1. and 2. “Business and Properties” of this Form 10-K. The results of operations reported and summarized below are not necessarily indicative of future operating results. Unless otherwise specified, all references to “Notes” refer to Notes to Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K. A glossary of definitions for some of the oil and gas industry terms used in this Form 10-K is provided beginning on page 2. Additionally, please refer to the section above entitled “Forward-Looking Statements” in this Form 10-K. The information below has been furnished to the Trustee by Highlander Oil & Gas Assets LLC (HOGA). In this Form 10-K, the “Depositor” refers to Freeport-McMoRan Inc. (FCX), for all periods ending prior to the Effective Date (defined below), and to HOGA, for all periods beginning on and after the Effective Date; and the “Grantor” refers to McMoRan Oil & Gas LLC (McMoRan), for all periods ending prior to the Effective Date, and to HOGA, for all periods beginning on and after the Effective Date.

Previous wording

On June 3, 2013, Freeport-McMoRan Inc. (FCX) and McMoRan Exploration Co. (MMR) completed the transactions contemplated by the Agreement and Plan of Merger, dated as of December 5, 2012 (the merger agreement), by and among MMR, FCX, and INAVN Corp., a Delaware corporation and indirect wholly owned subsidiary of FCX (Merger Sub). Pursuant to the merger agreement, Merger Sub merged with and into MMR, with MMR surviving the merger as an indirect wholly owned subsidiary of FCX (the merger).

Current wording

On June 3, 2013, FCX and McMoRan Exploration Co. (MMR) completed the transactions contemplated by the Agreement and Plan of Merger, dated as of December 5, 2012 (the merger agreement), by and among MMR, FCX, and INAVN Corp., a Delaware corporation and indirect wholly owned subsidiary of FCX (Merger Sub). Pursuant to the merger agreement, Merger Sub merged with and into MMR, with MMR surviving the merger as an indirect wholly owned subsidiary of FCX (the merger).

Previous wording

The Royalty Trust was created to hold a 5% gross overriding royalty interest (collectively, the overriding royalty interests) in future production from each of McMoRan’s Inboard Lower Tertiary/Cretaceous exploration prospects located in the shallow waters of the Gulf of Mexico and onshore in South Louisiana that existed as of December 5, 2012, the date of the merger agreement (collectively, the subject interests). The subject interests were “carved out” of the mineral interests acquired by FCX pursuant to the merger and were not considered part of FCX’s purchase consideration of MMR. McMoRan has informed the Trustee that it has no plans to pursue, has relinquished, has allowed to expire or has sold all of its subject interests.

Current wording

The Royalty Trust was created to hold a 5% gross overriding royalty interest (collectively, the overriding royalty interests) in future production from each of McMoRan’s Inboard Lower Tertiary/Cretaceous exploration prospects located in the shallow waters of the Gulf of Mexico and onshore in South Louisiana that existed as of December 5, 2012, the date of the merger agreement (collectively, the subject interests). The subject interests were “carved out” of the mineral interests acquired by FCX pursuant to the merger and were not considered part of FCX’s purchase consideration of MMR.

Previous wording

In connection with the merger, on June 3, 2013, (1) FCX, as depositor, McMoRan Oil & Gas LLC (McMoRan), as grantor, the Trustee and the Delaware Trustee entered into the amended and restated royalty trust agreement to govern the Royalty Trust and the respective rights and obligations of FCX, the Trustee, the Delaware Trustee, and the Royalty Trust unitholders with respect to the Royalty Trust (the Royalty Trust Agreement); and (2) McMoRan, as grantor, and the Royalty Trust, as grantee, entered into the master conveyance of overriding royalty interests (the master conveyance) pursuant to which McMoRan conveyed to the Royalty Trust the overriding royalty interests in future production from the subject interests. Other than (a) its formation, (b) its receipt of contributions and loans from FCX for administrative and other expenses as provided for in the Royalty Trust Agreement, (c) its payment of such administrative and other expenses, (d) its repayment of loans from FCX, (e) its receipt of the conveyance of the overriding royalty interests from McMoRan pursuant to the master conveyance, (f) its receipt of royalties from McMoRan or HOGA, and (g) its cash distributions to Royalty Trust unitholders, if any, the Royalty Trust has not conducted any activities. The Trustee has no involvement with, control over, or responsibility for, any aspect of any operations on or relating to the subject interests.

Current wording

In connection with the merger, on June 3, 2013, (1) FCX, as depositor, McMoRan, as grantor, the Trustee and the Delaware Trustee entered into the amended and restated royalty trust agreement to govern the Royalty Trust and the respective rights and obligations of FCX, the Trustee, the Delaware Trustee, and the Royalty Trust unitholders with respect to the Royalty Trust (the Royalty Trust Agreement); and (2) McMoRan, as grantor, and the Royalty Trust, as grantee, entered into the master conveyance of overriding royalty interests (the master conveyance) pursuant to which McMoRan conveyed to the Royalty Trust the overriding royalty interests in future production from the subject interests. Other than (a) its formation, (b) its receipt of contributions and loans from the Depositor for administrative and other expenses as provided for in the Royalty Trust Agreement, (c) its payment of such administrative and other expenses, (d) its repayment of loans from the Depositor, (e) its receipt of the conveyance of the overriding royalty interests from McMoRan pursuant to the master conveyance, (f) its receipt of royalties from McMoRan or HOGA, and (g) its cash distributions to Royalty Trust unitholders, if any, the Royalty Trust has not conducted any activities. The Trustee has no involvement with, control over, or responsibility for, any aspect of any operations on or relating to the subject interests.

Previous wording

On February 5, 2019, McMoRan completed the sale of all of its rights, title and interest in and to the onshore Highlander subject interest pursuant to a purchase and sale agreement with Highlander Oil & Gas Assets LLC (HOGA) (the Highlander Sale). The onshore Highlander subject interest was sold subject to the overriding royalty interest in future production held by the Royalty Trust. As a result of the Highlander Sale, HOGA has a 72 percent working interest and an approximate 48 percent net revenue interest in the onshore Highlander subject interest. The Royalty Trust continues to hold a 3.6 percent overriding royalty interest in the onshore Highlander subject interest. HOGA is the operator of the Highlander subject interests.

Current wording

On February 5, 2019, McMoRan completed the sale of all of its rights, title and interest in and to the onshore Highlander subject interest pursuant to a purchase and sale agreement with HOGA (the Highlander Sale). The onshore Highlander subject interest was sold subject to the overriding royalty interest in future production held by the Royalty Trust. As a result of the Highlander Sale, HOGA has a 72 percent working interest and an approximate 48 percent net revenue interest in the onshore Highlander subject interest. The Royalty Trust continues to hold a 3.6 percent overriding royalty interest in the onshore Highlander subject interest. HOGA is the operator of the Highlander subject interest. The onshore Highlander subject interest is the only subject interest in which HOGA has an interest, as McMoRan previously had relinquished, allowed to expire or sold all of the other subject interests.

Previous wording

The Royalty Trust has no ability to direct or influence the exploration or development of the subject interests. In addition, none of FCX, McMoRan or HOGA is under any obligation to fund or to commit any other resources to the exploration or development of the subject interests. To the extent that HOGA does not fund further exploration and development of the onshore Highlander subject interest, or if for any other reason sufficient production from the onshore Highlander subject interest is not maintained in commercial quantities, Royalty Trust unitholders will not realize any additional value from their investment in the Royalty Trust units.

Current wording

The Royalty Trust has no ability to direct or influence the exploration or development of the onshore Highlander subject interest. In addition, HOGA is under no obligation to fund or to commit any other resources to the exploration or development of the onshore Highlander subject interest. To the extent that HOGA does not fund further exploration and development of the onshore Highlander subject interest, or if for any other reason sufficient production from the onshore Highlander subject interest is not maintained in commercial quantities, Royalty Trust unitholders will not realize any additional value from their investment in the Royalty Trust units.

Previous wording

On January 19, 2023, the sole well producing from the onshore Highlander subject interest experienced an operational issue, resulting in substantial amounts of water entering the well, which caused a shut in of the well before production resumed at significantly reduced levels. Following an evaluation by HOGA’s field operations team, HOGA determined that it would be necessary to commence operations to control the water production, in expectation of eventually initiating “kill” operations on the well. HOGA informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased. Since that time the well has flowed intermittently but not on a continuous basis. In October 2023, HOGA informed the Trustee that due to the underground flow of fluids into the wellbore, the well cannot be salvaged and must be plugged and abandoned. HOGA subsequently informed the Trustee that operations to permanently plug and abandon the well commenced in early March 2024.

Current wording

On January 19, 2023, the sole well producing from the onshore Highlander subject interest experienced an operational issue, resulting in substantial amounts of water entering the well, which caused a shut in of the well before production resumed at significantly reduced levels. Following an evaluation by HOGA’s field operations team, HOGA determined that it would be necessary to commence operations to control the water production, in expectation of eventually initiating “kill” operations on the well. HOGA informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased. After that time the well flowed intermittently but not on a continuous basis. In October 2023, HOGA informed the Trustee that due to the underground flow of fluids into the wellbore, the well could not be salvaged and would be required to be plugged and abandoned. HOGA subsequently informed the Trustee that operations to permanently plug and abandon the well commenced in early March 2024.

Previous wording

The onshore Highlander subject interest is the only subject interest that has established commercial production. Abandoning the well eliminated any production from the onshore Highlander subject interest, which also eliminated any proceeds to which the Royalty Trust would be entitled pursuant to its overriding royalty interests during the same period. Unless another well is drilled on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods. HOGA has not informed the Trustee of any definitive plans to drill a new well on the Highlander subject interest. Neither the Trustee nor the Royalty Trust unitholders has any right to control or influence operations of the subject interest.

Current wording

The onshore Highlander subject interest is the only subject interest that has established commercial production. Abandoning the well eliminated any production from the onshore Highlander subject interest, which also eliminated any proceeds to which the Royalty Trust would be entitled pursuant to its overriding royalty interests during the same period. Unless another well is drilled on the onshore Highlander subject interest and produces hydrocarbons in commercial quantities, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods. HOGA informed the Trustee that a new well on the onshore Highlander subject interest was spudded on January 30, 2025; however, the future production status of this well remains unknown. Neither the Trustee nor the Royalty Trust unitholders has any right to control or influence operations of the subject interest.

Previous wording

For additional information regarding McMoRan’s and HOGA’s current oil and gas activities in relation to the subject interests, see Part I, Items 1. and 2. “Business and Properties – The Subject Interests – Exploratory and Development Drilling” and Part I, Item 1A. “Risk Factors” of this Form 10-K.

Current wording

For additional information regarding HOGA’s current oil and gas activities in relation to the onshore Highlander subject interest, see Part I, Items 1. and 2. “Business and Properties – The Subject Interests – Exploratory and Development Drilling” and Part I, Item 1A. “Risk Factors” of this Form 10-K.

Previous wording

For information regarding McMoRan’s and HOGA’s production, see “Results of Operations” in this section of this Form 10-K.

Current wording

For information regarding HOGA’s production, see “Results of Operations” in this section of this Form 10-K.

Previous wording

For information regarding McMoRan’s and HOGA’s acreage position, see Part I, Items 1. and 2. “Business and Properties – The Subject Interests – Acreage” of this Form 10-K.

Current wording

For information regarding HOGA’s acreage position, see Part I, Items 1. and 2. “Business and Properties – The Subject Interests – Acreage” of this Form 10-K.

Previous wording

*Royalty Income.*The onshore Highlander subject interest began commercial production on February 25, 2015. Prior to this date there had been no commercial production of hydrocarbons from any of the subject interests. During the year ended December 31, 2023, the Royalty Trust received royalties of $401,278 from HOGA related to 101,352 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.67 per Mcf and an average receipt price of $4.63 per Mcf. During the year ended December 31, 2022, the Royalty Trust received royalties of $2,472,908 from McMoRan and HOGA related to 429,000 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.43 per Mcf and an average receipt price of $6.19 per Mcf. Royalty income was lower during the year ended December 31, 2023, as compared to the year ended December 31, 2022 due to significantly decreased production due to the operational issues of the well and lower natural gas prices.

Current wording

*Royalty Income.*The onshore Highlander subject interest began commercial production on February 25, 2015. Prior to this date there had been no commercial production of hydrocarbons from any of the subject interests. As there was no production in 2024, the Royalty Trust did not receive any royalties for the year ended December 31, 2024. During the year ended December 31, 2023, the Royalty Trust received royalties of $401,278 from HOGA related to 101,352 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.67 per Mcf and an average receipt price of $4.63 per Mcf. Royalty income was lower during the year ended December 31, 2024, as compared to the year ended December 31, 2023 due to the well being shut-in.

Previous wording

*Administrative Expenses.*For the years ended December 31, 2023 and 2022, the Royalty Trust paid administrative expenses of $469,822 and $604,361, respectively. Administrative expenses, which consisted primarily of audit, legal and trustee expenses incurred in connection with the administration of the Royalty Trust, were lower in 2023 as compared to 2022 due to no administrative fees being paid in the fourth quarter of 2023.

Current wording

*Administrative Expenses.*For the years ended December 31, 2024 and 2023, the Royalty Trust paid administrative expenses of $899,455 and $469,821, respectively. Administrative expenses, which consisted primarily of audit, legal and trustee expenses incurred in connection with the administration of the Royalty Trust, were higher in 2024 compared to 2023 because no administrative fees were paid in the fourth quarter of 2023. Fourth quarter 2023 administrative expenses were paid in the first quarter of 2024, when the Royalty Trust borrowed funds from FCX.

Previous wording

Pursuant to the Royalty Trust Agreement, FCX has agreed to pay annual trust expenses up to $350,000, with no right of repayment or interest due, to the extent the Royalty Trust lacks sufficient funds to pay administrative expenses. On February 1, 2024, pursuant to this provision, FCX contributed approximately $166,000 for the payment of trust expenses incurred during the year ended December 31, 2023, and contributed the maximum of $350,000 for the payment of trust expenses incurred during the year ending December 31, 2024. No such contributions were made during the year ended December 31, 2022. In addition to such annual contributions, FCX has agreed to lend money, on an unsecured, interest-free basis, to the Royalty Trust to fund the Royalty Trust’s ordinary administrative expenses as set forth in the Royalty Trust Agreement. All funds the Trustee borrows to cover expenses or liabilities, whether from FCX or from any other source, must be repaid before the Royalty Trust unitholders will receive any distributions. No loans or repayments were made during the years ended December 31, 2023 or 2022. To the extent annual trust expenses exceed $350,000, the Royalty Trust may be required to borrow funds from FCX.

Current wording

Pursuant to the Royalty Trust Agreement, the Depositor has agreed to pay annual trust expenses up to $350,000, with no right of repayment or interest due, to the extent the Royalty Trust lacks sufficient funds to pay administrative expenses. On February 1, 2024, pursuant to this provision, FCX contributed approximately $166,000 for the payment of trust expenses incurred during the year ended December 31, 2023, and contributed the maximum of $350,000 for the payment of trust expenses incurred during the year ended December 31, 2024. In addition to such annual contributions, the Depositor has agreed to lend money, on an unsecured, interest-free basis, to the Royalty Trust to fund the Royalty Trust’s ordinary administrative expenses as set forth in the Royalty Trust Agreement. All funds the Trustee borrows to cover expenses or liabilities, whether from the Depositor or from any other source, must be repaid before the Royalty Trust unitholders will receive any distributions. FCX loaned the Royalty Trust $200,000 during the year ended December 31, 2024. No loans or repayments were made during the year ended December 31, 2023. Pursuant to the Assignment, as of December 31, 2024, FCX assigned to HOGA the promissory note relating to the outstanding loan to the Royalty Trust. To the extent annual trust expenses exceed $350,000, the Royalty Trust may be required to borrow funds from HOGA in the future.

Previous wording

Pursuant to the Royalty Trust Agreement, FCX also agreed to provide and maintain a $1.0 million stand-by reserve account or an equivalent letter of credit for the benefit of the Royalty Trust to enable the Trustee to draw on such reserve account or letter of credit to pay obligations of the Royalty Trust if its funds are inadequate to pay its obligations at any time. Currently, with the consent of the Trustee, FCX may reduce the reserve account or substitute a letter of credit with a different face amount for the original letter of credit or any substitute letter of credit. In connection with this arrangement, FCX has provided $1.0 million in the form of a reserve fund cash account to the Royalty Trust. As of December 31, 2023, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

Current wording

Pursuant to the Royalty Trust Agreement, the Depositor also agreed to provide and maintain a $1.0 million stand-by reserve account or an equivalent letter of credit for the benefit of the Royalty Trust to enable the Trustee to draw on such reserve account or letter of credit to pay obligations of the Royalty Trust if its funds are inadequate to pay its obligations at any time. Currently, with the consent of the Trustee, HOGA may reduce the reserve account or substitute a letter of credit with a different face amount for the original letter of credit or any substitute letter of credit. In connection with this arrangement, FCX provided $1.0 million in the form of a reserve fund cash account to the Royalty Trust. As of December 31, 2024, the Royalty Trust had used $151,632 from the reserve account, and the Depositor had not requested a reduction of such reserve account. Effective December 31, 2024, pursuant to the Assignment, FCX assigned its right, title and interest in the stand-by reserve account to HOGA, and HOGA assumed the responsibility to maintain the stand-by reserve account from FCX.

Previous wording

Royalties are paid to the Royalty Trust on the last day of the month following the month in which production payments are received by McMoRan or HOGA in accordance with the terms of the master conveyance. In accordance with the master conveyance, the Royalty Trust received royalties from HOGA of $401,278 and $2,472,908 during the years ended December 31, 2023 and 2022, respectively, due to production from the onshore Highlander subject interest.

Current wording

Royalties are paid to the Royalty Trust on the last day of the month following the month in which production payments are received by the Grantor in accordance with the terms of the master conveyance. In accordance with the master conveyance. The Royalty Trust did not receive any royalties in 2024, as the well was shut-in. The Royalty Trust received royalties from HOGA of $401,278 during the year ended December 31, 2023 due to production from the onshore Highlander subject interest.

Previous wording

Royalties received by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce Royalty Trust indebtedness. The Royalty Trust had no indebtedness outstanding as of December 31, 2023. As of December 31, 2023, the Trustee has established a minimum cash reserve of $302,500. As a result, distributions will be made to Royalty Trust unitholders only when royalties received less administrative expenses incurred and repayment of any indebtedness exceeds the minimum cash reserve.

Current wording

Royalties received by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce Royalty Trust indebtedness. The Royalty Trust has an outstanding note payable to HOGA of $200,000 outstanding as of December 31, 2024. The Royalty Trust had no indebtedness outstanding as of December 31, 2023. As of December 31, 2024, the Trustee has established a minimum cash reserve of $302,500. As a result, distributions will be made to Royalty Trust unitholders only when royalties received less administrative expenses incurred and repayment of any indebtedness exceeds the minimum cash reserve.

Previous wording

Commencing with the distribution to Royalty Trust unitholders in the first quarter of 2022, the Royalty Trust withheld $8,750 from the funds otherwise available for distribution each quarter through the first quarter of 2023, with the intent of gradually building a cash reserve of approximately $350,000. As no proceeds were available for distribution in the second, third or fourth quarters of 2023, the Royalty Trust did not withhold any funds for the cash reserve with respect to those periods. Unless another well is drilled on the onshore Highlander subject interest as discussed in “Operational Activities – Status of the Onshore Highlander Subject Interest” above, the Royalty Trust does not intend to withhold funds for the cash reserve as the Royalty Trust does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods. This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Royalty Trust. The Trustee may increase or decrease the targeted cash reserve amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the Royalty Trust unitholders. Cash held in reserve will be invested as required by the Royalty Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to Royalty Trust unitholders, together with interest earned on the funds.

Current wording

Commencing with the distribution to Royalty Trust unitholders in the first quarter of 2022, the Royalty Trust withheld $8,750 from the funds otherwise available for distribution each quarter through the first quarter of 2023, with the intent of gradually building a cash reserve of approximately $350,000. As no proceeds have been available for distribution since the first quarter of 2023, the Royalty Trust has not withheld any funds for the cash reserve with respect to those periods. Unless another well is drilled on the onshore Highlander subject interest and produces hydrocarbons in commercial quantities as discussed in “Operational Activities – Status of the Onshore Highlander Subject Interest” above, the Royalty Trust does not intend to withhold funds for the cash reserve as the Royalty Trust does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods. This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Royalty Trust. The Trustee may increase or decrease the targeted cash reserve amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the Royalty Trust unitholders. Cash held in reserve will be invested as required by the Royalty Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to Royalty Trust unitholders, together with interest earned on the funds.

Previous wording

Distributable income totaled $197,331 and $1,842,816 for the years ended December 31, 2023 and 2022, respectively. These distributions are not necessarily indicative of future distributions. The Royalty Trust’s only other sources of liquidity are mandatory annual contributions, any loans and the required standby reserve account or letter of credit from FCX. As a result, any material adverse change in FCX’s, McMoRan’s or HOGA’s financial condition or results of operations could materially and adversely affect the Royalty Trust and the underlying Royalty Trust units. See Part I, Item 1A. “Risk Factors” of this Form 10-K for more information.

Current wording

There was no distributable income in 2024. Distributable income totaled $197,331 for the year ended December 31, 2023. These distributions are not necessarily indicative of future distributions. The Royalty Trust’s only other sources of liquidity are mandatory annual contributions, any loans and the required standby reserve account or letter of credit from HOGA. As a result, any material adverse change in HOGA’s financial condition or results of operations could materially and adversely affect the Royalty Trust and the underlying Royalty Trust units. See Part I, Item 1A. “Risk Factors” of this Form 10-K for more information.

Previous wording

The Royalty Trust evaluates the carrying values of the overriding royalty interests in the subject interests for impairment if conditions indicate that potential uncertainty exists regarding the Royalty Trust’s ability to recover its recorded amounts related to the overriding royalty interests. Indications of potential impairment with respect to the overriding royalty interests can include, among other things, subject interest lease expirations, reductions in estimated reserve quantities or resource potential, changes in estimated future oil and gas prices, exploration costs, and/or drilling plans, and other matters that arise that could negatively impact the carrying values of the overriding royalty interests. If an impairment event occurs and it is determined that the carrying value of the Royalty Trust’s overriding royalty interests in the subject interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the overriding royalty interests in the subject interests exceeds the fair value of these assets, which would be measured by discounting projected cash flows. The related impairment amounts are recorded as a reduction to the overriding royalty interests with an offsetting reduction to the Trust Corpus in the period such impairment is determined, see Note 3 in the Notes to Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K. The Royalty Trust fully impaired the carrying value of the onshore Highlander subject interest by $308,071 during the year ended December 31, 2023. Unless another well is drilled on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests. Therefore, the Royalty Trust recognized the remaining carrying value of the onshore Highlander subject interest as of March 31, 2023 as an impairment loss.

Current wording

The Royalty Trust evaluates the carrying values of the overriding royalty interests in the subject interests for impairment if conditions indicate that potential uncertainty exists regarding the Royalty Trust’s ability to recover its recorded amounts related to the overriding royalty interests. Indications of potential impairment with respect to the overriding royalty interests can include, among other things, subject interest lease expirations, reductions in estimated reserve quantities or resource potential, changes in estimated future oil and gas prices, exploration costs, and/or drilling plans, and other matters that arise that could negatively impact the carrying values of the overriding royalty interests. If an impairment event occurs and it is determined that the carrying value of the Royalty Trust’s overriding royalty interests in the subject interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the overriding royalty interests in the subject interests exceeds the fair value of these assets, which would be measured by discounting projected cash flows. The related impairment amounts are recorded as a reduction to the overriding royalty interests with an offsetting reduction to the Trust Corpus in the period such impairment is determined, see Note 3 in the Notes to Financial Statements located in Part II, Item 8. “Financial Statements and Supplementary Data” of this Form 10-K. The Royalty Trust fully impaired the carrying value of the onshore Highlander subject interest by $308,071 during the year ended December 31, 2023. Unless another well is drilled on the onshore Highlander subject interest and produces hydrocarbons in commercial quantities, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests. Therefore, the Royalty Trust recognized the remaining carrying value of the onshore Highlander subject interest as of March 31, 2023 as an impairment loss.