BP Prudhoe Bay Royalty Trust(BPT) - 2022 Q4 - Annual Report

PART I ITEM 1. BUSINESS The Trust is a passive grantor trust with a royalty interest in the Prudhoe Bay oil field, where payments depend on WTI prices and declining production, projected to cease after 2024 The Trust The Trust is a passive entity administered by a Trustee, focused on collecting and distributing royalty revenues, with specific termination conditions - The Trust's primary function is to collect income from the Royalty Interest, pay expenses, and distribute the remaining cash to Unitholders[240] - The Trust will terminate if net revenues from the Royalty Interest are less than $1,000,000 per year for two successive years, or if holders of at least 60% of the outstanding Units vote for termination[5][245] - The Trustee has the authority to establish a cash reserve, borrow funds, or sell Trust assets under specific conditions to pay for Trust liabilities, provided it does not adversely affect the Trust's tax status as a 'grantor trust'[293][264] The Royalty Interest The Royalty Interest provides a royalty on Prudhoe Bay production, calculated daily as WTI price minus inflation-adjusted Chargeable Costs and Production Taxes - The daily "Per Barrel Royalty" is calculated as the WTI Price for that day minus the sum of inflation-adjusted Chargeable Costs and Production Taxes[273] Chargeable Costs Schedule | Year | Chargeable Costs (per barrel) | | :--- | :--- | | 2020 | $26.50 | | 2021 | $29.25 | | 2022 | $32.00 | | 2023 | $34.75 | Per Barrel Royalty Calculation Example (Q3 2022) | Metric | Value ($) | | :--- | :--- | | Average WTI Price | $91.87 | | Adjusted Chargeable Costs | $72.98 | | Production Taxes | $3.30 | | Average Per Barrel Royalty | $15.59 | The Prudhoe Bay Unit and Field The Prudhoe Bay field, operated by HNS, is declining, with Trust's proved reserves at 8.232 million barrels, and royalty payments projected to cease after 2024 - The Prudhoe Bay field has been in production since 1977, with production declining in recent years. The average well production rate has decreased from 166 barrels per day in 2018 to 157 in 2022[12][325] Net Production Allocated to 1989 Working Interests (thousand barrels per day) | Calendar Year | Oil | Condensate | | :--- | :--- | :--- | | 2018 | 77.3 | 0.0 | | 2019 | 75.5 | 0.0 | | 2020 | 74.0 | 0.0 | | 2021 | 70.6 | 0.0 | | 2022 | 69.5 | 0.0 | - Based on the 2022 average WTI price of $93.67/barrel, HNS estimates that royalty payments to the Trust will cease after 2024. Consequently, no proved reserves are attributed to the Trust beyond that date[57][11][201] Certain Tax Considerations The Trust is a grantor trust, not directly taxable, with unitholders reporting income and deductions, and foreign unitholders subject to a 30% withholding tax - The Trust is a grantor trust, not a taxable entity. Unitholders must report their share of Trust income and deductions on their own tax returns[211] - Foreign unitholders are typically subject to a 30% withholding tax on gross income from the Royalty Interest, though a lower treaty rate may apply[184] - The Trustee considers the Trust a widely held fixed investment trust (WHFIT) for U.S. Federal income tax purposes and provides tax information accordingly[148] ITEM 1A. RISK FACTORS The Trust faces significant risks from WTI price volatility, declining production, operational disruptions, rising inflation, and potential termination due to low net revenues Risks Related To Royalty Payments Royalty payments are uncertain due to WTI prices and rising costs, with past cessations and a $6.0 million cash reserve maintained by the Trustee to cover expenses - The Trust did not receive any royalty payments for the four quarters of 2020 and the first quarter of 2021 due to low WTI prices, and payments may cease again in the future[218] - The Trust will terminate if net revenues are less than $1,000,000 for two consecutive years. This condition was met for 2020, making termination a possibility[61][220] - The Trustee intends to maintain a cash reserve of at least $6,000,000 to pay for administrative and termination expenses, which may reduce or eliminate distributions to unitholders even if royalty payments are received[59][219] Risks Related to WTI Price WTI crude oil prices are highly volatile due to global factors, directly impacting Trust revenues and reserve estimates, while inflation further reduces royalty payments - Crude oil prices are subject to wide swings due to factors like economic activity, geopolitical events (e.g., Russia's war with Ukraine), OPEC+ decisions, and the strength of the U.S. dollar[9][361] - High inflation, as measured by the Consumer Price Index, increases the Cost Adjustment Factor, which in turn reduces the Per Barrel Royalty and negatively affects distributions[380] - Government policies aimed at reducing greenhouse gas emissions and promoting green energy could decrease demand for oil, negatively affecting the WTI price and Trust revenues[384] Risks Related to Oil Production Prudhoe Bay production is declining, HNS has no obligation to maintain it, and the Trans-Alaska Pipeline System (TAPS) faces risks that could halt all production - Production from the Prudhoe Bay field is declining and is expected to continue to do so. Average net production allocated to the Trust has been below 90,000 barrels per day since 2018[12][385] - HNS has no obligation to continue production from the 1989 Working Interests and may interrupt or discontinue it at any time, which would halt royalty payments to the Trust[14][366] - All oil from the Prudhoe Bay Unit is transported via the Trans-Alaska Pipeline System (TAPS), which is susceptible to damage from natural causes, accidents, or issues related to declining oil flow, potentially interrupting production[17] Risks Related to the Units Unitholders have limited rights, unit market price is volatile, and financial statements are prepared on a modified cash basis, not U.S. GAAP - Trust unitholders have limited voting rights and no requirement for annual meetings or re-election of the Trustee[23] - The Trust's financial statements are prepared on a modified cash basis, which is not U.S. GAAP. This basis differs in how revenues and expenses are recognized[24][373] - Potential conflicts of interest exist between HNS and the Trust, as HNS's actual profitability may differ from the contractually defined Per Barrel Royalty it pays to the Trust[373][396] ITEM 1B. UNRESOLVED STAFF COMMENTS The Trust has no unresolved written comments from the Securities and Exchange Commission staff regarding its reports - The Trust has no unresolved written comments from the SEC staff[25] ITEM 2. PROPERTIES The Trust's properties are detailed in Item 1, with no other properties held - The Trust's properties are detailed in Item 1. No other properties are held[374][398] ITEM 3. LEGAL PROCEEDINGS No legal proceedings are reported for the period - Not applicable[26] ITEM 4. MINE SAFETY DISCLOSURE This item is not applicable to the Trust - Not applicable[375] PART II ITEM 5. MARKET FOR REGISTRANT'S UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF UNITS The Trust's Units are traded on the NYSE (BPT), with 21.4 million units outstanding, and distributions depend on WTI prices and production - The Trust's units are listed on the New York Stock Exchange under the symbol BPT[376] - As of March 13, 2023, there were 21,400,000 Units outstanding with 200 holders of record[28] ITEM 7. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Trust's financial condition is driven by WTI-sensitive royalty revenues, which surged in 2022, with a $6.0 million cash reserve maintained and payments projected to cease after 2024 Liquidity and Capital Resources The Trust's liquidity relies solely on royalty revenues, with a $6.0 million cash reserve established in 2021 to cover expenses and termination costs - The Trust's only source of liquidity is revenue from the Royalty Interest. The Trustee has the power to borrow or establish a cash reserve under limited circumstances[29] - In October 2021, the Trustee increased the cash reserve to $6.0 million, funded from royalty payments, to cover administrative and future termination expenses[31][59] Results of Operations Royalty revenues surged to $82.3 million in 2022 due to higher WTI prices, leading to $80.9 million cash earnings and $3.7768 per unit distributions Financial Performance Comparison: 2022 vs 2021 (in thousands) | Metric | Year Ended 12/31/2022 | Year Ended 12/31/2021 | Change (%) | | :--- | :--- | :--- | :--- | | Royalty revenues | $82,283 | $9,417 | 773.8% | | Cash earnings | $80,888 | $7,811 | 935.6% | | Cash distributions | $80,823 | $2,007 | 3927.1% | | Administrative expenses | $1,464 | $1,605 | (8.8)% | Key Operational Drivers: 2022 vs 2021 (12 Months Ended 9/30) | Metric | 12 Months Ended 9/30/2022 | 12 Months Ended 9/30/2021 | Change (%) | | :--- | :--- | :--- | :--- | | Average WTI Price | $92.97 | $59.28 | 56.8% | | Adjusted Chargeable Costs | $69.36 | $58.64 | 18.3% | | Average Production Taxes | $4.17 | $2.04 | 104.4% | | Average net royalty production (mb/d) | 69.83 | 71.48 | (2.3)% | Financial Performance Comparison: 2021 vs 2020 (in thousands) | Metric | Year Ended 12/31/2021 | Year Ended 12/31/2020 | Change (%) | | :--- | :--- | :--- | :--- | | Royalty revenues | $9,417 | $9,269 | 1.6% | | Cash earnings | $7,811 | $8,126 | (3.9)% | | Cash distributions | $2,007 | $9,079 | (77.9)% | | Administrative expenses | $1,605 | $1,692 | (5.1)% | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Trust's primary market risk is crude oil price volatility, with no material interest rate, foreign currency, or derivative risks - The Trust's main market risk is the volatility of crude oil prices. It is not subject to material interest rate risk, foreign currency risk, or risks from derivative instruments[415] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents KPMG's auditor report and the Trust's financial statements (modified cash basis, not U.S. GAAP) for 2020-2022, with notes detailing accounting and reserves Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on the Trust's financial statements (modified cash basis) and internal controls for 2022, identifying no critical audit matters - KPMG LLP provided an unqualified opinion on the financial statements, which are prepared on a modified cash basis of accounting[72][418] - KPMG LLP issued an unqualified opinion on the effectiveness of the Trust's internal control over financial reporting as of December 31, 2022[75][105] - The auditor determined that there were no critical audit matters arising from the audit[74] Financial Statements The Trust's financial statements show significant growth in 2022, with Trust Corpus at $5.787 million, cash earnings of $80.888 million, and distributions of $3.7768 per unit Statement of Assets, Liabilities and Trust Corpus (in thousands) | | December 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $132 | $6,002 | | Security held to maturity | $5,935 | — | | Total Assets | $6,067 | $6,002 | | Liabilities and Trust Corpus | | | | Accrued expenses | $280 | $364 | | Trust Corpus | $5,787 | $5,638 | | Total Liabilities and Trust Corpus | $6,067 | $6,002 | Statements of Cash Earnings and Distributions (in thousands, except per unit data) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Royalty revenues | $82,283 | $9,417 | $9,269 | | Cash earnings | $80,888 | $7,811 | $8,126 | | Cash distributions | $80,823 | $2,007 | $9,079 | | Cash distributions per unit | $3.7768 | $0.0938 | $0.4242 | Statements of Changes in Trust Corpus (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Trust corpus at beginning of year | $5,638 | $59 | $898 | | Cash earnings | 80,888 | 7,811 | 8,126 | | Cash distributions | (80,823) | (2,007) | (9,079) | | Trust corpus at end of year | $5,787 | $5,638 | $59 | Notes to Financial Statements Notes confirm modified cash basis accounting, detail the $6.0 million cash reserve, and report 8.232 million barrels of proved reserves with $56.751 million discounted future net cash flow for 2022 - The financial statements are prepared on a modified cash basis, where revenues are recorded when received and expenses are recorded on an accrual basis. This is considered most meaningful as distributions are based on net cash receipts[92][122] - Due to a cash shortfall in 2020, the Trust received a $537,835 indemnity payment from HNS. Subsequently, in 2021, the Trustee increased the cash reserve to approximately $6,000,000 to cover future expenses[90] Proved Reserves and Discounted Future Net Cash Flows | As of Year-End | Net Proved Reserves (million barrels) | Standardized Measure of Discounted Future Net Cash Flows (in thousands) | | :--- | :--- | :--- | | 2022 | 8.232 | $56,751 | | 2021 | 0 | $0 | | 2020 | 0 | $0 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Trust reports no changes in or disagreements with its accountants regarding accounting or financial disclosures for the past two fiscal years - There have been no changes in or disagreements with accountants during the last two fiscal years[160] ITEM 9A. CONTROLS AND PROCEDURES The Trustee concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes in the fourth quarter - The Trustee's officers concluded that the Trust's disclosure controls and procedures were effective as of December 31, 2022[137] - Based on the COSO criteria, the Trustee concluded that the Trust's internal control over financial reporting was effective as of December 31, 2022[140] - No changes in the Trust's internal control over financial reporting occurred during the fourth quarter that materially affected, or are reasonably likely to materially affect, these controls[141] ITEM 9B. OTHER INFORMATION This item is not applicable - Not applicable[142] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The Trust has no directors or executive officers, being administered by the Trustee under the Trust Agreement, and lacks a formal code of ethics or audit committee - The Trust has no directors or executive officers; it is administered by the Trustee[168] - There is no audit committee or similar body responsible for reviewing the Trust's financial statements[354] ITEM 11. EXECUTIVE COMPENSATION The Trust pays no executive compensation, as it has no directors or officers; the Trustee receives a contractually defined administrative fee and expense reimbursements - The Trust has no directors, officers, or employees and therefore pays no executive compensation[1] Trustee's Fees Received | Year ended December 31, | Trustee's Fees ($) | | :--- | :--- | | 2020 | $213,378 | | 2021 | $229,149 | | 2022 | $215,538 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS As of March 15, 2023, no beneficial owners held over 5% of Trust Units, and neither the Trustee nor related parties own any Units, with no equity compensation plans - As of March 15, 2023, there were no known beneficial owners of more than 5% of the Units[193] - Neither the Trustee, co-trustee, HNS, Hilcorp, Standard Oil, nor BP owns any Units[147] - No Units are authorized for issuance under any equity compensation plan[172] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE No material related party transactions occurred since 2022, except for Trustee fees and reimbursements, and the Trust has no independent directors - No material related party transactions have occurred since the start of 2022, except for the contractually defined payments to the Trustee[175] - The Trust has no independent directors[334] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES This section details fees paid to KPMG LLP for 2021-2022 services, noting the Trust lacks an audit committee for pre-approval Accountant Fees (KPMG LLP) | Service | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Audit | $196,500 | $174,000 | | Audit related | $24,500 | $22,000 | | Tax | $221,000 | $272,000 | | Total | $442,000 | $468,000 | - The Trust does not have an audit committee or an audit committee pre-approval policy for accountant fees[196] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists filed documents, including financial statements and exhibits like the Trust Agreement and Miller and Lents report, with schedules omitted as not applicable - The report includes the Trust's financial statements and lists key legal documents like the Trust Agreement and Overriding Royalty Conveyance as exhibits[177][197] - The report of Miller and Lents, Ltd., an independent oil and gas consulting firm, dated February 24, 2023, is filed as Exhibit 99[55][178] ITEM 16. FORM 10-K SUMMARY No summary is provided under this item - None[379]