UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549












FORM 10-Q










(Mark One)



| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30,
2020

OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------



For the transition period from             
to

Commission File Number: 001-35274










SANDRIDGE PERMIAN TRUST

(Exact name of registrant as specified in
its charter)










|Delaware                                                       |  | 45-6276683                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|The Bank of New York Mellon Trust Company, N.A., Trustee
601 Travis Street, 16th Floor,
Houston, Texas |  | 77002     
|------------------------------------------------------------------------------------------------------ |  | ----------
|(Address of principal executive offices)                                                               |  | (Zip Code)



Registrant’s telephone number, including
area code:

(512) 236-6555



Former name, former address and former fiscal
year, if changed since last report: Not applicable










Securities registered pursuant to Section 12(b) of
the Act: None.



Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No  ̈



Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes  ̈  No  ̈



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



|Large accelerated filer |  ̈ |  | Accelerated filer         | x
|----------------------- | - |  | ------------------------- | -
|Non-accelerated filer   |  ̈ |  | Smaller reporting company | x
|                        |   |  | Emerging growth company   |  ̈



If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ̈



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



As of November 5, 2020, 52,500,000
Common Units of Beneficial Interest in SandRidge Permian Trust were outstanding.




















SANDRIDGE PERMIAN TRUST

FORM 10-Q

Quarter Ended September 30, 2020



|PART I. FINANCIAL INFORMATION                                                              |  |  |    | 
|------------------------------------------------------------------------------------------ |  |  | -- | 
|                                                                                           |  |  |    | 
|ITEM 1. Financial Statements (Unaudited)                                                   |  |  | 4  | 
|Statements of Assets and Trust Corpus                                                      |  |  | 4  | 
|Statements of Distributable Income                                                         |  |  | 5  | 
|Statements of Changes in Trust Corpus                                                      |  |  | 6  | 
|Notes to Financial Statements                                                              |  |  | 7  | 
|ITEM 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations |  |  | 15 | 
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                         |  |  | 24 | 
|ITEM 4. Controls and Procedures                                                            |  |  | 24 | 
|                                                                                           |  |  |    | 
|PART II. OTHER INFORMATION                                                                 |  |  |    | 
|                                                                                           |  |  |    | 
|ITEM 1A. Risk Factors                                                                      |  |  | 25 | 
|ITEM 6. Exhibits                                                                           |  |  | 29 | 



All references to “we,” “us,”
 “our,” or the “Trust” refer to SandRidge Permian Trust. References to “SandRidge”
refer to SandRidge Energy, Inc., and where the context requires, its subsidiaries.





2







DISCLOSURES REGARDING FORWARD-LOOKING
STATEMENTS



This Quarterly Report
includes “forward-looking statements” about the Trust, Avalon and other matters discussed herein that are subject to
risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
All statements other than statements of historical fact included in this document, including, without limitation, statements under
 “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I
and elsewhere in this Quarterly Report regarding the Trust’s or Avalon’s plans and objectives for future operations,
are forward-looking statements. Actual outcomes and results may differ materially from those projected. Forward-looking statements
are generally accompanied by words such as “estimate,” “target,” “project,” “predict,”
 “believe,” “expect,” “anticipate,” “potential,” “could,” “may,”
 “foresee,” “plan,” “goal,” “should,” “intend” or other words that convey
the uncertainty of future events or outcomes. The Trust has based these forward-looking statements on its current expectations
and assumptions about future events. These statements are based on certain assumptions made by the Trust in light of its experience
and its perception of historical trends, current conditions and expected future developments as well as other factors it believes
are appropriate under the circumstances. However, whether actual results and developments will conform with the Trust’s expectations
and predictions is subject to a number of risks and uncertainties, including the risk factors discussed in Item 1A of the Trust’s
2019 Form 10-K and in Item 1A of Part II of this Quarterly Report, which could affect the future results of the energy
industry in general, and the Trust and Avalon in particular, and could cause those results to differ materially from those expressed
in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially
realized, they may not have the expected consequences to or effects on Avalon’s business or the Trust’s results. Such
statements are not guarantees of future performance and actual results or developments may differ materially from those projected
in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements.





3







PART I. Financial Information



ITEM 1. Financial Statements



SANDRIDGE PERMIAN TRUST

STATEMENTS OF ASSETS AND TRUST CORPUS

(In thousands, except unit data)



|                                                                                                  |  | September 30, 2020 |          |   | December 31, 2019 |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | -
|                                                                                                  |  | (Unaudited)        |          |   |                   |  
|ASSETS                                                                                            |  |                    |          |   |                   |  
|Cash and cash equivalents                                                                         |  | $                  | 3,290    |   |                   | $
|Investment in royalty interests                                                                   |  |                    | 549,831  |   |                   |  
|Less: accumulated amortization and impairment                                                     |  |                    | (534,527 | ) |                   |  
|Net investment in royalty interests                                                               |  |                    | 15,304   |   |                   |  
|Total assets                                                                                      |  | $                  | 18,594   |   |                   | $
|TRUST CORPUS                                                                                      |  |                    |          |   |                   |  
|Trust corpus, 52,500,000 units issued and outstanding at September 30, 2020 and December 31, 2019 |  | $                  | 18,594   |   |                   | $



The accompanying notes are an integral part
of these financial statements.





4







SANDRIDGE PERMIAN TRUST

STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)

(In thousands, except per unit data)



|                                                                                         |  | Three Months Ended September 30, |       |  | Nine Months Ended September 30, |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ----- |  | ------------------------------- | -
|                                                                                         |  | 2020                             |       |  | 2019                            |  
|Revenues                                                                                 |  |                                  |       |  |                                 |  
|Royalty income                                                                           |  | $                                | 1,664 |  |                                 | $
|Total revenues                                                                           |  |                                  | 1,664 |  |                                 |  
|Expenses                                                                                 |  |                                  |       |  |                                 |  
|Post-production expenses                                                                 |  |                                  | 11    |  |                                 |  
|Production taxes                                                                         |  |                                  | 80    |  |                                 |  
|Property taxes                                                                           |  |                                  | —     |  |                                 |  
|Franchise taxes                                                                          |  |                                  | —     |  |                                 |  
|Trust administrative expenses                                                            |  |                                  | 415   |  |                                 |  
|Cash reserves (used) withheld for current Trust expenses, net of amounts withheld (used) |  |                                  | 504   |  |                                 |  
|Total expenses                                                                           |  |                                  | 1,010 |  |                                 |  
|Distributable income available to unitholders                                            |  | $                                | 654   |  |                                 | $
|Distributable income per unit (52,500,000 units issued and outstanding)                  |  | $                                | 0.012 |  |                                 | $



The accompanying notes are an integral part
of these financial statements.





5







SANDRIDGE PERMIAN TRUST

STATEMENTS OF CHANGES IN TRUST CORPUS
(Unaudited)

(In thousands)



|                                                |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|----------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                |  | 2020                             |        |   | 2019                            |  
|Trust corpus, beginning of period               |  | $                                | 25,301 |   |                                 | $
|Amortization of investment in royalty interests |  |                                  | (855   | ) |                                 |  
|Impairment of investment in royalty interests   |  |                                  | (6,380 | ) |                                 |  
|Net cash reserves (used) withheld               |  |                                  | 504    |   |                                 |  
|Distributable income                            |  |                                  | 654    |   |                                 |  
|Distributions paid to unitholders               |  |                                  | (630   | ) |                                 |  
|Trust corpus, end of period                     |  | $                                | 18,594 |   |                                 | $



The accompanying notes are an integral part
of these financial statements.





6







SANDRIDGE PERMIAN TRUST

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



1. Organization of Trust



SandRidge Permian Trust
(the “Trust”) is a statutory trust formed under the Delaware Statutory Trust Act pursuant to a trust agreement,
as amended and restated, by and among SandRidge Energy, Inc. (“SandRidge”), as Trustor, The Bank of New
York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and The Corporation Trust Company, as Delaware
Trustee (the “Delaware Trustee”) (such amended and restated trust agreement, as amended to date, the “Trust
Agreement”).



The Trust holds royalty
interests conveyed by SandRidge from its interests in specified oil and natural gas properties located in Andrews County, Texas
(the “Underlying Properties”). These royalty interests were conveyed by SandRidge to the Trust (the “Royalty
Interests”) concurrent with the initial public offering and sale of 34,500,000 Trust common units (“Trust units”)
in August 2011 pursuant to the terms set forth in conveyancing documents effective April 1, 2011 (the “Conveyances”).
As consideration for conveyance of the Royalty Interests, the Trust remitted the net proceeds of the offering, along with 4,875,000
Trust units and 13,125,000 unregistered subordinated units of the Trust (“subordinated units”), to certain wholly-owned
subsidiaries of SandRidge.



Pursuant to a development
agreement between the Trust and SandRidge, SandRidge was obligated to drill, or cause to be drilled, 888 development wells within
an area of mutual interest (“AMI”) by March 31, 2016 (the “Trust Development Wells”).
SandRidge fulfilled this obligation in November 2014. As no additional development wells will be drilled, the Trust’s
production is expected to decline each quarter during the remainder of its life. As a result of SandRidge fulfilling its drilling
obligation, the subordinated units converted to Trust units in January 2016. At October 31, 2018, SandRidge owned 13,125,000
Trust units, or 25% of all Trust units.



On November 1,
2018, SandRidge sold all of its interests in the Underlying Properties and all of its outstanding Trust units (the “Sale
Transaction”) to Avalon Energy, LLC, a Texas limited liability company (“Avalon”). The Conveyances
permitted SandRidge to sell all or any part of its interest in the Underlying Properties, where the Underlying Properties were
sold subject to and burdened by the Royalty Interests. In connection with the Sale Transaction, Avalon and its affiliates assumed
all of SandRidge’s obligations under the Conveyances, the Trust Agreement and the administrative services agreement between
SandRidge and the Trust pursuant to which SandRidge and Avalon have provided accounting, tax preparation, bookkeeping and informational
services to the Trust (the “Administrative Services Agreement”). In addition, SandRidge assigned its rights
under the registration rights agreement between SandRidge and the Trust to Avalon. As of September 30, 2020, Avalon holds
13,125,000 Trust units, or 25% of all Trust units.



In connection with
the Sale Transaction, Avalon obtained a revolving line of credit from Washington Federal, National Association (“WaFed”)
pursuant to the terms of a Loan Agreement and related security documents (the “WaFed Loan”). Avalon used the
proceeds of the WaFed Loan to fund a portion of the purchase price for the interests in the Underlying Properties and Trust units
acquired in the Sale Transaction. The WaFed Loan is secured by a first lien mortgage on Avalon’s interest in the Underlying
Properties and a pledge of the Avalon Trust units (the “WaFed Collateral”). The Royalty Interests are not part
of the WaFed Collateral.



The Trust is passive
in nature and neither the Trust nor the Trustee has any control over, responsibility for, or involvement with, any aspect of the
oil and natural gas operations, capital costs or other activities related to the Underlying Properties. The business and affairs
of the Trust are administered by the Trustee. The Trust Agreement generally limits the Trust’s business activities to owning
the Royalty Interests and certain activities reasonably related thereto, including activities required or permitted by the terms
of the Conveyances.



The Trust makes quarterly
cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s administrative expenses,
property taxes and Texas franchise taxes, and cash reserves withheld by the Trustee, on or about the 60th day following the completion
of each quarter. Due to the timing of the payment of production proceeds to the Trust, each distribution covers production for
a three-month period consisting of the first two months of the most recently ended quarter and the final month of the quarter preceding
it.





7







The Trust will dissolve
and begin to liquidate on March 31, 2031 (the “Termination Date”), unless sooner dissolved in accordance
with the terms of the Trust Agreement as described below, and will soon thereafter wind up its affairs and terminate. At the Termination
Date, 50% of the Royalty Interests will revert automatically to Avalon. The remaining 50% of the Royalty Interests will be sold
at that time, with the net proceeds of the sale, as well as any remaining Trust cash reserves, distributed to the unitholders on
a pro rata basis, subject to Avalon’s right of first refusal to purchase the Royalty Interests retained by the Trust at the
Termination Date. In addition, the Trust will dissolve if one of the following events occurs prior to the Termination Date: (a) the
Trust sells all of the Royalty Interests; (b) cash available for distribution for any four consecutive quarters, on a cumulative
basis, is less than $5.0 million; (c) the Trust unitholders approve an earlier dissolution of the Trust; or (d) the Trust
is judicially dissolved pursuant to the provisions of the Delaware Statutory Trust Act. In the case of any of the foregoing, the
Trustee would then sell all of the Trust’s assets (subject to Avalon’s right of first refusal to purchase the Royalty
Interests held by the Trust as of the date of such event), either by private sale or public auction, and distribute the net proceeds
of the sale to the Trust unitholders after payment, or reasonable provision for payment, of all Trust liabilities.



2. Going Concern and Potential Early Termination of
the Trust



The
accompanying financial statements have been prepared assuming that the Trust will continue as a going concern. As discussed
under “Distributions to Unitholders” in Note 4 below, during April 2020, as a result of increased production costs
necessary to operate the Underlying Properties, coupled with the sharp decline in oil and gas prices since the beginning of 2020,
Avalon informed the Trustee that Avalon would be unable to pay on a timely basis the quarterly distribution amount it owes to the
Trust for the three-month period ended March 31, 2020 and believed it would be unable to generate sufficient cash for quarterly
payments to the Trust for the foreseeable future. Although the Trust has since announced quarterly distributions for the three-month
periods ended June 30, 2020 (which primarily relates to production attributable to the Trust’s Royalty Interests from
March 1, 2020 to May 31, 2020) and September 30, 2020 (which primarily relates to production attributable to the
Trust’s Royalty Interests from June 1, 2020 to August 31, 2020) of approximately $652,000 and $1,732,000, respectively,
there is no assurance that Avalon will be able to make distributions in subsequent calendar quarters or pay the quarterly payment
amount it owes the Trust for the three-month period ended March 31, 2020 as discussed in Note 4 below.



As the COVID-19 pandemic
continues to show no signs of abating and has recently resurged in the United States, Avalon has informed the Trust that it believes
crude oil prices will continue to fluctuate for the remainder of 2020 and beyond. Avalon has informed the Trustee that, due to
such uncertainty, combined with (a) the reduced revenues generated from operation of the Underlying Properties during the
nine-month period ended September 30, 2020 (as compared to the nine-month period ended September 30, 2019), resulting
from the continuing decline in production of crude oil from Trust Wells and (b) the fact that Avalon does not have the cash
needed to make the payment due to the Trust, together with accrued interest, for the three-month period ended March 31, 2020,
Avalon believes that the aggregate cash available for distribution, after expenses and any reserves established by the Trustee,
will be less than $5 million for the four consecutive quarters ending December 31, 2020. Therefore, it is highly likely that
the Trust will be required to commence dissolution on the Quarterly Payment Date (as defined in the Trust Agreement) with respect
to the quarter ending December 31, 2020, which is expected to be on or about February 22, 2021. The Trustee would then
commence winding-up the business and affairs of the Trust in accordance with the terms of the Trust Agreement, including among
other things, selling all of the Trust’s remaining assets, paying or making provision for the payment of all anticipated
or contingent Trust expenses or liabilities, distributing all remaining cash to Trust unitholders, and thereafter terminating the
Trust. Due to this uncertainty, there is substantial doubt regarding the Trust’s ability
to continue as a going concern within one year after the date that the financial statements are issued. The Trust’s financial
statements do not include any adjustments that might result from the outcome of this uncertainty.



Avalon’s
Financial Condition. The reduced demand for crude oil in the global market resulting from the economic effects of the
COVID-19 pandemic and the dramatic reduction in the benchmark price of crude oil during 2020 have had a negative impact on
Avalon’s financial condition. In an effort to reduce leasehold operating expenses ("LOE") and preserve the oil
and gas leases on which oil and gas wells burdened by the Royalty Interests (“Trust Wells”) are located, as
further described below, Avalon shut in 113 Trust Wells that were not capable of producing oil and natural gas in paying
quantities, as permitted under the Conveyances, during the nine-month period ended September 30, 2020. These Trust Wells were
not necessary to hold the leasehold interests burdened by the Trust’s Royalty Interests.





8







Given
Avalon’s financial condition, the Board of Managers of Avalon decided to explore strategic alternatives with respect to
its assets, including the Underlying Properties and the Avalon Trust units. Avalon had a number of discussions regarding a
possible transaction with over 20 potential strategic partners during the second quarter of 2020. After evaluating its
alternatives, on July 30, 2020, Avalon entered into a letter agreement with Montare Resources I, LLC
(“Montare”), a newly formed company owned and controlled by Dickie D. Hunter, whereby Avalon agreed to
negotiate exclusively with Montare regarding a possible sale of Avalon assets, including the Underlying Properties, to
Montare, subject to certain conditions including the negotiation and execution of definitive documents. On the same date,
Avalon and WaFed entered into an amendment to the WaFed Loan that extended (i) the date by which Avalon was obligated to
provide a reserve report to WaFed (regarding the redetermination of the WaFed Loan borrowing base) to September 15, 2020
and (ii) the date by which Avalon was required to pay off the WaFed Loan to October 15, 2020. In addition, WaFed and
Montare entered into a Participation Agreement with respect to the WaFed Loan whereby Montare (i) purchased an undivided
participation interest in the WaFed Loan and (ii) established the right to purchase the WaFed Loan in the event Avalon does not meet the
conditions of the amended WaFed Loan. See “Amendment of WaFed Loan” in Note 7. “Subsequent Events”
for additional discussion of a further amendment to the WaFed Loan.



On
August 26, 2020, Montare, Avalon and certain of their respective affiliates entered into a Contribution and Support
Agreement, pursuant to which Avalon, among other things, (i) agreed, subject to certain conditions, to contribute all of
the assets held by Avalon and its affiliates, including the Underlying Properties and the Avalon Trust units, to Montare in
exchange for interests in Montare or an affiliate thereof (the “Contribution Transaction”),
(ii) agreed to support Montare’s acquisition of all of the issued and outstanding Trust units not owned by Avalon
by means of a transaction with the Trust or as otherwise determined by Montare in its sole discretion (a “Montare
Transaction”), and any related actions taken by Montare with respect to a Montare Transaction, including by
exercising any of Avalon’s rights under the Trust Agreement, (iii) granted exclusivity and an irrevocable proxy to
Montare to vote all Trust units beneficially owned by Avalon in connection with a Montare Transaction, and (iv) to not
take any action that, directly or indirectly, is detrimental to or hinders Montare’s ability to consummate a Montare
Transaction. The consummation of the Contribution Transaction is subject to certain conditions, including Montare’s
determination in its sole and absolute discretion that all conditions necessary for the consummation of a Montare Transaction
have been satisfied or waived. Only upon the completion of both a Montare Transaction and the Contribution Transaction,
certain employees of Avalon, including its executive management team, may become employees of Montare or its
affiliates.  If any carried interest is payable to the Montare management group following completion of a Montare
Transaction and the Contribution Transaction, certain executive officers of Avalon will share in such carried interest.



After preliminary discussions between Montare and the Trust regarding a Montare Transaction
ended (as previously reported by Avalon and Montare in Amendment No. 3 to their
joint Schedule 13D filed on September 8, 2020 and by the Trust in its Form 8-K filed on September 8,
2020), Montare and Avalon amended the Contribution and Support Agreement effective October 12, 2020. As amended,
the Contribution and Support Agreement contemplates, among other things, (1) a sale of Avalon assets having a value of less
than $5.0 million, in accordance with the terms of the Trust Agreement, to Montare free from and unburdened by the applicable
portion of the Royalty Interests held by the Trust and (2) an extension of the term of the Contribution and Support Agreement
to December 31, 2021 (from December 30, 2020) unless sooner terminated by agreement of the parties or a material adverse
event. See “Sale of Assets by Avalon to Montare” in Note
7 below.



3. Basis of Presentation and Summary of Significant
Accounting Policies



Basis of Accounting. 
The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) as the Trust records revenues when cash is received (rather
than when earned) and expenses when paid (rather than when incurred) and may also establish cash reserves for contingencies, which
would not be accrued in financial statements prepared in accordance with GAAP. This comprehensive basis of accounting other than
GAAP corresponds to the accounting permitted for royalty trusts by the United States Securities and Exchange Commission (“SEC”)
as specified by Staff Accounting Bulletin Topic 12: E, Financial Statements of Royalty Trusts. Amortization of investment
in the Royalty Interests, calculated on a unit-of-production basis, and any impairments are charged directly to the trust corpus.
Distributions to unitholders are recorded when declared.



Significant Accounting
Policies. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP,
which may require such entities to accrue or defer revenues and expenses in a period other than when such revenues are received,
or expenses are paid. Because the Trust’s financial statements are prepared on the modified cash basis as described above,
most accounting pronouncements are not applicable to the Trust’s financial statements.





9







The Trust is treated
for federal and applicable state income tax purposes as a partnership. For U.S. federal income tax purposes, a partnership is not
a taxable entity and incurs no U.S. federal income tax liability.



With respect to state
taxation, a partnership is typically treated in the same manner as it is for U.S. federal income tax purposes.  However, the
Trust’s activities result in the Trust having nexus in Texas and, therefore, make it subject to Texas franchise tax. Texas
franchise tax is treated as an income tax for financial statement purposes. The Trust is required to pay Texas franchise tax each
year at a maximum effective rate (subject to changes in the statutory rate) of 0.525% of its gross income, all of which is realized
from activities in Texas. The Trust records Texas franchise tax when paid.



Impairment of Investment
in Royalty Interests.  On a quarterly basis, the Trust evaluates the carrying value of the investment in Royalty Interests
by comparing the undiscounted cash flows expected to be realized from the Royalty Interests to the carrying value. If the expected
future undiscounted cash flows are less than the carrying value, the Trust recognizes an impairment loss for the difference between
the carrying value and the estimated fair value of the Royalty Interests, which is determined using future cash flows of the net
oil, natural gas and natural gas liquids (“NGL”) reserves attributable to the Royalty Interests, discounted
at a rate based upon the weighted average cost of capital of publicly traded royalty trusts. The weighted average cost of capital
is based upon inputs that are available in the public market. The future cash flows of the net oil, natural gas and NGL reserves
attributable to the Royalty Interests utilizes the oil and natural gas futures prices readily available in the public market adjusted
for differentials and estimated quantities of oil, natural gas and NGL reserves that geological and engineering data demonstrate,
with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions.
As there are numerous uncertainties inherent in estimating quantities of proved reserves, these quantities are a significant unobservable
input resulting in the fair value measurement being considered a level 3 measurement within the fair value hierarchy. During the
three- and nine-month periods ended September 30, 2020, due to the sharp decline in oil and gas prices since the beginning
of 2020, the Trust recorded impairments in the carrying value of the Investment in Royalty Interests in aggregate of $6.4
million and $83.5 million, respectively. The impairments resulted in non-cash charges to trust corpus and did not affect the
Trust’s distributable income. There were no impairments in the carrying value of the investment in Royalty Interests during
the three- or nine-month periods ended September 30, 2019. Material write-downs in subsequent periods may occur if commodity
prices continue to decline. Any impairment would result in a non-cash charge to trust corpus and would not affect the Trust’s
distributable income. See “Risks and Uncertainties” in Note 6 below for further discussion.



Distributable Income
Per Unit.Distributable income per unit amounts as calculated for the periods presented in the accompanying unaudited statements
of distributable income may differ from declared distribution amounts per unit due to rounding and the timing of the Trust’s
payment of Trust administrative expenses and other costs.



Interim Financial
Statements. The accompanying unaudited interim financial statements have been prepared in accordance with the accounting policies
stated in the audited financial statements contained in the 2019 Form 10-K and reflect all adjustments that are, in the opinion
of the Trustee, necessary to state fairly the information in the Trust’s unaudited interim financial statements. The accompanying
statement of assets and trust corpus as of December 31, 2019 has been derived from audited financial statements. The unaudited
interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in
the 2019 Form 10-K.





10







4. Distributions to Unitholders



The Trust makes quarterly
cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s administrative expenses,
property tax and Texas franchise tax, and cash reserves withheld by the Trustee, on or about the 60th day following the completion
of each quarter. Distributions cover a three-month production period consisting of the first two months of the most recently ended
quarter and the final month of the preceding quarter. A summary of the Trust’s distributions to unitholders during the three-
and nine-month periods ended September 30, 2020 and the year ended December 31, 2019 is as follows:





|                      |  |                                       |  |                  |  |           |                   |  | Total         |   |     | Distribution | 
|--------------------- |  | ------------------------------------- |  | ---------------- |  | --------- | ----------------- |  | ------------- | - | --- | ------------ | 
|                      |  | Covered                               |  |                  |  |           |                   |  | Distribution  |   |     | Per Common   | 
|                      |  | Production Period                     |  | Date Declared    |  | Date Paid |                   |  | Paid          |   |     | Unit         | 
|                      |  |                                       |  |                  |  |           |                   |  | (in millions) |   |     |              | 
|Calendar Quarter 2020 |  |                                       |  |                  |  |           |                   |  |               |   |     |              | 
|First Quarter         |  | September 1, 2019 — November 30, 2019 |  | January 23, 2020 |  |           | February 28, 2020 |  |               | $ | 4.2 |              | 
|Second Quarter        |  | December 1, 2019 — February 29, 2020  |  | April 23, 2020   |  |           | —                 |  |               |   | —   |              | 
|Third Quarter         |  | March 1, 2020 — May 31, 2020          |  | July 23, 2020    |  |           | August 31, 2020   |  |               | $ | 0.6 |              | 
|Calendar Quarter 2019 |  |                                       |  |                  |  |           |                   |  |               |   |     |              | 
|First Quarter         |  | September 1, 2018 — November 30, 2018 |  | January 24, 2019 |  |           | February 22, 2019 |  |               | $ | 5.0 |              | 
|Second Quarter        |  | December 1, 2018 — February 28, 2019  |  | April 25, 2019   |  |           | May 24, 2019      |  |               | $ | 3.7 |              | 
|Third Quarter         |  | March 1, 2019 — May 31, 2019          |  | July 25, 2019    |  |           | August 23, 2019   |  |               | $ | 4.7 |              | 
|Fourth Quarter        |  | June 1, 2019 — August 31, 2019        |  | October 24, 2019 |  |           | November 24, 2019 |  |               | $ | 3.8 |              | 





As reported in the
Trust’s Form 8-K filed on April 23, 2020 (the “April 2020 Form 8-K”), Avalon informed
the Trustee that Avalon would be unable to pay on a timely basis the approximately $4.65 million it owes the Trust, which
reflects the quarterly distribution amount for the three-month period ended March 31, 2020 (which primarily relates to production
attributable to the Trust’s interests from December 1, 2019 to February 29, 2020) of approximately $3.73 million,
or $0.071 per unit,  together with approximately $0.73 million of Trust expenses and $0.19 million to be withheld by
the Trustee for the Trust’s previously disclosed cash reserve for future known, anticipated or contingent expenses or liabilities
of the Trust. Consequently, the Trustee was unable to make the quarterly distribution to unitholders. In accordance with the terms
of the Conveyances, the unpaid amount owed the Trust will accrue interest at the rate of interest per annum publicly announced
from time to time by The Bank of New York Mellon Trust Company, N.A. at its “prime rate” in effect at its principal
office in New York City until paid to the Trust. The accrued interest from May 15, 2020 to September 30, 2020 was approximately
$57,000. Avalon has informed the Trustee that Avalon intends to make the payment of the distribution to the Trust, with interest
in accordance with the Conveyances, when funds are available to do so.



Avalon also informed
the Trustee that Avalon is using its commercially reasonable efforts to preserve the oil and gas leases burdened by the Royalty
Interests so that in the future, assuming that oil prices return to a profitable level, the Trust will still hold its Royalty Interests,
and Trust unitholders may have the opportunity to receive future quarterly distributions. Avalon also has informed the Trustee
that it believes that continuing production from those Trust Wells required to preserve such leases is preferable to stopping production,
as the failure to continue production would result in a termination of Avalon’s working interest in such Trust Wells and,
therefore, the Royalty Interests, which would have a material adverse effect on the Trust’s financial condition. Avalon has
reported to the Trustee that Avalon therefore used revenues it received during the production period from December 1, 2019
to February 29, 2020 to pay the operating expenses necessary to maintain production from the Trust Wells and to pay oil and
gas lessor royalties, as the proceeds attributable to Avalon’s net revenue interest in the Underlying Properties was insufficient
to cover all such costs. Avalon had anticipated that revenues from production during the quarterly production period commencing
March 1, 2020 would be sufficient to fund the quarterly payment to the Trust for the quarter ended March 31, 2020 (the
 “May 2020 Quarterly Payment”); however, revenues from production during that quarterly production period were
insufficient to generate the cash needed to make the May 2020 Quarterly Payment to the Trust due to the sharp drop in crude
oil prices during the first quarter of 2020. In April 2020, Avalon informed the Trustee that due to Avalon’s decision
to prioritize the preservation of oil and gas leases burdened by the Royalty Interests, coupled with the sharp decline in oil and
gas prices since the beginning of 2020, as discussed elsewhere in this Quarterly Report, at that time Avalon did not believe it
would be able to generate sufficient cash for quarterly payments to the Trust for the foreseeable future. However, with the partial
recovery of crude oil prices since the end of April 2020 and with increased cost-cutting efforts, Avalon was able to make
a payment of approximately $1.7 million to the Trust for the three-month period ended June 30, 2020 (which primarily relates
to production attributable to the Trust’s Royalty Interests from March 1, 2020 to May 31, 2020), and the Trust
made a quarterly distribution to Trust unitholders of $652,000 for that period. See “Distribution to Unitholders” in
Note 7. “Subsequent Events” for a discussion of the quarterly distribution to be made to Trust unitholders in November 2020.
In addition, see Note 2. “Going Concern and Potential Early Termination of the Trust” for a discussion of the potential
early termination of the Trust in February 2021.





11







5. Related Party Transactions



Trustee Administrative
Fee.  Under the terms of the Trust Agreement, the Trust pays an annual administrative fee to the Trustee, which prior
to 2017 was $150,000. The annual administrative fee can be adjusted for inflation by no more than 3% in any year. The Trustee’s
administrative fees paid during the three-month periods ended September 30, 2020 and 2019 totaled approximately $41,000 and
$39,000, respectively. The Trustee’s administrative fees paid during the nine-month periods ended September 30, 2020
and 2019 totaled approximately $120,000 and $118,000, respectively.



Registration Rights
Agreement.  The Trust is party to a registration rights agreement pursuant to which the Trust has agreed to register the
offering of the Trust units now held by Avalon upon request by Avalon. The holders have the right to require the Trust to file
no more than five registration statements in aggregate, one of which has been filed to date. The Trust does not bear any expenses
associated with such transactions.



Administrative
Services Agreement.  The Trust is party to an Administrative Services Agreement with Avalon (as the assignee of
SandRidge) that obligates the Trust to pay Avalon an annual administrative services fee for accounting, tax preparation,
bookkeeping and informational services performed by Avalon on behalf of the Trust. For its services under the Administrative
Services Agreement, Avalon receives an annual fee of $300,000, which is payable in equal quarterly installments and will
remain fixed for the life of the Trust. Avalon is also entitled to receive reimbursement for its out-of-pocket fees, costs
and expenses incurred in connection with the provision of any of the services under the Administrative Services Agreement.
The Administrative Services Agreement will terminate on the earliest to occur of: (i) the date the Trust shall have
dissolved and commenced winding up in accordance with the Trust Agreement, (ii) the date that all of the Royalty
Interests have been terminated or are no longer held by the Trust, (iii) pertaining to services to be provided with
respect to any Underlying Properties transferred by Avalon, the date that either Avalon or the Trustee may designate by
delivering 90-days’ prior written notice, provided that the transferee of such Underlying Properties assumes
responsibility to perform the services in place of Avalon and (iv) a date mutually agreed by Avalon and the Trustee.
During the three-month period ended September 30, 2020, the Trust paid administrative fees in the amount of $75,000 to
Avalon. There were no amounts paid to Avalon during the three-month period ended September 30, 2019, as the related
quarterly administrative fee was paid during a different period. During the nine-month period ended September 30, 2020, the
Trust paid administrative fees in the amount of $225,000 to Avalon. During the nine-month period ended September 30, 2019,
the Trust paid administrative fees in the amount of $75,000 to Avalon and $75,000 to SandRidge. During the nine-month period
ended September 30, 2020, the Trust reimbursed Avalon for approximately $124,000 for out-of-pocket fees, costs and
expenses that Avalon had incurred in prior periods.



6. Commitments and Contingencies



Loan Commitment.
Pursuant to the Trust Agreement, if at any time the Trust’s cash on hand (including available cash reserves) is not sufficient
to pay the Trust’s ordinary course administrative expenses as they become due, Avalon (as the assignee of SandRidge) will,
at the Trustee’s request, loan funds to the Trust necessary to pay such expenses. Any funds loaned by Avalon pursuant to
this commitment will be limited to the payment of current accounts payable or other obligations to trade creditors in connection
with obtaining goods or services or the payment of other current liabilities arising in the ordinary course of the Trust’s
business, and may not be used to satisfy Trust indebtedness, or to make distributions. If Avalon were to loan funds pursuant to
this commitment, no further distributions will be made to unitholders (except in respect of any previously determined quarterly
cash distribution amount) until such loan is repaid in full, with interest, unless Avalon consents to any further distributions.
Any such loan will be on an unsecured basis, and the terms of such loan will be substantially the same as that which would be obtained
in an arm’s length transaction between Avalon and an unaffiliated third party. No such loan from Avalon was outstanding at
September 30, 2020 or December 31, 2019, and given Avalon’s current financial condition, as further discussed under
 “Avalon’s Financial Condition” in Note 2 above, it is unlikely such loan could be made.





12







Risks and Uncertainties. 
The Trust’s revenue and distributions are substantially dependent upon the prevailing and future prices for oil, natural
gas and NGL, each of which depends on numerous factors beyond the Trust’s control such as overall oil, natural gas and NGL
production and inventories in the Permian Basin, economic conditions impacting the energy industry generally, the global political
environment, regulatory developments and competition from other energy sources. Oil, natural gas and NGL prices historically have
been volatile, reached a historical low during April 2020 due to the reduced demand for crude oil products as a result of
the COVID-19 pandemic and the inability of Russia and Saudi Arabia to agree on reduction in crude oil production, and may be subject
to significant fluctuations in the future. In the absence of derivative arrangements, continuing low levels of future production
and record low commodity prices will reduce the Trust’s revenues and distributable income available to unitholders.



Following the closing
of the Sale Transaction, the Trust is highly dependent on Avalon for multiple services, including the operation of the Trust Wells,
remittance of net proceeds from the sale of production from the Trust Wells to the Trust, administrative services such as accounting,
tax preparation, and bookkeeping, and information services performed on behalf of the Trust. Avalon is a relatively new oil and
gas company formed in August 2018 with no prior operating history. Avalon’s ability to continue operating the Underlying
Properties depends on its financial condition and economic performance, access to capital, and other factors, many of which are
out of Avalon’s control.



As previously reported
in the April 2020 Form 8-K, Avalon informed the Trustee that during 2019, Avalon repaired 29 producing Trust Wells to
increase production. Avalon has reported that this effort, combined with higher-than-expected LOE and declining oil prices, contributed
to an operating loss for Avalon in 2019 despite Avalon’s efforts to reduce LOE (including shutting in some non-economic Trust
Wells, alternating production to reduce electrical and other field operating costs, and staff lay-offs). Avalon also informed the
Trustee that Avalon is likely to shut in additional Trust Wells that are not capable of producing oil and natural gas in paying
quantities, as permitted under the Conveyances. Avalon shut in 16 Trust Wells and 113 Trust Wells during the three- and nine-month
periods ended September 30, 2020, respectively. Avalon has not repaired any Trust Wells to increase production during the
first three quarters of 2020. As a result of its operating loss in 2019, Avalon has informed the Trustee that Avalon’s independent
public accounting firm included a going concern qualification in its audit report on Avalon’s financial statements for the
fiscal year ended December 31, 2019. This negative impact could affect Avalon’s ability to operate the Trust Wells and
provide services to the Trust in the future.



7. Subsequent Events



Distribution to
Unitholders.On October 22, 2020, the Trust declared a cash distribution of $0.033 per unit covering production for the
three-month period from June 1, 2020 to August 31, 2020. The distribution will be paid on or about November 25,
2020 to record holders as of November 13, 2020. Distributable income for June 1, 2020 to August 31, 2020 was calculated
as follows (in thousands, except for unit and per unit amounts):



|Revenues                                                                |  |   |       | 
|----------------------------------------------------------------------- |  | - | ----- | 
|Royalty income                                                          |  | $ | 2,749 | 
|Total revenues                                                          |  |   | 2,749 | 
|Expenses                                                                |  |   |       | 
|Post-production expenses                                                |  |   | 7     | 
|Production taxes                                                        |  |   | 131   | 
|Cash reserves withheld by Trustee (1)                                   |  |   | 689   | 
|Total expenses                                                          |  |   | 827   | 
|Distributable income to unitholders                                     |  | $ | 1,922 | 
|Additional cash reserve (2)                                             |  |   | 190   | 
|Distributable income available to unitholders                           |  | $ | 1,732 | 
|Distributable income per unit (52,500,000 units issued and outstanding) |  | $ | 0.033 | 










| | (1) | Includes amounts withheld for payment of future Trust
administrative expenses.
| | --- | ------------------------------------------------------------------------------

| | (2) | Cash reserve increase for the payment of future known,
anticipated or contingent expenses or liabilities.
| | --- | ---------------------------------------------------------------------------------------------------------





13







Sale of Assets
by Avalon to Montare. After preliminary discussions between Montare and the Trust regarding a Montare Transaction ended
(as reported by Avalon and Montare in Amendment No. 3 to their joint Schedule 13D filed September 8, 2020 and by
the Trust in its Form 8-K filed on September 8, 2020), Montare and Avalon amended the Contribution and Support
Agreement, effective October 12, 2020, to include a possible sale of Avalon assets having a value of less than $5.0
million, in accordance with the terms of the Trust Agreement and Conveyances, to Montare free from and unburdened by the
applicable portion of the Royalty Interests held by the Trust. On October 12, 2020, Montare and Avalon entered into a
Purchase and Sale Agreement, effective as of September 1, 2020, whereby Avalon sold wells and related assets associated
with certain Underlying Properties to Montare, unburdened by the applicable portion of the Royalty Interests held by the
Trust, for approximately $4.9 million in accordance with Avalon’s contractual rights set forth in the Trust Agreement
and the Conveyances (the “Montare Sale”). Prior to the Montare Sale, Avalon engaged an independent
petroleum engineering firm to determine the fair value of all Trust Wells. Avalon informed the Trust that Avalon then sold to
Montare those Trust Wells having a collective value of $4.9 million, leaving the 65 most valuable Trust Wells burdened by
Royalty Interests. The wells sold to Montare include 483 shut-in wells and 338 other wells with negative present value and
428 wells with positive present value. The Royalty Interests released by the Trust in connection with the Montare Sale
represented approximately 32% of the fair value of the Royalty Interests at September 1, 2020, as determined by an appraisal
prepared for Avalon by an independent petroleum engineering firm. The wells sold to Montare represented approximately 76% of
production attributable to the Trust's Royalty Interests for the month ended August 31, 2020 (the most recent month for which
production data is available). As previously reported by the Trust in its Form 8-K filed October 14, 2020, Avalon
notified the Trust of the Montare Sale on October 13, 2020. As required by the terms of the Trust Agreement, an officer
of Avalon certified to the Trust that (i) the gross purchase price received by Avalon for the sale of the Underlying
Properties was less than $5 million and (ii) the cash proceeds received by the Trust in respect of the Royalty Interests
to be released in connection with such sale represents Fair Value (as defined in the Trust Agreement) to the Trust for such
Royalty Interests. A copy of the independent petroleum engineering firm’s valuation report has been provided to the
Trustee. The Montare Sale was completed on October 13, 2020, and all of the $4.9 million of proceeds that Avalon
received from such sale have been paid to the Trust as fair value for the Royalty Interests required
to be released by the Trustee in connection with theMontare Sale in accordance with Section 3.02 of the Trust
Agreement. These proceeds will be distributed by the Trust, less any withholdings as determined by the Trustee, to Trust
unitholders with the quarterly distribution, if any, for the three-month period ending December 31, 2020 (which
primarily relates to production attributable to the Trust’s Royalty Interests from September 1, 2020 to
November 30, 2020) in accordance with the terms of the Conveyances granting the Royalty Interests to the Trust. Such
distribution is expected to occur in late February 2021. As provided in the Trust Agreement, the sales proceeds of $4.9
million received by the Trust is not included in the calculation of the cash available for distribution and therefore does
not affect the expected timing of the dissolution of the Trust as discussed in Note 2 above.



PEDEVCO Exchange
Offer. On October 13, 2020, PEDEVCO Corp. (“PEDEVCO”) and its wholly owned subsidiary, SRPT Acquisition, LLC,
made an unsolicited offer to exchange each outstanding Trust unit for 4/10ths of one share of PEDEVCO common stock. The Trustee
filed its Solicitation/Recommendation Statement on October 27, 2020. The exchange offer is scheduled to expire on November 30,
2020, unless extended.



Amendment of WaFed
Loan. On October 30, 2020, Avalon and WaFed entered into an amendment to the WaFed Loan that, among other things, (i) extends
the date by which Avalon is required to provide a reserve report of an independent petroleum engineer to WaFed (regarding the redetermination
of the borrowing base) to April 15, 2021, (ii) requires Avalon to pay off the WaFed Loan by April 15, 2021, and
(iii) provides a partial release of Trust Wells located on certain of the Underlying Properties in connection with the Montare
Sale. In addition, WaFed and Montare amended and restated the Participation Agreement, and Montare purchased an additional interest
in the WaFed Loan.





14







ITEM 2. Trustee’s Discussion and Analysis of
Financial Condition and Results of Operations



Introduction



The following discussion
and analysis are intended to help the reader understand the financial condition, results of operations, liquidity and capital resources
of SandRidge Permian Trust (the “Trust”). This discussion and analysis should be read in conjunction with the
Trust’s unaudited interim financial statements and the accompanying notes included in this Quarterly Report and the Trust’s
audited financial statements and the accompanying notes included in the 2019 Form 10-K. All information regarding operations
was provided to the Trustee by Avalon.



Overview



The Trust is a statutory
trust formed under the Delaware Statutory Trust Act pursuant to a trust agreement, as amended and restated (the “Trust
Agreement”), by and among SandRidge Energy, Inc. (“SandRidge”), as Trustor, The Bank of New York
Mellon Trust Company, N.A., as Trustee (the “Trustee”), and The Corporation Trust Company, as Delaware Trustee
(the “Delaware Trustee”).



The Trust holds royalty
interests in specified oil and natural gas properties located in Andrews County, Texas (the “Underlying Properties”).
These royalty interests were conveyed by SandRidge to the Trust (the “Royalty Interests”) concurrent with the
initial public offering of the Trust’s common units (“Trust Units”) in August 2011 pursuant to the
terms set forth in conveyancing documents effective April 1, 2011 (the “Conveyances”). As consideration
for conveyance of the Royalty Interests, the Trust remitted the proceeds of the offering, along with 4,875,000 Trust units and
13,125,000 subordinated units of the Trust (“subordinated units”) to certain wholly-owned subsidiaries of SandRidge.



Pursuant to a development
agreement between the Trust and SandRidge, SandRidge was obligated to drill, or cause to be drilled, 888 development wells within
an area of mutual interest (“AMI”) by March 31, 2016 (the “Trust Development Wells”).
SandRidge fulfilled this obligation in November 2014. As no additional development wells will be drilled, the Trust’s
production is expected to decline each quarter during the remainder of its life. As a result of SandRidge fulfilling its drilling
obligation, the subordinated units converted to Trust units in January 2016. At October 31, 2018, SandRidge owned 13,125,000
Trust units, or 25% of all Trust units.



On November 1,
2018, SandRidge sold all of its interests in the Underlying Properties and all of its Trust units (the “Sale Transaction”)
to Avalon Energy LLC, a Texas limited liability company (“Avalon”). The Conveyances permitted SandRidge to sell
all or any part of its interest in the Underlying Properties, where the Underlying Properties were sold subject to and burdened
by the Royalty Interests. In connection with the Sale Transaction, Avalon and its affiliates assumed all of SandRidge’s obligations
under the Conveyances and the Trust Agreement and the administrative services agreement between SandRidge and the Trust pursuant
to which SandRidge and Avalon have provided accounting, tax preparation, bookkeeping and informational services to the Trust (the
 “Administrative Services Agreement”). In addition, SandRidge assigned its rights to Avalon under the registration
rights agreement between SandRidge and the Trust. As of September 30, 2020, Avalon holds 13,125,000 Trust units, or 25% of
all Trust units.



In connection with
the Sale Transaction, Avalon obtained a revolving line of credit from Washington Federal, National Association (“WaFed”)
pursuant to the terms of a Loan Agreement and related security documents (the “WaFed Loan”). Avalon used the
proceeds of the WaFed Loan to fund a portion of the purchase price for the interests in the Underlying Properties and Trust units
acquired in the Sale Transaction. The WaFed Loan is secured by a first lien mortgage on Avalon’s interest in the Underlying
Properties and a pledge of the Avalon Trust units (the “WaFed Collateral”). The Royalty Interests are not part
of the WaFed Collateral.



The Trust is passive
in nature and neither the Trust nor the Trustee has any control over, or responsibility for, any operating or capital costs related
to the Underlying Properties. The business and affairs of the Trust are administered by the Trustee. The Trust Agreement generally
limits the Trust’s business activities to owning the Royalty Interests and activities reasonably related thereto, including
activities required or permitted by the terms of the Conveyances.





15







The Trust makes quarterly
cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s administrative expenses,
property tax and Texas franchise tax and cash reserves withheld by the Trustee, on or about the 60th day following the completion
of each quarter. Due to the timing of the payment of production proceeds to the Trust, each distribution covers production from
a three-month period consisting of the first two months of the most recently ended quarter and the final month of the quarter preceding
it.



The Trust will dissolve
and begin to liquidate on March 31, 2031 (the “Termination Date”), unless sooner dissolved in accordance
with the terms of the Trust Agreement as described below and will soon thereafter wind up its affairs and terminate. At the Termination
Date, 50% of the Royalty Interests will revert automatically to Avalon. The remaining 50% of the Royalty Interests will be sold
at that time, with the net proceeds of the sale, as well as any remaining Trust cash reserves, distributed to the unitholders on
a pro rata basis, subject to Avalon’s right of first refusal to purchase the Royalty Interests retained by the Trust at the
Termination Date. In addition, the Trust will dissolve if one of the following events occurs prior to the Termination Date: (a) the
Trust sells all of the Royalty Interests; (b) cash available for distribution for any four consecutive quarters, on a cumulative
basis, is less than $5.0 million; (c) the Trust unitholders approve an earlier dissolution of the Trust; or (d) the Trust
is judicially dissolved pursuant to the provisions of the Delaware Statutory Trust Act. In the case of any of the foregoing, the
Trustee would then sell all of the Trust’s assets (subject to Avalon’s right of first refusal to purchase the Royalty
Interests retained by the Trust as of the date of such event), either by private sale or public auction, and distribute the net
proceeds of the sale to the Trust unitholders after payment, or reasonable provision for payment, of all Trust liabilities.



Commodity Price
Volatility. The Trust’s quarterly cash distributions are highly dependent upon the prices realized from the sale of oil,
natural gas and NGL. The markets for these commodities are volatile and experienced significant fluctuations during 2019 and have
declined sharply in 2020 in response to the economic effects of the dispute over production levels between Russia and the members
of the Organization of Petroleum Exporting Countries and the global outbreak of the novel form of coronavirus known as COVID-19.
These actions led to an immediate and steep decrease in oil prices, which reached a closing NYMEX price low of negative $37.63
per barrel of crude oil in April 2020.  The spot price for WTI crude oil has decreased from $61.17 per barrel on January 2,
2020 to $36.60 per barrel on November 2, 2020.  A buildup in inventories, lower global demand, political unrest, or other
factors, such as the economic effects of the COVID-19 pandemic, could cause prices for U.S. oil, natural gas and NGL to fluctuate
significantly in the future. As a result, there can be no assurance that prices for oil, natural gas and NGL will be maintained
at a constant level for any significant period of time.



COVID-19. The
COVID-19 pandemic has resulted in widespread and localized health crises that adversely affect general commercial activity, the
economies and financial markets of many countries and localities, as well as global demand for oil, natural gas and NGL. COVID-19
and the federal, state and local governmental responses to the pandemic also have resulted in significant business and operational
disruptions, including business closures, disruptions to supply chains, travel restrictions and limitations on the availability
of workforces. The full impact of COVID-19 is unknown and is rapidly evolving, and it is not possible to reliably estimate the
impact that these developments will have on future periods. A prolonged period of low crude oil and natural gas prices will adversely
affect Avalon as the operator of the Underlying Properties.  If commodity prices for crude oil, natural gas and NGL remain
at reduced levels, distributions to unitholders will be substantially lower than historical distributions, and in certain periods
there may be no distribution to unitholders.



Avalon’s
Financial Condition.The reduced demand for crude oil in the global market resulting from the economic effects of the
COVID-19 pandemic and the dramatic reduction in the benchmark price of crude oil during 2020 have had a negative impact on
Avalon’s financial condition. In an effort to reduce leasehold operating expenses ("LOE") and preserve the oil
and gas leases on which oil and gas wells burdened by the Royalty Interests (“Trust Wells”) are located,
as further described below, Avalon shut in 113 Trust Wells that were not capable of producing oil and natural gas in paying
quantities, as permitted under the Conveyances, during the nine-month period ended September 30, 2020. These Trust Wells were
not necessary to hold the leasehold interests burdened by the Trust’s Royalty Interests.





16







In April 2020,
Avalon informed the Trustee that Avalon is using its commercially reasonable efforts to preserve the oil and gas leases on
which the Trust Wells are located so that in the future, assuming that crude oil prices return to a profitable level, the
Trust will still hold its Royalty Interests, and Trust unitholders may have the opportunity to receive future quarterly
distributions. Avalon  informed the Trustee that Avalon believes that continuing production from the Trust Wells required
to preserve such leases is preferable to stopping production, as the failure to continue production would result in a
termination of Avalon’s working interest in such Trust Wells and, therefore, the Royalty Interests, which would have a
material adverse effect on the Trust’s financial condition. Avalon reported to the Trustee that Avalon therefore used
revenues it received during the production period from December 1, 2019 to February 29, 2020 to pay the operating
expenses necessary to maintain production from the Trust Wells and to pay oil and gas lessor royalties, as the proceeds
attributable to Avalon’s net revenue interest in the Underlying Properties was insufficient to cover all such costs.
Avalon had anticipated that revenues from production during the quarterly production period commencing March 1, 2020 would
be sufficient to fund the quarterly payment to the Trust for the quarter ended March 31, 2020(the
 “May 2020 Quarterly Payment”); however, revenues from production
during thatquarterly production period were insufficient to generate the cash
needed to make the May 2020 Quarterly Payment to the Trust due to the sharp drop in crude oil prices during the first
quarter of 2020. Avalon further informed the Trustee that due to Avalon’s decision to prioritize the preservation of
oil and gas leases burdened by the Royalty Interests, coupled with the sharp decline in oil and gas prices since the
beginning of 2020 as discussed elsewhere in this Quarterly Report, at that time Avalon did not believe that it would be able
to generate sufficient cash for quarterly payments to the Trust for the foreseeable future. However, with the partial
recovery of crude oil prices since the end of April 2020 and with increased cost-cutting efforts, Avalon was able to
make a payment of approximately $1.7 million to the Trust for the three-month period ended June 30, 2020 (which
primarily relates to production attributable to the Trust’s Royalty Interests from March 1, 2020 to May 31,
2020), and the Trust made a quarterly distribution to Trust unitholders of $652,000 for that period. See “Results of
Trust Operations” and “Liquidity and Capital Resources – Future Trust Distributions to Unitholders”
below with respect to additional distributions for the nine-month period ended September 30, 2020.



At the same time,
Avalon notified the Trust that Avalon was in default under certain financial covenants of the WaFed Loan and expected WaFed
to notify Avalon (concurrent with WaFed’s redetermination of the borrowing base under the WaFed Loan) that its
borrowing base would be reduced to less than the principal amount of such loan. As Avalon had indicated to the Trust that
Avalon did not have (and still does not have) sufficient funds to pay down the principal amount of the WaFed Loan and come
into compliance with any adjustment to the borrowing base, Avalon believed it was possible WaFed could foreclose on the
Underlying Properties securing the loan.



Given
Avalon’s financial condition, the Board of Managers of Avalon decided to explore strategic alternatives with respect to
its assets, including the Underlying Properties and the Avalon Trust units. Avalon had a number of discussions regarding a
possible transaction with over 20 potential strategic partners during the second quarter of 2020. After evaluating its
alternatives, on July 30, 2020, Avalon entered into a letter agreement with Montare Resources I, LLC
(“Montare”), a newly formed company owned and controlled by Dickie D. Hunter, whereby Avalon agreed to
negotiate exclusively with Montare regarding a possible sale of Avalon assets, including the Underlying Properties, to
Montare, subject to certain conditions including the negotiation and execution of definitive documents. On the same date,
Avalon and WaFed entered into an amendment to the WaFed Loan that extended (i) the date by which Avalon was obligated to
provide a reserve report to WaFed (regarding the redetermination of the WaFed Loan borrowing base) to September 15, 2020
and (ii) the date by which Avalon was required to pay off the WaFed Loan by October 15, 2020. In addition, WaFed and
Montare entered into a Participation Agreement with respect to the WaFed Loan whereby Montare (i) purchased an undivided
participation interest in the WaFed Loan and (ii) established the right to purchase the WaFed Loan in the event Avalon does
not meet the conditions of the amended WaFed Loan.



On
August 26, 2020, Montare, Avalon and certain of their respective affiliates
entered into a Contribution and Support Agreement, pursuant to which Avalon, among other things, (i) agreed, subject to
certain conditions, to contribute all of assets held by Avalon and its affiliates, including the Underlying Properties and
the Trust units beneficially owned by Avalon to Montare in exchange for interests in Montare or an affiliate thereof (the
 “Contribution Transaction”), (ii) agreed to support Montare’s acquisition of all of the issued
and outstanding Trust units not owned by Avalon by means of a transaction with the Trust or as otherwise determined by
Montare in its sole discretion (a “Montare Transaction”), and any related actions taken by Montare with
respect to a Montare Transaction, including by exercising any of Avalon’s rights under the Trust Agreement,
(iii) granted exclusivity and an irrevocable proxy to Montare to vote all Trust units beneficially owned by Avalon in
connection with  a Montare Transaction, and (iv) to not take any action that, directly or indirectly, is detrimental to
or hinders Montare’s ability to consummate a Montare Transaction. The consummation of the Contribution Transaction is
subject to certain conditions, including Montare’s determination in its sole and absolute discretion that all
conditions necessary for the consummation of a Montare Transaction have been satisfied or waived. Only upon the completion of
both a Montare Transaction and the Contribution Transaction, certain employees of Avalon, including its executive management
team, may become employees of Montare or its affiliates.  If any carried interest is payable to the Montare management
group following completion of a Montare Transaction and the Contribution Transaction, certain executive officers of Avalon
will share in such carried interest.



After preliminary discussions
between Montare and the Trust regarding a Montare Transaction ended (as previously reported by Avalon and Montare in Amendment
No. 3 to their joint Schedule 13D filed on September 8, 2020 and by the Trust in its Form 8-K filed on September 8,
2020), Montare and Avalon amended the Contribution and Support Agreement effective October 12, 2020. As amended, the Contribution and Support Agreement
contemplates, among other things, (1) a sale of Avalon assets having a value of less than $5.0 million, in accordance with the
terms of the Trust Agreement, to Montare free from and unburdened by the applicable portion of the Royalty Interests held by the
Trust and (2) an extension of the term of the Contribution and Support Agreement to December 31, 2021 (from December 30, 2020)
unless sooner terminated by agreement of the parties or a material adverse event.





17







On
October 12, 2020, Montare and Avalon entered into a Purchase and Sale Agreement, effective as of September 1, 2020,
whereby Avalon sold wells and related assets associated with certain Underlying Properties to Montare, unburdened by the
applicable portion of the Royalty Interests held by the Trust, for approximately $4.9 million in accordance with
Avalon’s contractual rights set forth in the Trust Agreement and the Conveyances (the “Montare
Sale”).Prior to the Montare Sale, Avalon engaged an independent petroleum engineering firm to determine the
fair value of all Trust Wells. Avalon informed the Trust that Avalon then sold to Montare those Trust Wells having a
collective value of $4.9 million, leaving the 65 most valuable Trust Wells burdened by Royalty Interests. The wells sold to
Montare include 483 shut-in wells and 338 other wells with negative present value and 428 wells with positive present value.
The Royalty Interests released by the Trust in connection with the Montare Sale represented approximately 32% of the fair
value of the Royalty Interests at September 1, 2020, as determined by an appraisal prepared for Avalon by an independent
petroleum engineering firm. The wells sold to Montare represented approximately 76% of production attributable to the Trust's
Royalty Interests for the month ended August 31, 2020 (the most recent month for which production data is available). As
previously reported by the Trust in its Form 8-K filed October 14, 2020, Avalon notified the Trust of the Montare
Sale on October 13, 2020. As required by the terms of the Trust Agreement, an officer of Avalon certified to the Trust
that (i) the gross purchase price received by Avalon for the sale of the Underlying Properties was less than $5 million
and (ii) the cash proceeds received by the Trust in respect of the Royalty Interests to be released in connection with
such sale represents Fair Value (as defined in the Trust Agreement) to the Trust for such Royalty Interests. A copy of the
independent petroleum engineering firm’s valuation report has been provided to the Trustee. The
Montare Sale was completed on October 13, 2020, and all of the $4.9 million of proceeds that Avalon received from such
sale have been paid to the Trust as fair value for the Royalty Interests required to be released by the Trustee in connection
with theMontare Sale in accordance with Section 3.02 of the Trust
Agreement.These proceeds will be distributed by the Trust, less any withholdings as determined by the Trustee, to
Trust unitholders with the quarterly distribution, if any, for the three-month period ending December 31, 2020 (which
primarily relates to production attributable to the Trust’s Royalty Interests from September 1, 2020 to
November 30, 2020) in accordance with the terms of the Conveyances granting the Royalty Interests to the Trust. Such
distribution is expected to occur in late February 2021. As provided in the Trust Agreement, the sales proceeds of $4.9
million received by the Trust is not included in the calculation of the cash available for distribution and therefore does
not affect the expected timing of the dissolution of the Trust as discussed in “—Potential Early Termination of
the Trust” below.



Pro forma information regarding the impact of the Montare Sale on the Trust is included as an exhibit to the Trust’s Current Report on Form 8-K/A filed on November 13, 2020 and is included as Exhibit 99.1 to this Quarterly Report and incorporated herein by reference.



On October 30,
2020, Avalon and WaFed entered into another amendment to the WaFed Loan that (i) extends the date by which Avalon is obligated
to provide a reserve report from an independent petroleum reserve engineer to WaFed (regarding the redetermination of the borrowing
base) to April 15, 2021, (ii) requires Avalon to pay off the WaFed Loan by April 15, 2021, and (ii) provides
a partial release of Trust Wells located on certain of the Underlying Properties in connection with the Montare Sale. In addition,
WaFed and Montare modified the Participation Agreement, and Montare purchased an additional interest in the WaFed Loan. See “Risk
Factors – The value of the Royalty Interests is highly dependent on the performance and financial condition of Avalon”
in Item 1A of Part II of this Quarterly Report for a discussion of additional risks relating to the WaFed Loan and Avalon’s
financial condition.



Potential
Early Termination of the Trust. The Trust Agreement provides that the Trust will terminate if cash available for
distribution for any four consecutive quarters, on a cumulative basis, is less than $5.0 million. If this early termination event
occurs, the Trust Agreement requires the Trustee to commence winding-up the business and affairs of the Trust, including among
other things, selling the Royalty Interests, either by private sale or public auction, subject to Avalon's right of first
refusal to purchase the Royalty Interests. After the sale of all of the Royalty Interests, payment of all Trust liabilities and
establishment of reasonable provisions for the payment of additional anticipated or contingent Trust expenses or liabilities, the
Trustee will distribute the net proceeds of the sale to the Trust unitholders, and thereafter terminate the Trust.



As the COVID-19 pandemic
continues to show no signs of abating and has recently resurged in the United States, Avalon has informed the Trust that it believes
crude oil prices will continue to fluctuate for the remainder of 2020 and beyond. Avalon has also informed the Trustee that, due
to such uncertainty, combined with (a) the reduced revenues generated from operation of the Underlying Properties during the
nine-month period ended September 30, 2020 (as compared to the nine-month period ended September 30, 2019) resulting
from the continuing decline in production of crude oil from Trust Wells, and (b) the fact that Avalon does not have the cash
needed to make the payment due to the Trust, together with accrued interest, for the three-month period ended March 31, 2020,
Avalon believes that the aggregate cash available for distribution, after expenses and any reserves established by the Trustee,
will be less than $5 million for the four consecutive quarters ending December 31, 2020 irrespective of whether the Montare
Sale had occurred. Therefore, it is highly likely that the Trust will be required to commence dissolution on the Quarterly Payment
Date (as defined in the Trust Agreement) with respect to the quarter ending December 31, 2020, which is expected to be on
or about February 22, 2021. The Trustee would then be required to commence winding-up the business and affairs of the Trust,
including among other things, selling all of the Trust’s remaining assets, paying or making provision for the payment of
all anticipated or contingent Trust expenses or liabilities, distributing all remaining cash to Trust unitholders, and thereafter
terminating the Trust. Due to this uncertainty, there is substantial doubt regarding the
Trust’s ability to continue as a going concern within one year after September 30, 2020, the date that the financial
statements are issued. The Trust’s financial statements do not include any adjustments that might result from the outcome
of this uncertainty.





18







Delisting of Trust
Units.On December 27, 2019, the Trust received written notification from The New York Stock Exchange (“NYSE”)
that the Trust no longer satisfied the continued listing compliance standards set forth under Rule 802.01C of the NYSE Listed
Company Manual because the average closing price of the Trust units fell below $1.00 over a 30 consecutive trading-day period.
As the Trust was unable to regain compliance with the applicable standards within an extended cure period, the NYSE announced the
suspension of trading of the Trust units due to non-compliance with Section 802.01C of the NYSE Listed Company Manual, effective
as of the close of trading on September 8, 2020, and announced that it was initiating proceedings to delist the Trust units.
As a result, the Trust units transitioned to the OTC Pink Market, operated by OTC Markets Group, effective with the opening of
trading on September 9, 2020 under the trading symbol “PERS.” On September 28, 2020, the NYSE filed a Form 25
to delist the Trust units, which became effective on October 9, 2020. The Trust can provide no assurance that any trading
market for the Trust units will exist on the OTC Pink Market or that current trading levels will be sustained or not diminish.



Properties.As
of September 30, 2020, the Trust’s assets consisted of Royalty Interests that burden the Trust Wells, all of which are
located in Andrews County, Texas.



Distributions.
The Trust makes quarterly cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s
administrative expenses, property tax and Texas franchise tax and cash reserves withheld by the Trustee, on or about the 60th day
following the completion of each quarter. Trust unitholders are responsible for all federal and state tax liabilities associated
with distributions they receive from the Trust.



Pursuant to Internal
Revenue Code (“IRC”) Section 1446, withholding tax on income effectively connected to a United States trade
or business allocated to non-U.S. persons (“ECI”) should be made at the highest marginal rate. Under IRC Section 1441,
withholding tax on fixed, determinable, annual, periodic income from United States sources allocated to non-U.S. persons should
be made at 30% of gross income unless the rate is reduced by treaty. This is intended to be a qualified notice to nominees and
brokers as provided for under Treasury Regulation Section 1.1446-4(b) by the Trust, and while specific relief is not
specified for IRC Section 1441 income, this disclosure is intended to suffice. Nominees and brokers should withhold at the
highest marginal rate on the distribution made to non-U.S. persons. The Tax Cuts and Jobs
Act (the “TCJA”) enacted in December 2017 treats a non-U.S. holder’s gain on the sale of Trust units
as ECI to the extent such holder would have had ECI if the Trust had sold all of its assets at fair market value on the date of
the exchange. The TCJA also requires the transferee of units to withhold 10% of the amount realized on the sale of exchange of
units (generally, the purchase price) unless the transferor certifies that it is not a nonresident alien individual or foreign
corporation. Pending the finalization of proposed regulations under IRC Section 1446, the IRS has suspended this new
withholding obligation with respect to publicly traded partnerships such as the Trust, which is classified as a partnership for
federal and state income tax purposes.



Results of Trust Operations



The primary factors
affecting the Trust’s revenues and costs are the quantity of oil, natural gas and NGL production from the Trust Wells, the
prices received for such production and post-production costs (primarily transportation). Royalty income, post-production expenses
and certain taxes are recorded on a cash basis when net revenue distributions are received by the Trust from Avalon. Information
regarding the Trust’s production, pricing and costs for the three- and nine-month periods ended September 30, 2020 and
2019 is presented below.





19







|                                                                                         |  | Three Months Ended September 30, |       |   | Nine Months Ended September 30, |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                                                                                         |  | 2020(1)                          |       |   | 2019(2)                         |  
|Production Data                                                                          |  |                                  |       |   |                                 |  
|Oil (MBbls)                                                                              |  |                                  | 78    |   |                                 |  
|NGL (MBbls)                                                                              |  |                                  | 9     |   |                                 |  
|Natural gas (MMcf)                                                                       |  |                                  | 36    |   |                                 |  
|Combined equivalent volumes (MBoe)                                                       |  |                                  | 93    |   |                                 |  
|Average daily combined equivalent volumes (MBoe/d)                                       |  |                                  | 1.0   |   |                                 |  
|Well Data                                                                                |  |                                  |       |   |                                 |  
|Initial and Trust Development Wells producing - average                                  |  |                                  | 851   |   |                                 |  
|Revenues (in thousands)                                                                  |  |                                  |       |   |                                 |  
|Royalty income                                                                           |  | $                                | 1,664 |   |                                 | $
|Total revenue                                                                            |  |                                  | 1,664 |   |                                 |  
|Expenses (in thousands)                                                                  |  |                                  |       |   |                                 |  
|Post-production expenses                                                                 |  |                                  | 11    |   |                                 |  
|Production taxes                                                                         |  |                                  | 80    |   |                                 |  
|Property taxes                                                                           |  |                                  | —     |   |                                 |  
|Franchise taxes                                                                          |  |                                  | —     |   |                                 |  
|Trust administrative expenses                                                            |  |                                  | 415   |   |                                 |  
|Cash reserves used (withheld) for current Trust expenses, net of amounts withheld (used) |  |                                  | 504   |   |                                 |  
|Total expenses                                                                           |  |                                  | 1,010 |   |                                 |  
|Distributable income available to unitholders                                            |  | $                                | 654   |   |                                 | $
|Average Prices                                                                           |  |                                  |       |   |                                 |  
|Oil (per Bbl)                                                                            |  |                                  | 20.21 |   |                                 | $
|NGL (per Bbl)                                                                            |  |                                  | 9.66  |   |                                 | $
|Combined oil and NGL (per Bbl)                                                           |  |                                  | 19.06 |   |                                 | $
|Natural gas (per Mcf)                                                                    |  |                                  | 0.14  |   |                                 | $
|Combined equivalent (per Boe)                                                            |  |                                  | 17.89 |   |                                 | $
|Average Prices — including impact of post-production expenses                            |  |                                  |       |   |                                 |  
|Natural gas (per Mcf)                                                                    |  |                                  | (0.17 | ) |                                 | $
|Combined equivalent (per Boe)                                                            |  |                                  | 17.77 |   |                                 | $
|Expenses (per Boe)                                                                       |  |                                  |       |   |                                 |  
|Post-production production                                                               |  |                                  | 0.12  |   |                                 | $
|Production taxes                                                                         |  |                                  | 0.86  |   |                                 | $










|(1) | Production volumes and related revenues and expenses for the three-month period ended September 30, 2020 (included in Avalon’s August 2020 net revenue distributions to the Trust) represent production from March 1, 2020 to May 31, 2020.                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Production volumes and related revenues and expenses for the three-month period ended September 30, 2019 (included in Avalon’s August 2019 net revenue distributions to the Trust) represent production from March 1, 2019 to May 31, 2019.                                                                                                                                                                                                                                                
|(3) | Production volumes and related revenues and expenses for the nine-month period ended September 30, 2020 (included in Avalon’s February 2020 and August 2020 net revenue distribution to the Trust) represent production from September 1, 2019 to November 30, 2019 and March 1, 2020 to May 31, 2020.  Avalon did not make a distribution of revenue to the Trust for the production period from December 1, 2019 to February 29, 2020. See “Overview–Avalon’s Financial Condition” above.
|(4) | Production volumes and related revenues and expenses for the nine-month period ended September 30, 2019 (included in Avalon’s February 2019, May 2019 and August 2019 net revenue distributions to the Trust) represent production from September 1, 2018 to May 31, 2019.                                                                                                                                                                                                                 



Three Months Ended September 30, 2020 Compared to
the Three Months Ended September 30, 2019



Revenues



Royalty Income.
Royalty income is a function of production volumes sold attributable to the Royalty Interests and associated prices received. Royalty
income received during the three-month period ended September 30, 2020 totaled approximately $1.7 million compared to $6.1
million received during the three-month period ended September 30, 2019. The approximate $4.4 million decrease in royalty
income consisted of approximately $2.8 million attributable to a decrease in prices received and approximately $1.6 million attributable
to a decrease in total volumes produced. The average number of producing wells in the three-month period ended September 30,
2020 decreased by 196 from 1,047 wells in the three-month period ended September 30, 2019, because those Trust Wells could
not produce oil and natural gas in paying quantities due to a continuing decline in production and were shut in.





20









Expenses



Production Taxes.
Production taxes are calculated as a percentage of oil and natural gas revenues, net of any applicable tax credits. Production
taxes for the three-month period ended September 30, 2020 totaled approximately $0.1 million, or $0.86 per Boe, and were approximately
4.8% of royalty income. Production taxes for the three-month period ended September 30, 2019 totaled approximately $0.3 million,
or $2.28 per Boe, and were approximately 4.7% of royalty income.



Trust Administrative
Expenses. Trust administrative expenses generally consist of fees paid to the Trustee and the Delaware Trustee, administrative
services fees paid to Avalon, tax return and related form preparation fees, legal and accounting fees, and other expenses incurred
as a result of being a publicly traded entity. Trust administrative expenses for the three-month period ended September 30,
2020 totaled approximately $0.4 million compared to approximately $0.1 million for the three-month period ended September 30,
2019. The increase during the 2020 period primarily relates to the timing of administrative expense payments.



Distributable Income



Distributable income
for the three-month period ended September 30, 2020 was $0.7 million, which included a net addition of approximately $0.5
million to the cash reserve for the payment of future Trust expenses, reflecting approximately $0.9 million withheld from the August 2020
cash distribution to unitholders partially offset by approximately $0.4 million used to pay Trust expenses during the period. Distributable
income for the three-month period ended September 30, 2019 was $4.7 million, which included a net addition of approximately
$1.0 million to the cash reserve for the payment of future Trust expenses, reflecting approximately $1.1 million withheld from
the August 2019 cash distribution to unitholders partially offset by approximately $0.1 million used to pay Trust expenses
during the period.



Nine Months Ended September 30, 2020 Compared to
the Nine Months Ended September 30, 2019



Revenues



Royalty Income.
Royalty income received during the nine-month period ended September 30, 2020 totaled $7.0 million compared to $17.2 million
received during the nine-month period ended September 30, 2019. The decrease is the result of Avalon’s failure to pay
proceeds owed to the Trust for the period from December 1, 2019 to February 29, 2020 in the amount of approximately $4.7
million. The average number of producing Trust Wells in the nine-month period ended September 30, 2020 decreased by 173 from
1,051 Trust Wells in the nine-month period ended September 30, 2019, because certain Trust Wells that could not produce minerals
in commercial quantities due to a continuing decline in production were shut in.



Expenses



Property Taxes.
Property taxes paid during the nine months ended September 30, 2020 were approximately $1.7 million, which related to 2019
property taxes. There were no property taxes paid during the nine months ended September 30, 2019 as the applicable taxes
were paid during a prior period.



Production Taxes.
Production taxes paid for the nine-month period ended September 30, 2020 totaled approximately $0.3 million, or $1.64 per
Boe, and were approximately 4.8% of royalty income. Production taxes for the nine-month period ended September 30, 2019 totaled
approximately $0.8 million, or $2.12 per Boe, and were approximately 4.8% of royalty income.





21









Distributable Income







Distributable income
for the nine-month period ended September 30, 2020 was $4.9 million, which included a net reduction of approximately $1.4
million to the cash reserve for the payment of future Trust expenses, reflecting approximately $3.1 million used to pay Trust expenses
during the period partially offset by approximately $1.7 million withheld from the February 2020 and August 2020 cash
distribution to unitholders. Distributable income for the nine-month period ended September 30, 2019 was $13.4 million, which
included a net addition of approximately $1.7 million to the cash reserve for the payment of future Trust expenses, reflecting
approximately $2.9 million withheld in aggregate from the February 2019, May 2019 and August 2019 cash distributions
to unitholders partially offset by approximately $1.2 million used to pay Trust expenses during the period.



Liquidity and Capital Resources



The Trust has no source
of liquidity or capital resources other than cash flow generated from the Royalty Interests and borrowings to fund administrative
expenses, including any amounts borrowed under Avalon’s loan commitment described in Note 6 to the unaudited interim financial
statements contained in Part I, Item 1 of this report. The Trust’s primary uses of cash are distributions to Trust
unitholders, the payment of Trust administrative expenses, establishing reserves (as determined by the Trustee) for future liabilities,
the payment of applicable taxes and the payment of expense reimbursements to Avalon for out-of-pocket expenses incurred on behalf
of the Trust. The Trust does not have any obligation to pay any costs associated with the operation of the Trust Wells.



Administrative expenses
include payments to the Trustee and the Delaware Trustee as well as a quarterly fee of $75,000 paid to Avalon pursuant to the Administrative
Services Agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the
excess cash, if any, received by the Trust from the sale of production attributable to the Royalty Interests during that quarter
over the Trust’s expenses for the quarter. If at any time the Trust’s cash on hand (including available cash reserves)
is not sufficient to pay the Trust’s ordinary course administrative expenses as they become due, the Trust may borrow funds
from the Trustee or other lenders, including Avalon, to pay such expenses. The Trustee does not intend to lend funds to the Trust.
Pursuant to the Trust Agreement, if at any time the Trust’s cash on hand (including available cash reserves) is not sufficient
to pay the Trust’s ordinary course administrative expenses as they become due, Avalon (as the assignee of SandRidge) will,
at the Trustee’s request, loan funds to the Trust necessary to pay such expenses. Any funds loaned by Avalon pursuant to
this commitment will be limited to the payment of current accounts payable or other obligations to trade creditors in connection
with obtaining goods or services or the payment of other current liabilities arising in the ordinary course of the Trust’s
business, and may not be used to satisfy Trust indebtedness, or to make distributions. If Avalon loans funds pursuant to this commitment,
no further distributions will be made to unitholders (except in respect of any previously determined quarterly cash distribution
amount) until such loan is repaid in full, with interest, unless Avalon consents to any further distributions. Any such loan will
be on an unsecured basis, and the terms of such loan will be substantially the same as that which would be obtained in an arm’s
length transaction between Avalon and an unaffiliated third party. No such loan was outstanding at September 30, 2020 or December 31,
2019, and given Avalon’s current financial condition, as further discussed under “Overview—Avalon’s Financial
Condition” above, it is unlikely such loan could be made.



Commencing with the
distribution to unitholders paid in the first quarter of 2019, the Trustee has withheld, and in the future intends to withhold,
the greater of $190,000 or 3.5% of the funds otherwise available for distribution to Trust unitholders each quarter to gradually
increase cash reserves for the payment of future known, anticipated or contingent expenses or liabilities by a total of approximately
$2,275,000. In 2019, the Trustee withheld an aggregate of $760,000 from the funds otherwise available for distribution to Trust
unitholders.  In 2020, the Trustee withheld approximately $380,000 from the funds otherwise available for distribution.



Reliance on Avalon.
The Trust is highly dependent on Avalon for multiple services, including the operation of the Trust Wells, remittance of net proceeds
from the sale of associated production to the Trust, administrative services such as accounting, tax preparation, bookkeeping,
regulatory filings and information services performed on behalf of the Trust, and potentially for loans to pay Trust administrative
expenses. Avalon is a relatively new oil and gas company formed in August 2018 with no prior operating history. Avalon’s
ability to continue operating the Underlying Properties depends on its future financial condition and economic performance, access
to capital, and other factors, many of which are out of Avalon’s control. If the reduced demand for crude oil in the global
market resulting from the economic effects of the COVID-19 pandemic and the recent reduction in the benchmark price of crude oil
persist for the near term or longer, such factors are likely to have a negative impact on Avalon’s financial condition. This
negative impact could affect Avalon’s ability to operate the Trust Wells and provide services to the Trust.





22







Avalon has informed
the Trustee that during 2019, Avalon repaired 29 producing Trust Wells to increase production. Avalon has reported that this effort,
combined with higher-than-expected lease operating expenses LOE and declining oil prices, contributed to an operating loss for
Avalon in 2019, despite Avalon’s efforts to reduce LOE (including shutting in some non-economic Trust Wells, alternating
production to reduce electrical and other field operating costs, and staff lay-offs). Avalon has informed the Trustee that Avalon
is likely to shut in additional Trust Wells that are not capable of producing oil and natural gas in paying quantities, as permitted
under the Conveyances. Avalon shut in 16 Trust Wells and 113 Trust Wells during the three- and nine-month periods ended September 30,
2020, respectively. Avalon did not repair any producing Trust Wells to increase production during the first half of 2020. As a
result of the operating loss for Avalon in 2019, Avalon has informed the Trustee that Avalon’s independent public accounting
firm included an emphasis of matter paragraph in its audit report on Avalon’s financial statements for the fiscal year ended
December 31, 2019. See “Overview – Avalon’s Financial Condition” above for additional information
regarding Avalon’s financial condition.



2020 Trust Distributions
to Unitholders.During the nine-month period ended September 30, 2020, the Trust’s distributions to unitholders
were as follows:



|                      |  |                   |                                       |  |               |                  |           |  |                   | Total        |  |   | Distribution  | 
|--------------------- |  | ----------------- | ------------------------------------- |  | ------------- | ---------------- | --------- |  | ----------------- | ------------ |  | - | ------------- | 
|                      |  | Covered           |                                       |  |               |                  |           |  |                   | Distribution |  |   | Per Common    | 
|                      |  | Production Period |                                       |  | Date Declared |                  | Date Paid |  |                   | Paid         |  |   | Unit          | 
|                      |  |                   |                                       |  |               |                  |           |  |                   |              |  |   | (in millions) | 
|Calendar Quarter 2020 |  |                   |                                       |  |               |                  |           |  |                   |              |  |   |               | 
|First Quarter         |  |                   | September 1, 2019 — November 30, 2019 |  |               | January 23, 2020 |           |  | February 28, 2020 |              |  | $ | 4.2           | 
|Second Quarter        |  |                   | December 1, 2019 — February 29, 2020  |  |               | April 23, 2020   |           |  | —                 |              |  |   | —             | 
|Third Quarter         |  |                   | March 1, 20120 — May 31, 2020         |  |               | July 23, 2020    |           |  | August 31, 2020   |              |  | $ | 0.6           | 



As previously reported
in the Trust’s Form 8-K filed on April 23, 2020, Avalon has informed the Trustee that Avalon was unable to pay
on a timely basis the approximately $4.65 million it owes the Trust, which reflects the quarterly distribution amount for
the three-month period ended March 31, 2020 (which primarily relates to production attributable to the Trust’s interests
from December 1, 2019 to February 29, 2020) of approximately $3.73 million, or $0.071 per unit,  together with approximately
$0.73 million of Trust expenses and $0.19 million to be withheld by the Trustee for the Trust’s previously disclosed
cash reserve for future known, anticipated or contingent expenses or liabilities of the Trust. Consequently, the Trustee was unable
to make the quarterly distribution to unitholders for the three-month period ended March 31, 2020. In accordance with the
terms of the Conveyances, the unpaid amount owed the Trust will accrue interest at the rate of interest per annum publicly announced
from time to time by The Bank of New York Mellon Trust Company, N.A. at its “prime rate” in effect at its principal
office in New York City until paid to the Trust. The accrued interest from May 15, 2020 to September 30, 2020 was approximately
$57,000. Avalon has informed the Trustee that Avalon intends to make the payment of the distribution to the Trust, with interest
in accordance with the Conveyances, when funds are available to do so.





23







Future Trust Distributions
to Unitholders.During the three-month production period from June 30, 2020 to August 31, 2020, combined sales volumes
were lower than the previous period. On October 22, 2020, the Trust declared a cash distribution of $0.033 per unit covering
production for the period. The distribution will be paid on or about November 25, 2020 to record unitholders as of November 13,
2020 and was calculated as follows (in thousands, except for unit and per unit amounts):



|Revenues                                                                |  |   |       | 
|----------------------------------------------------------------------- |  | - | ----- | 
|Royalty income                                                          |  | $ | 2,749 | 
|Total revenues                                                          |  |   | 2,749 | 
|Expenses                                                                |  |   |       | 
|Post-production expenses                                                |  |   | 7     | 
|Production taxes                                                        |  |   | 131   | 
|Cash reserves withheld by Trustee (1)                                   |  |   | 689   | 
|Total expenses                                                          |  |   | 827   | 
|Distributable income to unitholders                                     |  | $ | 1,922 | 
|Additional cash reserve (2)                                             |  |   | 190   | 
|Distributable income available to unitholders                           |  | $ | 1,732 | 
|Distributable income per unit (52,500,000 units issued and outstanding) |  | $ | 0.033 | 














(1) Includes amounts withheld for payment of future Trust
administrative expenses.



(2) Cash reserve increase for the payment of future known,
anticipated or contingent expenses or liabilities.



Potential Early
Termination of the Trust. As the COVID-19 pandemic continues to show no signs of abating and has recently resurged in the United
States, Avalon has informed the Trust that it believes crude oil prices will continue to fluctuate for the remainder of 2020 and
beyond. Avalon has also informed the Trustee that, due to such uncertainty, combined with (a) the reduced revenues generated
from operation of the Underlying Properties during the nine-month period ended September 30, 2020 (as compared to the nine-month
period ended September 30, 2019), resulting from the continuing decline in production of crude oil from Trust Wells and (b) the
fact that Avalon does not have the cash needed to make the payment due to the Trust, together with accrued interest, for the three-month
period ended March 31, 2020, Avalon believes that the aggregate cash available for distribution, after expenses and any reserves
established by the Trustee, will be less than $5 million for the four consecutive quarters ending December 31, 2020 irrespective
of whether the Montare Sale had occurred. Therefore, it is highly likely that the Trust will be required to commence dissolution
on the Quarterly Payment Date (as defined in the Trust Agreement) with respect to the quarter ending December 31, 2020, which
is expected to be on or about February 22, 2021. The Trustee would then commence winding-up the business and affairs of the
Trust in accordance with the terms of the Trust Agreement, including among other things, selling all of the Trust’s remaining
assets, paying or making provision for the payment of all anticipated or contingent Trust expenses or liabilities, distributing
all remaining cash to Trust unitholders, and thereafter terminating the Trust.



ITEM 3. Quantitative and Qualitative
Disclosures about Market Risk



As a “smaller
reporting company” as defined in Item 10(f) of Regulation S-K, the Trust is not required to provide information required
by this Item.



ITEM 4. Controls and Procedures



Disclosure Controls and Procedures



The Trustee conducted
an evaluation of the Trust’s disclosure controls and procedures, as defined in Rules 13a-15 and 15d-15 under the Exchange
Act, designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms and such information is accumulated and communicated as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, the Trustee has concluded that the disclosure controls and procedures of the Trust are effective as of
the end of the period covered by this report. In its evaluation of disclosure controls and procedures, the Trustee has relied,
to the extent considered reasonable, on information provided by Avalon (as successor to SandRidge).



Due to the nature of
the Trust as a passive entity and in light of the contractual arrangements pursuant to which the Trust was created, including the
provisions of (i) the Trust Agreement, (ii) the Administrative Services Agreement and (iii) the Conveyances granting
the Royalty Interests, the Trustee’s disclosure controls and procedures related to the Trust necessarily rely on (A) information
provided by Avalon (as successor to SandRidge), including information relating to results of operations, the costs and revenues
attributable to the Royalty Interests and other operating and historical data, plans for future operating and capital expenditures,
reserve information, information relating to projected production, and other information relating to the status and results of
operations of the Underlying Properties, and (B) conclusions and reports regarding reserves by the Trust’s independent
reserve engineers.





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Changes in Internal Control Over Financial
Reporting



There were no changes
in the Trust’s internal control over financial reporting during the quarter ended September 30, 2020, that have materially
affected, or are reasonably likely to materially affect, the Trustee’s internal control over financial reporting. The Trustee
notes for purposes of clarification that it has no authority over, has not evaluated and makes no statement concerning, the internal
control over financial reporting of Avalon and its affiliates.



PART II. Other Information



ITEM 1A. Risk Factors



Except as provided below, there have been no material changes
to the risk factors contained in Item 1A of the 2019 Form 10-K.



The COVID-19 pandemic could
materially adversely affect proceeds to the Trust and cash distributions to unitholders.



The
recent outbreak of the novel form of coronavirus known as COVID-19 and its development into a global pandemic has had,
and is likely to continue to have, a negative impact on worldwide economic and commercial activity and financial markets, as well
as global demand for crude oil and natural gas. The West Texas Intermediate spot price of crude oil has declined from $61.17
per barrel on January 2, 2020 to $36.60 per barrel on November 2, 2020, and crude oil reached a closing NYMEX price low
of negative $37.63 per barrel of crude oil in April 2020, in response to the economic effects of the COVID-19 pandemic and
the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries (“OPEC”),
which resulted in an oversupply of crude oil and exacerbated the decline in crude oil prices. COVID-19 and the responses by federal,
state and local governmental authorities to the pandemic have also resulted in significant business and operational disruptions,
including business closures, supply chain disruptions, travel restrictions, stay-at-home orders and limitations on the
availability of workforces. The full impact of COVID-19 is unknown and is rapidly evolving.



Continued
low oil and natural gas prices may ultimately reduce the amount of oil and natural gas that is economically viable to produce from
the Underlying Properties. As a result, Avalon could determine during periods of low commodity prices to shut-in or curtail production
from Trust Wells on the Underlying Properties, or even plug and abandon marginal Trust Wells that otherwise may have been allowed
to continue to produce for a longer period under conditions of higher prices. Specifically, Avalon may abandon any well or property
if it reasonably believes that the well or property can no longer produce oil or natural gas in commercially paying quantities,
which could result in termination of the portion of the Royalty Interest relating to the abandoned well, and Avalon
has no obligation to drill a replacement well. If commodity prices for crude oil and natural
gas remain at reduced levels, cash distributions to unitholders will be substantially lower than historical distributions, and
in certain periods there may be no distribution to unitholders.



As
the COVID-19 pandemic continues to show no signs of abating and has recently resurged in the United States, Avalon has informed
the Trust that it believes crude oil prices will continue to fluctuate for the remainder of 2020 and beyond. Avalon has informed
the Trustee that, due to such uncertainty, combined with (a) the reduced revenues generated from operation of the Underlying
Properties during the nine-month period ended September 30, 2020 (as compared to the nine-month period ended September 30,
2019), resulting from the continuing decline in production of crude oil from Trust Wells, and (b) the fact that Avalon does
not have the cash needed to make the payment due to the Trust, together with accrued interest, for the three-month period ended
March 31, 2020, Avalon believes that the aggregate cash available for distribution, after expenses and any reserves established
by the Trustee, will be less than $5 million for the four consecutive quarters ending December 31, 2020. Therefore, it is
highly likely that the Trust will be required to commence dissolution on the Quarterly Payment Date (as defined in the Trust Agreement)
with respect to the quarter ending December 31, 2020, which is expected to be on or about February 22, 2021. The Trustee
would then be required to commence winding-up the business and affairs of the Trust, including among other things, selling all
of the Trust’s remaining assets, paying or making provision for the payment of all anticipated or contingent Trust expenses
or liabilities, distributing all remaining cash to Trust unitholders, and thereafter terminating the Trust.





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To
the extent COVID-19 adversely affects production from the Underlying Properties or Avalon’s business, results of operations
and financial condition, it may also have the effect of heightening many of the other risks described in the Trust’s 2019
Form 10-K.



The ability or willingness of OPEC
and other oil exporting nations to set and maintain production levels has a significant impact on oil and natural gas commodity
prices, which could reduce the amount of cash available for distribution to Trust unitholders.



OPEC
is an intergovernmental organization that seeks to manage the price and supply of oil on the global energy market. Actions taken
by OPEC members, including those taken alongside other oil exporting nations, have a significant impact on global oil supply and
pricing. For example, OPEC and certain other oil exporting nations have previously agreed to take measures, including production
cuts, to support crude oil prices. In March 2020, members of OPEC and Russia considered extending and potentially increasing
these oil production cuts. However, those negotiations were unsuccessful. As a result, Saudi Arabia announced an immediate reduction
in export prices and Russia announced that all previously agreed upon oil production cuts would expire on April 1, 2020. These
actions led to an immediate and steep decrease in oil prices, which reached a closing NYMEX price low of negative $37.63 per Bbl
of crude oil in April 2020. Although OPEC has since agreed to certain production cuts, prices in the oil and gas market have
remained depressed, as the oversupply and lack of demand in the market persist. There can be no assurance that OPEC members and
other oil exporting nations will agree to future production cuts or other actions to support and stabilize oil prices, nor can
there be any assurance that they will not further reduce oil prices or increase production. Uncertainty regarding future actions
to be taken by OPEC members or other oil exporting countries could lead to increased volatility in the price of oil, which could
adversely affect the financial condition and economic performance of the operators of the underlying properties and may reduce
the 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.



The value of the Royalty Interests
is highly dependent on the performance and financial condition of Avalon.



As of November 1,
2018, Avalon is the operator of all Trust Wells. The Conveyances provide that Avalon is obligated to market, or cause to be marketed,
the oil, natural gas and NGL produced by such Trust Wells (to the extent such Trust Wells are capable of producing marketable hydrocarbons
in paying quantities) from the Underlying Properties. If Avalon were to default on its obligation, the cash distributions to the
Trust unitholders may be materially reduced. The Trust is highly dependent on its Trustor, Avalon, for multiple services, including
the operation of the Trust Wells, remittance of net proceeds from the sale of associated production to the Trust, administrative
services such as accounting, tax preparation, bookkeeping and informational services performed on behalf of the Trust. Due to the
Trust’s reliance on Avalon to fulfill these obligations, the value of the Royalty Interests and its ultimate cash available
for distribution is highly dependent on Avalon’s performance. Avalon has notified the Trustee that current reductions in
production of crude oil and the current low prices for crude oil have adversely impacted Avalon’s financial condition. This
negative impact could affect Avalon’s ability to operate the Trust Wells and provide services to the Trust. In addition,
Avalon has informed the Trustee that Avalon’s independent public accounting firm included a going concern qualification in
its audit report on Avalon’s financial statements for the fiscal year ended December 31, 2019.







Avalon
has informed the Trustee that during 2020 it has shut in additional Trust Wells that are not capable of producing oil and natural
gas in paying quantities, as permitted under the Conveyances, in an effort to further reduce LOE. These Trust Wells were not necessary
to hold the leasehold interests burdened by the Trust’s Royalty Interests. Avalon shut in 16 Trust Wells and 113 Trust Wells
during the three- and nine-month periods ended September 30, 2020, respectively.





26







Avalon
has also informed the Trustee that Avalon is using its commercially reasonable efforts to preserve the oil and gas leases on which
the Trust Wells are located so that in the future, assuming that crude oil prices return to a profitable level, the Trust will
still hold its Royalty Interests, and Trust unitholders may have the opportunity to receive future quarterly distributions. Avalon
also has informed the Trustee that Avalon believes that continuing production from the Trust Wells required to preserve such leases
is preferable to stopping production, as the failure to continue production would result in a termination of Avalon’s working
interest in such Trust Wells and, therefore, the Royalty Interests, which would have a material adverse effect on the Trust’s
financial condition. Avalon has reported to the Trustee that Avalon therefore used revenues it received during the production period
from December 1, 2019 to February 29, 2020 to pay the operating expenses necessary to maintain production from the Trust
Wells and to pay oil and gas lessor royalties, as the proceeds attributable to Avalon’s net revenue interest in the Underlying
Properties was insufficient to cover all such costs. Avalon had anticipated that revenues from production during the quarterly
production period commencing March 1, 2020 would be sufficient to fund the May 2020 Quarterly Payment to the Trust; however,
revenues from production during that quarterly production period were insufficient to generate the cash needed to make the May 2020
Quarterly Payment to the Trust due to the sharp drop in crude oil prices during the first quarter of 2020. In April 2020,
Avalon informed the Trustee that due to Avalon’s decision to prioritize the preservation of oil and gas leases burdened by
the Royalty Interests, coupled with the sharp decline in oil and gas prices since the beginning of 2020 as discussed elsewhere
in this Quarterly Report, at that time Avalon did not believe that it would be able to generate sufficient cash for quarterly payments
to the Trust for the foreseeable future. However, with the partial recovery of crude oil prices since the end of April 2020
and with increased cost-cutting efforts, Avalon was able to make a payment of approximately $1.7 million to the Trust for the three-month
period ended June 30, 2020 (which primarily relates to production attributable to the Trust’s Royalty Interests from
March 1, 2020 to May 31, 2020), and the Trust made a quarterly distribution to Trust unitholders of $652,000 for that
period. Additionally, Avalon has informed the Trust that it will make a payment of approximately $2.7 million to the Trust for
the three-month period ended September 30, 2020 (which primarily relates to production attributable to the Trust’s Royalty
Interests from June 1, 2020 to August 31, 2020) and on October 22, 2020, the Trust announced a quarterly distribution
for the three-month period ended September 30, 2020 of $1.7 million.





In
connection with the Sale Transaction, Avalon obtained a revolving line of credit from Washington Federal, National Association
(“WaFed”) pursuant to the terms of a Loan Agreement and related security documents (the “WaFed Loan”).
Avalon used the proceeds of the WaFed Loan to fund a portion of the purchase price for the interests in the Underlying Properties
and Trust units acquired in the Sale Transaction. The WaFed Loan is secured by a first lien mortgage on Avalon’s interest
in the Underlying Properties and a pledge of the Avalon Trust units (the “WaFed Collateral”). The Royalty Interests
are not part of the WaFed Collateral.



Since
April 2020, Avalon has been in discussions with WaFed regarding forbearance of certain breached financial covenants and an
extension of the WaFed Loan. On July 30, 2020, Avalon and WaFed entered into an amendment to the WaFed Loan that extended
the date by which Avalon was obligated to provide a reserve report to WaFed (regarding the redetermination of the borrowing base)
to September 15, 2020 and required Avalon to pay off the WaFed Loan by October 15, 2020. In addition, WaFed and Montare
entered into a Participation Agreement with respect to the WaFed Loan whereby Montare purchased an undivided participation interest
in the WaFed Loan and Montare has the right to purchase the WaFed Loan in the event Avalon does not meet the conditions of the
amended WaFed Loan. On October 30, 2020, Avalon and WaFed entered into another amendment to the WaFed Loan that (i) extends
the date by which Avalon is required to provide a reserve report of an independent petroleum engineer to WaFed (regarding the redetermination
of the borrowing base) to April 15, 2021, (ii) requires Avalon to pay off the WaFed Loan by April 15, 2021, and
(iii) provides a partial release of Trust Wells located on certain of the Underlying Properties in connection with the Montare
Sale. In addition, WaFed and Montare modified the Participation Agreement, and Montare purchased an additional interest in the
WaFed Loan.



The bankruptcy
of operators could impede the operation of Trust Wells.



The
value of the Royalty Interests and the Trust’s ultimate cash available for distribution is highly dependent on the financial
condition of the operator of the Trust Wells. Avalon has not agreed with the Trust to maintain a certain net worth or to be restricted
by other similar covenants. The ability to operate the Underlying Properties depends on an operator’s future financial condition,
economic performance and access to capital, which in turn will depend upon the supply and demand for oil, natural gas and NGL,
prevailing economic conditions and financial, business and other factors, many of which are beyond the control of such operators,
including Avalon.





27







Avalon
is not a reporting company and is not required to file periodic reports with the SEC pursuant to the Exchange Act. Therefore, as
a Trust unitholder, you do not have access to financial information about Avalon. Avalon has informed the Trustee that Avalon’s
independent public accounting firm included a going concern qualification in its audit report on Avalon’s financial statements
for the fiscal year ended December 31, 2019. In the event of any future bankruptcy of Avalon or any other future operator
of the Underlying Properties, the value of the Royalty Interests could be adversely affected by, among other things, delay or cessation
of payments under the Royalty Interests, business disruptions or cessation of operations by the operator, replacements of operators,
inability to find a replacement operator where necessary, reduced production of petroleum reserves. Any of such events would likely
result in decreased distributions to Trust unitholders.





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ITEM 6. Exhibits



The following exhibits are filed or furnished
as part of this Quarterly Report:



|            |  |                                                                                                                                                                                                                 |  | Incorporated by Reference |  | Filed or    
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------
|Exhibit
No. |  | Exhibit Description                                                                                                                                                                                             |  | Form                      |  | SEC
File No.
|3.1         |  | Certificate of Trust of SandRidge Permian Trust                                                                                                                                                                 |  | S-1                       |  | 333-174492  
|            |  |                                                                                                                                                                                                                 |  |                           |  |             
|3.2         |  | Amended and Restated Trust Agreement of SandRidge Permian Trust, dated August 16, 2011, by and among SandRidge Energy, Inc., The Bank of New York Mellon Trust Company, N.A., and The Corporation Trust Company |  | 8-K                       |  | 001-35274   
|            |  |                                                                                                                                                                                                                 |  |                           |  |             
|3.3         |  | Amendment No. 1 to Amended and Restated Trust Agreement of SandRidge Permian Trust, dated June 18, 2012, by the Bank of New York Mellon Trust Company, N.A.                                                     |  | 10-Q                      |  | 001-35274   
|            |  |                                                                                                                                                                                                                 |  |                           |  |             
|31.1        |  | Section 302 Certification                                                                                                                                                                                       |  |                           |  |             
|            |  |                                                                                                                                                                                                                 |  |                           |  |             
|32.1        |  | Section 906 Certification                                                                                                                                                                                       |  |                           |  |             
|            |  |                                                                                                                                                                                                                 |  |                           |  |             
|99.1        |  | Pro Forma Financial Information                                                                                                                                                                                 |  | 8-K/A                     |  | 001-35274   





29











SIGNATURE



Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.



|                        | SANDRIDGE PERMIAN TRUST
|----------------------- | -----------------------
|                        |                        
|                        | By:                    
|                        |                        
|                        |                        
|                        |                        
|                        |                        
|                        |                        
|Date: November 13, 2020 |                        



The Registrant, SandRidge
Permian Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar
functions. Accordingly, no additional signatures are available, and none have been provided. In signing the report above, the Trustee
does not imply that it has performed any such function or that any such function exists pursuant to the terms of the trust agreement
under which it serves.





30