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 June 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:



|Title of each class                 |  | Trading Symbol(s) |  | Name of each exchange on which registered
|----------------------------------- |  | ----------------- |  | -----------------------------------------
|Common Units of Beneficial Interest |  | PER               |  | The New York Stock Exchange              



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. YesxNo  ̈



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 July 30, 2020, 52,500,000 Common Units of Beneficial
Interest in SandRidge Permian Trust were outstanding.






















SANDRIDGE PERMIAN TRUST

FORM 10-Q

Quarter Ended June 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 | 12
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                         | 20
|ITEM 4. Controls and Procedures                                                            | 20
|                                                                                           |   
|PART II. OTHER INFORMATION                                                                 |   
|                                                                                           |   
|ITEM 1A. Risk Factors                                                                      | 21
|ITEM 6. Exhibits                                                                           | 24



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.



The overriding royalty interests conveyed
by SandRidge to the Trust constitute undivided interests in and to all minerals that may be produced and saved from designated
target formations underlying certain properties located in the Permian Basin in Andrews County, Texas (the “Underlying
Properties”) are referred to as the “Royalty Interests.”



As disclosed in the Trust’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”) and elsewhere
in this Quarterly Report on Form 10-Q (“Quarterly Report”), on November 1, 2018, SandRidge sold all
of its interests in the Underlying Properties and all of its outstanding Trust units to Avalon Energy, LLC, a Texas limited liability
company (“Avalon”).





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. We have based these forward-looking statements on our current expectations and assumptions
about future events. These statements are based on certain assumptions made by us in light of our experience and our perception
of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under
the circumstances. However, whether actual results and developments will conform with our 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)



|                                                                                             |  | June 30, 2020 |          |   | December 31, 2019 |  
|-------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | -
|                                                                                             |  | (Unaudited)   |          |   |                   |  
|ASSETS                                                                                       |  |               |          |   |                   |  
|Cash and cash equivalents                                                                    |  | $             | 2,763    |   |                   | $
|Investment in royalty interests                                                              |  |               | 549,831  |   |                   |  
|Less: accumulated amortization and impairment                                                |  |               | (527,293 | ) |                   |  
|Net investment in royalty interests                                                          |  |               | 22,538   |   |                   |  
|Total assets                                                                                 |  | $             | 25,301   |   |                   | $
|TRUST CORPUS                                                                                 |  |               |          |   |                   |  
|Trust corpus, 52,500,000 units issued and outstanding at June 30, 2020 and December 31, 2019 |  | $             | 25,301   |   |                   | $



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 June 30, |      |   | Six Months Ended June 30, |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | -
|                                                                                         |  | 2020                        |      |   | 2019                      |  
|Revenues                                                                                 |  |                             |      |   |                           |  
|Royalty income                                                                           |  | $                           | 3    |   |                           | $
|Total revenues                                                                           |  |                             | 3    |   |                           |  
|Expenses                                                                                 |  |                             |      |   |                           |  
|Post-production expenses                                                                 |  |                             | —    |   |                           |  
|Production taxes                                                                         |  |                             | —    |   |                           |  
|Property taxes                                                                           |  |                             | —    |   |                           |  
|Franchise taxes                                                                          |  |                             | 36   |   |                           |  
|Trust administrative expenses                                                            |  |                             | 338  |   |                           |  
|Cash reserves (used) withheld for current Trust expenses, net of amounts withheld (used) |  |                             | (371 | ) |                           |  
|Total expenses                                                                           |  |                             | 3    |   |                           |  
|Distributable income available to unitholders                                            |  | $                           | —    |   |                           | $
|Distributable income per unit (52,500,000 units issued and outstanding)                  |  |                             | —    |   |                           | $



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 June 30, |        |   | Six Months Ended June 30, |  
|----------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                |  | 2020                        |        |   | 2019                      |  
|Trust corpus, beginning of period               |  | $                           | 26,233 |   |                           | $
|Amortization of investment in royalty interests |  |                             | (561   | ) |                           |  
|Impairment of investment in royalty interests   |  |                             | —      |   |                           |  
|Net cash reserves (used) withheld               |  |                             | (371   | ) |                           |  
|Distributable income                            |  |                             | —      |   |                           |  
|Distributions paid to unitholders               |  |                             | —      |   |                           |  
|Trust corpus, end of period                     |  | $                           | 25,301 |   |                           | $



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 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 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 June 30, 2020, Avalon holds 13,125,000
Trust units, or 25% of all Trust units.



In connection with
the Sales 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 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 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.





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 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.



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 believes it will be unable to generate sufficient cash for quarterly
payments to the Trust for the foreseeable future. Although the Trust has since announced a quarterly distribution 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) of approximately $652,000, 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. Assuming that Avalon is unable to make the quarterly payment to the Trust for the three-month period ended March 31,
2020 or future quarterly payments, cash available for distribution for the four consecutive quarters ending December 31, 2020,
on a cumulative basis, may fall below $5.0 million, which would require the Trust to commence termination shortly after the quarterly
cash distribution would be required to be made in February 2021. If that early termination event occurs, the Trustee will
be required to sell all of the Trust’s remaining assets and liquidate 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 from mid-February to late April 2020 in the benchmark price of crude oil, which continued
to fluctuate throughout the second quarter of 2020, have had a negative impact on Avalon’s financial condition. Avalon has
informed the Trustee that during 2020 it has shut in oil and gas wells subject to the Royalty Interests (“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 23 Trust Wells and 79 Trust Wells during the first and second quarters of 2020, respectively.



Due
to the reduction in the number of producing wells (both Trust Wells and other wells owned by Avalon) and the resulting expected
reduction in the proved reserves attributable to Avalon’s net revenue interest in the Underlying Properties and other oil
and gas assets, Avalon notified the Trust in April 2020 that it expected WaFed to notify Avalon (concurrent with WaFed’s
redetermination of the borrowing base under the terms of the WaFed Loan) that the borrowing base would be reduced to less than
the outstanding principal amount of the WaFed Loan. As Avalon has indicated to the Trust that Avalon does not presently have sufficient
cash available to pay down the principal amount of the WaFed Loan to come into compliance with any adjustment to the borrowing
base, it is possible that WaFed could foreclose on the collateral securing the WaFed Loan or take other steps to protect its interest
in such 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,
among other things (i) extends the date on which Avalon is obligated to provide a reserve report to WaFed (regarding the redetermination
of the borrowing base) to September 15, 2020, (ii) provides for additional collateral for the WaFed Loan, (iii) requires increased
financial and operations reporting, and (iv) requires Avalon to pay off the WaFed Loan by October 15, 2020. In addition, WaFed
and a third party entered into a Participation Agreement with respect to the WaFed Loan where such third party has the right to
purchase the WaFed Loan in the event Avalon does not meet the conditions of the amended WaFed Loan. Avalon has informed the Trust
that if it is unsuccessful in its efforts to pay off the WaFed Loan, it anticipates that WaFed will call the WaFed Loan and foreclose
on its collateral, which could occur as early as late October 2020. If such foreclosure were to occur, Avalon would lose its working
interest in the Underlying Properties and could be replaced as operator of the Underlying Properties. 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 QuarterlyReport for a discussion of additional risks relating to the WaFed Loan and Avalon’s financial
condition. The Trustee intends to continue to monitor this situation closely and will take any appropriate action to protect its
Royalty Interests, including legal action to enforce its rights under the Conveyance.





8









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.



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 six-month period ended June 30, 2020, due to the sharp decline in oil and gas prices
since the beginning of 2020, the Trust recorded an impairment in the carrying value of the Investment in Royalty Interests of $77.1
million. The impairment resulted in a non-cash charge 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 six-month periods ended
June 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.





9







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 six-month periods ended June 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   |  | —                     |  |              | —             |  |              |  
|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 June 30, 2020 was approximately $19,000.
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; however, as discussed below, Avalon believes it will be unable to generate
sufficient cash to make all future quarterly payments to the Trust on a timely basis.



Avalon has
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 current period production would be sufficient to fund the quarterly payment to the Trust;
however, revenues from current period production have been insufficient to generate the cash needed to make the quarterly
payment to the Trust for the quarter ended March 31, 2020 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 recovery
of crude oil prices since the end of April 2020 and with increased cost-cutting efforts, Avalon has informed the Trust that
it will 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 has announced a quarterly distribution to Trust unitholders of $652,000 for that period. As the COVID 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 dramatically and cannot assure the Trust of its ability to generate
sufficient cash to make all future quarterly payments to the Trust on a timely basis.





10







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 June 30, 2020 and 2019 totaled approximately
$40,000 and $39,000, respectively. The Trustee’s administrative fees paid during the six-month periods ended June 30, 2020
and 2019 totaled approximately $80,000 and $78,000, 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 each of the three-month periods ended June 30, 2020 and 2019, the Trust paid administrative fees
in the amount of $75,000 to Avalon. During each of the six-month periods ended June 30, 2020 and 2019, the Trust paid administrative
fees in the amount of $150,000 to Avalon and SandRidge, respectively. During the six-month period ended June 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 June 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.



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.





11







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 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 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 23 Trust Wells and 79 Trust Wells
during the first and second quarters of 2020, respectively. Avalon has not repaired any Trust Wells to increase production during
the first two 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 July 23, 2020, the Trust declared a cash distribution of $0.012 per unit covering production for
the three-month period from March 1, 2020 to May 31, 2020. The distribution will be paid on or about August 31, 2020
to record holders as of August 17, 2020. Distributable income for March 1, 2020 to May 31, 2020 was calculated as follows
(in thousands, except for unit and per unit amounts):



|Revenues                                                                |  |   |       | 
|----------------------------------------------------------------------- |  | - | ----- | 
|Royalty income                                                          |  | $ | 1,663 | 
|Total revenues                                                          |  |   | 1,663 | 
|Expenses                                                                |  |   |       | 
|Post-production expenses                                                |  |   | 11    | 
|Production taxes                                                        |  |   | 80    | 
|Cash reserves withheld by Trustee (1)                                   |  |   | 730   | 
|Total expenses                                                          |  |   | 821   | 
|Distributable income to unitholders                                     |  | $ | 842   | 
|Additional cash reserve (2)                                             |  |   | 190   | 
|Distributable income available to unitholders                           |  | $ | 652   | 
|Distributable income per unit (52,500,000 units issued and outstanding) |  | $ | 0.012 | 










(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.



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.





12







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 June 30, 2020, Avalon holds 13,125,000 Trust units, or 25% of all Trust
units.



In connection with
the Sales 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.



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.





13









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 $40.77 per barrel on August 3, 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.



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 will require the Trustee to sell 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.



Based on Avalon's estimates
for the next twelve months regarding projected production from the Underlying Properties and estimated pricing for WTI crude oil
based on futures prices as of August 1, 2020 readily available in the public market, adjusted for differentials, and assuming
that Avalon is unable to make the quarterly payment to the Trust for the three-month period ended March 31, 2020 as discussed
below under “Liquidity and Capital Resources—Future Trust Distributions to Unitholders”, cash available for distribution
for the four consecutive quarters ending December 31, 2020, on a cumulative basis, may fall below $5.0 million, which would
require the Trust to commence termination shortly after the required quarterly cash distribution is to be made in February 2021.
If that occurs, the Trustee would be required to sell all of the Trust’s remaining assets and liquidate 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.



Status
of NYSE Delisting.As previously disclosed, 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. If the Trust were unable to regain compliance with the applicable standards
within a six-month cure period, the NYSE would commence suspension and delisting procedures. Although the Trust units continue
to be traded on the NYSE, the Trust might be unable to maintain compliance with the NYSE’s listing standards and could again
become subject to the NYSE delisting procedures. On April 23, 2020, the NYSE notified the Trustee that pursuant to temporary
NYSE rule changes adopted in response to the dramatic fluctuations in the capital markets resulting from the COVID-19 pandemic,
the cure period in which the Trust may regain compliance with the applicable listing standards has been extended to September 5,
2020. As the average 30-day closing price of the Trust units has remained below $1.00 since receipt of the notification, the Trustee
expects that the NYSE will delist the Trust units following market close on September 5, 2020 and that shortly thereafter trading
of the Trust units likely would be transferred to the over-the-counter market.



Properties.As of June 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.





14









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 six-month periods ended June 30, 2020 and 2019 is
presented below.



|                                                                                      |  | Three Months Ended
    June 30, |      |   | Six Months Ended
    June 30, |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ---- | - | ----------------------------- | -
|                                                                                      |  | 2020(1)                         |      |   | 2019(2)                       |  
|Production
    Data                                                                   |  |                                 |      |   |                               |  
|Oil
    (MBbls)                                                                       |  |                                 | —    |   |                               |  
|NGL
    (MBbls)                                                                       |  |                                 | —    |   |                               |  
|Natural
    gas (MMcf)                                                                |  |                                 | —    |   |                               |  
|Combined
    equivalent volumes (MBoe)                                                |  |                                 | —    |   |                               |  
|Average
    daily combined equivalent volumes (MBoe/d)                                |  |                                 | —    |   |                               |  
|Well
    Data                                                                         |  |                                 |      |   |                               |  
|Initial
    and Trust Development Wells producing - average                           |  |                                 | 990  |   |                               |  
|Revenues
    (in thousands)                                                           |  |                                 |      |   |                               |  
|Royalty
    income                                                                    |  | $                               | 3    |   |                               | $
|Total
    revenue                                                                     |  |                                 | 3    |   |                               |  
|Expenses
    (in thousands)                                                           |  |                                 |      |   |                               |  
|Post-production
    expenses                                                          |  |                                 | —    |   |                               |  
|Production
    taxes                                                                  |  |                                 | —    |   |                               |  
|Property
    taxes                                                                    |  |                                 | —    |   |                               |  
|Franchise
    taxes                                                                   |  |                                 | 36   |   |                               |  
|Trust
    administrative expenses                                                     |  |                                 | 338  |   |                               |  
|Cash
    reserves withheld for current Trust expenses, net of amounts (used) withheld |  |                                 | (371 | ) |                               |  
|Total
    expenses                                                                    |  |                                 | 3    |   |                               |  
|Distributable
    income available to unitholders                                     |  | $                               | —    |   |                               | $
|Average
    Prices                                                                    |  |                                 |      |   |                               |  
|Oil
    (per Bbl)                                                                     |  |                                 | —    |   |                               | $
|NGL
    (per Bbl)                                                                     |  |                                 | —    |   |                               | $
|Combined
    oil and NGL (per Bbl)                                                    |  |                                 | —    |   |                               | $
|Natural
    gas (per Mcf)                                                             |  |                                 | —    |   |                               | $
|Combined
    equivalent (per Boe)                                                     |  |                                 | —    |   |                               | $
|Average
    Prices — including impact of post-production expenses                     |  |                                 |      |   |                               |  
|Natural
    gas (per Mcf)                                                             |  |                                 | —    |   |                               | $
|Combined
    equivalent (per Boe)                                                     |  |                                 | —    |   |                               | $
|Expenses
    (per Boe)                                                                |  |                                 |      |   |                               |  
|Post-production
    production                                                        |  |                                 | —    |   |                               | $
|Production
    taxes                                                                  |  |                                 | —    |   |                               | $














| | (1) | Related revenues and expenses for the three-month period ended June 30, 2020.
| | --- | -----------------------------------------------------------------------------





15







|(2) | Production volumes and related revenues and expenses for the three-month period ended June 30,
2019 (included in SandRidge’s May 2019 net revenue distributions to the Trust) represent production from December 1,
2018 to February 28, 2019.                 
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Production
volumes and related revenues and expenses for the six-month period ended June 30, 2020 (included in Avalon’s February 2020
net revenue distribution to the Trust) represent production from September 1, 2019 to February 29, 2020.                 
|(4) | Production
volumes and related revenues and expenses for the six-month period ended June 30, 2019 (included in SandRidge’s February
2019 and May 2019 net revenue distributions to the Trust) represent production from September 1, 2018 to February 28, 2019.





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



Revenues



Royalty
Income. Royalty income is a function of production volumes sold attributable to the Royalty Interests and associated
prices received. There was no royalty income during the three-month period ended June 30, 2020 as a 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. Royalty income received during the three-month period ended June 30, 2019 totaled approximately $4.9 million.



Expenses



Production
Taxes. Production taxes are calculated as a percentage of oil and natural gas revenues, net of any applicable tax credits.
No production taxes were paid by the Trust for the three-month period ended June 30, 2020. Production taxes for the three-month
period ended June 30, 2019 totaled approximately $0.2 million, or $1.85 per Boe, and were approximately 4.8% 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 June 30, 2020 totaled approximately $0.3 million compared to approximately $0.6 million for the three-month period ended
June 30, 2019. The decrease during the 2020 period primarily relates to the timing of administrative expense payments.



Distributable Income



There was no distributable
income for the three-month period ended June 30, 2020 as Avalon was unable to pay the approximately $4.7 million it owes the
Trust, which reflects production from December 1, 2019 to February 29, 2020. Distributable income for the three-month
period ended June 30, 2019 was $3.8 million, which included a net addition of approximately $0.2 million to the cash reserve for
the payment of future Trust expenses, reflecting approximately $0.8 million withheld from the May 2019 cash distribution to
unitholders partially offset by approximately $0.6 million used to pay Trust expenses during the period.



Six Months Ended June 30, 2020 Compared to the Six Months
Ended June 30, 2019



Revenues



Royalty
Income. Royalty income received during the six-month period ended June 30, 2020 totaled $5.3 million compared to $11.2
million received during the six-month period ended June 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 six-month period ended June 30, 2020 decreased by 22 from 1,042 Trust Wells in the six-month
period ended June 30, 2019, because certain Trust Wells that could not produce minerals in commercial quantities due to a continuing
decline in production were shut in.





16









Expenses



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



Production
Taxes. Production taxes paid for the six-month period ended June 30, 2020 totaled approximately $0.3 million, or $2.31
per Boe, and were approximately 4.8% of royalty income. Production taxes for the six-month period ended June 30, 2019 totaled approximately
$0.5 million, or $2.05 per Boe, and were approximately 4.8% of royalty income.



Distributable Income



Distributable income
for the six-month period ended June 30, 2020 was $4.2 million, which included a net reduction of approximately $1.6 million to
the cash reserve for the payment of future Trust expenses, reflecting approximately $2.4 million used to pay Trust expenses during
the period partially offset by approximately $0.8 million withheld from the February 2020 cash distribution to unitholders.
Distributable income for the six-month period ended June 30, 2019 was $8.8 million, which included a net addition of approximately
$0.8 million to the cash reserve for the payment of future Trust expenses, reflecting approximately $1.8 million withheld in aggregate
from the February 2019 and May 2019 cash distributions to unitholders partially offset by approximately $1.0 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 June 30, 2020 or December 31,
2019, and given Avalon’s current financial condition, as further discussed under “—Avalon’s Financial Condition”
below, 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 $190,000 from the funds otherwise available for distribution.





17







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. 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 23 Trust Wells and 79 Trust Wells during the first and second quarters of 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.



2020
Trust Distributions to Unitholders.During the six-month period ended June 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   |  | —                 |  |              | —             |  |              |  





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 June 30, 2020 was approximately $19,000.
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; however, as discussed below, Avalon believes it will be unable to generate
sufficient cash for quarterly payments to the Trust for the foreseeable future.



Avalon has
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 current period production would be sufficient to fund the quarterly payment to the Trust;
however, revenues from current period production have been insufficient to generate the cash needed to make the quarterly
payment to the Trust for the quarter ended March 31, 2020 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 recovery
of crude oil prices since the end of April 2020 and with increased cost-cutting efforts, Avalon has informed the Trust that
it will 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 has announced a quarterly distribution to Trust unitholders of $652,000 for that period. As the COVID 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 dramatically and cannot assure the Trust of its ability to generate
sufficient cash to make all future quarterly payments to the Trust on a timely basis.





18







The Trustee intends
to continue to monitor this situation closely and, if appropriate, may take legal action against Avalon to enforce the Trust’s
rights under the Conveyances.



Future
Trust Distributions to Unitholders.During the three-month production period from
March 31, 2020 to May 31, 2020, combined sales volumes were lower than the previous period. On July 23, 2020, the Trust declared
a cash distribution of $0.012 per unit covering production for the period. The distribution will be paid on or about August 31,
2020 to record unitholders as of August 17, 2020 and was calculated as follows (in thousands, except for unit and per unit
amounts):



|Revenues                                                                |  |   |      
|----------------------------------------------------------------------- |  | - | -----
|Royalty income                                                          |  | $ | 1,663
|Total revenues                                                          |  |   | 1,663
|Expenses                                                                |  |   |      
|Post-production expenses                                                |  |   | 11   
|Production taxes                                                        |  |   | 80   
|Cash reserves withheld by Trustee (1)                                   |  |   | 730  
|Total expenses                                                          |  |   | 821  
|Distributable income to unitholders                                     |  | $ | 842  
|Additional cash reserve (2)                                             |  |   | 190  
|Distributable income available to unitholders                           |  | $ | 652  
|Distributable income per unit (52,500,000 units issued and outstanding) |  | $ | 0.012










(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.



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 ongoing fluctuations and the recent dramatic reduction in the benchmark price of crude oil from mid-February
to late April 2020 have had a negative impact on Avalon’s financial condition. Avalon has informed the Trustee that 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 23 Trust Wells and 79 Trust Wells during the first and second quarters of
2020, respectively.



Due to the
reduction in the number of producing wells (including Trust Wells and other wells owned by Avalon) and the resulting expected
reduction in the proved reserves attributable to Avalon’s net revenue interest in the Underlying Properties and other
oil and gas assets, Avalon notified the Trust in April 2020 that it expected WaFed to notify Avalon (concurrent with
WaFed’s redetermination of the borrowing base under the terms of the WaFed Loan) that the borrowing base would be
reduced to less than the outstanding principal amount of the WaFed Loan. As Avalon has indicated to the Trust that Avalon
does not presently have sufficient cash available to pay down the principal amount of the WaFed Loan to come into compliance
with any adjustment to the borrowing base, it is possible that WaFed could foreclose on the collateral securing the WaFed
Loan or take other steps to protect its interest in such 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, among other things (i) extends the date on which Avalon is
obligated to provide a reserve report to WaFed (regarding the redetermination of the borrowing base) to September 15, 2020,
(ii) provides for additional collateral for the WaFed Loan, (iii) requires increased financial and operations reporting, and
(iv) requires Avalon to pay off the WaFed Loan by October 15, 2020. In addition, WaFed and a third party entered into a
Participation Agreement with respect to the WaFed Loan where such third party has the right to purchase the WaFed Loan in the
event Avalon does not meet the conditions of the amended WaFed Loan. Avalon has informed the Trust that if it is unsuccessful
in its efforts to recapitalize and pay off the WaFed Loan, it anticipates that WaFed will call the WaFed Loan and foreclose
on its collateral, which could occur as early as late October 2020. If such foreclosure were to occur, Avalon would lose its
working interest in the Underlying Properties and could be replaced as operator of the Underlying Properties. 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. The Trustee intends to continue to monitor this situation closely and will take any
appropriate action to protect its Royalty Interests, including legal action to enforce its rights under the Conveyance.





19









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.



Changes in Internal Control Over Financial
Reporting



There were no changes
in the Trust’s internal control over financial reporting during the quarter ended June 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.





20









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 is negatively
impacting 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 $40.77
per barrel on August 3, 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 chains 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.



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. 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.





21







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 23 Trust Wells and 79 Trust Wells
during the first and second quarters of 2020, respectively.



Avalon
has 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 current period production would
be sufficient to fund the quarterly payment to the Trust; however, revenues from current period production have been insufficient
to generate the cash needed to make the quarterly payment to the Trust for the quarter ended March 31, 2020 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 recovery of crude oil prices since the end of April 2020 and with increased cost-cutting efforts, Avalon has informed
the Trust that it will 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 has announced a quarterly distribution to Trust unitholders of $652,000 for that period. As the COVID 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 dramatically and cannot assure the Trust of its ability to generate sufficient cash to make
all future quarterly payments to the Trust on a timely basis.



In
connection with the Sales 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. Due to the reduction in
the number of producing wells (both Trust Wells and other wells owned by Avalon) and the resulting expected reduction in the
proved reserves attributable to Avalon’s net revenue interest in the Underlying Properties and other oil and gas
assets, Avalon notified the Trust in April 2020 that it expected WaFed to notify Avalon (concurrent with WaFed’s
redetermination of the borrowing base under the terms of the WaFed Loan) that the borrowing base would be reduced to less
than the outstanding principal amount of the WaFed Loan. As Avalon has indicated to the Trust that Avalon does not presently
have sufficient cash available to pay down the principal amount of the WaFed Loan to come into compliance with any adjustment
to the borrowing base, it is possible that WaFed could foreclose on the collateral securing the WaFed Loan or take other
steps to protect its interest in such 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, among other things (i) extends the date on which Avalon is obligated to
provide a reserve report to WaFed (regarding the redetermination of the borrowing base) to September 15, 2020, (ii) provides
for additional collateral for the WaFed Loan, (iii) requires increased financial and operations reporting, and (iv) requires
Avalon to pay off the WaFed Loan by October 15, 2020. In addition, WaFed and a third party entered into a Participation
Agreement with respect to the WaFed Loan where such third party has the right to purchase the WaFed Loan in the event Avalon
does not meet the conditions of the amended WaFed Loan. Avalon has informed the Trust that if it is unsuccessful in its
efforts to recapitalize and pay off the WaFed Loan, it anticipates that WaFed will call the WaFed Loan and foreclose on its
collateral, which could occur as early as late October 2020. If such foreclosure were to occur, Avalon would lose its working
interest in the Underlying Properties and could be replaced as operator of the Underlying Properties. 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.





22







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.



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.





23







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                                                                                                                                                                                       |  |                           |  |             





24









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: August 7, 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.





25