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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‐Q

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

For the quarterly period ended March 31, 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: 001‐35459

WHITING USA TRUST II

(Exact name of registrant as specified in its charter)

| Delaware

                          |     | 38‐7012326    |
|------------------------------------------|--------------------|---------------------|
| (State or other jurisdiction of          |               | (I.R.S. Employer    |
| incorporation or organization)           |               | Identification No.) |
|                                     |               |                |
| The Bank of New York Mellon              |               |                |
| Trust Company, N.A., Trustee             |               |                |
| Global Corporate Trust                   |               |                |
| 601 Travis Street, 16th Floor            |               |                |
| Houston, Texas                           |               | 77002               |
| (Address of principal executive offices) |               | (Zip Code)          |

 

|   |                                                        |   |
|--------|-------------------------------------------------------------|--------|
|   | (512) 236‐6599                                        |   |
|   | (Registrant’s telephone number, including area code) |   |

 

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‐T (§232.405 of this chapter) 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    ☐                                                 |   | Smaller reporting company    ☑ |
| Accelerated filer             ☐ |   | Emerging growth company    ☐   |

Non‐accelerated filer      ☑

 

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 ☑

As of May 8, 2020,  18,400,000 Units of Beneficial Interest in Whiting USA Trust II were outstanding.

 

 

 

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TABLE OF CONTENTS

 

|                                  |                                                                                                    |   |
|---------------------------------------|---------------------------------------------------------------------------------------------------------|--------|
| Glossary of Certain Definitions  | 1                                                                                                       |
|                                  |                                                                                                    |   |
|                                  | PART I – FINANCIAL INFORMATION                                                                   |   |
|                                  |                                                                                                    |   |
| Item 1.                     | Condensed Financial Statements (Unaudited)                                                         | 5      |
|                                  | Condensed Statements of Assets, Liabilities and Trust Corpus as of March 31, 2020 and December 31, 2019 | 5      |
|                                  | Condensed Statements of Distributable Income for the Three Months Ended March 31, 2020 and 2019    | 5      |
|                                  | Condensed Statements of Changes in Trust Corpus for the Three Months Ended March 31, 2020 and 2019      | 5      |
|                                  | Notes to Condensed Modified Cash Basis Financial Statements                                             | 6      |
| Item 2.                     | Trustee’s Discussion and Analysis of Financial Condition and Results of Operations               | 10     |
| Item 3.                     | Quantitative and Qualitative Disclosures About Market Risk                                              | 16     |
| Item 4.                     | Controls and Procedures                                                                                 | 16     |
|                                  |                                                                                                    |   |
|                                  | PART II – OTHER INFORMATION                                                                      |   |
|                                  |                                                                                                    |   |
| Item 1A.                    | Risk Factors                                                                                            | 16     |
| Item 6.                     | Exhibits                                                                                                | 19     |

 

 

			 		

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GLOSSARY OF CERTAIN DEFINITIONS

The following are definitions of significant terms used in this report:

“ASC” Accounting Standards Codification.

“average annual capital expenditure amount” The quotient of (a) the sum of (i) the capital expenditures and (ii) the amounts reserved for approved capital expenditure projects, in each case attributable to the three years ended December 31, 2017, divided by (b) three. Such amount will be increased annually by 2.5% which began on December 31, 2017.

“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil and other liquid hydrocarbons.

“BOE” One stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one Bbl of crude oil equals six Mcf of natural gas and one Bbl of crude oil equals one Bbl of natural gas liquids.

“completion” The process of preparing an oil and gas wellbore for production through the installation of permanent production equipment, as well as perforation or fracture stimulation as required to optimize production.

“COPAS” The Council of Petroleum Accountants Societies, Inc.

“costless collar” An option position where the proceeds from the sale of a call option at its inception fund the purchase of a put option at its inception.

“deterministic method” The method of estimating reserves or resources using a single value for each parameter (from the geoscience, engineering or economic data) in the reserves calculation.

“differential” The difference between a benchmark price of oil and natural gas, such as the NYMEX crude oil spot price, and the wellhead price received.

“farm‐in or farm‐out agreement” An agreement under which the owner of a working interest in an oil or natural gas lease typically assigns the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a “farm‐in” while the interest transferred by the assignor is a “farm‐out.”

“FASB” Financial Accounting Standards Board.

“February 2019 distribution” The cash distribution to Trust unitholders of record on February 19, 2019 that was paid on February 28, 2019.

“February 2020 distribution” The cash distribution to Trust unitholders of record on February 19, 2020 that was paid on February 28, 2020.

“field” An area consisting of a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field that are separated vertically by intervening impervious strata, or laterally by local geologic barriers, or both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The geological terms “structural feature” and “stratigraphic condition” are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas of interest, etc.

“GAAP” Generally accepted accounting principles in the United States of America.

“gross acres” or “gross wells” The total acres or wells, as the case may be, in which a working interest is owned.

“Gross proceeds” The aggregate amount received by Whiting from sales of oil, natural gas and natural gas liquids produced from the underlying properties (other than amounts received for certain future non‐consent operations). Gross proceeds does not include any amount for oil, natural gas or natural gas liquids lost in production or marketing or used by Whiting in drilling, production and plant 

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operations. Gross proceeds includes “take‐or‐pay” or “ratable take” payments for future production in the event that they are not subject to repayment due to insufficient subsequent production or purchases.

“lease operating expense” or “LOE” The expenses of lifting oil or gas from a producing formation to the surface, constituting part of the current operating expenses of a working interest, and also including labor, superintendence, supplies, repairs, short‐lived assets, maintenance, allocated overhead costs and other expenses incidental to production, but not including lease acquisition or drilling or completion expenses.

“May 2020 distribution” The net profits generated by the NPI during the first quarterly payment period of 2020, which net profits were inclusive of a reserve for certain future expenses established by Whiting, and when combined with the payment period’s increased provision for estimated Trust expenses, resulted in no cash available for distribution to Trust unitholders of record on May 20, 2020.

“MBbl” One thousand barrels of crude oil, NGLs or other liquid hydrocarbons.

“MBOE” One thousand BOE.

“Mcf” One thousand standard cubic feet, used in reference to natural gas.

“MMBOE” One million BOE.

“MMBtu” One million British Thermal Units, used in reference to natural gas.

“MMcf” One million standard cubic feet, used in reference to natural gas.

“Money market rate” The lesser of (a) the rate of interest per annum publicly announced from time to time in the Midwest edition of the Wall Street Journal as the “money market” interest rate on an annual yield basis, but if such rate is not available, then such similar rate as reported by a nationally recognized financial news source or (b) the maximum rate of interest permitted under applicable law.

“net acres” or “net wells” The sum of the fractional working interests owned in gross acres or wells, as the case may be.

“Net proceeds” The provisions of the conveyance governing the computation of net proceeds are detailed and extensive. The following information summarizes the material information contained in the conveyance related to the computation of net proceeds. For more detailed provisions, we make reference to the conveyance agreement, which is filed as an exhibit to this report. Net proceeds is calculated as gross proceeds less Whiting’s share of the following:		

|  | · |  | any taxes paid by the owner of an underlying property to the extent not deducted in calculating gross proceeds, including estimated and accrued general property (ad valorem), production, severance, sales, excise and other taxes; |
|--|--------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | the aggregate amounts paid by Whiting upon settlement of the hedge contracts on a quarterly basis, as specified in the hedge contracts, which all terminated as of December 31, 2014; |
|--|--------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | any extraordinary taxes or windfall profits taxes that may be assessed in the future that are based on profits realized or prices received for production from the underlying properties; |
|--|--------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | all other costs and expenses, development costs and liabilities of testing, drilling, completing, recompleting, workovers, equipping, plugging back, operating and producing oil, natural gas and natural gas liquids, including allocated expenses such as labor, vehicle and travel costs and materials other than costs and expenses for certain future non‐consent operations; |
|--|--------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | costs or charges associated with gathering, treating and processing oil, natural gas and natural gas liquids (provided, however that any proceeds attributable to treatment or processing will offset such costs or charges, if any); |
|--|--------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | costs paid pursuant to existing operating agreements, including producing overhead charges; |
|--|--------|--|---------------------------------------------------------------------------------------------|

|  | · |  | to the extent Whiting is the operator of an underlying property and there is no operating agreement covering such underlying property, the overhead charges allocated by Whiting to such underlying property calculated in the same manner Whiting allocates overhead to other similarly owned property; |
|--|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | amounts previously included in gross proceeds but subsequently paid as a refund, interest or penalty; and |
|--|--------|--|-----------------------------------------------------------------------------------------------------------|

|  | · |  | amounts reserved at the option of Whiting for development expenditure projects, including well drilling, recompletion and workover costs, maintenance or operating expenses, which amounts will at no time exceed $2.0 million in the aggregate, and will be subject to the limitations described within the conveyance agreement (provided that such costs shall not be debited from gross proceeds when actually incurred). |
|--|--------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Plugging and abandonment liabilities relating to the underlying properties will not be deducted from the gross proceeds in determining net proceeds. If certain other non‐production revenues exceed the operating expenses during a payment period, the use of such excess amounts to offset operating expenses may be deferred, with interest accruing on such amounts at the prevailing money market rate, until the next quarterly period when such amounts, together with other offsets to costs for the applicable quarter, are less than such expenses. If any excess amounts have not been used to offset costs at the time when the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE (10.61 MMBOE at the 90% NPI) have been produced from the underlying properties and sold, which is the time when the NPI will terminate, then unitholders will not be entitled to receive the benefit of such excess amounts.

In the event that the net proceeds for any computation period is a negative amount, the Trust will receive no payment for that period, and any such negative amount attributable to the Trust, plus accrued interest at the prevailing money market rate, will be deducted from gross proceeds in the subsequent payment periods until all such negative amounts have been repaid.

“net profits interest” or “NPI” The nonoperating interest that creates a share in gross production from an operating or working interest in the underlying properties until terminated pursuant to its terms. The share is measured by net profits from the sale of production after deducting costs associated with that production.

“NGL” Natural gas liquid.

“NYMEX” The New York Mercantile Exchange.

“payment period” A calendar quarter, which is the period of time over which the computation of net proceeds (or net losses) generated by the NPI is determined for the respective quarter.

“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of most states legally require plugging of abandoned wells.

“probabilistic method” The method of estimating reserves using the full range of values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) to generate a full range of possible outcomes and their associated probabilities of occurrence. 

“proved reserves” Those reserves which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced, or the operator must be reasonably certain that it will commence the project, within a reasonable time.

The area of the reservoir considered as proved includes all of the following:

|  | a. |  | The area identified by drilling and limited by fluid contacts, if any, and |
|--|----|--|----------------------------------------------------------------------------|

|  | b. |  | Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. |
|--|----|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Reserves that can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when both of the following occur:

|  | a. |  | Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based, and |
|--|----|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. |  | The project has been approved for development by all necessary parties and entities, including governmental entities. |
|--|----|--|-----------------------------------------------------------------------------------------------------------------------|

Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12‐month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first‐day‐of‐the‐month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. 

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“recompletion” An operation whereby a completion in one zone is abandoned in order to attempt a completion in a different zone within the existing wellbore.

“reserves” Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.

“reservoir” A porous and permeable underground formation containing a natural accumulation of producible crude oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

“royalty” The amount or fee paid to the owner of mineral rights, expressed as a percentage or fraction of gross income from crude oil or natural gas produced and sold, unencumbered by expenses relating to the drilling, completing or operating of the affected well.

“SEC” The United States Securities and Exchange Commission.  

“standardized measure of discounted future net cash flows” or “standardized measure” The discounted future net cash flows relating to proved reserves based on the average price during the 12‐month period before the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first‐day‐of‐the‐month price for each month within such period (unless prices are defined by contractual arrangements, excluding escalations based upon future conditions); current costs and statutory tax rates (to the extent applicable); and a 10% annual discount rate.

“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to share in production, subject to all royalties, overriding royalties and other burdens and the obligation to share in all costs of exploration, development and operations and all associated risks.

“workover” Operations on a producing well to restore or increase production.

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PART I – FINANCIAL INFORMATION

Item 1.  Condensed Financial Statements

WHITING USA TRUST II

Condensed Statements of Assets, Liabilities and Trust Corpus (Unaudited)

(In thousands, except unit data)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |           |   |              |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|-------------------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | March 31, |   | December 31, |
|                                                                                                             |   | 2020           |   | 2019              |
| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |           |   |              |   |   |
| Cash and short-term investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $              | 137    |              | $      | 202    |
| Investment in net profits interest, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |           | 986    |              |   | 7,718  |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $              | 1,123  |              | $      | 7,920  |
| LIABILITIES AND TRUST CORPUS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |           |   |              |   |   |
| Reserve for Trust expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $              | 137    |              | $      | 202    |
| Trust corpus (18,400,000 Trust units issued and outstanding   as of March 31, 2020 and December 31, 2019)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |           | 986    |              |   | 7,718  |
| Total liabilities and Trust corpus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $              | 1,123  |              | $      | 7,920  |

 

 

Condensed Statements of Distributable Income (Unaudited)

(In thousands, except distributable income per unit data)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          |               |          |   |   |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|--------------------|---------------|--------|--------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          | Three Months Ended |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          | March 31,     |
|                                                                                                               |     | 2020               |     | 2019   |
| Income from net profits interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |          | $                  | 472           |   | $      | 1,962    |
| General and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |          |               | (265)         |   |   | (261)    |
| Cash reserves used for current Trust expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |          |               | 65            |   |   | 61       |
| State income tax withholding                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |          |               | (4)           |   |   | (5)      |
| Distributable income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          | $                  | 268           |   | $      | 1,757    |
| Distributable income per unit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |          | $                  | 0.014555      |   | $      | 0.095481 |

 

 

Condensed Statements of Changes in Trust Corpus (Unaudited)

(In thousands)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          |               |          |   |   |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|--------------------|---------------|--------|--------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          | Three Months Ended |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          | March 31,     |
|                                                                                                               |     | 2020               |     | 2019   |
| Trust corpus, beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |          | $                  | 7,718         |   | $      | 12,357  |
| Distributable income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |          |               | 268           |   |   | 1,757   |
| Distributions to unitholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |          |               | (268)         |   |   | (1,757) |
| Impairment of investment in net profits interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |          |               | (5,822)       |   |   |  - |
| Amortization of investment in net profits interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          |               | (910)         |   |   | (1,206) |
| Trust corpus, end of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |          | $                  | 986           |   | $      | 11,151  |

 

The accompanying notes are an integral part of these condensed modified cash basis financial statements.

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WHITING USA TRUST II

NOTES TO CONDENSED MODIFIED CASH BASIS FINANCIAL STATEMENTS

(Unaudited)

1.  ORGANIZATION OF THE TRUST

Trust Overview — Whiting USA Trust II (the “Trust”) is a statutory trust formed on December 5, 2011 under the Delaware Statutory Trust Act, pursuant to a trust agreement (the “Trust agreement”) among Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), as Trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and Wilmington Trust, National Association, as Delaware Trustee (the “Delaware Trustee”). The initial capitalization of the Trust estate was funded by Whiting Petroleum Corporation (“Whiting”) on December 8, 2011.

The Trust was created to acquire and hold a term net profits interest (“NPI”) for the benefit of the Trust unitholders pursuant to a conveyance from Whiting Oil and Gas, a 100%‐owned subsidiary of Whiting, to the Trust. The NPI is an interest in certain of Whiting Oil and Gas’ properties located in the Permian Basin, Rocky Mountains, Gulf Coast and Mid‐Continent regions of the United States (the “underlying properties”). The NPI is the only asset of the Trust, other than cash reserves held for future Trust expenses. As of December 31, 2019, these oil and gas properties included interests in approximately 1,305 gross  (368.3 net) producing oil and gas wells.

The NPI is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties. The Trust will wind up its affairs and terminate shortly after the earlier of (a) the NPI termination date, which is the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold (which amount is the equivalent of 10.61 MMBOE in respect of the Trust’s right to receive 90% of the net proceeds from such reserves pursuant to the NPI), or (b) the sale of the net profits interest. Once the Trust winds up its affairs and terminates, it will pay no further distributions. 

The Trust is highly dependent on Whiting for multiple services, including the operation of wells, remittance of net proceeds generated by the NPI and administrative services performed on behalf of the Trust. Whiting’s continued ability to operate wells, including those with interests held by the NPI, depends on its future financial condition, access to capital and other factors outside of its control. On April 1, 2020, Whiting and certain of its direct and indirect subsidiaries, including Whiting Oil and Gas (collectively, the “Debtors”) commenced voluntary cases under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors expect to continue normal operations as “debtors-in-possession” in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.  

As of March 31, 2020, on a cumulative accrual basis, 10.18 MMBOE  (96%)  of the 10.61 MMBOE attributable to the NPI have been produced and sold or divested.  The remaining minimum reserve quantities are projected to be produced prior to December 31, 2021, based on the Trust’s reserve report as of December 31, 2019.  Accordingly, the Trust’s remaining reserves attributable to the 90% NPI were estimated to be 1.52 MMBOE as of December 31, 2019, which is more than the minimum, but there is no assurance that the Trust will receive more than the minimum amount of reserves. The Trust’s reserve report as of December 31, 2019 was derived from NYMEX oil and gas prices of $55.69 per Bbl and $2.58 per MMBtu pursuant to current SEC and FASB guidelines, whereas the average NYMEX oil and gas prices for the month of April 2020 were $16.70 per Bbl and $1.69 per MMBtu, respectively. The Trust’s 2019 Annual Report on Form 10‐K includes additional information on the Trust’s reserves as of December 31, 2019.

2.  BASIS OF ACCOUNTING

Interim Financial Statements — The accompanying unaudited condensed financial information has been prepared by the Trustee in accordance with the instructions to the Quarterly Report on Form 10‐Q. The accompanying financial information is prepared on a comprehensive basis of accounting other than GAAP. In the opinion of the Trustee, the accompanying financial statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly, in all material respects, the results of the Trust for the interim periods presented. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The condensed modified cash basis financial statements and related notes included in this Quarterly Report on Form 10‐Q should be read in conjunction with the Trust’s financial statements and related notes included in the Trust’s 2019 Annual Report on Form 10‐K.

Term Net Profits Interest — The Trust uses the modified cash basis of accounting to report Trust receipts from the NPI and payments of expenses incurred. Actual cash distributions to the Trust are made based on the terms of the conveyance that created the Trust’s NPI. The NPI entitles the Trust to receive revenues (oil, gas and natural gas liquid sales) less expenses (the amount by which all royalties; 

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lease operating expenses including well workover costs; development costs; production and property taxes; payments made by Whiting to the hedge counterparty upon settlements of hedge contracts; maintenance expenses; producing overhead; and amounts that may be reserved for future development, maintenance or operating expenses, which reserve amounts may not exceed $2.0 million; exceed hedge payments received by Whiting under hedge contracts and other non‐production revenue) of the underlying properties multiplied by 90% (NPI percentage). Actual cash receipts may vary due to timing delays of cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices, subject to adjustment for the recovery of accumulated net losses funded by Whiting and accrued interest.

Modified Cash Basis of Accounting — The financial statements of the Trust, as prepared on a modified cash basis, reflect the Trust’s assets, liabilities, Trust corpus, earnings and distributions, as follows:

|  | a. |  | Income from net profits interest is recorded when NPI distributions are received by the Trust; |
|--|----|--|------------------------------------------------------------------------------------------------|

|  | b. |  | Distributions to Trust unitholders are recorded when paid by the Trust; |
|--|----|--|-------------------------------------------------------------------------|

|  | c. |  | Trust general and administrative expenses (which include the Trustees’ fees as well as accounting, engineering, legal and other professional fees) are recorded when paid; |
|--|----|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | d. |  | Cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities under GAAP; |
|--|----|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | e. |  | Amortization of the investment in net profits interest is calculated based on the units‐of‐production method. Such amortization is charged directly to Trust corpus and does not affect distributable income; and |
|--|----|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | f. |  | The Trust evaluates impairment of the investment in net profits interest by comparing the undiscounted cash flows expected to be realized from the investment in net profits interest to the NPI 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 investment in net profits interest. The fair value of the NPI is determined using the expected net discounted future cash flows from the underlying properties that are attributable to the net profits interest. The determination as to whether the NPI is impaired requires a significant amount of judgment by the Trustee and is based on the best information available to the Trustee at the time of the evaluation. |
|--|----|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

While these statements differ from financial statements prepared in accordance with GAAP, the modified cash basis of reporting revenues and distributions is considered to be the most meaningful for the Trust’s activities and results because quarterly distributions to the Trust unitholders are based on net cash receipts. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by FASB ASC Topic 932, Extractive Activities – Oil and Gas: Financial Statements of Royalty Trusts.

Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer certain 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, however, most accounting pronouncements are not applicable to the Trust’s financial statements.

Recent Accounting Pronouncements — There were no accounting pronouncements issued during the three months ended March 31, 2020 applicable to the Trust or its financial statements.

3.  INVESTMENT IN NET PROFITS INTEREST

Whiting Oil and Gas conveyed the NPI to the Trust in exchange for 18,400,000 Trust units. The investment in net profits interest was recorded at the historical cost basis of Whiting on March 28, 2012, the date of conveyance (except for the derivatives which were reflected at their fair value as of March 31, 2012), which was determined to be $194.0 million. However, such historical cost basis has been subject to impairments taken in prior periods. Accumulated amortization of the investment in net profits interest as of March 31, 2020 and December 31, 2019 was zero and $23.2 million, respectively.

Impairment of Net Profits Interest —  The value of the investment in net profits interest is reviewed whenever the Trustee judges that events and circumstances indicate that the recorded carrying value of the investment in net profits interest may not be recoverable. As a result of the significant decrease in the forward price curves for oil during the first quarter of 2020 which dropped below $21.00 per Bbl in March 2020 and the associated decline in anticipated future cash flows, an impairment test was performed.  As of March 31, 2020, the investment in net profits interest with a carrying value of $6.8 million was written down to its fair value of $1.0 million, resulting in a $5.8 million impairment charged directly to Trust corpus and which does not affect distributable income. The write-down of the net profits interest was  due to a reduction in anticipated future cash flows primarily driven by an expectation of sustained depressed oil 

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prices as of March 31, 2020. The fair value of the investment in net profits interest was ascribed using an income approach analysis based on the net discounted future cash flows from the NPI in the underlying properties and contains unobservable inputs including estimates of future oil and gas production attributable to the Trust; commodity prices based on forward strip price curves as of March 31, 2020 (adjusted for basis differentials); estimated operating, development, and general and administrative expenses; estimated state income tax withholdings; and a discount rate.

Oil prices further declined in April 2020, dropping below negative $37.00 per Bbl, and have continued to be depressed into May 2020. The dramatic decline in pricing in March 2020 and continuing into May 2020 is primarily attributable to Saudi Arabia’s announcement in March 2020 of plans to abandon previously agreed upon output restraints and economic effects of the coronavirus (“COVID-19”) pandemic on the demand for oil and natural gas. Substantial and extended declines in oil, natural gas and NGL prices have resulted and may continue to result in reduced 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. Absent a significant increase in commodity prices, this decline could result in a triggering event for further evaluation of impairment of the NPI in the second quarter of 2020, which could result in an impairment charge up to the remaining balance of the investment in net profits interest. 

4.  INCOME TAXES

The Trust is a grantor trust and therefore is not subject to federal income taxes. Accordingly, no recognition is given to federal income taxes in the Trust’s financial statements. The Trust unitholders are treated as the owners of Trust income and corpus, and the entire taxable income of the Trust is reported by the Trust unitholders on their respective tax returns.

For Montana state income tax purposes, Whiting must withhold from its NPI payments to the Trust, an amount equal to 6% of the net amount payable to the Trust from the sale of oil and gas in Montana. For Arkansas, Colorado, Michigan, Mississippi, New Mexico, North Dakota and Oklahoma, neither the Trust nor Whiting is withholding the income tax due to such states on distributions made to an individual resident or nonresident Trust unitholder, as long as the Trust is taxed as a grantor trust under the Internal Revenue Code.

5.  DISTRIBUTION TO UNITHOLDERS

Actual cash distributions to the Trust unitholders depend on the volumes of and prices received for oil, natural gas and natural gas liquids produced and sold from the underlying properties, among other factors. Quarterly cash distributions during the term of the Trust are made by the Trustee no later than 60 days following the end of each quarter (or the next succeeding business day) to the Trust unitholders of record on the 50th day following the end of each quarter. Such amounts equal the excess, if any, of the cash received by the Trust during the quarter, over the expenses of the Trust paid during such quarter, subject to any adjustments for changes made by the Trustee during such quarter to any cash reserves established for future expenses of the Trust or adjustments for the recovery of accumulated net losses and accrued interest. The sharp decline in oil prices during the first quarter of 2020 and continuing into May 2020 as well as the impact on oil and gas demand due to the COVID-19 pandemic, could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders. For further information on the oil price decline and economic effects of the COVID-19 pandemic refer to the “Investment in Net Profits Interest” footnote above.

Neither the Trust nor the unitholders are liable for any net losses that are generated by the net profits interest; however, any such net losses, plus accrued interest at the prevailing money market rate, are to be recovered by Whiting from future NPI gross proceeds before any further distributions will be made to Trust unitholders. Additionally, if the Trust borrows funds in order to pay its administrative liabilities, the Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid. There were no accumulated net losses funded or recovered by Whiting during the three months ended March 31, 2020 and 2019.

6.  RELATED PARTY TRANSACTIONS

Plugging and Abandonment — During the three months ended March 31, 2020, Whiting incurred $0.2 million of plugging and abandonment costs on the underlying properties. Pursuant to the terms of the conveyance agreement, plugging and abandonment costs relating to the underlying properties, net of any proceeds received from the salvage of equipment, are funded entirely by Whiting and are not therefore included as a deduction in the calculation of net proceeds or otherwise deducted from Trust unitholders over the term of the Trust.

Operating Overhead — Pursuant to the terms of its joint operating agreements, Whiting deducts from the gross oil and gas sales proceeds an overhead fee to operate those underlying properties for which Whiting has been designated as the operator. Additionally, with respect to those underlying properties for which Whiting is the operator but where there is no operating agreement in place, Whiting deducts 

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from the gross proceeds an overhead fee calculated in the same manner that Whiting allocates overhead to other similarly owned properties, which is customary practice in the oil and gas industry. Operating overhead activities include various engineering, legal and administrative functions. The fee is adjusted annually pursuant to COPAS guidelines and will increase or decrease each year based on changes in the year‐end index of average weekly earnings of crude petroleum and natural gas workers. The following table presents the Trust’s portion of these overhead charges for the distributions made during the three months ended March 31, 2020 and 2019:

|                                                     |                     |               |                     |   |   |   |
|----------------------------------------------------------|--------------------------|--------------------|--------------------------|--------|--------|--------|
|                                                     |                     | Three Months Ended |
|                                                     |                     | March 31,     |
|                                                     |      | 2020               |      | 2019   |
| Total overhead charges (in thousands)                    |                     | $                  | 332                      |   | $      | 323    |
| Overhead charge per month per active operated gross well |                     | $                  | 365                      |   | $      | 356    |

 

Administrative Services Fee — Under the terms of the administrative services agreement, the Trust is obligated to pay a quarterly administration fee of $50,000 to Whiting 60 days following the end of each calendar quarter. General and administrative expenses in the Trust’s condensed statements of distributable income for the three months ended March 31, 2020 and 2019 include $50,000 each for quarterly administrative fees paid to Whiting.

Trustee Administrative Fee — Under the terms of the Trust agreement, the Trust pays an annual administrative fee to the Trustee of $175,000, which is paid in four quarterly installments and is billed in arrears. Starting in 2017, such fee escalates by 2.5% each year and therefore, the annual administrative fee to be paid to the Trustee for 2020 and 2019 services is $193,167 and $188,456, respectively. Accordingly, the escalated quarterly administrative fee of $48,292 will be paid by the Trust starting in the second quarter of 2020. General and administrative expenses in the Trust’s condensed statements of distributable income for the three months ended March 31, 2020 and 2019 include $47,114 and $45,965,  respectively, for quarterly administrative fees paid to the Trustee. 

Letter of Credit  — In June 2012, Whiting established a $1.0 million letter of credit for the Trustee in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust in the event that Whiting should fail to lend funds to the Trust, if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and  if the Trustee were to draw on the letter of credit or were to borrow funds from Whiting or other entities, no further distributions would be made to unitholders until all such amounts, including interest thereon if applicable, have been repaid by the Trust. Such letter of credit expires and is subject to renewal in December 2020. As of March 31, 2020 and December 31, 2019, the Trust had no borrowings under the letter of credit.

Lending to the Trust — The Trustee can authorize the Trust to borrow money for the purpose of paying Trust administrative or incidental expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee, Whiting or the Delaware Trustee, as a lender, provided that the terms of the loan are similar to the terms it would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself, which may be a non‐interest bearing account, and make other short‐term investments with the funds distributed to the Trust. As of March 31, 2020 and December 31, 2019, the Trust had no borrowings outstanding.

7.  SUBSEQUENT EVENT

On May 7, 2020, the Trust announced that no distribution would be made to unitholders in the second quarter of 2020 as a result of the sharp decline in oil prices in the first quarter of 2020 and continuing into May 2020. For further information on the oil price decline and the economic effects of the COVID-19 pandemic refer to the “Investment in Net Profits Interest” footnote above.  The Trust is not able to predict future commodity prices, however, it appears likely that the depressed oil prices and economic effects of the COVID-19 pandemic will negatively impact future Trust quarterly payment periods. Due to these uncertainties and as provided in the terms of the NPI, Whiting established a $1.6 million reserve for future development, maintenance or operating expenses and related activities, while the Trustee increased the provision for Trust expenses to $0.9 million in order to enable it to pay the Trust’s future liabilities for approximately 12 months, which together reduced the cash available for distribution to Trust unitholders to zero.

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

References to the “Trust” in this document refer to Whiting USA Trust II. References to “Whiting” in this document refer to Whiting Petroleum Corporation and its subsidiaries. References to “Whiting Oil and Gas” in this document refer to Whiting Oil and Gas Corporation, a 100%‐owned subsidiary of Whiting Petroleum Corporation.

The following review of the Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as the Trustee’s discussion and analysis contained in the Trust’s 2019 Annual Report on Form 10‐K. The Trust’s Annual Report on Form 10‐K, Quarterly Reports on Form 10‐Q, Current Reports on Form 8‐K and all amendments to those reports are available on the SEC’s website www.sec.gov.

Note Regarding Forward‐Looking Statements

This Quarterly Report on Form 10‐Q includes “forward‐looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Quarterly Report on Form 10‐Q, including without limitation the statements under “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” are forward‐looking statements. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words “believes,” “expects,” “anticipates,” “intends” or similar expressions are intended to identify such forward‐looking statements. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10‐Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward‐looking statements:

|  | · |  | the effect of changes in commodity prices and conditions in the capital markets; |
|--|--------|--|----------------------------------------------------------------------------------|

|  | · |  | the effect, impact, potential duration or other implications of the outbreak of a novel strain of coronavirus (“COVID-19”) which the World Health Organization declared a pandemic in March 2020; |
|--|--------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | the actions of the Organization of Petroleum Exporting Countries (“OPEC”), including Saudi Arabia’s decision in March 2020 to abandon output restraints in response to Russia’s refusal to make production cuts; |
|--|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | changes in regional, domestic and global supply and demand for oil and natural gas and the impacts on storage capacity; |
|--|--------|--|-------------------------------------------------------------------------------------------------------------------------|

|  | · |  | uncertainty of estimates of oil and natural gas reserves and production; |
|--|--------|--|--------------------------------------------------------------------------|

|  | · |  | risks incidental to the operation and drilling of oil and natural gas wells; |
|--|--------|--|------------------------------------------------------------------------------|

|  | · |  | future production and development costs, which include capital expenditures; |
|--|--------|--|------------------------------------------------------------------------------|

|  | · |  | the inability to access oil and natural gas markets due to market conditions or operational impediments; |
|--|--------|--|----------------------------------------------------------------------------------------------------------|

|  | · |  | failure of the underlying properties to yield oil or natural gas in commercially viable quantities; |
|--|--------|--|-----------------------------------------------------------------------------------------------------|

|  | · |  | the effect of existing and future laws and regulatory actions; |
|--|--------|--|----------------------------------------------------------------|

|  | · |  | competition from others in the energy industry; |
|--|--------|--|-------------------------------------------------|

|  | · |  | inflation or deflation; and |
|--|--------|--|-----------------------------|

|  | · |  | other risks described under the caption “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and the Trust’s 2019 Annual Report on Form 10‐K. |
|--|--------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

All subsequent written and oral forward‐looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or the Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward‐looking statements.

Overview and Trust Termination

The Trust does not conduct any operations or activities. The Trust’s purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives pursuant to the NPI, and to perform certain administrative functions with respect to the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties.

Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated through March 31, 2020. The February 

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2020 distribution was mainly affected by October 2019 through December 2019 oil prices and September 2019 through November 2019 natural gas prices.

|        |   |         |   |         |   |         |   |         |   |         |   |         |   |         |   |         |   |   |   |   |   |   |   |   |   |   |
|-------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|        |   |         |   |         |   |         |   |         |   |         |   |         |   |         |   |         |   |   |   |   |   |   |   |   |   |   |
|        | 2018   |         | 2019   |         | 2020   |
|        | Q1     |    | Q2     |    | Q3     |    | Q4     |    | Q1     |    | Q2     |    | Q3     |    | Q4     |    | Q1     |
| Crude oil   | $      | 62.89        |   | $            | 67.90  |         | $      | 69.50        |   | $            | 58.83  |         | $      | 54.90        |   | $            | 59.83  |   | $      | 56.45  |   | $      | 56.96  |   | $      | 46.08  |
| Natural gas | $      | 3.13         |   | $            | 2.77   |         | $      | 2.88         |   | $            | 3.62   |         | $      | 3.00         |   | $            | 2.58   |   | $      | 2.29   |   | $      | 2.44   |   | $      | 1.88   |

 

Oil prices declined sharply during the first quarter of 2020, dropping below $21.00 per Bbl in March 2020 and further dropping to below negative $37.00 per Bbl in April 2020. This dramatic decline in pricing is primarily attributable to Saudi Arabia’s announcement in March 2020 of plans to abandon previously agreed upon output restraints and the economic effects of the COVID-19 pandemic on the demand for oil and natural gas. Continued low oil and gas prices could cause (i) a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders, as was the case for the second quarter of 2020, (ii) a reduction in the amount of oil, natural gas and natural gas liquids that are economic to produce from the underlying properties, which could extend the length of time required to produce 11.79 MMBOE (10.61 MMBOE at the 90% NPI) and (iii) the recognition of additional impairment charges on the NPI. All costless collar hedge contracts terminated as of December 31, 2014 and no additional hedges are allowed to be placed on the Trust assets. Consequently, there are no further cash settlement gains or losses on commodity derivatives for inclusion in the Trust’s computation of net proceeds (or net losses, as the case may be), and the Trust therefore has increased exposure to oil and natural gas price volatility. Additionally, in the current commodity price environment, the Trust’s distributions have increased sensitivity to fluctuations in actual and anticipated operating and capital expenditures, as was the case for the first quarter of 2019 and the second quarter of 2020 where Whiting established a reserve for anticipated future period operating expenses.

Trust Termination. The Trust will wind up its affairs and terminate shortly after the earlier of (a) the NPI termination date, which is the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE (10.61 MMBOE to the 90% net profits interest) have been produced from the underlying properties and sold, which is estimated to be December 31, 2021 based on the Trust’s year‐end 2019 reserve report or (b) the sale of the net profits interest. After the termination of the Trust, it will pay no further distributions.

Impairment of Net Profits Interest. As of March 31, 2020, the Trust’s investment in the NPI with a carrying value of $6.8 million was written down to its fair value of $1.0 million, resulting in a $5.8 million impairment charged directly to Trust corpus. The write-down of the net profits interest was due to a reduction in anticipated future cash flows primarily driven by an expectation of sustained depressed oil prices as of March 31, 2020.

Since the assets of the Trust are depleting assets, a portion of each cash distribution paid, if any, on the Trust units is a return of capital to investors, with the remainder being considered as a return on investment or yield. As a result, the market price of the Trust units will decline to zero at the termination of the Trust. As of March 31, 2020 on a cumulative accrual basis, 10.18 MMBOE  (96%)  of the 10.61 MMBOE attributable to the NPI have been produced and sold or divested (of which 239 MBOE, which is 90% of 266 MBOE, are included as gross proceeds in the Trust’s May 2020 distribution). The remaining minimum reserve quantities are projected to be produced prior to December 31, 2021, based on the Trust’s reserve report as of December 31, 2019.  However, the Trust’s 2019 reserve report was derived from NYMEX oil and gas prices of $55.69 per Bbl and $2.58 per MMBtu pursuant to current SEC and FASB guidelines, whereas the average NYMEX oil and gas prices for the month of April 2020 were $16.70 per Bbl and $1.69 per MMBtu, respectively. Lower oil and gas prices are likely to further reduce the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties, which may cause operators of the underlying properties to voluntarily curtail production and in turn could extend the length of time required to produce the Trust’s 10.61 MMBOE. The Trust’s 2019 Annual Report on Form 10‐K includes additional information on the Trust’s reserves, including the underlying assumptions, as of December 31, 2019.

Capital Expenditure Activities

The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in commercially paying amounts, if any, or that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator’s historical drilling success rate. The underlying properties have a capital expenditure budget per the December 31, 2019 reserve report of $3.8 million estimated to be spent between January 1, 2020 and December 31, 2021, the estimated termination date of the NPI. In addition, no assurance can be given that the actual level of capital expenditures on the underlying properties will meet this $3.8 million amount of budgeted capital expenditures over such time frame. With respect to fields for which Whiting is not the operator, Whiting has limited control over the timing and amount of capital expenditures relative to such fields. Please read the Trust’s Annual Report on Form 10‐K for the fiscal year ended December 31, 2019,  

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Item 1A. Risk Factors “Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust unitholders.” The following table presents the underlying properties’ aggregate capital expenditures attributable to the February 2020 distribution (in thousands):

|            |         |    |
|-----------------|--------------|---------|
|            |         |    |
|            | 2020         |
|            | Capital      |
| Region          | Expenditures |
| Rocky Mountains | $            | 387     |
| Permian Basin   |         | 50      |
| Gulf Coast      |         | 19      |
| Mid-Continent   |         |  - |
| Total           | $            | 456     |

 

Annual capital expenditure limitation. The capital expenditures included in the net proceeds attributable to the underlying properties are subject to an annual limitation which became effective January 1, 2018. As a result, the sum of the capital expenditures and amounts reserved for development, maintenance or operating costs of the underlying properties or related activities for each year beginning in 2018 may not exceed the average annual capital expenditure amount. The “average annual capital expenditure amount” means the quotient of (x) the sum of the capital expenditures and amounts reserved for approved capital expenditure projects with respect to the three years ended December 31, 2017, divided by (y) three, which amount equals $3.9 million and will be increased annually by 2.5% to account for expected increased costs due to inflation. Therefore, the capital expenditures included in the net proceeds attributable to the underlying properties and amounts reserved for expenditures cannot exceed $4.2 million during the year ending December 31, 2020.

Farm‐out agreements. In an effort to develop the underlying properties while limiting additional capital expenditures for the Trust (other than those capital expenditures already contemplated in the reserve report), Whiting Oil and Gas entered into three farm‐out agreements with a third‐party partner covering (i) 5,127 gross acres in eight leasehold sections within the Keystone South field in Winkler, Texas in April 2016 (the “Keystone South farm‐out”), (ii) 9,740 gross acres in approximately 15 units (which unit size is determined by the lateral well length) within the Signal Peak field in Howard County, Texas in February 2017, as amended in May 2018,  September 2019 and February 2020 (the “Signal Peak farm‐out”) and (iii) 640 gross acres in one leasehold section within the Flying W, SE field in Winkler County, Texas in March 2017 (the “Flying W farm‐out”).

These farm‐out agreements provide the third‐party partner with the option, but not the obligation, to drill one well in each of the leasehold sections or units, as the case may be, subject to the applicable farm‐out agreement, whereby the partner will pay 100% of the related drilling and well completion costs to earn a 75% working interest. As a result, the applicable underlying properties will consist of (i) 25% of the original working interest in these properties and (ii) an overriding royalty interest equal to the difference between 25% and the lease burdens of record. Upon completion of one well in each section or unit, as the case may be, pursuant to the terms of the applicable agreements, the partner has the option to drill (i) up to 15 additional wells under the Keystone South farm‐out, (ii) up to 12 additional wells under the Signal Peak farm‐out and (iii) one additional well under the Flying W farm‐out. For each of these additional optional wells, the partner is required to pay 85% of the drilling and well completion costs otherwise ascribed to the underlying properties for a 75% working interest. Given the Trust’s interest in the NPI, the Trust would be responsible for 13.5% of the underlying properties’ remaining drilling and well completion costs at the 90% NPI, subject to the average annual capital expenditure amount limitation discussed above.

The third‐party partner drilled and completed the first three wells pursuant to the terms of the Keystone South farm‐out agreement during 2017, a fourth well was drilled and completed during the second quarter of 2018 and a fifth well was drilled and completed during the fourth quarter of 2019, whereby the partner earned a 75% working interest in each of the underlying properties’ respective leasehold sections. The partner has no obligation to drill and complete any additional wells, and the Keystone South farm‐out will terminate during the second quarter of 2020 if no additional drilling has commenced by that time. 

During the fourth quarter of 2019, the third-party partner drilled and completed the first well under the Signal Peak farm‐out, whereby the partner earned a 75% working interest in the underlying properties’ respective leasehold section. The partner has no obligation to drill and complete any additional wells, and the Signal Peak farm-out will terminate during the third quarter of 2020 if no additional drilling has commenced by that time.

In addition, the partner drilled and completed the first well under the Flying W farm‐out during the second quarter of 2018, whereby the partner earned a 75% working interest in the underlying properties’ respective leasehold section. 

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As a result of the significant decline in crude oil prices in the first quarter of 2020 and continuing into May 2020, certain of the wells subject to these farm-out agreements were temporarily shut-in during April 2020, which will negatively impact production 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. 

Results of Trust Operations

Comparison of Results of the Trust for the Three Months Ended March  31,  2020 and 2019

The following is a summary of income from net profits interest and distributable income received by the Trust for the three months ended March 31, 2020 and 2019 (dollars in thousands, except per Bbl, per Mcf and per BOE amounts):

|                                            |                     |               |                     |   |   |   |    |   |
|-------------------------------------------------|--------------------------|--------------------|--------------------------|--------|--------|--------|---------|--------|
|                                            |                     |               |                     |   |   |   |    |   |
|                                            |                     | Three Months Ended |
|                                            |                     | March 31,     |
|                                            |      | 2020               |      | 2019   |
| Sales volumes:                                  |                     |               |                     |   |   |   |    |   |
| Oil from underlying properties (Bbl)(1)         |                     |               | 187,185                  | (3)    |   |   | 239,530 | (4)    |
| Natural gas from underlying properties (Mcf)    |                     |               | 232,720                  | (3)    |   |   | 260,676 | (4)    |
| Total production (BOE)                          |                     |               | 225,972                  |   |   |   | 282,976 |   |
| Average sales prices:                           |                     |               |                     |   |   |   |    |   |
| Oil (per Bbl)(1)                                |                     | $                  | 49.81                    |   |   | $      | 44.19   |   |
| Natural gas (per Mcf)(2)                        |                     | $                  | 1.83                     |   |   | $      | 3.29    |   |
| Cost metrics:                                   |                     |               |                     |   |   |   |    |   |
| Lease operating expenses (per BOE)              |                     | $                  | 36.60                    |   |   | $      | 28.14   |   |
| Production tax rate (percent of total revenues) |                     |               | 5.1                      | %      |   |   | 4.9     | %      |
| Revenues:                                       |                     |               |                     |   |   |   |    |   |
| Oil sales(1)                                    |                     | $                  | 9,323                    | (3)    |   | $      | 10,586  | (4)    |
| Natural gas sales                               |                     |               | 425                      | (3)    |   |   | 857     | (4)    |
| Total revenues                                  |                     |               | 9,748                    |   |   |   | 11,443  |   |
| Costs:                                          |                     |               |                     |   |   |   |    |   |
| Lease operating expenses                        |                     |               | 8,270                    |   |   |   | 7,964   |   |
| Production taxes                                |                     |               | 498                      |   |   |   | 564     |   |
| Development costs                               |                     |               | 456                      |   |   |   | 735     |   |
| Total costs                                     |                     |               | 9,224                    |   |   |   | 9,263   |   |
|  

Net proceeds                            |                     |               | 524                      |   |   |   | 2,180   |   |
| Net profits percentage                          |                     |               | 90                       | %      |   |   | 90      | %      |
| Income from net profits interest                |                     |               | 472                      |   |   |   | 1,962   |   |
| Provision for estimated Trust expenses          |                     |               | (200)                    |   |   |   | (200)   |   |
| Montana state income tax withheld               |                     |               | (4)                      |   |   |   | (5)     |   |
| Distributable income                            |                     | $                  | 268                      |   |   | $      | 1,757   |   |

__________

|  | (1) |  | Oil includes natural gas liquids. |
|--|-----|--|-----------------------------------|

|  | (2) |  | The average sales price of natural gas for the gas production months within the three months ended March  31,  2019 exceeded the average NYMEX gas prices due to the “liquids-rich” content of a portion of the natural gas volumes produced and sold from the underlying properties. While the gas volumes produced and sold from the underlying properties during the three months ended March  31, 2020 are still “liquids rich,” such liquids content did not result in a premium to the NYMEX natural gas price due to the depressed liquids prices during that period. |
|--|-----|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (3) |  | Oil and gas sales volumes and related revenues for the three months ended March 31, 2020 (consisting of Whiting’s February 2020 distribution to the Trust) generally represent oil production from October 2019 through December 2019 and natural gas production from September 2019 through November 2019. |
|--|-----|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (4) |  | Oil and gas sales volumes and related revenues for the three months ended March 31, 2019 (consisting of Whiting’s February 2019 distribution to the Trust) generally represent oil production from October 2018 through December 2018 and natural gas production from September 2018 through November 2018. |
|--|-----|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Income from Net Profits Interest. Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI proceeds are based on the oil and gas production for which Whiting has received payment within one month following the end of the most recent fiscal quarter. Whiting receives payment for its crude oil sales generally within 30 days following the month in which it is produced and sold, and Whiting receives payment for its natural gas sales generally within 60 days following 

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the month in which it is produced and sold. Income from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes and development costs as follows:

Revenues. Oil and natural gas revenues decreased $1.7 million (or 15%) during the three months ended March 31, 2020 as compared to the same 2019 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decrease in revenue between periods was primarily due to a decline in oil production volumes.  The crude oil average realized sales price increased by 13% and the natural gas average realized sales price decreased by 44% between periods primarily as a result of improved oil differentials and rising natural gas differentials, respectively. Crude oil production volumes decreased by 52 MBbl (or 22%) and natural gas production volumes decreased by 28 MMcf (or 11%) between periods. The decline in oil volumes between periods was primarily related to normal field decline and differences in timing associated with revenues received from non-operated properties.  The decline in gas volumes between periods was primarily related to normal field decline and the permanent shutdown of the third-party operated Chatom Gas Plant in November 2019,  which impacts wells located in the Lake Como field. Based on the December 31, 2019 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 8.5% for oil and 13.6% for gas from 2020 through the estimated December 31, 2021 NPI termination date.

Lease Operating Expenses. Lease operating expenses increased $0.3 million (or 4%) during the first quarter of 2020 compared to the same 2019 period primarily due to a  $0.7 million increase in oilfield goods and services, which was largely offset by $0.4 million of lower labor and other operating costs on Whiting-operated properties. The increase in overall LOE coupled with the decline in overall production volumes resulted in an increase in LOE on a per BOE basis of 30%  between periods from $28.14 during the three months ended March  31, 2019 to $36.60 for the same period in 2020.

Production Taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues increased from 4.9% for the three months ended March 31, 2019 to 5.1% for the same period in 2020.  Overall production taxes for the first quarter of 2020, however, decreased $0.1 million (or  12%) as compared to the same 2019 period primarily due to lower oil and natural gas revenues between periods.

Development Costs. Development costs decreased $0.3 million (or 38%) during the first quarter of 2020 compared to the same 2019 period primarily due to reduced drilling and capital workover costs in the Rangely Weber Sand field.

Liquidity and Capital Resources

Overview. The Trust has no source of liquidity or capital resources other than cash flows from the NPI. Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trust’s only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee, a quarterly fee paid to Whiting pursuant to an administrative services agreement and expenses in connection with the discharge of the Trustee’s duties, including third‐party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines the amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust’s expenses for that quarter. Available funds are reduced by (i) any cash the Trustee decides to hold as a reserve against future liabilities and (ii) any accumulated net losses to be recovered by Whiting, plus accrued interest. If the NPI generates net losses or limited net proceeds (which was the case during the first quarter of 2019 and the second quarter of 2020), the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust’s administrative expenses, which may be in excess of the provision for Trust expenses. The Trust may borrow the amount of funds required to pay its liabilities if the Trustee determines that the cash on hand and the cash to be received, which is dependent on future net proceeds, are insufficient to cover the Trust’s liabilities. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid. The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust’s liquidity or the availability of capital resources. As of April  30, 2020, the Trust had cash reserves of $0.1 million and a provision for estimated Trust expenses of $0.9 million from the May 2020 distribution for the payment of its administrative expenses. 

The Trust is highly dependent on Whiting for multiple services, including the operation of wells, remittance of net proceeds generated by the NPI and administrative services performed on behalf of the Trust. Whiting’s continued ability to operate wells, including those with interests held by the NPI, depends on its future financial condition, access to capital and other factors outside of its control. On April 1, 2020, Whiting and certain of its direct and indirect subsidiaries, including Whiting Oil and Gas (collectively, the “Debtors”) commenced voluntary cases under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States 

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Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors expect to continue to operate the business as “debtors-in-possession” in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

Letter of Credit. In June 2012, Whiting established a $1.0 million letter of credit for the Trustee in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust in the event that Whiting should fail to lend funds to the Trust, if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and if the Trustee were to draw on the letter of credit or were to borrow funds from Whiting or other entities, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust. Such letter of credit expires and is subject to renewal in December 2020. As of March 31, 2020 and December 31, 2019, the Trust had no borrowings under the letter of credit. 

Reserve for Expenditures. Whiting may reserve from the gross proceeds amounts up to a total of $2.0 million at any time for future development, maintenance or operating expenses on the underlying properties and related activities. Whiting did not fund such a reserve during the three months ended March 31, 2020 and 2019. Instead, Whiting deducted from the Trust’s gross proceeds only actual costs paid for development, maintenance and operating expenses. As provided in the terms of the Trust’s net profits interest, the May 2020 distribution includes Whiting’s establishment of a reserve for future expenditures of $1.6 million in response to the expectation that future gross proceeds from the underlying properties may be insufficient to cover the future operating costs of the underlying properties due to  (i) the sharp decline in oil prices in March 2020 and continuing into May 2020 and (ii) the impacts of the COVID-19 pandemic.  Consistent with the terms of the Trust’s NPI, the reserve will be utilized by Whiting for future development, maintenance or operating expenses on the underlying properties and related activities. These future expenses will not be deducted from the gross proceeds when incurred but rather, will be applied against the reserve until such reserve balance reaches zero.    

Plugging and Abandonment. Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the three months ended March 31, 2020, Whiting incurred $0.2 million  of plugging and abandonment charges on the underlying properties, and these costs were not charged to the unitholders of the Trust.

Future Trust Payment Periods

On May 7, 2020, the Trust announced that no distribution would be made to unitholders in the second quarter of 2020 as a result of the sharp decline in oil prices in the first quarter of 2020 and continuing into May 2020. Due to these uncertainties and as provided in the terms of the NPI, Whiting established a $1.6 million reserve for future development, maintenance or operating expenses and related activities, while the Trustee increased the provision for Trust expenses to $0.9 million in order to enable it to pay the Trust’s future liabilities for approximately 12 months, which together reduced the cash available for distribution to Trust unitholders to zero. 

As discussed above, during the first quarter of 2020, oil and natural gas prices sharply declined and have continued to decline in May 2020. The Trust is unable to predict future commodity prices; however, if prices remain at current levels or decline further, it appears likely that distributions to unitholders will be significantly impacted by low oil and natural gas prices and may be reduced to zero, as was the case during the second quarter of 2020.  Additionally, in the current commodity price environment, the Trust’s distributions have increased sensitivity to fluctuations in operating and capital expenditures and commodity price differentials. If the NPI generates net losses or limited net proceeds, the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust’s administrative expenses, which expenses may be in excess of the provision for Trust expenses.

New Accounting Pronouncements

There were no accounting pronouncements issued during the three months ended March 31, 2020 applicable to the Trust or its financial statements.

Critical Accounting Policies and Estimates

A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust’s financial statements is included in Item 7 of the Trust’s Annual Report on Form 10‐K for the year ended December 31, 2019. There have been no significant changes to the critical accounting policies during the three months ended March 31, 2020.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Commodity Hedge Contracts

The primary asset of and source of income to the Trust is the NPI, which generally entitles the Trust to receive 90% of the net proceeds from oil and gas production from the underlying properties. Consequently, the Trust is exposed to market risk from fluctuations in oil and gas prices.

The revenues derived from the underlying properties depend substantially on prevailing crude oil, natural gas and natural gas liquids prices. As a result, commodity prices also affect the amount of cash flow available for distribution to the Trust unitholders. Lower prices may also reduce the amount of oil, natural gas and natural gas liquids that can be economically produced. Whiting sells the oil, natural gas and natural gas liquid production from the underlying properties under floating market price contracts each month. Whiting entered into certain hedge contracts, all of which terminated as of December 31, 2014, to manage the exposure to crude oil price volatility associated with revenues generated from the underlying properties, and to achieve more predictable cash flows. No additional hedges are allowed to be placed on Trust assets, and therefore, there are no further cash settlements on commodity hedges for inclusion in the Trust’s computation of net proceeds (or net losses, as the case may be), which has the effect of increasing the Trust’s exposure to oil and natural gas price volatility. The Trust cannot enter into derivative contracts for speculative or trading purposes.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures. The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by Whiting to The Bank of New York Mellon Trust Company, N.A., as Trustee of the Trust, and its employees who participate in the preparation of the Trust’s periodic reports as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Trustee carried out an evaluation of the Trust’s disclosure controls and procedures. Mike Ulrich, as Trust Officer of the Trustee, has concluded that the disclosure controls and procedures of the Trust are effective.

Due to the contractual arrangements of (i) the Trust agreement and (ii) the conveyance of the NPI, the Trustee relies on (a) information provided by Whiting, including historical operating data, plans for future operating and capital expenditures, reserve information and information relating to projected production and (b) conclusions and reports on oil and gas reserves by the Trust’s independent reserve engineers. For a description of certain risks relating to these arrangements and risks relating to the Trustee’s reliance on information reported by Whiting and included in the Trust’s results of operations, refer to the Trust’s Annual Report on Form 10‐K for the fiscal year ended December 31, 2019, Item 1A. Risk Factors “The Trust and the Trust unitholders have no voting or managerial rights with respect to the underlying properties. As a result, neither the Trust nor the Trust unitholders have any ability to influence the operation of the underlying properties.”

Changes in Internal Control over Financial Reporting. During the quarter ended March 31, 2020, there was no change in the Trust’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, and makes no statement concerning, the internal control over financial reporting of Whiting.

PART II – OTHER INFORMATION

Item 1A.  Risk Factors

Risk factors relating to the Trust are contained in Item 1A of the Trust’s Annual Report on Form 10‐K for the fiscal year ended December 31, 2019.  The following are material updates to such risk factors:

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The amount of cash distributions by the Trust are subject to fluctuation as a result of changes in oil, natural gas and natural gas liquids prices. An extended period of low oil and natural gas prices may adversely affect the amount of cash distributions by the Trust and the value of the Trust units.

The reserves attributable to the underlying properties and the quarterly cash distributions of the Trust are highly dependent upon the prices realized from the sale of oil, natural gas and natural gas liquids. Prices of oil, natural gas and natural gas liquids applicable to the underlying properties can fluctuate widely on a quarter-to-quarter basis in response to a variety of factors that are beyond the control of the Trust and Whiting, including, but not limited to, the following:

|  | · |  | changes in regional, domestic and global supply and demand for oil and natural gas; |
|--|--------|--|-------------------------------------------------------------------------------------|

|  | · |  | the level of global oil and natural gas inventories and storage capacity; |
|--|--------|--|---------------------------------------------------------------------------|

|  | · |  | the occurrence or threat of epidemic or pandemic diseases, such as the coronavirus (“COVID-19”) pandemic, or any government response to such occurrence or threat; |
|--|--------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | the actions of the Organization of Petroleum Exporting Countries (“OPEC”), including Saudi Arabia’s decision in March 2020 to abandon output restraints in response to Russia’s refusal to make production cuts; |
|--|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | the price and quantity of imports of oil and natural gas; |
|--|--------|--|-----------------------------------------------------------|

|  | · |  | market demand and capacity limitations on exports of oil and natural gas; |
|--|--------|--|---------------------------------------------------------------------------|

|  | · |  | political and economic conditions, including embargoes and sanctions, in oil-producing countries or affecting other oil-producing activity, such as the U.S. imposed sanctions on Venezuela and Iran and conflicts in the Middle East; |
|--|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | developments of North American energy infrastructure; |
|--|--------|--|-------------------------------------------------------|

|  | · |  | the level of global oil and natural gas exploration and production activity; |
|--|--------|--|------------------------------------------------------------------------------|

|  | · |  | the effects of global conservation and sustainability measures; |
|--|--------|--|-----------------------------------------------------------------|

|  | · |  | proximity and capacity of oil and natural gas pipelines and other transportation facilities; |
|--|--------|--|----------------------------------------------------------------------------------------------|

|  | · |  | the effects of the global and domestic economies, including the impact of expected growth, access to credit and financial and other economic issues; |
|--|--------|--|------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | weather conditions; |
|--|--------|--|---------------------|

|  | · |  | technological advances affecting energy consumption; |
|--|--------|--|------------------------------------------------------|

|  | · |  | current and anticipated changes to domestic and foreign governmental regulations, such as regulation of oil and natural gas gathering and transportation, including those that may arise as a result of the upcoming U.S. Presidential election; |
|--|--------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · |  | the price and availability of competitors’ supplies of oil and natural gas; |
|--|--------|--|------------------------------------------------------------------------------------|

|  | · |  | basis differentials associated with market conditions, the quality and location of production and other factors; |
|--|--------|--|------------------------------------------------------------------------------------------------------------------|

|  | · |  | acts of terrorism; |
|--|--------|--|--------------------|

|  | · |  | the price and availability of alternative fuels; and |
|--|--------|--|------------------------------------------------------|

|  | · |  | acts of force majeure. |
|--|--------|--|------------------------|

These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements. Also, prices for crude oil and prices for natural gas do not necessarily move in tandem. Declines in oil or natural gas prices would not only reduce revenue, but could also reduce the amount of oil and natural gas that can be economically produced from the underlying properties, therefore potentially lowering the oil and gas reserve quantities attributable to the Trust’s interest in the NPI. If the oil and natural gas industry experiences extended periods of low prices, resulting in the NPI generating net losses or limited net proceeds (which was the case during the first quarter of 2019 and the second quarter of 2020), the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust’s administrative expenses.

Whiting entered into hedge contracts, which were structured as costless collar arrangements and were conveyed to the Trust to reduce the exposure to volatility in the underlying properties’ oil and gas revenues due to fluctuations in crude oil and natural gas prices, and to achieve more predictable cash flows. However, all such costless collar hedge contracts terminated as of December 31, 2014 and no additional hedges are allowed to be placed on the Trust assets. As a result, the amounts of the cash distributions may fluctuate significantly as a result of changes in commodity prices because there are no hedge contracts in place to reduce the Trust’s exposure to oil and natural gas volatility. 

Oil prices declined sharply during the first quarter of 2020, dropping below $21.00 per Bbl in March 2020 and further dropping to below negative $37.00 per Bbl in April 2020. This dramatic decline in pricing is primarily attributable to Saudi Arabia’s announcement of plans to abandon previously agreed upon output restraints and the economic effects of the COVID-19 pandemic on the demand for oil and natural gas. Substantial and extended declines in oil, natural gas and natural gas liquids prices have resulted and may continue to 

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result in reduced 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, and may ultimately reduce the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties. As a result, the operator of any of the underlying properties could determine during periods of low commodity prices to shut in or curtail production from the underlying properties. In addition, the operator of these properties could determine during periods of low commodity prices to plug and abandon marginal wells that otherwise may have been allowed to continue to produce for a longer period under conditions of higher prices. Because these properties are mature, decreases in commodity prices could have a more significant effect on the economic viability of these properties as compared to more recently discovered properties. The commodity price sensitivity of these mature wells is due to a culmination of factors that vary from well to well, including the additional costs associated with water handling and disposal, chemicals, surface equipment maintenance, downhole casing repairs and reservoir pressure maintenance activities that are necessary to maintain production. As a result, the volatility of commodity prices may cause the amount of future cash distributions to Trust unitholders to fluctuate, and a substantial decline in the price, or sustained periods of low prices, of oil, natural gas or natural gas liquids, will likely materially reduce, or completely eliminate, the amount of cash available for distribution to Trust unitholders. 

If the financial position of Whiting degrades in the future, Whiting may not be able to satisfy its obligations to the Trust.

At December 31, 2019, Whiting operated approximately 66% of the underlying properties based on the standardized measure of discounted future net cash flows. The conveyance provides that Whiting will be obligated to market, or cause to be marketed, the production related to the underlying properties for which it operates.

On April 1, 2020, Whiting and certain of its direct and indirect subsidiaries, including Whiting Oil and Gas (collectively, the “Debtors”) commenced voluntary cases under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors expect to continue to operate the business as “debtors-in-possession” in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. Whiting’s ability to perform its obligations related to the operation of the underlying properties and its obligations to the Trust will depend on Whiting’s future financial condition and economic performance, which in turn will depend upon the supply and demand for oil and natural gas, prevailing economic conditions and financial, business and other factors, many of which are beyond the control of Whiting. Whiting cannot provide any assurance that its financial condition and economic performance will not deteriorate in the future. A substantial or extended decline in oil or natural gas prices may materially and adversely affect Whiting’s future business, financial condition, results of operations, liquidity, ability to emerge from chapter 11 bankruptcy or ability to finance planned capital expenditures. If the reduced demand for crude oil in the global market as a result of the economic effects of the outbreak of the COVID-19 pandemic, and the reduction in the benchmark price of crude oil due in part to the announcement in March 2020 of Saudi Arabia’s abandonment of output restraints, persists for the near future or longer, or if the outbreak adversely affects employees of Whiting and such employees’ ability to conduct Whiting’s operations, such factors could have a negative impact on the financial condition and economic performance of Whiting. 

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 under negative $37.00 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.

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Item 6.  Exhibits

The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10‐Q. 

EXHIBIT INDEX

|  

  |               |  

                                                                                                                                                                                                                                                                                                                                                                                      |
|----------------|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ExhibitNumber  |     | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                                |
|  3.1*     |               | Certificate of Trust of Whiting USA Trust II [Incorporated herein by reference to Exhibit 3.3 to the Registration Statement on Form S‐1 (Registration No. 333‐178586)].                                                                                                                                                                                                                |
|  3.2*     |               | Amended and Restated Trust Agreement, dated March 28, 2012, by and among Whiting Oil and Gas Corporation, The Bank of New York Mellon Trust Company, N.A. as Trustee and Wilmington Trust, National Association, as Delaware Trustee. [Incorporated herein by reference to Exhibit 3.1 to the Trust’s Current Report on Form 8‐K filed on March 28, 2012 (File No. 001‐35459)]. |
| 10.1*     |               | Conveyance and Assignment, dated March 28, 2012, from Whiting Oil and Gas Corporation to The Bank of New York Mellon Trust Company, N.A. as Trustee of Whiting USA Trust II [Incorporated herein by reference to Exhibit 10.1 to the Trust’s Current Report on Form 8‐K filed on March 28, 2012 (File No. 001‐35459)].                                                          |
| 10.2*     |               | Administrative Services Agreement, dated March 28, 2012, by and between Whiting Oil and Gas Corporation and Whiting USA Trust II [Incorporated herein by reference to Exhibit 10.2 to the Trust’s Current Report on Form 8‐K filed on March 28, 2012 (File No. 001‐35459)].                                                                                                     |
| 31        |               | Certification pursuant to Section 302 of the Sarbanes‐Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                     |
| 32        |               | Certification pursuant to Section 906 of the Sarbanes‐Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                     |

__________

(* Asterisk indicates exhibit previously filed with the SEC and incorporated herein by reference.)

 

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SIGNATURES

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

|   |   |                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------|
|   |   | Whiting USA Trust II                                                      |
|   |   |                                                                                     |
|   | By:    | The Bank of New York Mellon Trust Company, N.A., |
|   |   | as Trustee                                                                          |
|   |   |                                                                                     |
|   | By:    | /s/ Mike Ulrich                                                                     |
|   |   | Mike Ulrich                                                                              |
|   |   | Vice President                                                                      |
|   |   |                                                                                     |

 

May 8, 2020

The registrant, Whiting USA Trust II, 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 such function exists pursuant to the terms of the Trust agreement under which it serves.

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