Item 1A. Risk Factors
This Form 10-K contains “forward-looking statements.” Please refer to the section above entitled “Forward-Looking Statements” for more information.
Risks Related to Operations
Production risks can adversely affect distributions from the Royalty Trust.
The occurrence of drilling, production or transportation accidents at any of the subject interests could reduce or eliminate Royalty Trust distributions, if any. Although the Royalty Trust, as the owner of the overriding royalty interests, should not be responsible for the costs associated with any such accidents, any such accidents may result in the loss of a productive well and associated reserves or interruption of production. The Royalty Trust does not maintain any type of insurance against any of the risks of conducting oil and gas exploration and production or related activities.
On January 19, 2023, the sole well producing from the onshore Highlander subject interest experienced an operational issue, resulting in substantial amounts of water entering the well, which caused a shut in of the well before production resumed at significantly reduced levels. Following an evaluation by HOGA’s field operations team, HOGA determined that it would be necessary to commence operations to control the water production, in expectation of eventually initiating “kill” operations on the well. HOGA informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased. After that time the well flowed intermittently but not on a continuous basis. In October 2023, HOGA informed the Trustee that due to the underground flow of fluids into the wellbore, the well could not be salvaged and would be required to be plugged and abandoned. HOGA subsequently informed the Trustee that operations to permanently plug and abandon the well commenced in early March 2024.
The onshore Highlander subject interest is the only subject interest that has established commercial production. Abandoning the well eliminated any production from the onshore Highlander subject interest, which also eliminated any proceeds to which the Royalty Trust would be entitled pursuant to its overriding royalty interests. Unless another well is drilled on the onshore Highlander subject interest and produces hydrocarbons in commercial quantities, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods. HOGA previously informed the Trustee that a new well on the onshore Highlander subject interest was spudded on January 30, 2025 and recently reported that the well had reached total depth of 30,862 feet on February 17, 2026; however, the future production status of this well remains unknown. Neither the Trustee nor the Royalty Trust unitholders has any right to control or influence operations of the subject interest.
The value of the Royalty Trust units is uncertain.
The Royalty Trust’s only assets and sources of income are the overriding royalty interests burdening the onshore Highlander subject interest. The onshore Highlander subject interest is the only subject interest in which HOGA has an interest, as McMoRan previously had relinquished, allowed to expire or sold all of the other subject interests. The overriding royalty interests entitle the Royalty Trust to receive a portion of the proceeds derived from the sale of hydrocarbons associated with the subject interests, if any.
The Royalty Trust has no ability to direct or influence the exploration or development of the subject interests. In addition, HOGA is not under any obligation to fund or to commit any resources to the exploration or development of the subject interests.
To the extent that HOGA does not fund the exploration and development of the onshore Highlander subject interest, or if for any other reason sufficient production from the onshore Highlander subject interest is not achieved and maintained in commercial quantities, Royalty Trust unitholders will not realize any additional value from their investment in the Royalty Trust units.
Future Royalty Trust distributions are uncertain because the Royalty Trust does not control the operations of the subject interests and any royalties received must exceed administrative expenses, any indebtedness and a minimum cash requirement.
The Royalty Trust has no control over the operations of the subject interests, which are necessary to generate any royalties to be distributed to the Royalty Trust unitholders. In addition, any royalties received by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce Royalty Trust indebtedness. Lastly, the Trustee has established a minimum cash reserve of $302,500 as of December 31, 2025. As a result, distributions will be made to Royalty Trust unitholders only when royalties received less administrative expenses incurred and repayment of all indebtedness exceeds the minimum cash reserve.
Although distributions were paid to Royalty Trust unitholders in 2021, 2022 and the first quarter of 2023, distributions may not necessarily be made in the future. As a result of the abandonment of the sole well producing on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods, unless another well is drilled on the onshore Highlander subject interest and produces hydrocarbons in commercial quantities. HOGA previously informed the Trustee that a new well on the onshore Highlander subject interest was spudded on January 30, 2025 and recently reported that the well had reached total depth of 30,862 feet on February 17, 2025; however, the future production status of this well remains unknown. The Royalty Trust’s only other sources of liquidity are mandatory annual contributions, any loans and the required standby reserve account or letter of credit from HOGA. As a result, any material adverse change in HOGA’s financial condition or results of operations could materially and adversely affect the Royalty Trust and the Royalty Trust units.
Natural gas prices fluctuate due to a number of factors that are beyond the control of the Royalty Trust and HOGA, and lower prices could reduce proceeds to the Royalty Trust and cash distributions to Royalty Trust unitholders.
The Royalty Trust’s quarterly distributions are highly dependent on the prices realized from the sale of natural gas, and a material decrease in such prices could reduce the amount of cash distributions paid to Royalty Trust unitholders. Natural gas prices fluctuate widely in response to relatively minor changes in supply, market uncertainty and a variety of additional factors that are beyond the control of HOGA and the Royalty Trust. These factors include, among others:
regional, domestic and foreign supply of, and demand for, natural gas, as well as perceptions of supply of, and demand for, natural gas;
U.S. and worldwide political and economic conditions;
tax, trade and tariff policies of the United States and other countries involved in global energy markets;
the wars in Ukraine and the Persian Gulf and the potential destabilizing effects such conflicts may pose for the global natural gas markets;
the occurrence or threat of epidemic or pandemic diseases or other public health event, or any government response to such occurrence or threat;
weather conditions and seasonal trends;
anticipated future prices of natural gas, alternative fuels and other commodities;
technological advances affecting energy consumption and energy supply;
the proximity, capacity, cost and availability of pipeline infrastructure, treating, transportation and refining capacity;
natural disasters and other acts of force majeure;
domestic and foreign governmental regulations and taxation;
energy conservation and environmental measures; and
the development, exploitation and market acceptance of alternative energy sources as part of a transition to a lower-carbon economy.
These factors and the volatility of the energy markets make it extremely difficult to predict future natural gas price movements with any certainty. During 2025, the New York Mercantile Exchange (NYMEX) natural gas price fluctuated from a low of $2.65 per MMBtu to a high of $9.86 per MMBtu. On March 2, 2026, the NYMEX natural gas price was $2.99 per MMBtu. Royalties that the Royalty Trust receives from its share of production will be reduced as a result of lower natural gas prices. As a result, future distributions from the Royalty Trust to its unitholders could be reduced or discontinued. In addition, lower oil and natural gas prices reduce the likelihood that the onshore Highlander subject interest will be developed or that any oil or natural gas discovered will be economic to produce. The volatility of energy prices reduces the accuracy of estimates of future cash distributions to the Royalty Trust unitholders and could affect the value of the Royalty Trust units.
The onshore Highlander subject interest targets Inboard Lower Tertiary/Cretaceous formations onshore in South Louisiana, which has greater risks and costs associated with its exploration and development than conventional prospects.
To date, only the onshore Highlander subject interest has achieved commercial production of hydrocarbons from Inboard Lower Tertiary/Cretaceous reservoirs in these areas. Moreover, the onshore Highlander subject interest is the only subject interest in which HOGA has an interest, as McMoRan previously has relinquished, allowed to expire or sold all of the other subject interests. The lack of comparative data and the limitations of diagnostic tools operating in the extreme temperatures and pressures encountered at these depths make it difficult to predict reservoir quality and well performance of these formations. It is also significantly more expensive and risky to drill and complete wells in these formations than at more conventional depths. Major contributors to such increased costs and risks include far higher temperatures and pressures encountered down hole, longer drilling times and the cost and extended procurement time related to the specialized equipment required to drill and complete these types of wells.
The Royalty Trust is vulnerable to risks associated with operations onshore in South Louisiana because the onshore Highlander subject interest is located in this area.
These risks include:
tropical storms and hurricanes, which are particularly common in South Louisiana during the summer and early fall of each year, and which can damage or completely destroy drilling, production and treatment facilities, which can result in the interruption or permanent cessation of production from associated wells;
flooding caused by heavy rain, which can result in the interruption or permanent cessation of production from associated wells;
extensive governmental regulation (including regulations that may, in certain circumstances, impose strict liability for pollution damage); and
interruption or termination of operations by governmental authorities based on environmental, safety or other considerations, including those relating to other operators and/or other geographical areas.
These exposures onshore in South Louisiana could have a material adverse effect on the onshore Highlander subject interest, on the Royalty Trust’s results of operations and financial condition, and on the market price of the Royalty Trust units.
Risks Related to Environmental Conditions
Climate change laws and regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the oil and natural gas that HOGA produces while the physical effects of climate change could disrupt their production and cause it to incur significant costs in preparing for or responding to those effects.
The threat of climate change continues to attract considerable attention globally. The Trump Administration’s efforts to roll back federal regulation of greenhouse gases (GHGs) represent a significant shift in federal climate policy, though the ultimate impact of those efforts on HOGA is unclear. In 2009, the EPA found that emissions of carbon dioxide, methane and other GHGs may present an endangerment to public health and the environment and subsequently issued regulations to restrict emissions of greenhouse gases under existing provisions of the CAA. These regulations include limits on tailpipe emissions from motor vehicles, preconstruction and operating permit requirements for certain large stationary sources, and methane emissions standards for certain new, modified and reconstructed oil and gas sources — as well as the EPA’s methane emissions guidelines for existing oil and gas sources that were adopted in 2024. The EPA also has adopted rules requiring the reporting of GHG emissions from specified large greenhouse gas emission sources in the United States, as well as certain onshore oil and natural gas production facilities, on an annual basis.
Shortly after President Trump took office in January 2025, the federal government embarked on a series of changes relating to climate policy and regulation. On January 20, 2025, President Trump announced the withdrawal of the United States from the Paris Climate Agreement. In July 2025, the EPA issued a proposed rule to rescind the 2009 GHG endangerment finding that provided a basis for GHG regulation under the CAA. In September 2025, the EPA proposed to rescind the GHG reporting program for sectors other than the oil and gas sector, while proposing to suspend GHG reporting requirements for the oil and gas sector until 2034. In February 2026, the EPA adopted a final rule repealing its prior endangerment finding, which opens the door for the EPA to repeal its GHG rules for the oil and gas sector.
The EPA has established methane standards for oil and gas sources under the CAA based on the now-repealed GHG endangerment finding. In 2024, the EPA adopted a final rule that will directly regulate volatile organic compound and methane emissions from new oil and gas sources and will require further emissions reductions through its regulation of flaring, compressors, pumps, storage vessels, process controllers, well completions and liquids unloading, and equipment leaks. At the same time, the EPA adopted emissions guidelines that will apply to existing oil and gas sources and that require reductions in volatile organic compound and methane emissions that are largely equivalent to the requirements for new sources. The existing source emissions guidelines are to be implemented through state plans, with expected compliance dates for existing sources arriving in 2029. In 2025, however, the EPA extended certain compliance deadlines for both new and existing sources, and the 2026 endangerment finding repeal provides a basis for undoing the oil and gas methane standards, though the fact that the oil and gas standards address both methane and volatile organic compounds, which are regulated independently of EPA’s authority to regulate GHGs, may limit the impact of future changes to the methane standards that currently apply to oil and gas sources.
The Inflation Reduction Act of 2022 (the IRA) included new CAA section 136(c) directing the EPA to collect the Waste Emissions Charge (WEC) from facilities in the oil and gas sector that report more than 25,000 tons of carbon dioxide equivalent emissions in a calendar year. The charge will first apply to methane emissions from calendar year 2024. The charge is determined by comparing actual reported methane emissions to statutorily established “methane intensity figures” that are based on gas production or throughput, with a charge assessed for every ton of methane emissions that exceeds the facility’s allowable emissions based on the applicable methane intensity figure. The charge will be $900 per ton for 2024 emissions and will increase to $1,200 and then $1,500 per ton in subsequent years. The program includes key exemptions, most notably a regulatory compliance exemption that applies to and exempts the emissions from facilities that are subject to and in complete compliance with the EPA’s new or existing source methane requirements. The EPA adopted new rules to implement the WEC program in November 2024. The EPA adopted new rules to implement the WEC program in November 2024. The fate of the WEC and the EPA rules implementing the WEC is unclear. In March 2025, President Trump signed legislation repealing the EPA’s 2024 WEC rules under the Congressional Review Act. The repeal of the EPA’s WEC rules did not eliminate the statutory requirement to pay the WEC, but it eliminated the rules established by the EPA to determine the WEC due, the payment mechanism, and any payment deadlines. The U.S. Congress may be considering amendment or repeal of certain portions of the IRA, including the statutory provisions establishing the WEC.
Meanwhile, more than one-third of the states have begun taking actions to control and/or reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Although most of the state-level initiatives have to date focused on large sources of GHG emissions, such as coal-fired electric plants, it is possible that smaller sources of emissions could become subject to GHG emission limitations or allowance purchase requirements in the future. In addition, Congress may consider adopting legislation to reduce emissions of greenhouse gases. Any one of these climate change regulatory and legislative initiatives could have a material adverse effect on HOGA’s business, capital expenditures, financial condition and results of operations.
The adoption and implementation of regulations imposing reporting obligations on, or limiting emissions of GHGs from, HOGA’s equipment and operations could require HOGA to incur costs to reduce emissions of GHGs associated with its operations or could adversely affect demand for the natural gas it produces. Legislation or regulations that may be adopted to address climate change could also affect the markets for HOGA’s products by making its products more or less desirable than competing sources of energy. To the extent that its products are competing with higher GHG-emitting energy sources, HOGA’s products may become more desirable in the market with more stringent limitations on GHG emissions. To the extent that its products are competing with lower GHG-emitting energy, HOGA’s products may become less desirable in the market with more stringent limitations on greenhouse gas emissions. HOGA cannot predict with any certainty at this time how these possibilities may affect its operations.
In addition, future regulatory initiatives in the U.S. related to climate change disclosure or reporting could adversely affect the Royalty Trust. On March 6, 2024, the SEC issued a final rule regarding the enhancement and standardization of mandatory climate-related disclosures for investors. The final rule mandates extensive disclosure of climate-related data, risks, and opportunities, including financial impacts, physical and transition risks, related governance and strategy and greenhouse gas emissions, for certain public companies. The SEC’s climate disclosure rule was challenged in court, and in March 2025 the SEC announced that it had voted to end its defense of the 2024 rule. The outcome of that litigation or separate rule changes made by the SEC may result in changes to climate-related disclosure requirements. Even in the absence of federal requirements, however, some states have adopted climate disclosure laws or rules that are not affected by the SEC’s review. Compliance with the federal or state disclosure rules may result in increased legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place on the personnel, systems and resources of HOGA or the Royalty Trust or both.
Finally, some scientists have theorized that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events. If any such significant physical effects were to occur, they could have an adverse effect on HOGA’s assets and operations and cause HOGA to incur costs in preparing for and responding to them. Additionally, energy needs could increase or decrease as a result of extreme weather conditions, depending on the duration and magnitude of those conditions.
Risks Related to Ownership of the Royalty Trust Units
There is a limited public market for the Royalty Trust units, which could affect the market price, trading volume, liquidity and resale price of the Royalty Trust units.
The Royalty Trust units are quoted on the OTCID Basic Market (OTCID), operated by OTC Markets Group, Inc. The OTCID is a significantly more limited market than the national securities exchanges, which could adversely affect the market price, trading volume, liquidity and resale price of the Royalty Trust units.
Meanwhile, an active market in the Royalty Trust units may not continue at present levels or increase in the future. In addition, securities that trade on the OTCID may experience more volatility compared to securities that trade on a national securities exchange. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volumes, and market conditions.
Because there is a limited public market for the Royalty Trust units, the market price and trading volume of the Royalty Trust units may be volatile.
The Royalty Trust unitholders may experience fluctuations in the market price and volume of the trading market for the Royalty Trust units for many reasons, including, without limitation:
as a result of other risk factors discussed in this Form 10-K;
the failure of the onshore Highlander subject interest to produce hydrocarbons;
decisions by HOGA to delay or not to pursue the exploration or development of the onshore Highlander subject interest;
reasons unrelated to operational performance, such as reports by industry analysts, investor perceptions, or announcements by competitors regarding their own performance;
legal or regulatory changes that could impact the business of HOGA; and
general economic, securities markets and industry conditions.
Fluctuations in the volume of the trading market may have a negative effect on the market price for the Royalty Trust units. Accordingly, Royalty Trust unitholders may not be able to realize a fair price when they determine to sell their Royalty Trust units or may have to hold them for a substantial period of time until the market for the Royalty Trust units improves, if it does at all. HOGA has a call right with respect to the outstanding Royalty Trust units at $10 per Royalty Trust unit. This call right could impose a ceiling on the price of the Royalty Trust units. In addition, if the Royalty Trust units are then listed for trading or admitted for quotation on a national securities exchange or any quotation system and the volume-weighted average price per Royalty Trust unit is equal to $0.25 or less for the immediately preceding consecutive nine-month period, HOGA may purchase all, but not less than all, of the outstanding Royalty Trust units at a price of $0.25 per Royalty Trust unit so long as HOGA tenders payment within 30 days following the end of such nine-month period. See Part I, Items 1. and 2. “Business and Properties – The Royalty Trust – The Royalty Trust Agreement – HOGA Call Rights” of this Form 10-K. In addition, Royalty Trust unitholders may incur brokerage charges in connection with the resale of the Royalty Trust units, which in some cases could exceed the proceeds realized by a holder from the resale of its Royalty Trust units.
“Penny Stock” rules may make buying or selling the Royalty Trust units difficult.
Trading in the Royalty Trust units is subject to material limitations as a consequence of regulations that limit the activities of broker-dealers effecting transactions in “penny stocks.” Pursuant to Rule 3a51-1 under the Exchange Act, the Royalty Trust units are a “penny stock” because (i) they are not listed on any national securities exchange, (ii) they have a market price of less than $5.00 per unit, and (iii) their issuer (the Trust) has net tangible assets less than $2,000,000 (if the issuer has been in business for at least three years) or $5,000,000 (if the issuer has been in business for less than three years). Rule 15g-9 promulgated under the Exchange Act imposes limitations upon trading activities on “penny stocks,” which makes selling the Royalty Trust units more difficult compared to selling securities that are not “penny stocks.” Rule 15a-9 restricts the solicitation of sales of “penny stocks” by broker-dealers unless the broker first (i) obtains from the purchaser information concerning his or her financial situation, investment experience, and investment objectives, (ii) reasonably determines that the purchaser has sufficient knowledge and experience in financial matters that the person is capable of evaluating the risks of investing in “penny stocks,” and (iii) delivers and receives back from the purchaser a manually signed written statement acknowledging the purchaser’s investment experience and financial sophistication.
Rules 15g-2 through 15g-6 promulgated under the Exchange Act require broker-dealers who engage in transactions in “penny stocks” first to provide their customers with a series of disclosures and documents, including (i) a standardized risk disclosure document identifying the risks inherent in investing in “penny stocks,” (ii) all compensation received by the broker-dealer in connection with the transaction, (iii) current quotation prices and other relevant market data, and (iv) monthly account statements reflecting the fair market value of the securities.
Any broker-dealer that initiates quotations for the Royalty Trust units might not continue to do so, and the loss of any such broker-dealer likely would have a material adverse effect on the market price of the Royalty Trust units.
FINRA sales practice requirements may also limit a Royalty Trust unitholder’s ability to buy and sell royalty trust units.
In addition to the “penny stock” rules described below, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy royalty trust units, which may limit Royalty Trust unitholders’ ability to buy and sell Royalty Trust units and have an adverse effect on the market for Royalty Trust units.
Because the Royalty Trust units are deemed a low-priced “penny stock,” it will be cumbersome for brokers and dealers to trade in the Royalty Trust units, making the market for the Royalty Trust units less liquid and negatively affecting the price of the Royalty Trust units. The Royalty Trust will be subject to certain provisions of the Exchange Act, commonly referred to as the “penny stock” rules as defined in Rule 3a51-1. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Since the Royalty Trust units are deemed to be a penny stock, trading is subject to additional sales practice requirements of broker-dealers. These require a broker-dealer to:
Deliver to the customer, and obtain a written receipt for, a disclosure document;
Disclose certain price information about the stock;
Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
Send monthly statements to customers with market and price information about the penny stock; and
In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with the information specified in the rules.
Consequently, penny stock rules and FINRA rules may restrict the ability or willingness of broker-dealers to trade and/or maintain a market in the Royalty Trust units. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of the Royalty Trust units.
Risks Related to the Royalty Trust Structure
The Royalty Trust is dependent on HOGA for funding unless royalty income from production on the onshore Highlander subject interest is sufficient to cover the Royalty Trust’s administrative expenses.
Pursuant to the Royalty Trust Agreement, the Depositor has agreed to pay annual trust expenses up to a maximum amount of $350,000, with no right of repayment or interest due, to the extent the Royalty Trust lacks sufficient funds to pay administrative expenses. Pursuant to this provision, HOGA contributed $200,750 on April 4, 2025 and $149,250 on May 16, 2025, together representing the maximum contribution of $350,000 for the payment of trust expenses incurred during the year ended December 31, 2025. On February 1, 2024, FCX contributed the maximum of $350,000 for the payment of trust expenses incurred during the year ended December 31, 2024. In addition to such annual contributions, the Depositor has agreed to lend money, on an unsecured, interest-free basis, to the Royalty Trust to fund the Royalty Trust’s ordinary administrative expenses as set forth in the Royalty Trust Agreement. All funds the Trustee borrows to cover expenses or liabilities, whether from the Depositor or from any other source, must be repaid before the Royalty Trust unitholders will receive any distributions. HOGA loaned the Royalty Trust $216,489 during the year ended December 31, 2025. FCX loaned the Royalty Trust $200,000 during the year ended December 31, 2024. Pursuant to the Assignment, as of December 31, 2024, FCX assigned to HOGA the promissory note relating to the outstanding loan to the Royalty Trust. As of December 31, 2025, the outstanding note payable to HOGA was $416,489. To the extent annual trust expenses exceed $350,000, the Royalty Trust may be required to borrow funds from HOGA in the future.
Pursuant to the Royalty Trust Agreement, the Depositor also agreed to provide and maintain a $1.0 million stand-by reserve account or an equivalent letter of credit for the benefit of the Royalty Trust to enable the Trustee to draw on such reserve account or letter of credit to pay obligations of the Royalty Trust if its funds are inadequate to pay its obligations at any time. Currently, with the consent of the Trustee, HOGA may reduce the reserve account or substitute a letter of credit with a different face amount for the original letter of credit or any substitute letter of credit. In connection with this arrangement, FCX provided $1.0 million in the form of a reserve fund cash account to the Royalty Trust. As of December 31, 2025, the Royalty Trust had used $151,632 from the reserve account, and the Depositor had not requested a reduction of such reserve account. Effective December 31, 2024, pursuant to the Assignment, FCX assigned its right, title and interest in the stand-by reserve account to HOGA, and HOGA assumed the responsibility to maintain the stand-by reserve account from FCX.
HOGA is a substantially smaller entity than FCX and does not have the same financial resources as FCX. Additionally, if any material adverse change in HOGA’s financial condition or results of operations causes HOGA to be unable to fund the exploration and development of the onshore Highlander subject interest, or if for any other reason sufficient production from the onshore Highlander subject interest is not reestablished and maintained in commercial quantities, Royalty Trust unitholders will not realize any additional value from their investment in the Royalty Trust units.
HOGA’s interests and the interests of the Royalty Trust unitholders may not always be aligned.
HOGA’s interests and the interests of the Royalty Trust unitholders are not completely aligned. For example, in setting budgets for development and production expenditures for HOGA’s properties, including the onshore Highlander subject interest, HOGA may make decisions that could adversely affect future production from the onshore Highlander subject interest, including a decision not to drill another well on the onshore Highlander subject interest.
HOGA may at any time transfer all or part of the onshore Highlander subject interest and will not have control or influence over the activities related to the subject interests it does not operate.
On February 5, 2019, McMoRan completed the sale of all of its rights, title and interest in and to the onshore Highlander subject interest pursuant to a purchase and sale agreement with HOGA. The onshore Highlander subject interest was sold subject to the overriding royalty interest in future production held by the Royalty Trust. As a result of the Highlander Sale, HOGA has a 72 percent working interest and an approximate 48 percent net revenue interest in the onshore Highlander subject interest. The Royalty Trust continues to hold a 3.6 percent overriding royalty interest in the onshore Highlander subject interest. HOGA is the operator of the Highlander subject interest. The onshore Highlander subject interest is the only subject interest in which HOGA has an interest, as McMoRan previously had relinquished, allowed to expire or sold all of the other subject interests.
HOGA may at any time transfer all or part of the onshore Highlander subject interest. The Royalty Trust unitholders are not entitled to vote on any transfer, and the Royalty Trust will not receive any proceeds from the transfer of the subject interest. Following any such transfer, the onshore Highlander subject interest would continue to be subject to the overriding royalty interests, but the net proceeds from the transferred subject interests would be calculated separately and paid by the transferee. Unless HOGA and the transferee agree otherwise, the transferee would be responsible for all of HOGA’s obligations relating to the overriding royalty interests on the subject interest transferred, and HOGA would have no continuing obligation to the Royalty Trust for the subject interest. Any purchaser could have a weaker financial position and/or be less experienced in natural gas development and production than HOGA.
The Royalty Trust is limited in duration, may be dissolved upon certain events and the Royalty Trust units are subject to call features.
The Royalty Trust will dissolve on the earliest to occur of (i) June 3, 2033, (ii) the sale of all of the overriding royalty interests, (iii) the election of the Trustee following its resignation for cause (as more fully described in the Royalty Trust Agreement), (iv) a vote of the holders of 66⅔% or more of the outstanding Royalty Trust units held by persons other than FCX, any of its affiliates, or HOGA, at a duly called meeting of the Royalty Trust unitholders at which a quorum is present, or (v) the exercise by HOGA of the right to call all of the Royalty Trust units as described in the next paragraph. The overriding royalty interests terminate upon the termination of the Royalty Trust, other than in certain limited circumstances where the Royalty Trust has been permitted to transfer the overriding royalty interests to a third party pursuant to the terms of the Royalty Trust Agreement (in which case the overriding royalty interests may extend through June 3, 2033).
HOGA has a call right with respect to the outstanding Royalty Trust units at $10 per Royalty Trust unit. In addition, if the Royalty Trust units are then listed for trading or admitted for quotation on a national securities exchange or any quotation system and the volume-weighted average price per Royalty Trust unit is equal to $0.25 or less for the immediately preceding consecutive nine-month period, HOGA may purchase all, but not less than all, of the outstanding Royalty Trust units at a price of $0.25 per Royalty Trust unit so long as HOGA tenders payment within 30 days following the end of such nine-month period.
The Royalty Trust is passive in nature and neither the Royalty Trust nor the Royalty Trust unitholders have any ability to influence HOGA or to control the development or operation of the onshore Highlander subject interest.
The Royalty Trust units are a passive investment that entitle the Royalty Trust unitholders only to receive cash distributions, if any, from the overriding royalty interests. Royalty Trust unitholders have no voting rights with respect to HOGA and, therefore, have no managerial, contractual or other ability to influence HOGA’s activities or the development or operations of the onshore Highlander subject interest. Additionally, HOGA is not under any obligation to fund or to commit any resources to the exploration or development of the onshore Highlander subject interest.
HOGA or FCX may sell Royalty Trust units in the public or private markets, and any such sales may have a material adverse effect on the trading price of the Royalty Trust units.
At December 31, 2025, the Royalty Trust had 230,172,696 Royalty Trust units outstanding. In connection with the Highlander Sale on February 5, 2019, McMoRan assigned 31,143,150 Royalty Trust units to HOGA and retained 31,143,149 Royalty Trust units. HOGA and FCX each hold 13.5% of the outstanding Royalty Trust units. HOGA or FCX may sell Royalty Trust units in the public or private markets. Any such sales may have a material adverse effect on the trading price of the Royalty Trust units. A small number of other Royalty Trust unitholders also hold significant percentages of the outstanding Royalty Trust units, and sales by such holders also may have a material adverse effect on the trading price of the Royalty Trust units. See Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Royalty Trust Unitholder Matters” of this Form 10-K.
The Royalty Trust is managed by a Trustee who cannot be replaced except by a majority vote of the Royalty Trust unitholders, which may make it difficult for Royalty Trust unitholders to remove or replace the Trustee.
The affairs of the Royalty Trust are managed by the Trustee. The voting rights of Royalty Trust unitholders are more limited than those of stockholders of most public corporations. For example, there is no requirement for the Royalty Trust to hold annual meetings of Royalty Trust unitholders or for an annual or other periodic re-election of the Trustee. The Royalty Trust does not intend to hold annual meetings of Royalty Trust unitholders. The Royalty Trust Agreement provides that the Trustee may only be removed by the affirmative vote of holders of a majority of the Royalty Trust units outstanding. As a result, it would be difficult for public Royalty Trust unitholders to remove or replace the Trustee without the cooperation of FCX and HOGA so long as each holds a significant percentage of the total Royalty Trust units.
Financial information of the Royalty Trust is not prepared in accordance with GAAP.
The financial statements of the Royalty Trust are prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States, or GAAP. Although this basis of accounting is permitted for royalty trusts by the SEC, the financial statements of the Royalty Trust differ from GAAP financial statements because revenues are not accrued in the month of production and cash reserves may be established for specified contingencies and deducted which could not be accrued in GAAP financial statements.
The Royalty Trust is a smaller reporting company and benefits from certain reduced governance and disclosure requirements, including that the Royalty Trust’s independent registered public accounting firm is not required to, nor were they engaged to, attest to the effectiveness of the Royalty Trust’s internal control over financial reporting. The Royalty Trust cannot be certain if the omission of reduced disclosure requirements applicable to smaller reporting companies will make the Royalty Trust units less attractive to investors.
Currently, the Royalty Trust is a “smaller reporting company,” meaning that the outstanding Royalty Trust units held by nonaffiliates had a value of less than $250 million at the end of the Royalty Trust’s most recently completed second fiscal quarter. As a smaller reporting company, the Royalty Trust is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, meaning the Royalty Trust’s auditors are not required to attest to the effectiveness of the Trust’s internal control over financial reporting. As a result, investors and others may be less comfortable with the effectiveness of the Royalty Trust’s internal controls and the risk that material weaknesses or other deficiencies in internal controls go undetected may increase. In addition, as a smaller reporting company, the Royalty Trust takes advantage of its ability to provide certain other less comprehensive disclosures in its SEC filings, including, among other things, providing only two years of audited financial statements in annual reports. Consequently, it may be more challenging for investors to analyze the Royalty Trust’s results of operations and financial prospects, as the information the Royalty Trust provides to Royalty Trust unitholders may be different from what one might receive from other public companies in which one holds shares. As a smaller reporting company, the Royalty Trust is not required to provide this information.
Risks Related to Cybersecurity
Cybersecurity incidents or other failures in telecommunications or information technology systems could result in information theft, data corruption and significant disruption of the respective operations of the Trustee and HOGA as they relate to the Royalty Trust.
Each of the Trustee and HOGA depend heavily upon information technology systems and networks in connection with their respective business activities as they relate to the Royalty Trust. Despite any security measures implemented, events such as the loss or theft of back-up tapes or other data storage media could occur, and computer systems could be subject to physical and electronic break-ins, cyber-attacks and similar disruptions from unauthorized tampering, including threats that may come from external factors, such as governments, organized crime, hackers and third parties to whom certain functions are outsourced, or may originate internally from within the respective companies. This risk is exacerbated with the advancement of technologies like artificial intelligence, which malicious third parties are using to create new, sophisticated and more frequent attacks. Furthermore, geopolitical tensions or conflicts, such as the ongoing wars in Ukraine and the Persian Gulf, may further heighten the risk of cybersecurity attacks.
If a cybersecurity incident were to occur, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, the computer systems and networks of the respective companies, or otherwise cause interruptions or malfunctions in the operations of the Royalty Trust, which could result in litigation, increased costs and regulatory penalties. Despite any steps taken by the respective companies to prevent and detect such attacks, it is possible that a cyber incident will not be discovered for some time after it occurs, which could increase exposure to these consequences.
Risks Related to Taxes
The tax treatment of the Royalty Trust units is uncertain.
Although the tax treatment of overriding royalty interests in specified developed wells that have been drilled is well developed, the law is less developed in the area of overriding royalty interests on exploration prospects that are not classified as having proved, probable or possible reserves and have potential well locations that may be drilled in the future. As a result, there is uncertainty as to the proper tax treatment of the overriding royalty interests held by the Royalty Trust, and counsel is unable to express any opinion as to the proper tax treatment as either a mineral royalty interest or a production payment. Based on the state of facts on the date on which this Form 10-K was filed, the Royalty Trust continues to treat the Royalty Trust units as mineral royalty interests for U.S. federal income tax purposes. However, no ruling has been requested from the IRS regarding the proper treatment of the Royalty Trust units; therefore, the IRS may assert, or a court may sustain the IRS in asserting, that the Royalty Trust units should be treated as “production payments” that are debt instruments for U.S. federal income tax purposes subject to the Treasury Regulations applicable to contingent payment debt instruments.
Royalty Trust unitholders should consult their tax advisors as to the specific tax consequences of the ownership and disposition of the Royalty Trust units, including the applicability and effect of U.S. federal, state, local and foreign income and other tax laws in light of their particular circumstances.
The Royalty Trust has not requested a ruling from the IRS regarding the tax treatment of ownership of the Royalty Trust units. If the IRS were to determine (and be sustained in that determination) that the Royalty Trust is not a “grantor trust” for federal income tax purposes, or that the overriding royalty interests are not properly treated as mineral royalty interests for U.S. federal income tax purposes, the Royalty Trust unitholders may receive different and potentially less advantageous tax treatment.
If the Royalty Trust were not treated as a grantor trust for U.S. federal income tax purposes, the Royalty Trust should be treated as a partnership for such purposes. Although the Royalty Trust would not become subject to U.S. federal income taxation at the entity level as a result of treatment as a partnership, and items of income, gain, loss and deduction would flow through to the Royalty Trust unitholders, the Royalty Trust’s tax reporting requirements would be more complex and costlier to implement and maintain, and any distributions to Royalty Trust unitholders could be reduced as a result.
If the Royalty Trust were treated for U.S. federal income tax purposes as a partnership, it likely would be subject to the procedures for auditing large partnerships as well as the procedures for assessing and collecting income taxes due (including applicable penalties and interest) as a result of an audit. These rules effectively would impose an entity level tax on the Royalty Trust, and Royalty Trust unitholders may have to bear the expense of the adjustment even if they were not Royalty Trust unitholders during the audited taxable year.
If the overriding royalty interests were not treated as a mineral royalty interest, the amount, timing and character of income, gain, or loss in respect of an investment in the Royalty Trust could be affected.
The Royalty Trust has not requested a ruling from the IRS regarding these tax questions. The IRS could challenge these positions on audit, and such challenges could be sustained by a court.
The availability and extent of percentage depletion deductions to the Royalty Trust unitholders for any taxable year is uncertain.
Payments out of production that are received by a Royalty Trust unitholder in respect of a mineral royalty interest for U.S. federal income tax purposes are taxable under current law as ordinary income subject to an allowance for cost or percentage depletion in respect of such income. The rules with respect to this depletion allowance are complex and must be computed separately by each Royalty Trust unitholder and not by the Royalty Trust for each natural gas property. As a result, the availability or extent of percentage depletion deductions to the Royalty Trust unitholders for any taxable year is uncertain.
The Royalty Trust encourages Royalty Trust unitholders to consult their own tax advisors to determine whether and to what extent percentage depletion would be available to them for both U.S. federal income tax and state income tax purposes.
Royalty Trust unitholders will be required to pay taxes on their pro-rata share of the taxable income attributable to the assets of the Royalty Trust even if they do not receive any cash distributions from the Royalty Trust.
Because the holders of Royalty Trust units will be taxed directly on their pro-rata share of the taxable income attributable to the assets of the Royalty Trust and such taxable income could be different in amount than the cash the Royalty Trust distributes, Royalty Trust unitholders will be required to pay any U.S. federal income taxes and, in some cases, state and local income taxes on such taxable income even if they receive no cash distributions from the Royalty Trust. Royalty Trust unitholders may not receive cash distributions from the Royalty Trust equal to their pro-rata share of the taxable income attributable to the assets of the Royalty Trust or even equal to the actual tax liability that results from that income.
As a consequence of special reporting rules, Royalty Trust unitholders may not be able to recognize income/claim losses realized by the Royalty Trust until the unitholders dispose of Royalty Trust units.
If the Royalty Trust satisfies the general de minimis test prescribed by the IRS and elects to report using the de minimis test, the Royalty Trust will only be required to report, with respect to sales or dispositions of trust assets, the amount of sales proceeds distributed to a Royalty Trust unitholder during the year. Reporting under the de minimis exception will leave unitholders with inadequate information to be able to fully report the result of the sales and dispositions falling under the de minimis threshold in a given year. The reason for the de minimis exception is that the IRS and the Treasury Department believe that if a widely held fixed investment trust such as the Royalty Trust sells or disposes of assets infrequently, although there may be some deferral of gains and losses if sales and dispositions are not fully reported, the deferral is acceptable, in light of the burden of fully and accurately reporting the sales and dispositions.
