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I was long HGT since 2006 and in recent weeks was stopped out. I'm not a lawyer.
I concur that there may be grounds for a lawsuit although not for the reasons you state.
After studying the Frankhouser class action documents, it looks like the royalty holders claim that that XTO, through its subsidiaries and affiliates, has unjustly enriched themselves and breached their fiduciary duties to the royalty owners by not disclosing the full market sales value they’ve received over many years. XTO has agreed to settle for $36MM. HGT unit holders have a net profits interest in the properties. Although the unit holders are not in the same position as the pure royalty interests, perhaps there may be a similar case that XTO and its subsidiaries have hidden downstream net profits from the production of the wells that has not been disclosed and distributed to HGT unit holders?
Separately, did the unjust enrichment that XTO’s subsidiaries took, and for which XTO is now ready to settle, actually enrich the HGT unit holders that will be called on to pay 80% of the settlement?
The situation is very complex and I’m being very brief.
Are there investors on this board who is has been long HGT and are living in the area of the wells?
Page 2 of the 10-K says that in determining net proceeds XTO deducts from cash received: property and production taxes, production expense, development costs and overhead. The last three items probably leave room for some discretion and that, generally, is not a good thing if the person exercising the discretion is conflicted. Further, most gas produced is purchased by an XTO sub based on weighted average sales prices and then sold to third parties for the best available price. Not sure why the actual (best available) prices aren't part of the equation of net proceeds flowing to the trust beneficiaries.
I share your concerns that the net proceeds calculation may not, in practice, be in the best interest of unit holders.
The prospectus basically says XTO owes unit holders a fiduciary duty to act in our best interest in managing our net profits interest in the production of the properties. It allows that it XTO may have contracts for that production with its own subsidiaries and affiliates. However I read on page on page 14 that it should not retain more than 2% of the proceeds from sale of production by affiliates.
I take this from the $36 lawsuit documents
“The undisputed facts establish that XTO operates and produces raw or
unprocessed natural gas from all of the class wells. XTO sells the gas from the
class wells to its wholly owned subsidiary, Timberland Gathering and Processing
Co., Inc. (“Timberland”), at or near the wellhead. All of the raw gas from the class
wells is gathered, commingled, and compressed by Timberland into its gathering
system and transported through the Timberland gathering system to the inlet of the Tyrone gas processing plant, which is also operated by Timberland. Exhibit 7 to
Plaintiffs’ Motion at 24-26, 28. …….. At the plant, Timberland processes the gas to
extract natural gas liquids (“NGLs”).1 All of the gas entering the Tyrone plant from
whatever source is processed by Timberland in the same manner, without regard to
the source well, even though some wells produce gas with higher entrained NGLs
than other wells. Exhibit 7 to Plaintiffs’ Motion at 28-29. At the tailpipe of the Tyrone
plant, Timberland sells the residue gas2 to Cross Timbers Energy Services, Inc.
(“CTES”), another wholly-owned subsidiary of XTO. Exhibit 6 to Plaintiffs’ Motion at
26; Exhibit 16 to Plaintiffs’ Motion at 11. CTES – without transporting or performing
any other processing3 – then sells the residue gas to an unaffiliated company, DCP “ (Duke)
Although Timberland (the XTO sub) extracts and sells NGLs from the gas stream, it does not pay XTO any additional amount based on the end value of the NGLs. Thus, the price received by XTO, and upon which it bases its royalty calculations, is 80 or 85 percent of the price paid by Duke to CTES for the residue gas (pressurized pipeline ready gas).
If that sounds familiar it is because that 80 or 85 % price (depending on Chase formation or below) of the Duke price seems to be what is also used as the starting point for our unit holders’ Net Profits calculation. If XTO is unfairly taking profits it affects us too.
Is that discount fair? Seems in OK and KN it has been settled that it is not for the land royalty holders. Perhaps it isn’t in keeping with the unit holders’ prospectus too – is there more than 2% in profits being siphoned off in the 15-20% to affiliates (Timberline or CTES)?
Regardless, in the financial statements I see absolutely no mention of NGL sales at Timberline benefiting the trust unit holders. This is a very big number. Do your DD on NGL, these revenues are really big in recent years with NG at such low prices, sometimes it is the only revenue keeping a well operating.
Long since 10 million worth of shares picked up by Simpson ( ?2009) & relied on guidance in annual reports( under litigation) stating that they were optimistic, but even an adverse ruling would not affect distributions. I relied on that. I do not know weather Simpson sold his shares prior to the settlement or still has them but that would be of interest. Please inform us of any known filings
I am Long since 10 million worth of shares picked up by Simpson ( ?2009) & relied on guidance in annual reports( under litigation) stating that they were optimistic, but even an adverse ruling would not affect distributions. I relied on that. I do not know weather Simpson sold his shares prior to the settlement or still has them but that would be of interest. Please inform us of any known filings
I think you may be off by a factor of 10 on the number of HGT units Bob Simpson, Founder and Chairman of Board of XTO, owned in 2009 - he owned 1 million. It's hard to tell what happens in the last three years and after XTO is bought up by XOM. No SEC Form4 record of sale on EDGAR, but he is not listed as a major holder either on your Yahoo menu. As to whether Bob Simpson would have XTO or his HGT interests as a priority, keep in mind Bob Simpson may have had a preference for keeping profits at XTO, the company he founded and was negotiating to sell for the highest possible price (think it was $31 billion?) in 2009-2010, rather than passing that cash flow through to land royalty owners and HGT unit holders.
Yes, the 2011 Annual report implies a strong case you shouldn't worry about but you may have missed a later paragraph on page 36 ending with:
“XTO Energy has informed the trustee that, although the amount of any reduction in net proceeds is not presently
determinable, in its management’s opinion, the amount is not currently expected to be material to the trust’s financial
position or liquidity though it could be material to the trust’s annual distributable income. Additionally, it could result
in costs exceeding revenues on the properties underlying the Oklahoma and Kansas net profit interests for one or more
monthly distributions, depending on the size of the judgment or settlement, if any, and the net proceeds being paid at
That doesn't sound too "optimistic" for future distributions, more like buried CYA by auditors and XTO against impending settlements.