SandRidge Permian Trust Provides Update Regarding Quarterly Distribution - Seite 2

Avalon has informed the Trustee that Avalon is using its commercially reasonable efforts to preserve the oil and gas leases burdened by the Overriding Royalty Interests so that in the future, assuming that oil prices return to a profitable level, the Trust will still hold its Overriding Royalty Interests, and Trust unitholders may have the opportunity to receive future quarterly distributions. Avalon also has informed the Trustee that Avalon believes that continuing production from those Wells required to preserve such leases is preferable to stopping production, as the failure to continue production would result in a termination of Avalon’s working interest in such Wells and, therefore, the Overriding Royalty Interests, which would have a material adverse effect on the Trust’s financial condition. Avalon has reported to the Trustee that Avalon therefore used revenues it received during the production period from December 1, 2019 to February 29, 2020 to pay the operating expenses necessary to maintain production from the Wells and to pay oil and gas lessor royalties, as the proceeds attributable to Avalon’s net revenue interest in the Underlying Properties was insufficient to cover all such costs. Avalon had anticipated that revenues from current period production would be sufficient to fund the quarterly payment to the Trust; however, revenues from current period production have been insufficient to generate the cash needed to make the quarterly payment to the Trust for the quarter ended March 31, 2020 due to the sharp drop in crude oil prices during the first quarter of 2020. Avalon has informed the Trustee that due to its decision to prioritize the preservation of oil and gas leases burdened by the Overriding Royalty Interest, coupled with the sharp decline in oil and gas prices since the beginning of 2020 as discussed below, Avalon believes it will be unable to generate sufficient cash for quarterly payments to the Trust for the foreseeable future.

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

Avalon has informed the Trustee that during 2019, Avalon repaired 29 producing wells burdened by the Overriding Royalty Interests to increase production. Avalon has reported that this effort, combined with higher-than-expected lease operating expenses (“LOE”) and declining oil prices, contributed to an operating loss for Avalon in 2019 despite Avalon’s efforts to reduce LOE (including shutting in some non-economic wells, alternating production to reduce electrical and other field operating costs, and staff lay-offs). Avalon has informed the Trustee that Avalon is likely to shut in additional Wells that are not capable of producing oil and natural gas in paying quantities, as permitted under the Conveyances. As a result of this operating loss for Avalon in 2019, Avalon’s independent public accounting firm is expected to include a going-concern qualification in its audit report on Avalon’s financial statements for the fiscal year ended December 31, 2019.