HOUSTON--(BUSINESS WIRE)--PACIFIC COAST OIL TRUST (OTC\u2013ROYTL) (the \u201cTrust\u201d), a royalty trust formed by Pacific Coast Energy Company LP (\u201cPCEC\u201d), announced today that there will be no cash distribution to the holders of its units of beneficial interest of record on May 27, 2026 based on the Trust\u2019s calculation of net profits generated during March 2026 (the \u201cCurrent Month\u201d) as provided in the conveyance of net profits interests and overriding royalty interest (the \u201cConveyance\u201d). As further described below under \u201cUpdate on Estimated Asset Retirement Obligations,\u201d based on information from PCEC, any monthly payments that PCEC may make to the Trust may not be sufficient to cover the Trust\u2019s administrative expenses and outstanding debt to PCEC, and therefore the likelihood of distributions to the unitholders in the foreseeable future is extremely remote. As further described below under \u201cStatus of the Dissolution of the Trust\u201d, because the annual cash proceeds received by the Trust from its net profits interests (the \u201cNet Profits Interests\u201d) and 7.5% overriding royalty interest (the \u201cRoyalty Interest\u201d) totaled less than $2.0 million for each of 2020 and 2021, the amended and restated trust agreement governing the Trust (the \u201cTrust Agreement\u201d) provides that the Trust is to be dissolved and wound-up. All financial and operational information in this press release has been provided to the Trustee by PCEC.<\/p>
\nOn May 20, 2026, Shipyard Capital, LP, Cedar Creek Partners, Walter Keenan, Cromwell Capital, LLC, Timothy Eriksen, Eriksen Family, LLC and Revi Ramesh Desai, derivatively on behalf of the Trust and, in the alternative, individually, filed a complaint against the Trustee alleging breach of contract, breach of fiduciary duty, gross negligence and willful misconduct, and negligent misrepresentation, in connection with PCEC\u2019s deduction of its asset retirement obligations discussed below under \u201cUpdate on Estimated Asset Retirement Obligations.\u201d Among other things, the plaintiffs also seek to enjoin the Trustee from dissolving the Trust or selling Trust assets pending resolution of the action. The Trustee has not yet been formally served with process in the lawsuit. The Trustee has not yet fully analyzed any rights it may have to indemnities that may be applicable or any claims it may make in connection with the litigation.<\/p>
\nOn October 23, 2024, a terminated employee of PCEC filed a complaint, styled Brendan Potyondy v. Pacific Coast Energy Company, LP, in the U.S. District Court for the Central District of California alleging that PCEC retaliated against him for engaging in protected whistleblowing activities in violation of federal and state laws. The plaintiff alleges that he filed certain reports with several federal and state agencies alleging violations of law by PCEC. Among the agencies plaintiff has contacted or alleges to have contacted are the U.S. Securities and Exchange Commission (\u201cSEC\u201d), the U.S. Department of Labor\u2019s Occupational Safety and Health Administration (\u201cOSHA\u201d) the California Occupational Safety and Health Administration, the California Geologic Management Division, and the California Department of Fish and Wildlife. In his complaint to the SEC, the plaintiff alleges, among other things, that PCEC had purposefully provided false data to the Trustee and to the Trust\u2019s independent registered public accounting firm regarding PCEC\u2019s operations, including the calculation of its asset retirement obligations. On November 22, 2024, Mr. Potyondy filed an amended complaint, which removed all claims alleging violation of state law and all allegations of alleged reports to state agencies. On January 28, 2025, the Court granted PCEC\u2019s motion to dismiss Mr. Potyondy\u2019s remaining claim, but granted him until February 11, 2025 to file an amended complaint to attempt to fix the defects the Court identified in Mr. Potyondy\u2019s complaint. On February 6, 2025, Mr. Potyondy filed his second amended complaint. PCEC moved to dismiss the amended complaint on February 18, 2025. The Court heard the motion on March 21, 2025, and on April 11, 2025, denied PCEC\u2019s motion to dismiss in its entirety; therefore, Mr. Potyondy\u2019s federal suit against PCEC will proceed. PCEC has indicated to the Trustee that it maintains the plaintiff\u2019s allegations are without merit and that PCEC will defend against these allegations. On May 23, 2025, OSHA notified Mr. Potyondy that the agency was closing Mr. Potyondy\u2019s administrative complaint because there was insufficient evidence that PCEC was aware that Mr. Potyondy had filed complaints with outside agencies or were notified of such complaints. Mr. Potyondy appealed the dismissal of his administrative complaint, and a hearing on his appeal had been set for April 2, 2026. Mr. Potyondy withdrew his administrative appeal prior to the April 2, 2026 hearing. On April 17, 2026, the Court heard PCEC\u2019s motion for summary judgment. The motion was granted in part and denied in part. Although Mr. Potyondy can move forward with his claim, he is barred from recovery of punitive damages. No trial date has been set. Meanwhile, the Trustee is in the process of independently investigating the relevant allegations made in the SEC complaint.<\/p>
\nThe Current Month\u2019s distribution calculation for the Developed Properties reflected operating income of approximately $1,047,000, as revenues from the Developed Properties were approximately $3.0 million, lease operating expenses including production taxes were approximately $1.9 million, and development costs were approximately $1,000. The average realized price for the Developed Properties was $84.94 per Boe for the Current Month, as compared to $53.14 per Boe in February 2026 (the \u201cPrior Month\u201d). The cumulative net profits deficit for the Developed Properties decreased from $12.1 million in the Prior Month to approximately $11.7 million in the Current Month, as further discussed below under \u201cUpdate on Estimated Asset Retirement Obligations\u201d.<\/p>
\nThe Current Month\u2019s calculation included approximately $80,000 from the 7.5% overriding royalty interest on the Remaining Properties from Orcutt Diatomite and Orcutt Field. Average realized prices for the Remaining Properties were $84.12 per Boe for the Current Month, as compared to $51.75 per Boe for the Prior Month. The cumulative net profits deficit for the Remaining Properties decreased from approximately $121,000 in the Prior Month to approximately $65,000 in the Current Month, as further discussed below under \u201cUpdate on Estimated Asset Retirement Obligations\u201d.<\/p>
\nThe monthly operating and services fee of approximately $116,000 payable to PCEC, together with Trust general and administrative expenses of approximately $37,000, exceeded the payment of approximately $80,000 received from PCEC with respect to the Remaining Properties, creating a shortfall of approximately $73,000.<\/p>
\nSales Volumes and Prices<\/b><\/p>
\nThe following table displays PCEC\u2019s underlying sales volumes and average prices for the Current Month:<\/p>
| \n | \nUnderlying Properties<\/p><\/td><\/tr>\n | |||
| \n | \nSales Volumes<\/p><\/td> | \n | \nAverage Price<\/p><\/td><\/tr>\n | |
| \n | \n(Boe)<\/p><\/td> | \n(Boe\/day)<\/p><\/td> | \n | \n(per Boe)<\/p><\/td><\/tr>\n |
\nDeveloped Properties (a)<\/p><\/td> | \n34,824<\/p><\/td> | \n1,123<\/p><\/td> | \n\u00a0<\/p><\/td> | \n$84.94<\/p><\/td><\/tr>\n |
\nRemaining Properties (b)<\/p><\/td> | \n13,347<\/p><\/td> | \n431<\/p><\/td> | \n | \n$84.12<\/p><\/td><\/tr>\n |
| \n | \n | \n | \n | \u00a0<\/td>\n<\/tr>\n |
\n(a) Crude oil sales volumes represented 99% of sales volumes<\/p><\/td> | \n | \n<\/tr>\n | ||
\n(b) Crude oil sales volumes represented 100% of sales volumes<\/p><\/td> | \n | \n<\/tr>\n<\/table> \nUpdate on Amounts Owed to PCEC by the Trust<\/b><\/p> \nPCEC has provided the Trust with a $1 million letter of credit to be used by the Trust if its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses as they become due. As of March 31, 2021, the letter of credit has been fully drawn down. Further, the Trust Agreement provides that if the Trust requires more than the $1 million under the letter of credit to pay administrative expenses, PCEC will, upon written request of the Trustee, loan funds to the Trust in such amount as necessary to pay such expenses. Although PCEC has continued to loan funds to the Trust as required under the Trust Agreement, the reduced ability to transport production from the Orcutt properties as discussed below under \u201cCancellation of Connection Agreement with Phillips 66\u201d, as well as recent declines in crude oil prices, have affected PCEC\u2019s ability to loan on a timely basis the full amount of the funds requested by the Trustee in recent periods. As of the date of this press release, PCEC has fulfilled its obligations to loan all requested funds to the Trust. Under the Trust Agreement, the Trust may only use funds provided under the letter of credit or loaned by PCEC or another source to pay the Trust\u2019s current accounts or other obligations to trade creditors in connection with obtaining goods or services or for the payment of other accrued current liabilities arising in the ordinary course of the Trust\u2019s business. As the Trust has fully drawn down the letter of credit, PCEC has loaned funds to the Trust pursuant to a promissory note to pay shortfalls related to previous months and is expected to loan funds to pay this month\u2019s shortfall of approximately $73,000.<\/p> \nAs of the end of the Current Month, the Trust owed PCEC approximately $13.7 million (which includes the amount drawn from the letter of credit, amounts borrowed under the promissory note, and in each case, net accrued interest).<\/p> \nLoans made to the Trust and amounts drawn from the letter of credit, together with interest thereon, will be repaid from proceeds, if any, payable to the Trust pursuant to the Net Profits Interests and the Royalty Interest, and from any proceeds from a sale of the Trust\u2019s assets in connection with the dissolution of the Trust. Consequently, no further distributions may be made until the Trust\u2019s indebtedness created by such amounts drawn or borrowed, including interest thereon, has been paid in full. Given the outstanding amount borrowed by the Trust to date, there may not be any net proceeds from a sale of the Trust\u2019s assets to be distributed to the Trust unitholders.<\/p> \nUpdate on Estimated Asset Retirement Obligations<\/b><\/p> \nAs previously disclosed, in November 2019, PCEC informed the Trustee that, as permitted by the Conveyance, PCEC intended to begin deducting its estimated asset retirement obligations (\u201cARO\u201d) associated with the West Pico, Orcutt Hill, Orcutt Hill Diatomite, East Coyote and Sawtelle fields, thereby reducing the amounts payable to the Trust under its Net Profits Interests. ARO is the recognition related to net present value of future plugging and abandonment costs that all oil and gas operators face. PCEC engaged an accounting firm, Moss Adams LLP (\u201cMoss Adams\u201d), acting as third-party consultants, to assist PCEC in determining its estimated ARO, and on February 27, 2020, PCEC informed the Trustee that based on the analysis performed by Moss Adams, PCEC\u2019s estimated ARO, as of December 31, 2019, was $45,695,643, which is approximately $10.0 million less than the undiscounted amount that was originally estimated before Moss Adams completed its analysis, as previously disclosed in the Trust\u2019s Current Report on Form 8-K filed on November 13, 2019. According to PCEC and its third-party consultants, its estimated ARO, which reflected PCEC\u2019s assessment of current market conditions as of December 31, 2019 and changes in California law, was determined to be approximately $33.2 million for the Developed Properties and approximately $12.5 million for the Remaining Properties, or approximately $26.5 million and approximately $3.1 million net to the Trust, respectively, and PCEC has reflected these amounts beginning with the calculation of the net profits generated during January 2020.<\/p> \nPCEC has informed the Trustee that in accordance with generally accepted accounting principles, PCEC will evaluate the ARO on a quarterly basis. As a result of that re-evaluation, the actual ARO incurred in the future may be greater or less than the estimated amounts provided by PCEC. As previously disclosed, PCEC has informed the Trustee that at year-end 2020, and following the end of each of the first, second and third quarters of 2021, in light of the accounting guidance under Accounting Standards Codification (\u201cASC\u201d) 410-20-35-3, which requires the recognition of changes in the asset retirement obligation due to the passage of time and revision of the timing or amount of the originally estimated undiscounted cash flows, PCEC re-evaluated the estimated ARO, which resulted in an aggregate increase to the ARO accrual for the Developed Properties by approximately $5.1 million, net to the Trust\u2019s interest, and an aggregate increase to the ARO accrual for the Remaining Properties by approximately $288,000, net to the Trust\u2019s interest. PCEC previously informed the Trustee that PCEC has recognized additional asset retirement obligations for the year ended December 31, 2021, in the amount of approximately $1.2 million, of which approximately $0.4 million relates to the Developed Properties, while approximately $0.8 million relates to the Remaining Properties. Net to the Trust\u2019s interests, this represents an upward ARO revision of approximately $0.3 million and approximately $0.2 million for the Developed Properties and the Remaining Properties, respectively.<\/p> \nIn June 2023, PCEC engaged Cornerstone Engineering, Inc. (\u201cCornerstone\u201d) to perform an ARO evaluation for the West Pico and Orcutt Hill fields. Based on Cornerstone\u2019s report, Moss Adams has provided PCEC with an updated ARO valuation that reflects an upward adjustment in the ARO values as of December 31, 2022, of approximately $13.7 million discounted to December 31, 2022, with a cumulative increase in the accretion for the first three quarters of 2023 of approximately $1.0 million net to the Trust\u2019s interests. The adjustment in the ARO values as of December 31, 2022, and accretion was recorded as a single adjustment during September for the calculated difference between the previously recorded ARO values and the new value including accretion through September 2023. These adjustments were reflected in the net profits interest calculations for September 2023.<\/p> \nPCEC has informed the Trustee that in the net profits calculation for the Current Month, PCEC reflected upward adjustments in the ARO of approximately $471,000 ($377,000 net to the Trust\u2019s 80% net profits interest) for the Developed Properties and approximately $141,000 ($35,000 net to the Trust\u2019s 25% net profits interest) for the Remaining Properties related to accumulated accretion on the ARO. PCEC has informed the Trustee that it expects to continue to make accretion adjustments monthly going forward.<\/p> \nThe net profits deficit for the Developed Properties decreased from approximately $12.1 million to approximately $11.7 million in the Current Month, while the net profits deficit for the Remaining Properties decreased from approximately $121,000 in the Prior Month to approximately $45,000 in the Current Month. The net profits deficit for the Developed Properties must be recouped from proceeds otherwise payable to the Trust from the 80% Net Profits Interest. The Trust is not responsible for the payment of the deficit, which will continue to be repaid out of the proceeds from the Net Profits Interests following the sale thereof in connection with the dissolution of the Trust. Proceeds from such sale would be used to repay amounts drawn from the letter of credit and borrowed from PCEC and to pay the expenses of the Trust, including any estimated future remaining expenses, with any remaining net proceeds to be distributed to the Trust unitholders; sale proceeds will not be reflected in any monthly net profits interest calculation and therefore would not be applied to repayment of any net profits deficit in existence at the time of such sale.<\/p> \nBased on PCEC\u2019s estimate of its ARO attributable to the Net Profits Interests, deductions relating to estimated ARO are likely to eliminate the likelihood of any distributions to Trust unitholders for the foreseeable future, as previously disclosed in the Trust\u2019s Current Report on Form 8-K filed on November 13, 2019.<\/p> \nAs previously disclosed, the Trust engaged Martindale Consultants, Inc. (\u201cMartindale\u201d), a provider of analysis and compliance review services to the oil and gas industry, to perform an independent review of the estimated ARO in the Moss Adams report that PCEC provided to the Trustee. The Trustee also has engaged an accounting expert to advise the Trustee regarding the accruals that PCEC has booked relating to its estimated ARO. As disclosed in the Trust\u2019s Current Report on Form 8-K filed on December 29, 2020, Martindale has completed its review of the estimated ARO and on December 21, 2020, provided its analysis and recommendations to the Trustee. Based on Martindale\u2019s recommendations provided in its report to the Trust, as disclosed in the Trust\u2019s Current Report on Form 8-K filed on December 29, 2020, the Trustee requested that PCEC promptly make several adjustments to its calculations and methods of deducting ARO from the proceeds to which the Trust is otherwise entitled pursuant to its Net Profits Interests. PCEC has responded to the Trustee, indicating PCEC\u2019s view that the adjustments would violate applicable contracts and accounting standards, and has therefore declined to make any adjustments to the estimated ARO calculation based on those requests and the recommendations of the Martindale report. The Trustee has concluded that it has taken all actions reasonably available to it under the Trust\u2019s governing documents in connection with PCEC\u2019s ARO calculation and therefore has determined not to take further action at this time.<\/p> \nStatus of the Dissolution of the Trust<\/b><\/p> \nAs described in more detail in the Trust\u2019s filings with the SEC, the Trust Agreement provides that the Trust will terminate if the annual cash proceeds received by the Trust from the Net Profits Interests and the Royalty Interest total less than $2.0 million for each of any two consecutive calendar years. Because of the cumulative net profits deficit\u2014which PCEC contends is the result of the substantial reduction in commodity prices during 2020 due to the COVID-19 pandemic and PCEC\u2019s deduction of estimated ARO beginning in the first quarter of 2020\u2014the only cash proceeds the Trust has received from March 2020 has been attributable to the Royalty Interest, other than the period from August 2022 through February 2023, when the net profits deficit with respect to the Remaining Properties had been eliminated. As a result, the total proceeds received by the Trust in each of 2020 and 2021 were less than $2.0 million. Therefore, the Trust had been expected to terminate by its terms at the end of 2021.<\/p> \nEvergreen Arbitration<\/b><\/p> \nAs previously disclosed in the Trust\u2019s Current Report on Form 8-K filed on December 23, 2021, on December 8, 2021, Evergreen Capital Management LLC (\u201cEvergreen\u201d) filed an Amended Class Action and Shareholder Derivative Complaint alleging a derivative action on behalf of the Trust and against PCEC in the Superior Court of the State of California for the County of Los Angeles (the \u201cCourt\u201d).<\/p> \nOn December 10, 2021, Evergreen filed a motion for temporary restraining order and for preliminary injunction, seeking to (1) enjoin the Trustee from dissolving the Trust, (2) enjoin PCEC from dissolving the Trust, (3) direct PCEC to account for all monies withheld from the Trust on the basis of ARO costs since September 2019, and (4) direct PCEC to place such monies in escrow. On December 16, 2021, the Court granted Evergreen\u2019s application for a temporary restraining order only to the extent of enjoining the dissolution of the Trust. Accordingly, the Trust did not dissolve at the end of 2021 and commence the process of selling its assets and winding up its affairs.<\/p> \nOn January 11, 2022, PCEC and Evergreen filed an agreed stipulation to stay the prosecution of Evergreen\u2019s derivative claims pending an arbitration of such claims. On January 13, 2022, the Court signed an Order dissolving the December 16, 2021, temporary restraining order and entering a new temporary restraining order to preserve the status quo until a tribunal of three arbitrators appointed pursuant to the Trust Agreement could rule on any request by Evergreen for injunctive relief. On April 11, 2022, PCEC notified the Court, at the arbitrators\u2019 request, that the arbitration panel had issued an order on April 7, 2022, denying Evergreen\u2019s request for injunctive relief. On April 13, 2022, Evergreen notified the Court that Evergreen had filed a motion for reconsideration with the arbitration panel that same day, which was denied on May 26, 2022. On August 30, 2022, the arbitration Panel issued a Partial Final Award dismissing with prejudice Evergreen\u2019s derivative claims against PCEC, including Evergreen\u2019s application for an injunction. On December 5, 2023, the California Superior Court confirmed that Partial Final Award.<\/p> \nOn June 20, 2022, Evergreen filed an amended pleading in the arbitration, adding the Trustee as a party to that proceeding. In early September 2022, Evergreen informed the Trustee that it was going to seek a preliminary injunction while its claims against the Trustee were pending. At the request of the arbitration panel, the Trustee agreed to take no steps toward the sale of the Trust corpus until the Panel decided Evergreen\u2019s application for a preliminary injunction. On September 12, 2022, the Trustee filed a motion to dismiss Evergreen\u2019s claims against the Trustee. On September 22, 2022, Evergreen filed an opposition to the Trustee\u2019s motion to dismiss. On September 15, 2022, Evergreen filed a motion to enjoin the Trustee from selling the Trust assets or dissolving the Trust during the pendency of the arbitration. The Trustee and PCEC filed a response in opposition to Evergreen\u2019s motion on September 22, 2022. Both motions were heard by the Panel on October 24, 2022. On October 31, 2022, the Panel granted the Trustee\u2019s motion and dismissed Evergreen\u2019s claims against the Trustee with prejudice, which mooted Evergreen\u2019s request for injunctive relief.<\/p> \nEvergreen has sought appeal of each of the judgments. Those appeals were consolidated in the Second Appellate District on November 1, 2023. On March 20, 2025, the California Court of Appeals heard oral arguments in the appeal, and on May 21, 2025, the Court of Appeals issued its decision affirming the arbitration awards that dismissed Evergreen\u2019s claims with prejudice.<\/p> \nSubject to the outcome of the Trustee\u2019s investigation of the relevant allegations in the whistleblower complaint against PCEC described above, and subject to the resolution of the derivative action against the Trustee described above, the Trustee plans to move forward with the winding up of the Trust in accordance with the provisions of the Trust Agreement, which will include selling all of the Trust\u2019s assets and distributing the net proceeds of the sale to the Trust unitholders after payment, or reasonable provision for payment, of all Trust liabilities, including the establishment of cash reserves in such amounts as the Trustee in its discretion deems appropriate for the purpose of making reasonable provision for all claims and obligations of the Trust, including any contingent, conditional or unmatured claims and obligations, in accordance with the Delaware Statutory Trust Act.<\/p> \nPCEC Arbitration<\/b><\/p> \nOn March 31, 2023, PCEC submitted a demand for arbitration against the Trustee, as trustee of the Trust, seeking, among other things, (1) an order compelling the Trustee to commence the process of dissolving the Trust pursuant to the provisions of the Trust Agreement, (2) a declaration that the Conveyance permits the legal fees and costs that PCEC, as operator, incurred in defending the Evergreen litigation and arbitration proceedings described above to be deducted from the proceeds from the Net Profits Interests, and (3) a declaration that the Trust must repay, with interest, the legal fees and costs that PCEC paid on behalf of the Trust to defend claims against the Trustee in the Evergreen proceedings or, alternatively, that PCEC may deduct such legal fees and costs from the proceeds from the Net Profits Interests.<\/p><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td><\/td> |