{"url_path":"/sec/gultu/10-q/2026/item-2","section_key":"item-2","section_title":"Item 2 Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.**","topic":"sec","document":{"doc_type":"10-Q","doc_date":"2026-05-13","source_url":"https://www.sec.gov/Archives/edgar/data/1565146/0001493152-26-022728-index.html","accession_number":"0001493152-26-022728","cik":"0001565146","ticker":"GULTU","issuer_name":"Gulf Coast Ultra Deep Royalty Trust","edgar_url":"https://www.sec.gov/Archives/edgar/data/1565146/0001493152-26-022728-index.html","primary_entity_key":"0001565146","primary_entity_name":"Gulf Coast Ultra Deep Royalty Trust"},"word_count":3284,"has_tables":true,"body_markdown":"**Item\n2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.**\n\n**OVERVIEW**\n\n*You\nshould read the following discussion in conjunction with the financial statements of Gulf Coast Ultra Deep Royalty Trust (the Royalty\nTrust) and the related Trustee’s Discussion and Analysis of Financial Condition and Results of Operations and the discussion of\nits Business and Properties in the Royalty Trust’s Annual Report on Form 10-K for the year ended December 31, 2025 (2025 Form 10-K),\nfiled with the United States (U.S.) Securities and Exchange Commission (SEC). The results of operations reported and summarized below\nare not necessarily indicative of future operating results. Unless otherwise specified, all references to “Notes” refer to\nthe Notes to Financial Statements located in Part I, Item 1. “Financial Statements” of this Form 10-Q. Also see the 2025\nForm 10-K for a glossary of definitions for some of the oil and gas industry terms used in this Form 10-Q. Additionally, please refer\nto the section entitled “Cautionary Statement” on page 15 of this Form 10-Q. The information below has been furnished to\nthe Trustee by Highlander Oil & Gas Assets LLC (HOGA). In this Form 10-Q, the “Depositor” refers to Freeport-McMoRan\nInc. (FCX), for all periods ending prior to the Effective Date (defined below), and to Highlander Oil & Gas Assets LLC (HOGA), for\nall periods beginning on and after the Effective Date; and the “Grantor” refers to McMoRan Oil & Gas LLC (McMoRan), for\nall periods ending prior to the Effective Date, and to HOGA, for all periods beginning on and after the Effective Date.*\n\n**Business\nOverview**\n\nOn\nJune 3, 2013, FCX and McMoRan Exploration Co. (MMR) completed the transactions contemplated by the Agreement and Plan of Merger, dated\nas of December 5, 2012 (the merger agreement), by and among MMR, FCX, and INAVN Corp., a Delaware corporation and indirect wholly owned\nsubsidiary of FCX (Merger Sub). Pursuant to the merger agreement, Merger Sub merged with and into MMR, with MMR surviving the merger\nas an indirect wholly owned subsidiary of FCX (the merger).\n\nThe\nRoyalty Trust is a statutory trust created as contemplated by the merger agreement by FCX under the Delaware Statutory Trust Act pursuant\nto a trust agreement entered into on December 18, 2012 (inception), by and among FCX, as depositor, Wilmington Trust, National Association,\nas Delaware trustee, and certain officers of FCX, as regular trustees. On May 29, 2013, Wilmington Trust, National Association, was replaced\nby BNY Trust of Delaware, as Delaware trustee (the Delaware Trustee), through an action of the depositor. Effective June 3, 2013, the\nregular trustees were replaced by The Bank of New York Mellon Trust Company, N.A., a national banking association, as trustee (the Trustee).\n\nThe\nRoyalty Trust was created to hold a 5% gross overriding royalty interest (collectively, the overriding royalty interests) in future production\nfrom specified Inboard Lower Tertiary/Cretaceous exploration prospects located in the shallow waters of the Gulf of Mexico and onshore\nin South Louisiana that existed as of December 5, 2012, the date of the merger agreement (collectively, the subject interests). The subject\ninterests were “carved out” of the mineral interests that were acquired by FCX pursuant to the merger and were not considered\npart of FCX’s purchase consideration of MMR.\n\nIn\nconnection with the merger, on June 3, 2013, (1) FCX, as depositor, McMoRan, as grantor, the Trustee and the Delaware Trustee entered\ninto the amended and restated royalty trust agreement to govern the Royalty Trust and the respective rights and obligations of FCX, the\nTrustee, the Delaware Trustee, and the Royalty Trust unitholders with respect to the Royalty Trust (the Royalty Trust Agreement); and\n(2) McMoRan, as grantor, and the Royalty Trust, as grantee, entered into the master conveyance of overriding royalty interests (the master\nconveyance) pursuant to which McMoRan conveyed to the Royalty Trust the overriding royalty interests in future production from the subject\ninterests. Other than (a) its formation, (b) its receipt of contributions and loans from FCX for administrative and other expenses as\nprovided for in the Royalty Trust Agreement, (c) its payment of such administrative and other expenses, (d) its repayment of loans from\nFCX, (e) its receipt of the conveyance of the overriding royalty interests from McMoRan pursuant to the master conveyance, (f) its receipt\nof royalties from McMoRan and HOGA, and (g) its cash distributions to Royalty Trust unitholders, if any, the Royalty Trust has not conducted\nany activities. The Trustee has no involvement with, control over, or responsibility for, any aspect of any operations on or relating\nto the subject interests.\n\n10\n\nThe\nTrustee receives annual compensation of $200,000. Additionally, the Trustee receives reimbursement for its reasonable out-of-pocket expenses\nincurred in connection with the administration of the Royalty Trust. The Trustee’s compensation is paid out of the Royalty Trust’s\nassets. The Trustee has a lien on the Royalty Trust’s assets to secure payment of its compensation and any indemnification expenses\nand other amounts to which it is entitled under the Royalty Trust Agreement.\n\nOn\nFebruary 5, 2019, McMoRan completed the sale of all of its rights, title and interest in and to the onshore Highlander subject interest\npursuant to a purchase and sale agreement with HOGA (the Highlander Sale). The onshore Highlander subject interest was sold subject to\nthe overriding royalty interest in future production held by the Royalty Trust. As a result of the Highlander Sale, HOGA has a 72 percent\nworking interest and an approximate 48 percent net revenue interest in the onshore Highlander subject interest. The Royalty Trust continues\nto hold a 3.6 percent overriding royalty interest in the onshore Highlander subject interest. HOGA is the operator of the onshore Highlander\nsubject interest. The onshore Highlander subject interest is the only subject interest in which HOGA has an interest, as McMoRan previously\nhad relinquished, allowed to expire or sold all of the other subject interests.\n\nEffective\nDecember 31, 2024 (the Effective Date), FCX, McMoRan and HOGA entered into an Assignment and Assumption Agreement and Bill of Sale, pursuant\nto which (1) FCX assigned to HOGA, and HOGA assumed, all of the financial and other obligations of FCX as depositor under the Royalty\nTrust Agreement, and (2) McMoRan assigned to HOGA, and HOGA assumed, all of the rights and obligations of McMoRan as grantor under the\nRoyalty Trust Agreement and the master conveyance that were not previously assumed by HOGA at the time of the Highlander Sale (collectively,\nthe Assignment). Notwithstanding the Assignment, FCX remains obligated to perform the financial and other obligations owed to the Royalty\nTrust by the depositor under the Royalty Trust Agreement, if HOGA were to be unable to fully perform such obligations in the future.\n\nAt\nMarch 31, 2026, HOGA owned interests in approximately 152 gas leases onshore in South Louisiana, covering approximately 9,000 gross acres\n(6,480 acres net to HOGA’s interests) associated with the onshore Highlander subject interest. As of March 31, 2026, the onshore\nHighlander subject interest had no production due to the shutting in and subsequent abandonment of the sole well producing from the onshore\nHighlander subject interest as discussed in “– Status of the Onshore Highlander Subject Interest” below.\n\n**Status\nof the Onshore Highlander Subject Interest**\n\nAs\npreviously disclosed, the sole well producing from the onshore Highlander subject interest experienced an operational issue on January\n19, 2023, resulting in substantial amounts of water entering the well, which caused a shut in of the well before production resumed at\nsignificantly reduced levels. Following an evaluation by HOGA’s field operations team, HOGA determined that it would be necessary\nto commence operations to control the water production, in expectation of eventually initiating “kill” operations on the\nwell. HOGA informed the Trustee that the well was shut in effective March 31, 2023 and production from the well ceased. In October 2023,\nHOGA informed the Trustee that due to the underground flow of fluids into the wellbore, the well could not be salvaged and would be required\nto be plugged and abandoned. HOGA subsequently notified the Trustee that operations had begun to permanently plug and abandon the sole\nwell producing from the onshore Highlander subject interest in early March 2024.\n\nThe\nonshore Highlander subject interest is the only subject interest that has established commercial production. Abandoning the well eliminated\nany production from the onshore Highlander subject interest, which also eliminated any proceeds to which the Royalty Trust would be entitled\npursuant to its overriding royalty interests. Unless another well is drilled on the onshore Highlander subject interest and produces\nhydrocarbons in commercial quantities, the Royalty Trust does not expect to receive any income attributable to its overriding royalty\ninterests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods. HOGA\npreviously informed the Trustee that a new well on the onshore Highlander subject interest was spudded on January 30, 2025 and recently\nreported that the well had reached total depth of 30,862 feet on February 17, 2026; however, the future production status of this well\nremains unknown. Neither the Trustee nor the Royalty Trust unitholders has any right to control or influence operations of the subject\ninterest.\n\n** **\n\n11\n\n** **\n\n**LIQUIDITY\nAND CAPITAL RESOURCES**\n\n** **\n\nPursuant\nto the Royalty Trust Agreement, the Depositor has agreed to pay annual trust expenses up to a maximum amount of $350,000 (the “Depositor\nAnnual Expense Cap”), with no right of repayment or interest due, to the extent the Royalty Trust lacks sufficient funds to pay\nadministrative expenses. Pursuant to this provision, on January 12, 2026, HOGA contributed $28,923 for fourth quarter 2025 administrative\nexpenses, and on March 2, 2026, HOGA contributed $86,988 for fourth quarter 2025 and first quarter 2026 administrative expenses, all\nof which funds were applied toward the Depositor Annual Expense Cap for 2026. In the prior year, HOGA contributed the maximum of $350,000\nfor the payment of trust expenses incurred during the year ended December 31, 2025.\n\nIn\naddition to such annual contributions, the Depositor has agreed to lend money, on an unsecured, interest-free basis, to the Royalty Trust\nto fund the Royalty Trust’s ordinary administrative expenses as set forth in the Royalty Trust Agreement. All funds the Trustee\nborrows to cover the Royalty Trust’s expenses or liabilities, whether from the Depositor or from any other source, must be repaid\nbefore the Royalty Trust unitholders will receive any distributions. The Depositor has loaned funds to the Royalty Trust in the following\namounts on the dates set forth below:\n\nDate\nAmount\n\nNovember\n6, 2024\n$200,000\n\nMay\n16, 2025\n$10,750\n\nJune\n27, 2025\n$42,469\n\nJuly\n31, 2025\n$58,007\n\nSeptember\n26, 2025\n$50,438\n\nNovember\n7, 2025\n$54,825\n\nAs\nof March 31, 2026, the Royalty Trust has an outstanding note payable to HOGA of $416,489.\n\nPursuant\nto the Royalty Trust Agreement, the Depositor agreed to provide and maintain a $1.0 million stand-by reserve account or an equivalent\nletter 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\nobligations of the Royalty Trust if its funds are inadequate to pay its obligations at any time. Currently, with the consent of the Trustee,\nthe Depositor may reduce the reserve account or substitute a letter of credit with a different face amount for the original letter of\ncredit or any substitute letter of credit. In connection with this arrangement, the Depositor provided $1.0 million to the Royalty Trust.\nThe $1.0 million, plus interest collected thereon, is reflected as reserve fund cash, with a corresponding reserve fund liability in\nthe accompanying Statements of Assets, Liabilities and Trust Corpus. As of March 31, 2026, the Depositor had not requested a reduction\nof the reserve account.\n\nIn\naccordance with the terms of the master conveyance, royalties are paid to the Royalty Trust on the last day of the month following the\nmonth in which production payments are received by HOGA. The Royalty Trust did not receive royalties during the three-month periods ended\nMarch 31, 2026 and 2025.\n\nRoyalties\nreceived by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce Royalty Trust indebtedness.\nAs of March 31, 2026, the Royalty Trust has an outstanding note payable to HOGA of $416,489.\n\nEach\nquarter, the Trustee will determine the amount of funds available for distribution to the Royalty Trust unitholders. Available funds\nwill equal the excess cash received by the Royalty Trust from the royalty interests and other sources during that quarter over the Royalty\nTrust’s liabilities for that quarter. Available funds will be reduced by any cash the Trustee decides to hold as a reserve against\nfuture liabilities. As of March 31, 2026 the Trustee has established a minimum cash reserve of $302,500. The minimum cash reserve is\nnot reflective of the Royalty Trust’s operating cash balance as of March 31, 2026 and 2025. Distributions will be made to Royalty\nTrust unitholders only when royalties received less administrative expenses incurred and repayment of any indebtedness exceeds the minimum\ncash reserve.\n\n12\n\nCommencing\nwith the distribution to unitholders in the first quarter of 2022, the Royalty Trust withheld $8,750 from the funds otherwise available\nfor distribution each quarter through the first quarter of 2023, with the intent of gradually building a cash reserve of approximately\n$350,000. As no proceeds were available for distribution in the first quarter of 2026, the Royalty Trust did not withhold any funds for\nthe cash reserve. Unless another well is drilled on the onshore Highlander subject interest, as discussed in “Overview –\nStatus of the Onshore Highlander Subject Interest” above, and produces hydrocarbons in commercial quantities, the Royalty Trust\ndoes not intend to withhold funds for the cash reserve as the Royalty Trust does not expect to have any cash available to distribute\nto unitholders in future periods. This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities\nof the Royalty Trust. The Trustee may increase or decrease the targeted cash reserve amount at any time and may increase or decrease\nthe rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the unitholders. Cash held\nin reserve will be invested as required by the Royalty Trust Agreement. Any cash reserved in excess of the amount necessary to pay or\nprovide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders,\ntogether with interest earned on the funds.\n\nThere\nwas no distributable income during the three-month periods ended March 31, 2026 and 2025 due to the shutting in and subsequent abandonment\nof the sole well producing from the onshore Highlander subject interest as discussed in “Overview – Status of the Onshore\nHighlander Subject Interest” above. Any distribution in a particular period is not necessarily indicative of future distributions.\n\nThe\nRoyalty Trust’s only other sources of liquidity are mandatory annual contributions, any loans and the required standby reserve\naccount or letter of credit from HOGA. As a result, any material adverse change in HOGA’s financial condition or results of operations\ncould materially and adversely affect the Royalty Trust and the underlying royalty trust units.\n\n**OFF-BALANCE\nSHEET ARRANGEMENTS**\n\nThe\nRoyalty Trust has no off-balance sheet arrangements. The Royalty Trust has not guaranteed the debt of any other party, nor does the Royalty\nTrust have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt, losses or\ncontingent obligations.\n\n** **\n\n**RESULTS\nOF OPERATIONS**\n\n*Royalty\nIncome.*In accordance with the terms of the master conveyance, during the three-month periods ended March 31, 2026 and 2025, the\nRoyalty Trust did not receive royalty income, due to the shutting in and subsequent abandonment of the sole well producing from the onshore\nHighlander subject interest as discussed in “Overview – Status of the Onshore Highlander Subject Interest” above.\n\n*Administrative\nExpenses.*Administrative expenses consist primarily of audit, legal and trustee expenses incurred in connection with the administration\nof the Royalty Trust. During the three-month periods ended March 31, 2026 and 2025, the Royalty Trust paid administrative expenses of\n$115,911 and $0, respectively. Administrative expenses were lower during the three-month period ended March 31, 2025 as compared to the\ncorresponding 2026 period, primarily because the Royalty Trust deferred payment of first quarter 2025 administrative expenses to the\nsecond quarter of 2025.\n\n* *\n\n**NEW\nACCOUNTING STANDARDS**\n\nNone.\n\n13\n\n**CAUTIONARY\nSTATEMENT**\n\nThis\nQuarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as\namended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are all statements\nother than statements of historical facts, such as any statements regarding the future financial condition of the Royalty Trust or the\ntrading market for the royalty trust units, all statements regarding the plans of HOGA for the subject interests, the potential results\nof any drilling on the subject interests, anticipated interests of HOGA and the Royalty Trust in any of the subject interests, HOGA’s\ngeologic models and the nature of the geologic trend onshore in South Louisiana discussed in this Form 10-Q, the amount and date of quarterly\ndistributions to Royalty Trust unitholders, expectations regarding the drilling of a new well on the Highlander subject interest, and\nstatements regarding the Royalty Trust’s future income from the overriding royalty interests and future distributions to Royalty\nTrust unitholders and all statements regarding any belief or understanding of the nature or potential of the subject interests. The words\n“anticipates,” “may,” “can,” “plans,” “believes,” “estimates,”\n“expects,” “projects,” “intends,” “likely,” “will,” “should,”\n“to be,” “potential,” and any similar expressions and/or statements that are not historical facts are intended\nto identify those assertions as forward-looking statements.\n\nForward-looking\nstatements are not guarantees or assurances of future performance and actual results may differ materially from those anticipated, projected\nor assumed in the forward-looking statements. Important factors that may cause actual results to differ materially from those anticipated\nby the forward-looking statements include, but are not limited to, the future plans of HOGA for its remaining oil and gas properties;\nthe risk that the subject interests will not produce additional hydrocarbons; general economic and business conditions; variations in\nthe market demand for, and prices of, oil and natural gas; drilling results; changes in oil and natural gas reserve expectations; the\npotential adoption of new governmental regulations; decisions by HOGA not to develop and/or transfer the subject interests; any inability\nof HOGA to develop the subject interests; damages to facilities resulting from natural disasters or accidents; fluctuations in the market\nprice, volume and frequency of the trading market for the royalty trust units; the amount of cash received or expected to be received\nby the Trustee from the underlying subject interests on or prior to a record date for a quarterly cash distributions; the cost and timing\nof drilling a new well on the Highlander subject interest; and other factors described in Part I, Item 1A. “Risk Factors”\nin the 2025 Form 10-K, as updated by the Royalty Trust’s subsequent filings with the SEC. Any differences in actual cash receipts\nby the Royalty Trust could affect the amount of quarterly cash distributions.\n\nInvestors\nare cautioned that current production rates may not be indicative of future production rates or of the amounts of hydrocarbons that a\nwell may produce, and that many of the assumptions upon which forward-looking statements are based are likely to change after such forward-looking\nstatements are made, which the Royalty Trust cannot control. The Royalty Trust cautions investors that it does not intend to update its\nforward-looking statements, notwithstanding any changes in assumptions, changes in business plans, actual experience, or other changes,\nand the Royalty Trust undertakes no obligation to update any forward-looking statements except as required by law."}