Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Quarter ended March 31, 2024
Structure: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. Hilcorp San Juan L.P. is the operator of the subject interests.
Trustee Change: Argent Trust Company succeeded PNC Bank as Trustee effective February 15, 2024.
Units Outstanding: 46,608,796
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Royalty Income | $5,091,060 | $36,416,704 |
| Total Income | $5,108,715 | $36,453,640 |
| Distributable Income | $4,092,544 | $35,971,276 |
| Distributable Income per Unit | $0.087806 | $0.771771 |
| Cash and Short-term Investments | $3,323,927 | $1,574,347 |
| Cash Reserves | $1,400,000 | $1,000,000 |
| Net Overriding Royalty Interest (Net Book Value) | $2,703,773 | $2,753,249 |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 86% year-over-year, driven primarily by a sharp decline in natural gas prices (average price dropped from $10.53/Mcf in Q1 2023 to $3.19/Mcf in Q1 2024).
- Production Volumes: Natural gas production decreased by 4.6% (5,595,016 Mcf vs. 5,863,499 Mcf). Oil production increased slightly by 3.9%.
- Capital Expenditures: Capital expenditures deducted from net proceeds increased significantly to $990,794 in Q1 2024 from $33,660 in Q1 2023, reflecting a higher spending budget for 2024 projects.
- Expenses: General and administrative expenses increased 110.66% to $1,016,171, attributed to timing differences in expense payments.
- Liquidity: Cash reserves were increased from $1.0 million to $1.4 million to cover potential revenue shortfalls.
Outlook, Risks, and Management Commentary
- 2024 Capital Plan: Hilcorp estimates 2024 capital expenditures at $34.0 million (reduced from an initial $36.0 million estimate). This includes $25.0 million for two drilling projects in the Mancos formation and $8.0 million for well recompletions/workovers.
- Commodity Price Risk: Distributable income is heavily influenced by natural gas prices. The Trustee notes that lower commodity prices may reduce production volumes and net proceeds.
- Depletion: The subject interests are depleting assets. Hilcorp cannot estimate the productive life of the properties, though capital investments may offset reserve reductions.
- Audit and Compliance: The Trustee continues an ongoing comprehensive audit of Hilcorp's accounting, pricing, and cost reporting. A previous audit settlement of $1,037,093.45 regarding 2017-2020 expenses was paid in September 2023.
- Legal Proceedings: A personal injury lawsuit naming the Trust was filed in March 2024 but was dismissed (nonsuited) on March 27, 2024, releasing the Trust from liability.
- Subsequent Event: A distribution of $0.022864 per Unit was declared on April 19, 2024, payable May 14, 2024.
Investor Verification Checklist
- Verify the impact of the $34.0 million 2024 capital expenditure plan on future monthly distributions, as these costs are deducted from gross proceeds before royalty calculation.
- Monitor natural gas price trends (San Juan Basin Index) as the primary driver of revenue volatility.
- Review the status of the ongoing audit of Hilcorp's production costs and pricing to ensure no further adjustments or underpayments are identified.
- Confirm the Trustee's plan to increase cash reserves to $2.0 million and the potential impact on near-term distribution amounts.
- Assess the long-term depletion rate of the subject interests given the natural decline in production volumes.