Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2023
Trustee: PNC Bank, National Association
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796 as of November 14, 2023
The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. Income is derived from "Net Proceeds" (Gross Proceeds minus Production Costs) generated by the operator, Hilcorp. The Trust is a fixed investment trust taxed as a grantor trust.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 |
|---|---|---|
| Royalty Income | $4,320,039 | $49,256,075 |
| Total Income | $4,339,812 | $49,375,150 |
| Distributable Income | $3,947,050 | $48,005,830 |
| Distributable Income per Unit | $0.084685 | $1.029974 |
| Cash and Short-Term Investments | $3,507,213 | (Balance Sheet Item) |
| Cash Reserves | $1,000,000 | (Balance Sheet Item) |
| Net Overriding Royalty Interest (Net) | $2,783,778 | (Balance Sheet Item) |
Production Data (Three Months Ended Sep 30, 2023):
- Natural Gas: 5,989,625 Mcf (Average Price: $2.04/Mcf)
- Oil and Condensate: 17,292 Bbls (Average Price: $62.00/Bbl)
Material Changes vs. Prior Period
- Quarter-over-Quarter Decline: Distributable income for the three months ended September 30, 2023, decreased approximately 81.30% compared to the same period in 2022 ($3.9M vs. $21.1M). This was driven by a significant drop in natural gas prices (from $6.32/Mcf to $2.04/Mcf) and slightly lower production volumes.
- Year-to-Date Stability: For the nine months ended September 30, 2023, Distributable Income decreased only 1.68% compared to the prior year ($48.0M vs. $48.8M). The average natural gas price for the nine-month period actually increased slightly to $5.42/Mcf from $5.21/Mcf in 2022, offsetting volume declines.
- Expense Increases: General and administrative expenses rose 59.28% for the quarter and 19.10% for the nine-month period, primarily due to timing differences in payments. Capital expenditures increased 194.53% for the quarter and 77.51% for the nine-month period due to a higher 2023 project budget.
- Settlement Payment: The Trust received a one-time audit settlement payment of $1,037,093.45 from Hilcorp regarding disputed expenses from 2017-2020, which was included in the September 2023 distribution.
Outlook, Risks, and Management Commentary
- Trustee Transition: PNC Bank has entered an agreement to resign as Trustee, nominating Argent Trust Company as the successor. This requires approval by Unit Holders at a special meeting expected on December 1, 2023.
- Capital Plan: Hilcorp estimates 2023 capital expenditures at $4.4 million, focusing on 25 well recompletions and workovers. Actual costs may vary.
- Regulatory Risk: The Biden administration announced a 50-year moratorium on new oil and gas development on approximately 4,200 acres in Sandoval County, NM. Hilcorp confirmed these tracts are not within the Trust's production area or future development plans.
- Market Risk: Distributions are heavily dependent on natural gas prices and production volumes. The Trust has no control over production costs or commodity prices.
- Accounting Adjustments: Hilcorp continues to reconcile historical production volumes (2017-2020) and may issue further adjustments to revenues and taxes in the future.
Investor Verification Checklist
- Trustee Approval: Verify the outcome of the special meeting on December 1, 2023, regarding the appointment of Argent Trust Company.
- Production Volumes: Monitor Hilcorp's reporting on natural gas volumes, as the Trust's income is directly tied to the 75% royalty on net proceeds.
- Commodity Prices: Track natural gas price fluctuations, which caused a significant variance in Q3 2023 income compared to Q3 2022.
- Future Adjustments: Watch for announcements regarding further revenue or tax adjustments resulting from the ongoing audit of 2017-2020 production volumes.
- Capital Expenditures: Confirm if Hilcorp's actual 2023 capital spending aligns with the $4.4 million estimate, as higher costs reduce Net Proceeds.