Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2022
Trustee: PNC Bank, National Association
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern 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; it does not pay federal income tax at the trust level.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 |
Three Months Ended June 30, 2021 |
Six Months Ended June 30, 2022 |
Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Royalty Income | $13,722,931 | $7,565,789 | $28,613,422 | $15,777,876 |
| Total Income | $13,724,760 | $7,566,146 | $28,615,458 | $15,778,646 |
| Distributable Income | $13,343,042 | $7,166,008 | $27,712,269 | $14,917,251 |
| Distributable Income per Unit | $0.286277 | $0.153748 | $0.594571 | $0.320052 |
| General & Admin Expenses | $(381,718) | $(400,138) | $(903,189) | $(861,395) |
| Cash and Short-term Investments | $6,202,132 (as of June 30, 2022) | |||
| Cash Reserves | $1,000,000 (as of June 30, 2022) | |||
| Net Overriding Royalty Interest (Net) | $3,291,011 (as of June 30, 2022) |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 81% for the quarter and 81% for the six-month period compared to the prior year. This was driven primarily by a significant increase in natural gas prices (average price rose from $2.77/Mcf to $4.54/Mcf for the quarter).
- Production Decline: Despite higher prices, natural gas production volumes decreased. For the quarter ended June 30, 2022, production fell 19.2% (from 7,517,056 Mcf to 6,073,883 Mcf). For the six-month period, production fell 6.9%.
- Cost Reductions: Capital expenditures decreased by 34.5% for the quarter and 51.6% for the six-month period compared to 2021, attributed to timing differences and prior year budgeting.
- Severance Taxes: Severance taxes decreased 5.3% for the quarter due to overestimations in the prior year, but increased 61% for the six-month period due to higher gross proceeds and corrections to prior period estimates.
Outlook, Risks, and Management Commentary
- Capital Plan: Hilcorp's 2022 capital project plan estimates $1.9 million in spending, primarily for 24 well recompletions and workovers ($1.5 million) and facilities projects ($300,000). No new drilling projects were conducted in 2021 or to date in 2022.
- Depletion: The Subject Interests are depleting assets. Hilcorp has stated it is unable to estimate the productive life of the interests. Production is subject to natural decline curves.
- Regulatory and Geopolitical Risks: The Trust faces risks from inflation, the conflict in Ukraine, and potential regulatory changes regarding methane emissions and hydraulic fracturing under the Biden Administration. However, Hilcorp does not believe current federal lease restrictions impact existing leases.
- Accounting Adjustments: Hilcorp continues to refine reporting processes. While "true-ups" for operated wells were completed as of December 31, 2021, non-operated property true-ups for 2021 were completed in early 2022. Future distributions may still include adjustments for prior periods.
- Liquidity: The Trust maintains a $1.0 million cash reserve to cover administrative expenses. The Trustee does not anticipate increasing this reserve in 2022.
Investor Verification Checklist
- Production Volumes: Verify the continued decline in natural gas production volumes against the increase in commodity prices to assess future income sustainability.
- Capital Expenditures: Monitor Hilcorp's execution of the $1.9 million 2022 capital plan to determine if it successfully offsets natural depletion.
- Cost Accounting: Review future filings for any further "true-ups" or adjustments to production costs and severance taxes, as Hilcorp recently transitioned to actual reporting from estimates.
- Regulatory Impact: Assess the potential impact of new federal methane regulations on Hilcorp's operating costs and production capabilities.
- Depletion Rate: Confirm the rate of depletion of the Net Overriding Royalty Interest, which is charged directly to the trust corpus rather than as an expense.