Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2021
Trustee: BBVA USA (subsidiary of PNC Financial Services Group)
Operator: Hilcorp San Juan L.P.
Units Outstanding: 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 of production after deducting production costs, taxes, and other expenses.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 |
Three Months Ended June 30, 2020 |
Six Months Ended June 30, 2021 |
Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Royalty Income | $7,565,789 | $970,722 | $15,777,876 | $6,039,129 |
| Distributable Income | $7,166,008 | $585,244 | $14,917,251 | $5,203,505 |
| Distributable Income per Unit | $0.153748 | $0.012557 | $0.320052 | $0.111642 |
| General & Admin Expenses | $(400,138) | $(494,672) | $(861,395) | $(948,379) |
| Cash and Short-term Investments | $1,821,025 (as of June 30, 2021) | |||
| Cash Reserves | $1,000,000 (as of June 30, 2021) | |||
| Net Overriding Royalty Interest (Net) | $4,385,805 (as of June 30, 2021) |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 680% for the three months ended June 30, 2021, and 161% for the six-month period compared to 2020. This was primarily driven by a spike in natural gas prices during the February 2021 winter storms.
- Commodity Prices: Average natural gas prices rose from $0.92/Mcf (Q2 2020) to $2.77/Mcf (Q2 2021). Average oil prices increased from $21.74/Bbl to $50.59/Bbl over the same quarterly comparison.
- Production Volumes: Natural gas production from Subject Interests increased 9.4% in Q2 2021 compared to Q2 2020. Six-month production decreased slightly by 3.7%.
- Costs: Lease operating expenses and property taxes increased 31% in Q2 2021 due to estimated costs and increased activity, though they decreased 12% for the six-month period due to a $0.5 million credit from Hilcorp regarding audit exceptions.
- 2020 Context: Q2 2020 distributable income was minimal due to low gas prices and "true-up" adjustments resulting in excess production costs allocated to the Trust.
Outlook, Risks, and Management Commentary
- True-Ups and Estimates: Hilcorp is transitioning to a new accounting system. Production data for February, March, and April 2021 was based on estimates. Hilcorp anticipates adjusting reported production and financial information for operated wells (Jan–Apr 2021) and non-operated wells (Nov 2020–Apr 2021). These adjustments will impact future distributions.
- Subsequent Event: On July 20, 2021, the Trust announced a distribution of $0.084740 per Unit ($3,949,643.61 total) based on May 2021 production, paid on August 13, 2021. This included additional gross profits of $1.9 million net to the Trust from true-ups.
- Regulatory Risks: The Trust notes potential impacts from federal regulations regarding methane emissions and climate change policies under the Biden administration, though Hilcorp does not currently expect these to affect existing leases.
- Liquidity: The Trust maintains a $1.0 million cash reserve to cover administrative expenses if royalty income is insufficient. The Trustee does not anticipate increasing this reserve in 2021.
- Impairment: No impairment of the Trust's assets was recognized as of June 30, 2021.
Investor Verification Checklist
- True-Up Adjustments: Verify the magnitude of upcoming adjustments to distributions resulting from Hilcorp's reconciliation of estimated vs. actual production for early 2021.
- Commodity Price Sensitivity: Monitor natural gas prices, as the Trust's income is heavily weighted toward gas production (approx. 95% of gross proceeds in Q2 2021).
- Operator Performance: Review Hilcorp's capital expenditure plans and production decline rates for the Subject Interests.
- Regulatory Environment: Track federal and state regulations regarding methane emissions and hydraulic fracturing that could impact production costs or volumes.
- Trustee Transition: Note the administrative transition of the Trustee from BBVA USA to PNC Bank, expected around October 2021.