Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 2016 (Form 10-Q)
Structure: The Trust holds a 75% net overriding royalty interest in oil and natural gas properties in the San Juan Basin, New Mexico. The working interest is operated by Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips. The Trust has no employees; Compass Bank serves as Trustee.
Units Outstanding: 46,608,796 as of August 9, 2016.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 |
|---|---|---|
| Royalty Income | $1,541,698 | $4,575,210 |
| Total Revenue | $1,542,294 | $4,576,464 |
| Distributable Income | $431,160 | $2,217,894 |
| Distributable Income per Unit | $0.009251 | $0.047586 |
| Cash and Short-term Investments | $1,111,987 | (Balance Sheet Item) |
| Cash Reserves | $986,313 | (Balance Sheet Item) |
| Net Overriding Royalty Interest (Net) | $8,420,606 | (Balance Sheet Item) |
| Debt | None reported | None reported |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 32% for the three months and 52% for the six months ended June 30, 2016, compared to the same periods in 2015. This was driven primarily by lower natural gas prices (average $1.43/Mcf vs. $2.38/Mcf in Q2 2015) and reduced production volumes.
- Distributable Income Drop: Distributable income fell 71% for the quarter and 73% for the six-month period year-over-year.
- Expense Increases: General and administrative expenses increased 80% for the quarter and 58% for the six months, largely due to audit and legal costs associated with ongoing litigation against Burlington.
- Capital Expenditures: Capital expenditures by the operator decreased significantly (94% for the quarter) compared to 2015, as ConocoPhillips suspended drilling programs due to depressed natural gas prices.
- Cash Reserves: The Trustee increased cash reserves by $450,000 during the first six months of 2016 to mitigate risks of future revenue shortfalls.
Outlook, Risks, and Management Commentary
- Outlook: ConocoPhillips has not allocated capital for drilling in the San Juan Basin for 2016 due to low natural gas prices. The 2016 capital plan anticipates $4.8 million in expenditures, primarily for facility maintenance. Drilling may resume if prices improve.
- Litigation: The Trust is engaged in litigation against Burlington (filed July 2014) regarding unresolved revenue and expense audit exceptions. The trial is scheduled for March 2017. Unfavorable resolutions could reduce future royalty payments.
- Liquidity: The Trust relies entirely on royalty income. If funds are insufficient to pay liabilities, the Trustee may borrow, which would suspend distributions to Unit Holders until repayment.
- Market Risk: The Trust is highly sensitive to natural gas prices. There have been no material changes to market risk disclosures since the 2015 10-K.
Investor Verification Checklist
- Commodity Prices: Monitor natural gas and oil price trends, as they directly dictate royalty income and distribution levels.
- Litigation Status: Track the progress of the lawsuit against Burlington, as the outcome could materially impact future cash flows.
- Capital Spending: Verify if ConocoPhillips resumes drilling activity in the San Juan Basin, which would affect long-term production volumes.
- Reserve Depletion: Review the amortization of the net overriding royalty interest, which reflects the depletion of the underlying asset base.
- Cash Reserves: Monitor the level of cash reserves held by the Trustee to ensure coverage of administrative and legal expenses during periods of low production revenue.