Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 2017 (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. It is a fixed investment trust taxed as a grantor trust, with no employees or officers; Compass Bank serves as Trustee.
Units Outstanding: 46,608,796 as of August 9, 2017.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 |
|---|---|---|
| Royalty Income | $6,450,981 | $15,059,201 |
| Total Income | $6,452,457 | $15,062,060 |
| Distributable Income | $5,981,432 | $14,128,441 |
| Distributable Income per Unit | $0.128333 | $0.303129 |
| Cash and Short-Term Investments | $2,814,722 (as of June 30, 2017) | N/A |
| Net Overriding Royalty Interest (Net of Amortization) | $7,206,408 (as of June 30, 2017) | N/A |
| Cash Reserves | $1,000,000 (as of June 30, 2017) | N/A |
| Debt | None reported | None reported |
Material Changes vs. Prior Period
- Revenue Surge: Royalty Income increased 318% for the three months ended June 30, 2017, compared to the same period in 2016 ($6.45M vs. $1.54M). For the six-month period, it increased 229% ($15.06M vs. $4.58M).
- Price Drivers: The increase was primarily driven by higher natural gas prices. The average natural gas price rose from $1.43/Mcf (Q2 2016) to $2.63/Mcf (Q2 2017) and from $1.61/Mcf (6M 2016) to $2.78/Mcf (6M 2017).
- Expense Reduction: General and administrative expenses decreased 47% in Q2 2017 and 51% in the first half of 2017 compared to 2016, largely due to reduced legal and audit costs associated with ongoing litigation.
- Production Volumes: Despite higher prices, natural gas production volumes decreased slightly (6.24M Mcf in Q2 2017 vs. 6.91M Mcf in Q2 2016).
- Capital Expenditures: Capital expenditures decreased 71% in Q2 2017 and 68% in the first half of 2017 compared to 2016, attributed to the challenging price environment and fewer maintenance projects.
Outlook, Risks, and Unusual Items
- Asset Sale (Material Event): On July 31, 2017, ConocoPhillips completed the sale of its San Juan Basin assets, including the Subject Interests, to Hilcorp San Juan LP. ConocoPhillips is responsible for production through July 2017; Hilcorp will assume responsibility starting August 2017.
- Transition Risks: The Trust faces potential administrative disruptions, increased costs, and changes in reporting procedures as it transitions from ConocoPhillips to Hilcorp. Hilcorp's capital expenditure budget for the remainder of 2017 is subject to change and could adversely affect Distributable Income.
- Litigation: The Trust is engaged in litigation against Burlington (ConocoPhillips) regarding revenue and expense accounting. The case is set for trial in January 2018, but parties have preliminarily agreed on settlement terms. A $1 million gross credit was included in the July 2017 distribution based on a reversal of accrued capital expenses related to this matter.
- Guidance: The filing does not provide specific forward-looking financial guidance for future quarters, noting that actual results may differ materially from expectations due to commodity price volatility and the operator transition.
Investor Verification Checklist
- Verify the terms of the settlement agreement in the 2014 Litigation against Burlington to confirm the $1 million credit and future payment obligations.
- Monitor the transition of reporting and operational control from ConocoPhillips to Hilcorp, specifically regarding the accuracy of revenue and expense calculations starting with August 2017 production.
- Review Hilcorp's capital expenditure plans for the Subject Interests, as increased spending could reduce Distributable Income.
- Track natural gas price trends in the San Juan Basin, as the Trust's income is highly sensitive to commodity prices.
- Confirm the status of the Trust's cash reserves ($1.0 million) and whether additional reserves will be required for the transition or ongoing litigation.