Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarterly period ended June 30, 2015 (Form 10-Q)
Structure: The Trust is a passive entity holding a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. It does not operate the properties; Burlington Resources Oil & Gas Company LP ("Burlington") is the operator. The Trustee is Compass Bank.
Units Outstanding: 46,608,796 as of August 10, 2015.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 |
Three Months Ended June 30, 2014 |
Six Months Ended June 30, 2015 |
Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Royalty Income | $2,264,542 | $18,124,799 | $9,609,143 | $32,650,525 |
| Total Revenue | $2,265,039 | $18,195,512 | $9,689,587 | $32,722,692 |
| Distributable Income | $1,416,218 | $17,712,260 | $8,179,028 | $31,802,103 |
| Distributable Income per Unit | $0.030385 | $0.380019 | $0.175483 | $0.682319 |
| Cash and Short-term Investments | $1,952,531 | $4,011,340 (Dec 31, 2014) | $1,952,531 | $4,011,340 (Dec 31, 2014) |
| Net Overriding Royalty Interest (Asset) | $9,081,135 | $9,362,757 (Dec 31, 2014) | $9,081,135 | $9,362,757 (Dec 31, 2014) |
| Distribution Payable | $1,416,218 | $3,825,098 (Dec 31, 2014) | $1,416,218 | $3,825,098 (Dec 31, 2014) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the three months ended June 30, 2015, dropped 87.5% compared to the same period in 2014. This was driven primarily by a significant decrease in average natural gas prices (from $5.23/Mcf in Q2 2014 to $2.38/Mcf in Q2 2015) and increased capital expenditures deducted by Burlington.
- Capital Expenditures: Capital costs attributable to the Underlying Properties increased to approximately $5.0 million in Q2 2015, compared to $1.8 million in Q2 2014. For the six months ended June 30, 2015, capital expenditures were approximately $9.8 million versus $3.1 million in 2014.
- Operating Expenses: Lease operating expenses decreased slightly in Q2 2015 ($7.97 million) compared to Q2 2014 ($9.43 million) due to cost-reduction efforts by Burlington. However, Trust administrative expenses increased due to legal costs associated with ongoing litigation.
- Production Volumes: Gas sales volumes decreased slightly (7.24 million Mcf in Q2 2015 vs. 7.59 million Mcf in Q2 2014), while oil sales volumes increased (16,533 Bbls vs. 14,387 Bbls).
Outlook, Risks, and Contingencies
- Drilling Activity: Burlington completed its 2015 new well drilling program in March 2015 and anticipates no new drilling activity for the remainder of the year due to the challenged price environment. Existing wells will continue to be operated.
- Capital Budget: Burlington's estimated capital expenditure budget for 2015 is $14 million, though actual spending is subject to change based on regulatory approvals and gas prices.
- Legal Proceedings (2014 Litigation): The Trust is suing Burlington for breach of contract regarding unresolved audit exceptions. The Trust seeks monetary relief in excess of $12,000,000. Discovery has commenced, and mediation is being scheduled.
- Historical Settlement Dispute: The Trust disputes a $4.9 million deduction made by Burlington in 2008 related to a third-party settlement (Wright case), arguing the claim was released in 1996. This remains part of the 2014 Litigation.
- Regulatory Risk (Jicarilla Apache Nation): A long-standing dispute regarding "major portion" royalty calculations for Native American leases remains unresolved. While a 2010 appellate court ruling remanded the issue to the Department of the Interior (DOI), the DOI has not yet provided the necessary calculations. Burlington cannot currently estimate a range of loss for the Trust regarding this matter.
- Market Risk: The Trust has no debt and does not use derivatives. Its primary risk is the volatility of natural gas and oil prices, which directly impacts royalty income.
Investor Verification Checklist
- Price Sensitivity: Verify the correlation between current San Juan Basin natural gas prices and the Trust's projected distributable income, given the 54% drop in average gas price year-over-year.
- Litigation Status: Monitor the progress of the "2014 Litigation" against Burlington, specifically the potential for a settlement or judgment exceeding $12 million.
- Capital Expenditure Impact: Confirm how Burlington's increased capital spending ($9.8M in H1 2015 vs $3.1M in H1 2014) affects the net proceeds available for distribution.
- Regulatory Developments: Track any new orders or calculations issued by the Department of the Interior regarding the Jicarilla Apache Nation "major portion" royalty dispute.
- Drilling Resumption: Assess the likelihood of Burlington restarting its drilling program in the San Juan Basin based on future natural gas price recovery.