Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarterly period ended September 30, 2013 (Form 10-Q)
Trustee: Compass Bank
Outstanding Units: 46,608,796
Business Overview: 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 Trust's income is derived from net proceeds of production after deducting costs, taxes, and capital expenditures.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 |
|---|---|---|
| Royalty Income | $13,743,934 | $23,653,832 |
| Total Revenue | $13,745,174 | $23,655,736 |
| Distributable Income | $13,456,291 | $22,389,268 |
| Distributable Income per Unit | $0.288708 | $0.480366 |
| Cash and Short-Term Investments | $4,596,596 | $4,596,596 (as of Sep 30, 2013) |
| Net Overriding Royalty Interest (Asset) | $11,378,080 | $11,378,080 (as of Sep 30, 2013) |
| Distributions Payable | $4,410,354 | $4,410,354 (as of Sep 30, 2013) |
| Capital Expenditures (Burlington) | ~$1.6 million | ~$20.9 million |
Material Changes vs. Prior Period
- Quarterly Performance (Q3 2013 vs. Q3 2012): Royalty income increased significantly from $4.93 million to $13.74 million. Distributable income per unit rose from $0.099 to $0.289. This increase was driven primarily by a rise in the average natural gas price from $2.44/Mcf to $3.64/Mcf and lower capital expenditures ($1.6 million vs. $4.1 million).
- Year-to-Date Performance (9 Months 2013 vs. 9 Months 2012): Distributable income decreased from $29.62 million to $22.39 million. Despite higher average gas prices ($3.57/Mcf vs. $3.35/Mcf) and oil prices, the increase in proceeds was offset by significantly higher capital expenditures ($20.9 million vs. $13.9 million) and increased lease operating expenses.
- Production Volumes: Gas sales volumes were relatively stable (8.82 million Mcf in Q3 2013 vs. 8.50 million Mcf in Q3 2012). Oil sales volumes increased slightly.
- Drilling Activity: Burlington temporarily suspended its drilling program for new wells in March 2013 due to the price environment. In Q3 2013, only one gross well was completed compared to four in Q3 2012.
Guidance, Outlook, Risks, and Contingencies
- Capital Expenditure Outlook: Burlington's amended 2013 capital budget is estimated at $18.5 million, though actual expenditures could range from $15 million to $45 million depending on regulatory approvals and gas prices. The focus has shifted to recompletions and workovers of existing wells rather than new drilling.
- Legal Proceedings (Jicarilla Apache Nation): A long-standing dispute regarding royalty valuation methods ("major portion" vs. "dual accounting") remains unresolved. The U.S. Court of Appeals remanded the matter to the Department of the Interior (DOI) in 2011. Burlington cannot currently estimate a potential loss range as the DOI has not provided the required calculations for the 1984-1988 period.
- Legal Proceedings (BP Settlement): The Trust is a member of the plaintiff class in a settlement with BP America Production Company regarding royalty underpayments. BP agreed to pay $10 million plus interest. The Trustee notes it is uncertain whether the distribution to the Trust will be material.
- 2012 Calculation Error: Burlington previously identified a calculation error in 2012 that overstated Royalty Income by approximately $3.4 million. This overpayment was offset against distributions in late 2012.
- Market Risk: The Trust is highly sensitive to natural gas prices. The Trustee believes the Trust is not subject to material interest rate or foreign currency risk.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as they are the primary driver of Royalty Income.
- Capital Expenditure Impact: Monitor Burlington's actual capital spending versus the $18.5 million budget, as higher spending directly reduces distributable income.
- Legal Resolution Status: Track updates on the Jicarilla Apache Nation litigation and the DOI's progress on the "major portion" calculation, as a settlement could result in significant retroactive deductions.
- BP Settlement Distribution: Confirm the final amount distributed to the Trust from the $10 million BP settlement.
- Drilling Program Restart: Watch for announcements regarding the resumption of Burlington's drilling program, which would increase capital costs but potentially boost future production.