Business Context and Reporting Period
The San Juan Basin Royalty Trust (the "Trust") is a widely held fixed investment trust created under Texas law. It holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The Trust does not operate the properties; Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips, acts as the operator. The Trustee is Compass Bank. This filing covers the fiscal year ended December 31, 2010.
Key Financial Metrics
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Royalty Income | $79,971,751 | $31,888,681 | $144,588,156 |
| Distributable Income | $78,355,835 | $30,173,056 | $143,081,245 |
| Distributions per Unit | $1.681139 | $0.647367 | $3.069833 |
| Total Assets (Dec 31) | $19,969,007 | $22,185,213 | $25,377,265 |
| Trust Corpus (Dec 31) | $14,745,884 | $16,843,731 | $17,927,498 |
| Units Outstanding | 46,608,796 | 46,608,796 | 46,608,796 |
Production and Pricing (2010): Gas production attributable to the Royalty was 17,102,939 Mcf at an average price of $4.86 per Mcf. Oil production was 31,808 Bbls at an average price of $67.08 per Bbl. Total production costs (including capital expenses) for the Underlying Properties were $61,766,699.
Material Changes vs. Prior Period
- Revenue Surge: Royalty Income increased 151% from 2009 to 2010, driven primarily by higher natural gas prices and a significant reduction in capital expenditures deducted from net proceeds.
- Capital Expenditures: Capital expenses deducted in 2010 were $13.1 million, a sharp decrease from $33.6 million in 2009. This reduction significantly boosted net proceeds available to the Trust.
- Reserve Revisions: Proved natural gas reserves increased to 142,106,000 Mcf in 2010 from 133,836,000 Mcf in 2009, largely due to higher average gas prices improving the economic viability of reserves.
- Legal Settlement: In May 2010, the Trust received a $2.6 million payment from BROG settling litigation regarding compliance audit issues, which was included in 2010 Royalty Income.
Outlook, Risks, and Contingencies
Guidance and Outlook: The Trustee does not provide forward-looking projections for future distributions due to the speculative nature of the oil and gas industry and the Trust's lack of control over operations. BROG estimated 2011 capital expenditures at $13.6 million, though actual spending could range from $5 million to $35 million depending on gas prices and regulatory approvals.
Key Risks and Contingencies:
- Commodity Price Volatility: Distributions are highly sensitive to natural gas prices. Lower prices reduce net proceeds and may render certain reserves uneconomic.
- Contract Disputes: BROG is in an ongoing dispute with Enterprise Field Services, LLC ("EFS") regarding gathering and processing rates. EFS attempted to terminate contracts in December 2010, but an injunction prevented flow reductions. Mediation was scheduled for March 2011.
- Regulatory Litigation: The Jicarilla Apache Nation is pursuing litigation against the Department of Interior regarding royalty valuation methods ("major portion" calculation). A final judgment could impact Royalty Income, though no loss estimate has been provided by BROG.
- Depleting Assets: The underlying properties are depleting assets. Future distributions depend on BROG's ability to maintain production through development projects, which are capital intensive and price-dependent.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as they are the primary driver of Trust income.
- Capital Expenditure Trends: Monitor BROG's actual capital spending versus budget, as high capital costs directly reduce distributions.
- Contract Renewals: Track the status of gas sales contracts expiring in March 2011 (Chevron, BP, Macquarie) and the resolution of the EFS gathering dispute.
- Reserve Estimates: Review the independent engineer's report (Cawley, Gillespie & Associates) for updates on proved reserves and the impact of price changes on reserve quantities.
- Legal Proceedings: Monitor the outcome of the Jicarilla Apache Nation litigation and any potential retroactive royalty adjustments.