Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter and nine months ended September 30, 2007
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. The properties are operated by Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips. The Trustee is Compass Bank.
Units Outstanding: 46,608,796 (as of November 8, 2007)
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9 Months 2007 | 9 Months 2006 |
|---|---|---|---|---|
| Royalty Income | $37,086,982 | $30,779,508 | $87,324,045 | $109,792,831 |
| Interest Income | $561,866 | $601,349 | $1,275,679 | $1,136,032 |
| Total Income | $37,648,848 | $31,380,857 | $88,599,724 | $110,928,863 |
| Admin Expenses | $263,629 | $293,291 | $1,411,072 | $1,418,453 |
| Distributable Income | $37,385,219 | $31,087,566 | $87,188,652 | $109,510,410 |
| Distribution per Unit | $0.802107 | $0.666989 | $1.870650 | $2.349564 |
| Cash & Short-term Investments | $11,324,437 (as of Sept 30, 2007) | |||
| Net Overriding Royalty Interest (Asset) | $20,398,572 (as of Sept 30, 2007) |
Note: The Trust has no debt. Distributions are paid from net proceeds of production.
Material Changes vs. Prior Period
- Quarterly Performance (Q3 2007 vs. Q3 2006): Distributable income increased by approximately 20% ($6.3 million). This increase was driven by higher average gas prices ($6.55/Mcf in 2007 vs. $5.79/Mcf in 2006) and lower capital expenditures ($3.2 million in 2007 vs. $8.6 million in 2006). These factors offset a decline in gas production volumes (108,199 Mcf/day in 2007 vs. 112,118 Mcf/day in 2006).
- Year-to-Date Performance (9 Months 2007 vs. 2006): Distributable income decreased by approximately 20% ($22.3 million). The decline was primarily due to lower production volumes and lower average gas prices in the first half of 2007 ($6.33/Mcf vs. $6.77/Mcf). Capital expenditures were also lower in 2007 ($22.3 million vs. $30.8 million).
- Oil Prices: Average oil prices decreased in both periods compared to the prior year ($64.16/Bbl in Q3 2007 vs. $66.65/Bbl in Q3 2006).
Outlook, Risks, and Contingencies
Guidance and Operations
BROG estimates its 2007 capital expenditure budget for the Underlying Properties at $28 million, though actual spending could range from $20 million to $50 million depending on regulatory approvals and gas prices. The development strategy is shifting toward conventional gas wells and reducing infill drilling in the Fruitland Coal formation.
Legal Proceedings and Contingencies
- Arbitration Appeal: A significant contingency involves an Arbitration Award of $7,683,699 issued in 2005 in favor of the Trust. While a trial court confirmed the award, the First Court of Appeals in Texas reversed this judgment on August 16, 2007, vacating the unpaid balance. The Trust has filed a Petition for Review with the Supreme Court of Texas. The outcome and timing of this appeal are uncertain.
- Market Risk: The Trust is exposed to volatility in oil and gas prices. It does not engage in hedging or derivative transactions.
- Regulatory Risk: As a publicly traded trust, the Trust must comply with Sarbanes-Oxley Act requirements, which may require amendments to the Trust Indenture and incur material costs.
Investor Verification Checklist
- Arbitration Outcome: Monitor the status of the appeal before the Texas Supreme Court regarding the $7.7 million Arbitration Award, as a reversal could impact future distributions.
- Production Decline: Verify the natural production decline curve reported by BROG and its impact on future royalty income.
- Capital Expenditures: Track actual capital spending against the $20M-$50M range, as higher spending reduces net proceeds available for distribution.
- Commodity Prices: Assess the sensitivity of distributions to fluctuations in natural gas and oil prices in the San Juan Basin.
- Contract Renewals: Confirm the status of gas sales contracts with ChevronTexaco, Coral, and PNM, which were extended through March 31, 2009.