Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter ended March 31, 2004
Structure: The Trust is a passive entity holding a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The working interest owner is Burlington Resources Oil & Gas Company LP ("BROG"). The Trustee is TexasBank.
Units Outstanding: 46,608,796 (as of May 10, 2004)
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Royalty Income | $21,196,352 | $19,911,068 |
| Total Income (Royalty + Interest) | $21,205,044 | $19,918,521 |
| General & Administrative Expenses | $513,163 | $420,374 |
| Distributable Income | $20,691,881 | $19,498,147 |
| Distributable Income per Unit | $0.443948 | $0.418337 |
| Cash and Short-Term Investments | $9,259,177 | $7,082,284 (Dec 31, 2003) |
| Net Overriding Royalty Interest (Asset) | $29,131,300 | $29,822,820 (Dec 31, 2003) |
| Distributions Payable | $9,144,319 | $6,967,426 (Dec 31, 2003) |
Production Data (Q1 2004 vs Q1 2003):
- Gas Sales: 11,029,233 Mcf (Avg Price: $4.17/Mcf) vs 11,637,548 Mcf (Avg Price: $3.51/Mcf)
- Oil Sales: 14,855 Bbls (Avg Price: $28.06/Bbl) vs 16,107 Bbls (Avg Price: $24.44/Bbl)
Material Changes vs. Prior Period
- Revenue Increase: Royalty income increased by approximately 6.5% compared to Q1 2003. This was primarily driven by a significant increase in average gas prices ($0.66/Mcf higher) and oil prices ($3.62/Bbl higher), which offset a decline in total gas and oil sales volumes.
- Expense Increase: General and administrative expenses rose by approximately $92,789, attributed to timing differences in the receipt and payment of expenses.
- Capital Expenditures: Capital costs attributable to the underlying properties for Q1 2004 were approximately $9.45 million, compared to $6.6 million in Q1 2003. Higher capital expenditures reduce the net profits available for royalty calculation.
- Asset Amortization: The net overriding royalty interest decreased by $691,520 due to amortization for the quarter.
Outlook, Risks, and Management Commentary
- 2004 Capital Budget: BROG estimates a 2004 capital expenditure budget of $18.5 million, with a potential range of $15 million to $25 million depending on project mix and gas prices. The plan includes drilling 103 new wells (73 coal seam, 30 conventional) and working over existing wells.
- Gas Sales Contracts: BROG has contracts with Duke Energy (now ConocoPhillips) and PNM Gas Services. The contract with ConocoPhillips is set to expire on March 31, 2005, and BROG has notified them of its intent to terminate. A request for proposal for new purchasers is being prepared.
- Tax Credits: The Section 29 tax credit for coal seam gas expired for fuel sold after 2002. However, cash-basis taxpayers may still claim credits for 2002 sales if proceeds are received in 2004. The Trust estimates the credit was approximately $0.03 per Unit in Q1 2003; no specific 2004 estimate is provided in this filing.
- Legal Proceedings: The Trust is not a party to any legal proceedings. However, adverse outcomes in litigation involving BROG could materially decrease Royalty income. No estimate of potential loss has been provided by BROG.
- Regulatory Compliance: The Trust faces challenges complying with Sarbanes-Oxley Act governance rules (e.g., audit committees) due to its passive trust structure. The Trustee intends to seek relief or amend the Indenture if necessary.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as income is highly correlated with price fluctuations.
- Capital Expenditure Impact: Monitor BROG's actual capital spending against the $15M-$25M range, as higher spending directly reduces distributable income.
- Contract Renewal: Track the status of the gas sales contract expiring March 31, 2005, and the terms of any new agreements.
- Production Volumes: Review future production reports to confirm if the decline in gas volumes (from 11.6M to 11.0M Mcf) is a temporary or structural trend.
- Legal Exposure: Stay informed of any litigation developments involving BROG that could impact the underlying properties.