SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2002
Trustee: Bank One, N.A.
Outstanding Units: 46,608,796 (as of August 14, 2002)

The Trust holds a 75% net overriding royalty interest in oil and gas properties operated by Burlington Resources Oil & Gas Company LP ("BROG"). Income is derived from the sale of production less costs, taxes, and capital expenditures.

Key Financial Metrics

Production Data (Q2 2002 vs Q2 2001):
- Average Gas Price: $2.18/Mcf vs $4.92/Mcf
- Average Oil Price: $19.14/Bbl vs $24.60/Bbl
- Gas Sales Volume: 11,129,745 Mcf vs 10,355,225 Mcf

Material Changes vs. Prior Period

• Revenue Decline: Distributable income dropped approximately 65% in Q2 2002 compared to Q2 2001. The primary driver was a significant decrease in average natural gas prices (from $4.92 to $2.18 per Mcf) and oil prices.
• Capital Expenditures: Capital costs deducted in Q2 2002 were approximately $3.4 million, compared to $7.0 million in Q2 2001. Lower capital spending in 2002 partially mitigated the impact of lower commodity prices on net profits.
• Administrative Expenses: Expenses increased in Q2 2002 due to timing differences and costs associated with an arbitration proceeding regarding gas marketing issues.
• Val Verde Credit Loss: Effective July 1, 2002, the Trust lost the "Val Verde Credit" (estimated at $2.07 million annually) following the sale of the Val Verde facility by BROG. This will increase costs allocated to the Trust and decrease future royalty income.

Guidance, Outlook, Risks, and Contingencies

Management Commentary and Outlook

BROG projects drilling 43 new wells in 2002 (36 conventional, 7 coal seam) with an estimated spend of $9.6 million on new wells and $2.8 million on workovers. Production volumes have remained relatively stable, averaging 125 MMcf per day in Q2 2002, up from 116 MMcf per day in Q2 2001, due to infill drilling programs.

Risks and Contingencies

• Legal Proceedings (MMS & Qui Tam): The Trust is exposed to potential losses from ongoing litigation regarding royalty valuation and underpayments.
  • MMS Settlements: BROG settled claims with the Jicarilla Apache Nation and MMS. BROG proposes to deduct up to $3.6 million from future Trust distributions to cover its share of these settlements. Deductions of $1 million were made in May and June 2002.
  • Qui Tam Litigation: Consolidated litigation (In re Natural Gas Royalties Qui Tam Litigation) alleges underpayment of royalties on federal and Indian lands. No estimate of potential loss to the Trust can be made at this time.
• Gas Imbalance: A partial settlement was reached in 2000 regarding gas imbalances. Remaining imbalances are being corrected via volume adjustments, the value of which is currently being determined.
• Excess Production Costs: As of Dec 31, 2001, excess production costs of $2.26 million existed. $1.7 million attributable to the Trust was deducted in the first six months of 2002.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current natural gas and oil prices against the Trust's break-even thresholds, given the 55% drop in gas prices year-over-year.
• Legal Deductions: Confirm the final allocation of the $3.6 million settlement deduction proposed by BROG and the status of the Qui Tam litigation.
• Val Verde Credit Impact: Monitor future quarterly reports to quantify the exact reduction in royalty income resulting from the loss of the Val Verde Credit effective July 1, 2002.
• Capital Expenditure Recovery: Assess whether BROG's 2002 capital budget ($12.4 million) is sufficient to offset natural production decline and maintain future distributable income.
• Trustee Resignation: Review the June 12, 2002 Form 8-K regarding the Trustee's resignation and the appointment of a successor.