Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2020
Trustee: BBVA USA
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and natural gas properties located in the San Juan Basin of northwestern New Mexico. The Trust is a fixed investment trust taxed as a grantor trust, meaning income is passed through to Unit Holders. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Royalty Income | $5,068,407 | $6,549,564 |
| Total Income | $5,071,969 | $6,557,615 |
| Distributable Income | $4,618,262 | $6,014,837 |
| Distributable Income per Unit | $0.099085 | $0.129050 |
| Cash and Short-Term Investments | $2,498,537 | $1,079,421 |
| Net Overriding Royalty Interest (Net Book Value) | $5,254,179 | $5,452,207 |
| General & Administrative Expenses | $(453,707) | $(542,778) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty Income decreased by approximately 23% ($1.48 million) compared to Q1 2019. This was driven by a 25% decrease in total gross proceeds, attributed to lower natural gas production volumes (6.86 million Mcf vs. 7.39 million Mcf) and a lower average natural gas price ($2.02/Mcf vs. $2.52/Mcf).
- Cost Reductions: Lease operating expenses and property taxes decreased by approximately 13% ($1.0 million), primarily due to reduced compression and gas treating expenses. Capital expenditures dropped 92% ($0.7 million) due to Hilcorp's reduced 2020 capital spending plan.
- Severance Taxes: Aggregate severance taxes decreased by 59% ($1.3 million), reflecting lower revenue and true-up adjustments.
- Liquidity: Cash and short-term investments increased by $1.42 million to $2.50 million, despite lower income, likely due to timing of distributions and expense payments.
Outlook, Risks, and Contingencies
- Commodity Price Risk: The Trust's income is heavily influenced by natural gas prices. Recent declines in oil and gas prices due to the COVID-19 pandemic and OPEC/Russia production disputes pose a significant risk to future distributions.
- True-Up Adjustments: Hilcorp continues to reconcile estimated revenues and severance taxes for prior periods (including Jan-Dec 2018, Oct 2019, and Mar-Jul 2019). Future distributions may be adjusted (increased or decreased) based on these "true-ups." Specifically, there is a potential negative adjustment of up to $2.0 million related to "Other" gross proceeds estimates from late 2017/early 2018 that have not yet been finalized.
- Operational Outlook: Hilcorp does not anticipate materially reducing production or taking wells offline despite the current pricing environment, though the full impact of the pandemic remains unknown.
- Accounting Basis: The Trust operates on a modified cash basis. Revenues are not accrued in the month of production, and expenses are recorded when paid. Amortization is charged directly to trust corpus.
Investor Verification Checklist
- True-Up Exposure: Verify the status of the potential $2.0 million negative adjustment regarding "Other" gross proceeds from 2017/2018 and the timeline for finalizing prior period reconciliations.
- Production Volumes: Monitor natural gas production volumes and average sales prices, as these are the primary drivers of distributable income.
- Capital Spending: Confirm Hilcorp's adherence to the reduced $0.3 million capital spending plan for 2020 and its impact on future production decline rates.
- Commodity Sensitivity: Assess the impact of ongoing volatility in natural gas prices on future quarterly distributions.
- Cash Reserves: Note that cash reserves are maintained at $1.0 million to cover administrative expenses if royalty income is insufficient.