Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter and nine months ended September 30, 2015
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. It does not operate the properties; Burlington Resources Oil & Gas Company LP ("Burlington") is the operator. The Trustee is Compass Bank.
Units Outstanding: 46,608,796 (as of November 6, 2015)
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2015 |
Three Months Ended Sep 30, 2014 |
Nine Months Ended Sep 30, 2015 |
Nine Months Ended Sep 30, 2014 |
|---|---|---|---|---|
| Royalty Income | $5,414,897 | $16,076,429 | $15,024,041 | $48,726,954 |
| Total Revenue | $5,415,511 | $16,078,329 | $15,105,098 | $48,801,021 |
| Distributable Income | $5,013,545 | $15,692,706 | $13,192,574 | $47,494,809 |
| Distributable Income per Unit | $0.107567 | $0.336690 | $0.283050 | $1.019009 |
| Cash and Short-term Investments | $2,999,380 | $4,011,340 | $2,999,380 | $4,011,340 |
| Net Overriding Royalty Interest (Asset) | $8,892,026 | $9,362,757 | $8,892,026 | $9,362,757 |
| Distributions Payable | $2,463,067 | $3,825,098 | $2,463,067 | $3,825,098 |
Production Data (Three Months Ended Sep 30, 2015):
- Gas Sales: 7,490,209 Mcf (Avg Price: $2.26/Mcf)
- Oil Sales: 21,652 Bbls (Avg Price: $54.65/Bbl)
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 66% in the third quarter of 2015 compared to the same period in 2014. This was primarily driven by a significant drop in natural gas prices (from $4.47/Mcf in Q3 2014 to $2.26/Mcf in Q3 2015) and increased capital costs deducted by the operator.
- Capital Expenditures: Capital costs attributable to the Underlying Properties increased to approximately $1.6 million in Q3 2015 from $1.2 million in Q3 2014. For the nine months ended September 30, 2015, capital expenditures were approximately $11.4 million compared to $4.4 million in the prior year period.
- Operating Expenses: Lease operating expenses decreased slightly in Q3 2015 ($7.38 million) compared to Q3 2014 ($8.30 million) due to cost-reduction efforts by Burlington. However, Trust administrative expenses increased due to legal costs associated with ongoing litigation.
- Drilling Activity: Burlington completed its 2015 new well drilling program in March 2015 and anticipated no new drilling activity for the remainder of the year due to the challenged price environment.
Guidance, Outlook, Risks, and Contingencies
- Outlook: The Trust's income is heavily dependent on natural gas prices. Burlington anticipates restarting its drilling program in the future, dependent on gas prices. No new drilling was expected for the remainder of 2015.
- Legal Proceedings (2014 Litigation): The Trust is suing Burlington for breach of contract regarding unresolved audit exceptions. The Trust seeks monetary relief in excess of $12,000,000. Discovery and mediation schedules have been extended due to Burlington's internal reorganization.
- Historical Settlement Dispute: The Trust disputes a $4.9 million deduction made by Burlington in 2008 related to a settlement of royalty underpayment claims (Wright case), arguing the claim was released in 1996.
- Regulatory Risk (Jicarilla Apache Nation): A long-standing dispute regarding "major portion" royalty calculations for Native American leases remains unresolved. A 2010 Court of Appeals ruling remanded the matter to the Department of the Interior (DOI). Burlington states it cannot estimate a range of loss for the Trust until the DOI provides a new calculation for the 1984-1988 period.
- Contract Expirations: Key gas sales contracts with Chevron and EDF Trading are set to expire in March 2016, with requests for proposals expected to begin in April 2016.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as the Trust's revenue is highly correlated with this metric.
- Litigation Status: Monitor the status of the "2014 Litigation" against Burlington and the potential for a settlement or judgment exceeding $12 million.
- Regulatory Developments: Track updates from the Department of the Interior regarding the Jicarilla Apache Nation "major portion" calculation case, which could impact historical royalty payments.
- Operator Capital Budget: Review Burlington's capital expenditure plans for 2016, as increased drilling costs will reduce net proceeds available to the Trust.
- Contract Renewals: Assess the terms of new gas sales contracts expected to be negotiated in early 2016 for volumes expiring in March 2016.