Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter ended March 31, 2013
Structure: The Trust is a passive entity holding a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, operated by Burlington Resources Oil & Gas Company LP ("Burlington"). The Trustee is Compass Bank. The Trust has no employees or officers; all administrative functions are performed by the Trustee.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Royalty Income | $3,672,228 | $14,850,493 |
| Total Revenue | $3,829,418 | $15,198,187 |
| Distributable Income | $3,396,293 | $14,624,696 |
| Distributable Income per Unit | $0.072868 | $0.313776 |
| General & Administrative Expenses | $(433,125) | $(573,491) |
| Cash and Short-term Investments | $0 | $1,420,096 |
| Net Overriding Royalty Interest (Asset) | $12,067,958 | $12,163,460 |
| Trust Corpus | $12,067,958 | $12,163,460 |
Production Data (Q1 2013 vs Q1 2012):
- Gas Sales: 7,320,787 Mcf (Avg Price: $3.64/Mcf) vs 8,212,735 Mcf (Avg Price: $4.38/Mcf)
- Oil Sales: 11,871 Bbls (Avg Price: $77.96/Bbl) vs 14,370 Bbls (Avg Price: $86.01/Bbl)
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 75% compared to Q1 2012. This was driven by a 17% decrease in gas production volumes and a 17% decrease in average gas prices ($0.74/Mcf lower).
- Capital Expenditures: Capital costs deducted by Burlington increased significantly to approximately $12.5 million in Q1 2013, compared to $5.9 million in Q1 2012. This increase in costs, combined with lower revenues, resulted in production costs exceeding revenues for the month of March 2013, leading to a $0 distribution for that month.
- Liquidity: Cash and short-term investments dropped to $0 from $1.42 million at year-end 2012. A decrease in cash reserves of $156,724 was utilized to pay administrative expenses.
- Drilling Activity: Burlington temporarily suspended its drilling program in the San Juan Basin on March 27, 2013, citing the need to monitor natural gas prices. Existing wells continue to be operated.
Guidance, Outlook, and Risks
Outlook and Management Commentary:
- Burlington revised its 2013 capital expenditure budget downward to an estimated $18.5 million (down $10 million from the January forecast), though actual spending could range from $15 million to $45 million depending on regulatory approvals and gas prices.
- The Trustee notes that the Trust's income is heavily influenced by natural gas prices and production volumes. The suspension of drilling is a direct response to the challenged price environment.
Risks and Contingencies:
- Jicarilla Apache Nation Litigation: Ongoing litigation regarding "major portion" royalty calculations for the period January 1984 through February 1988. The U.S. Court of Appeals remanded the matter to the Department of the Interior (DOI) in 2011. Burlington states it cannot estimate a range of loss for the Trust until the DOI provides a new calculation. Burlington may seek reimbursement from the Trust if a judgment or settlement requires additional royalty payments.
- BP Settlement: The Trust is a member of the plaintiff class in a settlement with BP America Production Company regarding royalty underpayments. A $10 million settlement was approved in March 2013, but it is uncertain if the amount distributed to the Trust will be material.
- Contract Expirations: Several gas sales contracts with PG&E and Shell expired March 31, 2013. New contracts were secured with Shell and EDF Trading effective April 1, 2013.
Investor Verification Checklist
- Drilling Suspension Status: Verify if Burlington has resumed drilling operations in the San Juan Basin and the impact on future production volumes.
- Gas Price Sensitivity: Monitor natural gas prices in the San Juan Basin, as the Trust's income is highly sensitive to price fluctuations (Q1 2013 avg: $3.64/Mcf).
- Capital Expenditure Execution: Track actual capital expenditures against the revised $18.5 million budget to assess future deductions from Royalty Income.
- Legal Proceedings Update: Monitor developments in the Jicarilla Apache Nation case regarding the 1984-1988 period, as a negative outcome could result in significant retroactive royalty payments reducing Trust income.
- BP Settlement Distribution: Confirm the final amount, if any, distributed to the Trust from the $10 million BP settlement.