Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2023
Trustee: PNC Bank, National Association
Operator: Hilcorp San Juan L.P.
Units Outstanding: 46,608,796 (as of August 14, 2023)
The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. Income is derived from "Net Proceeds" (Gross Proceeds minus Production Costs) generated by Hilcorp. The Trust is a pass-through entity taxed as a grantor trust.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2023 |
Three Months Ended June 30, 2022 |
Six Months Ended June 30, 2023 |
Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Royalty Income | $8,519,333 | $13,722,931 | $44,936,036 | $28,613,422 |
| Total Income | $8,581,698 | $13,724,760 | $45,035,337 | $28,615,458 |
| Distributable Income | $8,087,503 | $13,343,042 | $44,058,779 | $27,712,269 |
| Distributable Income per Unit | $0.173518 | $0.286277 | $0.945289 | $0.594571 |
| Cash and Short-Term Investments | $1,791,747 | (Balance Sheet data for 2022 not provided in text for direct comparison) | ||
| Cash Reserves | $1,000,000 | |||
| Net Overriding Royalty Interest (Net) | $2,812,651 | (Dec 31, 2022: $2,968,707) |
Production Data (Three Months Ended June 30, 2023):
- Natural Gas: 5,613,332 Mcf (Subject Interests) | Avg Price: $3.69/Mcf
- Oil: 9,105 Bbls (Subject Interests) | Avg Price: $66.09/Bbl
Material Changes vs. Prior Period
- Quarterly Performance (Q2 2023 vs. Q2 2022): Distributable income decreased by approximately 39% ($5.25 million). This decline was driven by lower natural gas production volumes (down ~7.6%) and significantly lower natural gas prices ($3.69/Mcf vs. $4.54/Mcf).
- Semi-Annual Performance (YTD 2023 vs. YTD 2022): Distributable income increased by approximately 59% ($16.35 million). The increase was primarily due to higher natural gas prices in the first quarter of 2023 ($7.19/Mcf average for six months vs. $4.67/Mcf in 2022), which offset a decline in production volumes.
- Expenses: General and administrative expenses increased 30% for the quarter and 8% for the six months, attributed to timing differences in payments. Lease operating expenses increased 12% for the quarter.
- Capital Expenditures: Hilcorp's capital expenditures increased 15% for the quarter but decreased 16% for the six months compared to the prior year periods.
Outlook, Risks, and Contingencies
- Capital Plan: Hilcorp estimates 2023 capital expenditures at $4.4 million, focusing on 25 well recompletions/workovers ($3.7M), facilities/compression ($0.5M), and permitting ($0.2M).
- Accounting Adjustments: Hilcorp completed a review of production volume allocations for 2017–2020 in January 2023. Initial proposed adjustments for 2017 revenues were presented in February 2023. The Trustee is engaging with Hilcorp regarding these adjustments, which may result in future revisions to reported revenues.
- Audit and Compliance: The Trust maintains an ongoing comprehensive audit process of Hilcorp's revenues, costs, and pricing. The Trustee is analyzing specific expenses, such as year-end salaries and bonuses paid to Hilcorp employees, to ensure compliance with the Conveyance.
- Market Risks: Income is heavily dependent on natural gas prices and production volumes. Weather disruptions (winter storms) and line pressure in gathering systems can impact production. The Trust cannot acquire new assets; income is subject to natural depletion.
- Liquidity: The Trust maintains a $1.0 million cash reserve. If Royalty Income is insufficient to cover liabilities, the Trustee may borrow funds, though no distributions would be made until borrowings are repaid.
Investor Verification Checklist
- Production Volume Trends: Verify the continued decline in natural gas production volumes (down ~6.7% YTD) and the impact of the 2023 capital plan on stabilizing or reversing this trend.
- Commodity Price Sensitivity: Monitor natural gas price fluctuations, as the Trust's income is highly correlated with spot prices in the San Juan Basin.
- Accounting Revisions: Track the status of the 2017–2020 volume allocation adjustments and any resulting true-ups to revenue or severance taxes.
- Expense Compliance: Review future filings for the outcome of the Trustee's analysis regarding Hilcorp's year-end salary/bonus expenses and other lease operating costs.
- Depletion Rate: Assess the rate of depletion of the net overriding royalty interest, which decreased from $2.97M to $2.81M over the six-month period.