Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 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 May 11, 2015.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Royalty Income | $7,344,601 | $14,525,726 |
| Total Revenue (incl. interest) | $7,424,548 | $14,527,180 |
| Distributable Income | $6,762,810 | $14,089,843 |
| Distributable Income per Unit | $0.145098 | $0.302300 |
| Cash and Short-term Investments | $1,431,327 | $4,011,340 (Dec 31, 2014) |
| Net Overriding Royalty Interest | $9,162,781 | $9,362,757 (Dec 31, 2014) |
| Distributions Payable | $1,245,085 | $3,825,098 (Dec 31, 2014) |
Production Data (Q1 2015 vs Q1 2014):
- Gas Sales: 7,199,704 Mcf (Avg Price: $3.35/Mcf) vs 7,769,282 Mcf (Avg Price: $4.13/Mcf).
- Oil Sales: 12,357 Bbls (Avg Price: $47.53/Bbl) vs 18,737 Bbls (Avg Price: $81.92/Bbl).
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 49.4% year-over-year, driven primarily by lower natural gas and oil prices and increased capital expenditures.
- Price Volatility: Average gas prices fell $0.78 per Mcf, and average oil prices fell $34.39 per barrel compared to Q1 2014.
- Capital Costs: Capital expenditures deducted from gross proceeds rose to approximately $4.7 million in Q1 2015 from $1.3 million in Q1 2014.
- Administrative Expenses: Increased to $661,738 from $437,337, largely due to legal costs associated with ongoing litigation.
- Drilling Activity: Burlington suspended its drilling program in March 2015 due to the challenged price environment. Eight gross (4.75 net) conventional wells were completed in Q1 2015, compared to none in Q1 2014.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Distributions
Cessation of Distributions: On April 20, 2015, the Trust announced it would not declare a cash distribution for April 2015. Royalty income for April was only $92,095 due to lower gas prices and higher capital costs. No distributions will be made until future net proceeds are sufficient to pay current liabilities and replenish cash reserves. No assurances are given regarding the timing or amount of future distributions.
Capital Budget: Burlington estimates a 2015 capital expenditure budget of $14 million, though actual spending is subject to change based on regulatory approvals and gas prices. No new drilling or recompletion activity is anticipated after Q1 2015.
Risks and Contingencies
- Litigation (2014 Litigation): The Trust is suing Burlington for breach of contract and failure to properly account for royalties, seeking monetary relief in excess of $12,000,000. Discovery is ongoing.
- Historical Settlement Dispute: The Trust disputes a $4.9 million deduction made by Burlington in 2008 related to a third-party settlement (Wright case), arguing the claim was released in 1996.
- Regulatory/DOI Case: Ongoing litigation involving the Jicarilla Apache Nation and the Department of the Interior regarding "major portion" royalty calculations for 1984-1988 production. Burlington states it cannot estimate the potential loss to the Trust as the DOI has not provided necessary calculations.
- Market Risk: The Trust is highly sensitive to natural gas and oil price volatility. It holds no derivative instruments to hedge these risks.
Investor Verification Checklist
- Verify the status of the April 2015 distribution suspension and the timeline for resuming payments.
- Monitor the progress of the "2014 Litigation" against Burlington and the potential for a $12M+ recovery.
- Track the Department of the Interior's actions regarding the "major portion" royalty calculation dispute, which could impact historical royalty income.
- Review Burlington's capital expenditure plans and drilling suspension status, as these directly impact future net proceeds.
- Confirm the impact of current natural gas prices ($3.35/Mcf in Q1 2015) on the Trust's ability to cover operating costs and generate distributable income.