Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Fiscal Year Ended December 31, 2022
Structure: The Trust is a widely held fixed investment trust with no employees, officers, or directors. It is administered by PNC Bank, National Association (Trustee). The Trust holds a 75% net overriding royalty interest in oil and natural gas properties (Subject Interests) located in the San Juan Basin, New Mexico, operated primarily by Hilcorp San Juan L.P. (Hilcorp).
Operations: The Trust does not operate the properties. Income is derived from 75% of the Net Proceeds (Gross Proceeds less production costs) generated by the Subject Interests. As of December 31, 2022, 99% of proved reserves were natural gas.
Key Financial Metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Royalty Income | $79,008,985 | $37,623,612 |
| Total Income (Royalty + Interest) | $79,066,171 | $37,624,762 |
| Distributable Income | $77,599,453 | $35,970,088 |
| Distributable Income per Unit | $1.664908 | $0.771744 |
| General & Administrative Expenses | $1,466,718 | $1,654,674 |
| Trust Corpus (Net Asset Value) | $2,968,707 | $3,690,847 |
| Cash and Short-Term Investments | $5,488,194 | $6,240,726 |
| Cash Reserves | $1,000,000 | $1,000,000 |
Production Data (Attributable to Royalty):
- Natural Gas: 13,971,762 Mcf (2022) vs. 11,029,493 Mcf (2021)
- Oil and Condensate: 23,637 Bbls (2022) vs. 31,323 Bbls (2021)
- Average Natural Gas Price: $5.54/Mcf (2022) vs. $3.20/Mcf (2021)
- Average Oil Price: $86.73/Bbl (2022) vs. $54.72/Bbl (2021)
Material Changes vs. Prior Period
- Revenue Surge: Royalty Income increased 110% year-over-year, driven primarily by a 73% increase in the average natural gas price and a 58% increase in the average oil price.
- Production Costs: Total production costs (including capital expenses) increased to $44.3 million in 2022 from $32.0 million in 2021. Lease operating expenses rose 17% to $26.2 million.
- Reserve Revisions: Proved natural gas reserves increased significantly to 146,641 MMcf in 2022 from 84,142 MMcf in 2021. This increase is attributed primarily to higher natural gas prices used in reserve calculations rather than new drilling (no new drill projects were conducted in 2022).
- Accounting Adjustments: In 2022, Hilcorp made actualizations and adjustments resulting in $10.95 million of additional Royalty Income paid to the Trust, related to prior period true-ups and process reviews.
Guidance, Outlook, and Risks
Capital Expenditure Outlook (2023): Hilcorp estimates 2023 capital expenditures for the Subject Interests at $4.4 million. This includes approximately $3.7 million for 25 well recompletions and workovers, $0.5 million for facilities projects, and $0.2 million for permitting costs. No new drill projects are currently planned.
Management Commentary: The Trustee notes that the Trust's income is heavily dependent on natural gas prices and Hilcorp's operational decisions. Hilcorp has implemented new controls to reduce the need for future revenue corrections ("true-ups").
Risks and Contingencies:
- Commodity Price Risk: The Trust has no ability to hedge; distributions fluctuate directly with natural gas and oil prices.
- Operator Dependency: The Trust relies entirely on Hilcorp for production data, cost reporting, and operational decisions. Hilcorp may reduce expenditures or abandon wells if they are no longer economically viable.
- Regulatory/Climate Change: New EPA regulations regarding methane emissions and the Inflation Reduction Act may increase production costs or reduce demand for natural gas.
- Depletion: The Subject Interests are depleting assets. Without significant capital investment in new drilling, production volumes will decline over time.
Investor Verification Checklist
- Reserve Estimates: Verify the significant increase in proved reserves (from 84,142 to 146,641 MMcf) is driven by price assumptions rather than physical additions, as no new wells were drilled.
- Cost Allocation: Monitor the ongoing audit of Hilcorp's production costs and capital expenditures to ensure compliance with the Conveyance, particularly regarding lease operating expenses and year-end salary/bonus allocations.
- 2023 Capital Plan: Confirm execution of the $4.4 million 2023 capital budget, specifically the 25 well recompletions, to assess potential production stabilization.
- True-up Status: Verify that Hilcorp's claim that all prior month actualizations have occurred holds true in subsequent quarterly reports.
- Regulatory Impact: Assess the potential financial impact of the EPA's Methane Emissions Reduction Program (starting 2024) on Hilcorp's operating costs.