Business Context and Reporting Period
The San Juan Basin Royalty Trust (SJT) is a widely held fixed investment trust created under Texas law. It holds a 75% net overriding royalty interest in oil and natural gas properties (Subject Interests) located in the San Juan Basin of northwestern New Mexico. The Trust is managed by PNC Bank, National Association, as Trustee, and relies on Hilcorp San Juan L.P. for operations and financial data. The reporting period covers the fiscal year ended December 31, 2021.
Key Financial Metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Royalty Income | $37,623,612 | $8,844,272 |
| Total Income | $37,624,762 | $8,850,520 |
| General & Administrative Expenses | $1,654,674 | $1,432,038 |
| Distributable Income | $35,970,088 | $7,418,482 |
| Distributable Income per Unit | $0.771744 | $0.159164 |
| Cash and Short-Term Investments | $6,240,726 | $1,286,468 |
| Trust Corpus (Net Overriding Royalty Interest) | $3,690,847 | $5,123,834 |
| Cash Reserves | $1,000,000 | $1,000,000 |
Production and Pricing (2021 vs 2020):
- Natural Gas Production (Royalty): 11,029,493 Mcf (2021) vs. 3,558,084 Mcf (2020).
- Average Natural Gas Price: $3.20 per Mcf (2021) vs. $1.51 per Mcf (2020).
- Average Oil Price: $54.72 per Bbl (2021) vs. $31.47 per Bbl (2020).
- Proved Reserves (Dec 31, 2021): 84,142 MMcf of Natural Gas and 234 MBbls of Oil/Condensate.
Material Changes Versus Prior Period
Distributable Income increased by 385% to $36.0 million in 2021 compared to $7.4 million in 2020. This surge was primarily driven by a 105% increase in Gross Proceeds, resulting from significantly higher natural gas and oil prices. While production volumes for natural gas attributable to the Royalty increased, the primary driver was the price appreciation.
Proved reserves increased substantially from 38,003 MMcf in 2020 to 84,142 MMcf in 2021. This revision was largely due to higher natural gas prices making previously uneconomic reserves economically producible, rather than new drilling. Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021.
Capital expenditures reported for 2021 were $313,440, a 21% increase from 2020, primarily allocated to facilities projects for natural gas compression.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capital Plan: Hilcorp estimated 2022 capital expenditures at $1.9 million, with $1.5 million allocated to 24 well recompletions and workovers. The Trustee does not anticipate changes to the $1.0 million cash reserve in 2022.
Unusual Items and Adjustments: In 2021, Hilcorp completed a transition to a new accounting system. This resulted in "true-ups" and adjustments for prior periods (June 2018 through May 2021), generating an additional $4.65 million in Royalty Income paid to the Trust. These adjustments caused a temporary suspension of distributions in August 2021 due to excess production costs, which were subsequently recovered.
Risks and Contingencies:
- Commodity Price Risk: The Trust's income is heavily dependent on natural gas prices (94% of 2021 Gross Proceeds). Volatility in energy markets directly impacts distributions.
- Regulatory and Climate Change: New EPA regulations regarding methane emissions and potential federal bans on hydraulic fracturing or new leases on federal lands could increase operating costs or reduce production.
- Operator Dependency: The Trust has no control over Hilcorp's operations. Hilcorp may abandon wells or reduce expenditures, which could accelerate reserve depletion.
- Depletion: The Subject Interests are depleting assets. Without significant capital investment by Hilcorp, production volumes will decline over time.
Investor Verification Checklist
- Reserve Revisions: Verify the impact of price-based reserve revisions on the reported 121% increase in proved natural gas reserves.
- True-Up Adjustments: Confirm that the $4.65 million in 2021 Royalty Income from prior period adjustments is fully accounted for and that no further significant true-ups are expected.
- 2022 Capital Execution: Monitor Hilcorp's execution of the $1.9 million 2022 capital plan, specifically the 24 well recompletions, to assess future production stability.
- Commodity Price Sensitivity: Assess the Trust's exposure to natural gas price volatility, given that 98% of reserves are natural gas.
- Regulatory Compliance: Review ongoing EPA and federal regulatory developments regarding methane emissions and drilling restrictions that could affect Hilcorp's operations.