Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2016
Trustee: Compass Bank
Underlying Asset: 75% net overriding royalty interest in oil and natural gas properties in the San Juan Basin, New Mexico, operated by Burlington Resources Oil & Gas Company LP (Burlington).
Units Outstanding: 46,608,796
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Royalty Income | $3,033,512 | $7,344,601 |
| Total Income | $3,034,170 | $7,424,548 |
| Distributable Income | $1,786,734 | $6,762,810 |
| Distributable Income per Unit | $0.038335 | $0.145098 |
| Cash and Short-Term Investments | $963,204 | $1,819,252 (Dec 31, 2015) |
| Cash Reserves | $761,313 | $536,313 (Dec 31, 2015) |
| Net Overriding Royalty Interest (Net) | $8,573,863 | $8,724,387 (Dec 31, 2015) |
| General & Administrative Expenses | $1,022,436 | $661,738 |
Material Changes vs. Prior Period
- Revenue Decline: Royalty Income decreased 59% year-over-year, driven primarily by a drop in average natural gas prices from $3.35/Mcf in Q1 2015 to $1.80/Mcf in Q1 2016.
- Distributable Income Drop: Distributable Income fell 74% to $1.8 million, resulting in a per-unit distribution of $0.038335 compared to $0.145098 in the prior year.
- Expense Increases: General and administrative expenses rose 55% to $1.0 million due to increased audit and legal costs related to ongoing litigation with Burlington.
- Capital Expenditures: Capital expenditures by Burlington decreased 88% to $0.6 million, as no drilling activity occurred in Q1 2016 due to depressed natural gas prices.
- Cash Reserves: The Trustee increased cash reserves by $225,000 during the quarter to mitigate risks associated with potential future revenue shortfalls.
Outlook, Risks, and Unusual Items
- Guidance: The filing contains no specific financial guidance. Burlington's 2016 capital plan anticipates $4.8 million in expenditures, but no funds are currently allocated to drilling; activity depends on future natural gas price recovery.
- Litigation: The Trust is engaged in ongoing litigation against Burlington regarding unresolved revenue and expense audit exceptions. The trial has been rescheduled to March 2017. Unfavorable resolutions could reduce future royalty payments.
- Subsequent Event (Overpayment): On April 19, 2016, Burlington notified the Trust of a $246,266 overpayment due to accounting system errors. This amount will be deducted from May 2016 royalty income.
- Market Risk: The Trust's income is heavily dependent on natural gas prices. Continued low prices may necessitate further increases in cash reserves or reductions in distributions.
Investor Verification Checklist
- Verify the status of the litigation against Burlington and potential impacts on future royalty calculations.
- Monitor natural gas price trends in the San Juan Basin, as they directly dictate royalty income.
- Confirm the deduction of the $246,266 overpayment in the May 2016 distribution.
- Review Burlington's capital expenditure plans for any changes in drilling activity that could affect long-term production volumes.
- Assess the adequacy of the Trust's cash reserves ($761,313) relative to rising administrative and legal costs.