SJT

Business Context and Reporting Period

The San Juan Basin Royalty Trust (the "Trust") is a Texas express trust created in 1980, holding a 75% net overriding royalty interest in oil and natural gas properties (the "Subject Interests") located in the San Juan Basin of northwestern New Mexico. The Trustee is Compass Bank. The Trust does not operate the properties; operations are managed by Burlington Resources Oil & Gas Company LP ("Burlington"), a subsidiary of ConocoPhillips. The Trust distributes net proceeds from production to Unit Holders. This filing covers the fiscal year ended December 31, 2016.

Key Financial Metrics

Production and Pricing (2016): Average natural gas price was $1.89 per Mcf (down from $2.60 in 2015). Average oil price was $30.01 per Bbl (down from $47.00 in 2015). Total natural gas production from Subject Interests was 28,003,159 Mcf.

Material Changes Versus Prior Period

• Revenue Decline: Royalty Income decreased 14% to $16.79 million in 2016 compared to 2015, driven primarily by a significant drop in natural gas prices and reduced production volumes.
• Capital Expenditures: Capital expenditures deducted from net proceeds dropped 89% to $1.38 million in 2016 from $12.81 million in 2015. Burlington suspended its drilling program in 2016 due to depressed commodity prices.
• Operating Expenses: Lease operating expenses and property taxes decreased 13% to $26.45 million in 2016, reflecting reduced maintenance and repair costs.
• Administrative Costs: General and administrative expenses increased 41% to $3.13 million in 2016. This increase was largely due to legal and audit costs associated with ongoing litigation against Burlington and expenses related to a failed proxy campaign by Southwest Bank to replace the Trustee.
• Reserve Revisions: While proved natural gas reserves increased slightly by 4.2% to 78,739 MMcf, the discounted future net cash flows decreased 9.3% to $93.48 million due to lower price assumptions.

Outlook, Risks, and Contingencies

• 2017 Capital Plan: Burlington's 2017 capital expenditure budget is estimated at $1.7 million, allocated entirely to maintenance, facilities, and well recompletions. No capital is allocated for new drilling.
• Commodity Price Risk: The Trust's income is highly sensitive to natural gas prices. Continued low prices may lead to further production curtailments or well abandonments by the operator.
• Litigation:
  • Burlington Matter: The Trust is engaged in litigation seeking over $12 million in damages regarding audit exceptions and royalty calculations. The trial date was moved to January 16, 2018.
  • Jicarilla Matter: An unresolved regulatory issue regarding royalty valuation methods on Native American leases could impact future income, though a loss range cannot currently be estimated.
• Asset Sale Risk: ConocoPhillips announced a $5 to $8 billion divestiture program focusing on North American natural gas assets, which may include the Subject Interests. A sale could alter the operator's financial stability or increase Trust administrative costs.
• Termination Risk: The Trust will terminate if gross revenue falls below $1 million for two successive years or if 75% of Unit Holders vote for termination.

Investor Verification Checklist

• Verify the status of the $12+ million lawsuit against Burlington and the likelihood of recovery.
• Monitor ConocoPhillips' divestiture program to determine if the Subject Interests are sold and the creditworthiness of any potential new operator.
• Track natural gas price trends and their impact on Burlington's decision to maintain or abandon marginal wells.
• Review the Trust's cash reserve levels ($1.0 million) against the estimated costs of ongoing litigation.
• Confirm the 2017 capital expenditure budget remains at $1.7 million with no new drilling activity.