Business Context and Reporting Period
The San Juan Basin Royalty Trust (the "Trust") is a widely held fixed investment trust created under Texas law. It holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The Trust is a passive entity with no employees, officers, or directors; all administrative functions are performed by Compass Bank (the "Trustee"). The underlying properties are operated by Burlington Resources Oil & Gas Company LP ("Burlington"). This filing covers the fiscal year ended December 31, 2014.
Key Financial Metrics
| Metric | 2014 | 2013 | 2012 |
|---|---|---|---|
| Royalty Income | $61,507,662 | $38,042,603 | $34,485,777 |
| Distributable Income | $59,873,115 | $36,492,592 | $33,481,687 |
| Distributions per Unit | $1.284587 | $0.782955 | $0.718358 |
| Total Assets (Dec 31) | $13,374,097 | $15,619,678 | $13,583,556 |
| Trust Corpus (Dec 31) | $9,362,757 | $10,968,996 | $12,163,460 |
| Units Outstanding | 46,608,796 | 46,608,796 | 46,608,796 |
Production and Pricing (2014): Gas production attributable to the Royalty was 15,303,435 Mcf at an average price of $4.47 per Mcf. Oil production was 30,112 Bbls at an average price of $82.99 per Bbl. Total production costs (including capital expenses) for the underlying properties were $60,278,903.
Material Changes vs. Prior Period
- Revenue Increase: Royalty Income increased by approximately 61.7% from 2013 to 2014. This was primarily driven by higher natural gas prices ($4.47 vs. $3.88 per Mcf) and significantly lower capital expenditures ($6.5 million in 2014 vs. $21.5 million in 2013).
- Capital Expenditures: Burlington suspended its drilling program in 2013 due to low gas prices. In 2014, drilling resumed with five new conventional wells, but total capital costs remained low compared to the prior year.
- Reserve Revisions: Proved natural gas reserves increased to 120,748,000 Mcf in 2014 from 104,518,000 Mcf in 2013. This increase was attributed to higher gas prices and lower lease operating expenses.
- Overpayment Recovery: Burlington identified an overpayment of approximately $3.25 million to the Trust due to a severance tax allocation error (2007–2012). Burlington recouped this amount in installments from March through November 2014.
Guidance, Outlook, Risks, and Contingencies
- Drilling Outlook: Burlington anticipates no new drilling or recompletion activity in the San Juan Basin after the first quarter of 2015 due to the challenged price environment for natural gas. The 2015 capital budget is estimated at $14 million, primarily for maintenance and prior-year projects.
- Litigation (2014 Litigation): On July 31, 2014, the Trustee filed a lawsuit against Burlington seeking monetary relief in excess of $12 million. The claims involve breach of contract and failure to properly account for net overriding royalty interests regarding revenue and expense audit exceptions. Mediation is scheduled for April 2015.
- Regulatory Contingency (Jicarilla Apache Nation): A long-standing dispute regarding "major portion" royalty calculations on Native American leases remains unresolved. While a 2010 Court of Appeals ruling remanded the matter to the Department of the Interior (DOI), the DOI has not yet provided the necessary calculations. Burlington cannot currently estimate the potential loss to the Trust.
- Price Volatility: Distributions are highly dependent on natural gas prices. The Trust has no control over production volumes or commodity prices.
Investor Verification Checklist
- Litigation Status: Monitor the outcome of the $12+ million lawsuit filed against Burlington and the status of the Jicarilla Apache Nation regulatory dispute.
- Drilling Activity: Verify if Burlington resumes drilling in 2015 as gas prices fluctuate, as this impacts future reserve growth and production volumes.
- Contract Expirations: Note that gas sales contracts with EDF and Shell expire March 31, 2015, and the Chevron contract term extends through March 31, 2016. Review terms of any new contracts.
- Reserve Estimates: Acknowledge that reserve quantities are estimates sensitive to price changes; a decline in gas prices could materially reduce reported reserves.
- Overpayment Recoupment: Confirm that the $3.25 million severance tax overpayment recovery was fully completed by November 2014 and assess its impact on 2014 distributions.