Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarterly period ended June 30, 2013 (Form 10-Q)
Trustee: Compass Bank
Structure: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, operated by Burlington Resources Oil & Gas Company LP ("Burlington"). The Trust is a passive entity with no employees; it distributes net proceeds from production to Unit Holders.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Royalty Income | $6,237,669 | $9,909,897 |
| Total Revenue | $6,237,867 | $9,910,561 |
| Distributable Income | $5,536,683 | $8,932,976 |
| Distributable Income per Unit | $0.118790 | $0.191658 |
| Cash and Short-Term Investments | $3,944,939 (as of June 30, 2013) | N/A |
| Net Overriding Royalty Interest (Asset) | $11,847,943 (as of June 30, 2013) | N/A |
| Distributions Payable | $3,758,696 (as of June 30, 2013) | N/A |
Production Data (Three Months Ended June 30, 2013):
- Gas Sales: 8,369,221 Mcf (Average Price: $3.42/Mcf)
- Oil Sales: 14,936 Bbls (Average Price: $81.41/Bbl)
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the three months ended June 30, 2013, decreased to $6.24 million from $10.58 million in the same period in 2012. For the six-month period, income dropped to $9.91 million from $25.43 million.
- Cost Increases: The decline in distributable income is primarily attributed to significantly higher capital expenditures and lease operating expenses in 2013 compared to 2012.
- Capital expenditures for Q2 2013 were approximately $6.8 million versus $3.9 million in Q2 2012.
- Lease operating expenses for Q2 2013 were $10.02 million versus $6.87 million in Q2 2012.
- 2012 Calculation Error: Burlington reported a "2012 Calculation Error" where lease operating expenses and capital expenditures were understated by approximately 25% from April to July 2012. This resulted in an overpayment of royalties to the Trust of approximately $3.39 million, which was offset against subsequent royalty payments starting in August 2012.
- Interest Income: Interest income was negligible in 2013 ($198 for Q2) compared to $210,041 in Q2 2012, largely due to the receipt of interest on late payments in 2012 related to compliance audit negotiations.
Outlook, Risks, and Management Commentary
- Drilling Suspension: On March 27, 2013, Burlington announced a temporary suspension of its drilling program in the San Juan Basin to monitor natural gas prices. Existing wells continue to be operated.
- Capital Budget: Burlington's amended 2013 capital budget is estimated at $18.5 million, though actual expenditures could range from $15 million to $45 million depending on regulatory approvals and gas prices. Approximately $5 million of this budget is allocated to prior years' projects.
- Legal Proceedings (Contingencies):
- Jicarilla Apache Nation Case: Litigation regarding "major portion" royalty calculations for the period January 1984 through February 1988 remains outstanding. The U.S. Court of Appeals remanded the matter to the Department of the Interior (DOI). Burlington states it cannot estimate a range of loss for the Trust until the DOI provides a new calculation.
- BP Settlement: A settlement in Abraham et al. v. BP America Production Company was approved in March 2013 for $10 million plus interest. The Trust is a member of the plaintiff class, but the materiality of any distribution to the Trust is uncertain.
- Contractual Obligations: Gas sales contracts with Chevron, Shell, and EDF Trading are in place. Contracts with PG&E and Shell expired March 31, 2013, and were replaced by new agreements.
Investor Verification Checklist
- Cost Recovery Impact: Verify the extent to which the "2012 Calculation Error" offset continues to reduce current royalty distributions.
- Capital Expenditure Volatility: Monitor Burlington's actual capital spending against the wide estimated range ($15M–$45M) and its impact on net proceeds.
- Drilling Program Status: Confirm if and when Burlington resumes its suspended drilling program in the San Juan Basin.
- Legal Exposure: Track the Department of the Interior's progress on the Jicarilla Apache Nation "major portion" calculation, as a settlement could result in significant reimbursement claims against the Trust.
- Gas Price Sensitivity: Assess the Trust's exposure to natural gas price fluctuations, given that a high percentage of income is derived from gas sales.