Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2024
Trustee: Argent Trust Company (succeeded PNC Bank on February 15, 2024)
Outstanding Units: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico, operated primarily by Hilcorp San Juan L.P. The Trust is a pass-through entity taxed as a grantor trust and does not engage in commercial activities other than holding the royalty interest.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2024 |
Three Months Ended June 30, 2023 |
Six Months Ended June 30, 2024 |
Six Months Ended June 30, 2023 |
|---|---|---|---|---|
| Royalty Income | $1,854,914 | $8,519,333 | $6,945,974 | $44,936,036 |
| Total Income | $1,892,127 | $8,581,698 | $7,000,842 | $45,035,337 |
| Distributable Income | $1,065,685 | $8,087,503 | $5,158,221 | $44,058,779 |
| Distributable Income per Unit | $0.022864 | $0.173519 | $0.110671 | $0.945289 |
| Cash and Short-Term Investments | $1,467,743 (as of June 30, 2024) | |||
| Cash Reserves | $1,467,743 (as of June 30, 2024) | |||
| Net Overriding Royalty Interest (Net) | $2,677,617 (as of June 30, 2024) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 78% for the three months ended June 30, 2024, and 85% for the six-month period compared to 2023. This was driven by a sharp decline in natural gas prices and increased production costs.
- Commodity Prices: Average natural gas prices fell from $3.69/Mcf (Q2 2023) to $1.92/Mcf (Q2 2024). For the six-month period, prices dropped from $7.19/Mcf to $2.56/Mcf.
- Production Costs: Capital expenditures increased significantly, rising 479% in Q2 2024 compared to Q2 2023, due to Hilcorp's 2024 capital project plan. Lease operating expenses also increased.
- Excess Production Costs: For the first time in the reported periods, Production Costs exceeded Gross Proceeds by $1,655,045 for the three and six months ended June 30, 2024. Under the Trust Indenture, these excess costs must be recovered from future Net Proceeds before Royalty Income is paid to the Trust.
- Distribution Suspension: Due to the excess production costs and low prices, the Trust did not declare distributions for May, June, or July 2024. The Trustee utilized cash reserves to cover administrative expenses during these months.
Guidance, Outlook, and Risks
- Capital Expenditure Plan: Hilcorp's 2024 capital expenditure plan is estimated at $34.0 million (reduced from an initial $36.0 million). Approximately $25.0 million is allocated to two drilling projects in the Mancos formation, and $8.0 million to well recompletions and workovers.
- Liquidity Strategy: The Trustee increased cash reserves to $1.8 million in April 2024 to cover operating expenses during revenue shortfalls. As of June 30, 2024, reserves stood at $1.47 million. The Trustee plans to replenish and increase reserves to $2.0 million before resuming distributions.
- Future Distributions: Distributions will resume only when Gross Proceeds exceed Production Costs and the Trustee determines sufficient funds are available to replenish reserves and pay expenses. The Trust is not obligated to reimburse Hilcorp for excess costs if future proceeds are insufficient.
- Risks: The Trust faces significant exposure to natural gas price volatility, depletion of reserves, and the timing and magnitude of Hilcorp's capital expenditures. The Trustee continues to audit Hilcorp's accounting and reporting to ensure compliance with the Conveyance.
Key Facts for Investor Verification
- Zero Distributions: Verify the suspension of monthly distributions for May, June, and July 2024 due to excess production costs exceeding gross proceeds.
- Excess Cost Recovery: Confirm the $1.655 million in excess production costs that must be recovered from future revenues before any new royalty income is generated.
- Reserve Utilization: Monitor the Trustee's use of cash reserves to pay administrative expenses and the timeline for replenishing reserves to the target $2.0 million.
- Commodity Price Sensitivity: Assess the impact of current natural gas prices (~$1.92/Mcf) on the ability to generate positive Net Proceeds.
- Capital Spending Impact: Evaluate how Hilcorp's $34 million 2024 capital budget will affect near-term cash flows and the recovery of excess costs.