Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Fiscal Year Ended December 31, 2020
Structure: The Trust is a widely held fixed investment trust holding a 75% net overriding royalty interest in oil and natural gas properties (Subject Interests) located in the San Juan Basin, New Mexico. The Trustee is BBVA USA. The operator of the Subject Interests is Hilcorp San Juan L.P. (Hilcorp).
Operations: The Trust does not operate the properties or have employees. It receives net proceeds from Hilcorp based on production volumes and prices, less production costs, and distributes the income to Unit Holders.
Key Financial Metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Royalty Income | $8,844,272 | $9,899,548 |
| Total Income (Royalty + Interest) | $8,850,520 | $9,925,444 |
| General & Administrative Expenses | $1,432,038 | $1,834,484 |
| Distributable Income | $7,418,482 | $8,090,960 |
| Distributable Income per Unit | $0.159164 | $0.173594 |
| Trust Corpus (End of Period) | $5,123,834 | $5,452,207 |
| Cash and Short-Term Investments | $1,286,468 | $1,079,421 |
| Cash Reserves | $1,000,000 | $1,000,000 |
Production Data (Attributable to Royalty):
- Natural Gas: 3,558,084 Mcf (2020) vs. 2,192,560 Mcf (2019)
- Oil & Condensate: 27,951 Bbls (2020) vs. 40,179 Bbls (2019)
- Average Natural Gas Price: $1.51/Mcf (2020) vs. $1.79/Mcf (2019)
- Average Oil Price: $31.47/Bbl (2020) vs. $45.11/Bbl (2019)
Material Changes vs. Prior Period
- Revenue Decline: Royalty Income decreased by approximately 11% ($1.06 million) compared to 2019. This was driven by lower natural gas prices, lower oil prices, and specific adjustments to prior period estimates ("true-ups") by Hilcorp.
- Capital Expenditures: Capital expenditures deducted from gross proceeds plummeted 96% to $259,746 in 2020 from $7.9 million in 2019. Hilcorp halted new drilling and recompletions in 2020 due to low commodity prices.
- Operating Expenses: Lease operating expenses and property taxes decreased 17% to $23.5 million, reflecting cost-cutting measures by Hilcorp.
- Reserve Reduction: Proved natural gas reserves declined to 38,003 MMcf in 2020 from 49,334 MMcf in 2019, primarily due to lower pricing assumptions and production.
- True-Up Adjustments: In 2020, Hilcorp made adjustments resulting in a net reduction of $0.4 million in Royalty Income due to reconciling prior period estimates. Additionally, a $2.0 million "Other Gross" proceeds estimate from 2017/2018 was recouped in 2020.
Guidance, Outlook, and Risks
2021 Outlook:
- Hilcorp's 2021 capital budget is approximately $0.3 million, allocated primarily to natural gas compression facilities.
- No new drilling or well recompletions are planned for 2021 due to low natural gas prices.
- The Trustee does not anticipate changes to the $1.0 million cash reserve level in 2021.
Risks and Contingencies:
- Commodity Price Risk: The Trust's income is heavily dependent on natural gas prices (96% of gross proceeds in 2020). Low prices reduce income and may lead to further capital expenditure cuts.
- Operator Dependency: The Trust relies entirely on Hilcorp for production data, cost calculations, and operational decisions. Hilcorp may prioritize other assets over the Subject Interests.
- True-Up Uncertainty: Hilcorp is still reconciling revenue and tax estimates for periods as recent as July 2020. Future distributions may be adjusted downward if underpayments are found, or upward if overpayments occurred.
- Regulatory/Climate Change: New federal regulations regarding methane emissions and climate change (e.g., rejoining the Paris Agreement) could increase operating costs or reduce demand for fossil fuels.
- Termination Risk: The Trust will terminate if gross revenue falls below $1 million for two successive years.
Investor Verification Checklist
- True-Up Status: Verify the status of Hilcorp's ongoing reconciliation of prior period revenues and severance taxes, which could materially impact future distributions.
- Capital Spending Plans: Monitor Hilcorp's capital expenditure plans; a lack of drilling/recompletions accelerates production decline.
- Commodity Prices: Track Henry Hub natural gas prices, as they are the primary driver of the Trust's distributable income.
- Reserve Estimates: Review the independent engineer's report (Cawley, Gillespie & Associates) for changes in proved reserves driven by price fluctuations.
- Cash Reserve Utilization: Confirm that the $1.0 million cash reserve remains intact and has not been drawn down to cover administrative expenses.