SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2019
Trustee: Compass Bank
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796

The Trust holds a 75% net overriding royalty interest in oil and natural gas properties located in the San Juan Basin of northwestern New Mexico. The Trust is a fixed investment trust taxed as a grantor trust, meaning income is passed through to Unit Holders. Financial statements are prepared on a modified cash basis, not GAAP.

Key Financial Metrics

Production Data (Q1 2019): Natural Gas: 2,624,050 Mcf (Royalty share); Oil: 5,237 Bbls (Royalty share).
Average Prices (Q1 2019): Natural Gas: $2.52/Mcf; Oil: $40.96/Bbl.

Material Changes vs. Prior Period

• Distributable Income: Decreased by approximately $0.2 million (3.0%) compared to Q1 2018. This decline was driven by higher production costs and a decrease in "Other" income, partially offset by higher natural gas prices.
• Royalty Income: Decreased slightly by $97,249. While gross proceeds increased by 14% (driven by a natural gas price increase from $2.03 to $2.52 per Mcf), production costs rose significantly.
• Production Costs:
  • Lease Operating Expenses & Property Taxes: Increased by $1.8 million (28%) to $7.96 million, primarily due to increased activity at the Subject Interests.
  • Capital Expenditures: Increased by $0.4 million (116%) to $722,896, attributed to planned well recompletions.
  • Severance Taxes: Increased by $0.4 million (20%) due to higher gross proceeds from natural gas.
• Other Income: Decreased from $1.0 million in Q1 2018 to $507,000 in Q1 2019. The 2018 figure included estimated revenue adjustments related to the transition from Burlington to Hilcorp.

Outlook, Risks, and Management Commentary

• True-Up Process: Hilcorp continues to reconcile actual revenue and severance tax numbers against previously reported estimates ("true-ups") from the 2017 asset acquisition. This process involves a 2-3 month lag and may result in adjustments to future distributions. Specifically, an additional $1.0 million in "Other" revenue estimated for Dec 2017 and Jan 2018 has not yet been trued-up, potentially leading to a negative adjustment of up to $2.0 million in fiscal 2019.
• Subsequent Events: The April 2019 distribution included a true-up of oil and gas production used in the March 2019 distribution, resulting in a net decrease of approximately $0.46 million.
• Capital Expenditure Budget: Hilcorp revised its 2019 capital expenditure budget to approximately $2.7 million for the Subject Interests.
• Liquidity: The Trust maintains $1.0 million in cash reserves to cover general and administrative expenses. The Trustee does not anticipate increasing reserves in 2019 but cannot guarantee this.
• Risks: The Trust's financial reporting is entirely dependent on the accuracy and timeliness of data provided by Hilcorp. Delays in the transition of historical data from Burlington to Hilcorp have necessitated the use of estimates and extended the true-up period. Market risk remains tied to natural gas and oil prices.

Investor Verification Checklist

• True-Up Adjustments: Monitor future filings for the finalization of the $2.0 million potential negative adjustment regarding "Other" revenue from late 2017/early 2018.
• Production Cost Trends: Verify if the 28% increase in lease operating expenses and 116% increase in capital expenditures are temporary or indicative of a new baseline for the Subject Interests.
• Commodity Price Sensitivity: Assess the impact of natural gas price volatility on future distributable income, given that a high percentage of income is derived from natural gas.
• Hilcorp Reporting Reliability: Review ongoing disclosures regarding the transition of data from Burlington to Hilcorp to ensure no material delays in future reporting.
• Capital Expenditure Plan: Confirm adherence to the revised $2.7 million 2019 capital expenditure budget and its impact on net proceeds.