Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (Trust)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2017
Trustee: Compass Bank
Outstanding Units: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and natural gas properties in the San Juan Basin, New Mexico. The principal operator is Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips. The Trust is a pass-through entity taxed as a grantor trust.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Royalty Income | $8,608,220 | $3,033,512 |
| Total Income | $8,609,603 | $3,034,170 |
| Distributable Income | $8,147,010 | $1,786,734 |
| Distributable Income per Unit | $0.174796 | $0.038335 |
| General & Administrative Expenses | $(462,593) | $(1,022,436) |
| Cash and Short-Term Investments | $4,310,292 | $3,932,658 (Dec 31, 2016) |
| Cash Reserves | $1,000,000 | $1,000,000 |
| Net Overriding Royalty Interest (Net Book Value) | $7,463,286 | $7,784,379 (Dec 31, 2016) |
Production Data (Q1 2017): Natural Gas: 3,161,814 Mcf (Royalty share); Oil: 6,093 Bbls (Royalty share).
Average Prices (Q1 2017): Natural Gas: $2.93/Mcf; Oil: $35.77/Bbl.
Material Changes vs. Prior Period
- Revenue Surge: Royalty Income increased 184% year-over-year, driven primarily by a 63% increase in the average natural gas price ($1.80 to $2.93 per Mcf) and reduced operating costs.
- Expense Reduction: General and Administrative expenses decreased 55% due to lower audit and legal costs related to ongoing litigation. Lease operating expenses decreased 15% due to reduced maintenance costs.
- Capital Expenditures: Capital expenditures by the operator decreased 66% to $194,680, reflecting a challenging price environment and fewer maintenance projects.
- Distribution Growth: Distributable Income per Unit increased 356% to $0.174796.
Outlook, Risks, and Contingencies
- Potential Asset Sale: ConocoPhillips announced a definitive agreement to sell its San Juan Basin interests to an affiliate of Hilcorp Energy Company for up to $3.0 billion. The transaction is expected to close in Q3 2017. The Trustee noted this may increase administrative expenses but the impact on operations remains uncertain.
- Litigation: The Trust is engaged in ongoing litigation against Burlington (the "2014 Litigation") seeking over $12 million in damages regarding accounting and payment disputes. The trial date was moved to January 16, 2018, to facilitate settlement discussions.
- Capital Budget: The operator's 2017 capital expenditure budget is estimated at $1.7 million, with no funds allocated for new drilling due to depressed natural gas prices.
- Market Risk: The Trust's income is heavily dependent on natural gas prices and production volumes. There have been no material changes to market risk disclosures.
Investor Verification Checklist
- Verify the closing status and terms of the ConocoPhillips sale to Hilcorp Energy Company and its impact on future royalty payments.
- Monitor the status of the "2014 Litigation" against Burlington, including any settlement updates or trial outcomes scheduled for 2018.
- Confirm the operator's adherence to the $1.7 million 2017 capital expenditure budget and the lack of new drilling activity.
- Review future natural gas price trends, as the Trust's income is highly sensitive to commodity price fluctuations.
- Check for any changes in the Trust's cash reserves, which are currently held at $1.0 million for litigation expenses.