Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter and nine months ended September 30, 2010
Trustee: Compass Bank
Operator: Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips
Business Model: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. It is a passive entity that distributes net proceeds from production to Unit Holders. The Trust has no employees, officers, or directors.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Royalty Income | $19,033,188 | $7,232,890 | $63,485,843 | $19,257,575 |
| Total Revenue | $19,036,834 | $7,427,371 | $63,702,578 | $19,455,467 |
| Distributable Income | $18,837,998 | $6,991,681 | $62,047,897 | $17,749,344 |
| Distributable Income per Unit | $0.404173 | $0.150007 | $1.331249 | $0.380814 |
| Cash and Short-term Investments | $7,880,992 | $5,341,482 | $7,880,992 | $5,341,482 |
| Net Overriding Royalty Interest (Asset) | $15,261,376 | $16,843,731 | $15,261,376 | $16,843,731 |
| Distributions Payable | $7,725,203 | $5,185,693 | $7,725,203 | $5,185,693 |
Production Data (Q3 2010 vs Q3 2009):
- Gas Sales: 8,357,488 Mcf (Avg Price: $4.72/Mcf) vs 8,916,522 Mcf (Avg Price: $2.98/Mcf)
- Oil Sales: 17,524 Bbls (Avg Price: $63.48/Bbl) vs 17,414 Bbls (Avg Price: $56.08/Bbl)
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 163% in Q3 2010 compared to Q3 2009. This was driven primarily by a 58% increase in average natural gas prices ($4.72 vs $2.98 per Mcf) and a significant reduction in capital expenditures deducted by BROG ($3.1 million in Q3 2010 vs $7.4 million in Q3 2009).
- Settlement Proceeds: Royalty income for the nine months ended September 30, 2010, included a $2.6 million payment received in May 2010 from BROG as part of a litigation settlement.
- Expense Reduction: General and administrative expenses decreased in both the quarter and nine-month periods, largely due to reduced legal costs associated with the settled litigation.
- Production Volume: While gas prices rose, total gas sales volume decreased slightly (8.36 million Mcf in Q3 2010 vs 8.92 million Mcf in Q3 2009).
Outlook, Risks, and Contingencies
- Capital Expenditure Outlook: BROG estimates 2010 capital expenditures for the Underlying Properties at $17.9 million, with an additional $6.8 million attributable to prior year budgets. However, actual spending could range from $10 million to $45 million depending on regulatory approvals and gas prices.
- Contractual Risks:
- Gas Sales: Contracts with Chevron, BP Energy, and Macquarie Cook Energy expire March 31, 2011. New contracts are being sought for April 1, 2011.
- Gathering/Processing: BROG is unable to reach a new agreement with Enterprise Field Services (EFS). Current month-to-month contracts terminate December 1, 2010. BROG considers alternative offers commercially inferior and is evaluating options, though no major interruption in flow is anticipated.
- Regulatory Risks: New air quality rules and requirements for closed-loop drilling fluid systems could increase compliance costs and reduce the number of drilling projects.
- Tax Status: The Trust is a grantor trust; income is taxed to Unit Holders. Production from coal seam wells no longer qualifies for Section 45K tax credits under current law.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as the Trust's income is heavily correlated to this metric.
- Capital Expenditure Impact: Monitor BROG's actual capital spending for 2010, as higher spending directly reduces the net proceeds available for distribution.
- Contract Renewals: Track the status of new gas sales contracts (expiring March 2011) and the resolution of the gathering/processing dispute with EFS (terminating December 2010).
- Production Volumes: Review future production reports to confirm if the slight decline in gas volumes observed in Q3 2010 is a trend or a temporary fluctuation.
- Legal Settlements: Confirm if the $2.6 million litigation settlement received in May 2010 was a one-time event or indicative of ongoing recoveries.