SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarterly period ended June 30, 2007 (Form 10-Q)
Trustee: Compass Bank
Units Outstanding: 46,608,796 (as of August 9, 2007)
Business Overview: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. The Trust is a passive entity; it does not engage in operations. Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips, manages the properties and calculates net proceeds payable to the Trust.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased by approximately 7.9% for the quarter and 36.4% for the six-month period compared to the same periods in 2006.
  • Quarterly Comparison: Royalty income dropped from $28.53 million (Q2 2006) to $26.29 million (Q2 2007).
  • Semi-Annual Comparison: Royalty income dropped from $79.01 million (6M 2006) to $50.24 million (6M 2007).
• Production Volumes: Gas sales volumes attributable to the Royalty decreased significantly.
  • Quarterly Gas Sales: 4,490,936 Mcf (2007) vs. 5,200,329 Mcf (2006).
  • Six-Month Gas Sales: 8,769,841 Mcf (2007) vs. 11,732,815 Mcf (2006).
• Pricing:
  • Gas: Average price increased to $6.38/Mcf in Q2 2007 from $5.97/Mcf in Q2 2006. However, for the six-month period, the average price was lower ($6.20 vs. $7.26).
  • Oil: Average price decreased to $57.98/Bbl in Q2 2007 from $60.57/Bbl in Q2 2006.
• Costs: Capital expenditures deducted by BROG were lower in 2007 ($8.2 million for Q2 vs. $10.95 million for Q2 2006), partially offsetting the revenue decline. Lease operating expenses increased due to higher activity and overhead rates.

Outlook, Risks, and Contingencies

• Capital Expenditure Outlook: BROG estimates a 2007 capital expenditure budget of $28 million, with a projected range of $20 million to $50 million depending on regulatory approvals and gas prices. The strategy involves a shift toward conventional gas development and a reduction in infill drilling in the Fruitland Coal formation.
• Legal Proceedings (Arbitration): A significant arbitration award of $7,683,699 was issued in favor of the Trust in 2005. While a portion was paid in 2006, the balance remains pending an appeal by BROG in the First Court of Appeals in Houston, Texas. Oral arguments were heard in April 2007, and the parties await a ruling. A Supersedeas Bond has been filed by BROG to secure the balance.
• Market Risk: The Trust is exposed to volatility in oil and gas prices and production volumes. The Trust does not engage in hedging or derivative transactions.
• Regulatory Risk: The Trust is subject to Sarbanes-Oxley Act requirements, though as a passive trust, it may face challenges in literal compliance. The Trustee is monitoring rulemaking for potential relief.
• Trustee Change: Compass Bancshares, Inc. (parent of the Trustee) announced an agreement to be acquired by Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), expected to close in the second half of 2007.

Investor Verification Checklist

• Production Decline: Verify the extent of the volume decline in gas production and whether it is attributed to natural decline or accounting adjustments (over-accruals in 2006).
• Arbitration Status: Monitor the status of the appeal regarding the $7.68 million arbitration award, as the final resolution could impact future cash flows.
• Capital Spending: Track BROG's actual capital expenditures against the $20M-$50M range, as higher spending reduces net proceeds available to the Trust.
• Contract Expirations: Note that gas sales contracts with ChevronTexaco, Coral, and PNM were extended through March 31, 2009, but monitor for future termination notices.
• Trustee Transition: Confirm the impact of the BBVA acquisition of Compass Bancshares on the Trust's administration.