SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Quarterly period ended June 30, 2019 (Form 10-Q)
Trustee: BBVA USA
Outstanding Units: 46,608,796
Business Overview: The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The principal operator of these properties is Hilcorp San Juan L.P. The Trust's income is derived solely from royalty payments based on net proceeds from production, less production costs and capital expenditures.

Key Financial Metrics

Note: The Trust operates on a modified cash basis. There is no debt reported on the balance sheet.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased by approximately 19% for the three months ended June 30, 2019, compared to the same period in 2018 ($2.41M vs. $2.99M). For the six-month period, it decreased by 7% ($8.96M vs. $9.64M).
• Capital Expenditure Surge: Capital expenditures increased dramatically, rising $2.1 million (1,815%) for the quarter and $2.5 million (556%) for the six months compared to 2018. This was driven by Hilcorp's revised 2019 plan to fund 17 well recompletions and new drilling.
• Production Costs: Total production costs increased due to higher capital expenditures and lease operating expenses, offsetting the increase in average natural gas prices ($1.74/Mcf in Q2 2019 vs. $1.65/Mcf in Q2 2018).
• Production Volumes: Natural gas production volumes decreased in Q2 2019 compared to Q2 2018, attributed to severe winter conditions impacting access and maintenance.

Guidance, Outlook, and Risks

• Cessation of Distributions: On August 9, 2019, the Trust reported that Hilcorp likely will not distribute any royalty income for the remainder of 2019 due to substantial capital expenditures. Consequently, the Trust will not make cash distributions to unit holders until future net proceeds are sufficient to cover liabilities and replenish cash reserves.
• Cash Reserve Utilization: The Trust utilized approximately $0.1 million from its cash reserves in June 2019 to cover administrative expenses due to zero distributable income for that month. As of August 1, 2019, cash reserves were approximately $0.8 million.
• Capital Expenditure Plan: Hilcorp revised its 2019 capital expenditure plan from $2.7 million to $12.6 million. This includes drilling two new horizontal wells (Fruitland Coal and Mancos formations) and extensive well recompletions.
• True-Up Adjustments: Ongoing reconciliation ("true-ups") of estimated revenues and costs from the transition period (Burlington to Hilcorp) may result in future adjustments to distributions. A potential negative adjustment of up to $2.0 million related to "Other" revenue estimates from late 2017/early 2018 remains pending.
• Liquidity Risk: If cash reserves are insufficient to fund administrative expenses, the Trustee may borrow funds against the royalty interests, which would further delay distributions.

Investor Verification Checklist

• Zero Distribution Outlook: Verify the confirmation that no distributions will be paid for the remainder of 2019 due to capital spending exceeding net proceeds.
• Cash Reserve Sufficiency: Monitor the Trust's cash reserve balance ($0.8M as of early August 2019) against monthly administrative expenses to assess the risk of borrowing.
• Capital Expenditure Execution: Track Hilcorp's actual spending against the revised $12.6 million plan and the performance of the new wells (Trail Canyon 104H and Trieb Federal Com 601 #1H).
• True-Up Adjustments: Watch for future filings regarding the finalization of the $2.0 million potential negative adjustment related to prior period revenue estimates.
• Production Recovery: Assess whether production volumes recover from the impact of severe winter conditions reported in Q2 2019.