Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2009
Trustee: Compass Bank
Units Outstanding: 46,608,796 (as of November 9, 2009)
The Trust is a passive entity holding 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 the underlying properties is Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips. The Trust does not operate the properties; it collects net proceeds from BROG and distributes them to Unit Holders.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 |
Three Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2009 |
Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Royalty Income | $7,232,890 | $52,541,763 | $19,257,575 | $113,730,327 |
| Total Revenue | $7,427,371 | $52,574,271 | $19,455,467 | $113,946,948 |
| Distributable Income | $6,991,681 | $52,223,050 | $17,749,344 | $112,392,874 |
| Distributable Income per Unit | $0.150007 | $1.120455 | $0.380814 | $2.411409 |
| Cash and Short-Term Investments | $2,632,743 | $7,449,767 | $2,632,743 | $7,449,767 |
| Net Overriding Royalty Interest (Asset) | $17,278,209 | $17,927,498 | $17,278,209 | $17,927,498 |
| Trust Corpus | $17,278,209 | $17,927,498 | $17,278,209 | $17,927,498 |
Production Data (Three Months Ended Sep 30, 2009):
- Gas Sales: 8,916,522 Mcf (Average Price: $2.98/Mcf)
- Oil Sales: 17,414 Bbls (Average Price: $56.08/Bbl)
Material Changes Versus Prior Period
- Revenue Decline: Royalty income decreased by approximately 86% in the third quarter of 2009 compared to the same period in 2008. This was primarily driven by a sharp decline in natural gas prices, which fell from an average of $10.62 per Mcf in Q3 2008 to $2.98 per Mcf in Q3 2009.
- Volume Increase: Despite the price drop, gas production volumes increased slightly (96,919 Mcf/day in Q3 2009 vs. 94,968 Mcf/day in Q3 2008). Oil volumes also increased.
- Expense Variance: General and administrative expenses increased to $435,690 in Q3 2009 from $351,221 in Q3 2008, attributed to timing differences and increased legal costs related to ongoing litigation.
- Capital Expenditures: Capital costs deducted by BROG in Q3 2009 were approximately $7.4 million. BROG estimates total 2009 capital expenditures could range from $10 million to $45 million depending on regulatory approvals and gas prices.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance:
The Trust provides no specific financial guidance. Future distributions are heavily dependent on natural gas prices and production volumes. BROG anticipates 431 projects in 2009 with a budget of $25.2 million, though actual spending may vary significantly. New gas sales contracts were entered into in April 2009 with various purchasers (Chevron, PG&E, BP, Macquarie Cook) extending through at least March 2011, with prices fluctuating based on published indices.
Legal Proceedings and Contingencies:
- Wright v. AGIP Petroleum: In March 2008, BROG reduced distributions by $4.9 million to cover its portion of a settlement regarding royalty underpayments. The Trust's consultants are still analyzing the applicability of this settlement to the Trust.
- Trust vs. BROG (Arbitration Award): The Trust is litigating to recover approximately $5.0 million related to a 2005 arbitration award that was partially vacated by an appellate court. The Trust seeks damages for breach of contract. A trial on the merits is scheduled for May 2011. BROG has appealed a District Court ruling that denied them attorney fees.
Risks:
- Price Volatility: The Trust's income is highly sensitive to natural gas prices, which are subject to global economic conditions and supply/demand dynamics.
- Regulatory Risk: New environmental regulations regarding surface disturbances and drilling fluid disposal could increase compliance costs and reduce the number of drilling projects.
- Dependence on BROG: The Trust relies entirely on BROG for accurate and timely information regarding production and costs.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as a significant portion of income is derived from gas sales.
- Capital Expenditure Impact: Monitor BROG's actual capital spending versus the $10M-$45M estimated range, as higher capital costs directly reduce net proceeds available for royalty distributions.
- Litigation Status: Track the progress of the San Juan Basin Royalty Trust vs. Burlington Resources litigation, specifically the outcome of the trial scheduled for May 2011 regarding the $5 million arbitration award.
- Contract Expirations: Note that new gas sales contracts extend through March 2011; monitor for any early terminations or renegotiations.
- Production Volumes: Confirm if the increase in gas volumes observed in Q3 2009 is sustainable or if it was influenced by specific operational factors (e.g., facility downtime in prior periods).