Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2020
Trustee: BBVA USA
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796 as of August 10, 2020
The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. Income is derived from net proceeds of production after costs, taxes, and deductions. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2019 |
Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Royalty Income | $970,722 | $2,408,205 | $6,039,129 | $8,957,770 |
| Total Income | $972,774 | $2,417,869 | $6,044,742 | $8,975,484 |
| Distributable Income | $585,244 | $1,996,703 | $5,203,505 | $8,011,540 |
| Distributable Income per Unit | $0.012557 | $0.042840 | $0.111642 | $0.171890 |
| Cash and Short-Term Investments | $892,858 | N/A | $892,858 | N/A |
| Net Overriding Royalty Interest (Asset) | $5,172,070 | N/A | $5,172,070 | N/A |
| Cash Reserves | $892,858 | N/A | $892,858 | N/A |
Production Data (Three Months Ended June 30, 2020):
- Natural Gas: 6,871,522 Mcf (Average Price: $0.92/Mcf)
- Oil: 11,896 Bbls (Average Price: $21.74/Bbl)
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 60% for the quarter and 33% for the six-month period compared to 2019. This was driven primarily by a significant drop in natural gas prices (from $1.74 to $0.92 per Mcf for the quarter) and a slight decrease in production volumes.
- Cost Reductions: Capital expenditures dropped 100% for the quarter and 98% for the six-month period due to Hilcorp's reduced capital spending plan. Lease operating expenses decreased 15% for the quarter.
- True-Ups and Adjustments: Hilcorp performed true-up adjustments on prior periods (Feb 2019–Nov 2019), resulting in a $0.5 million net reduction to Royalty Income for the quarter. Additionally, negative adjustments to "Other" revenue occurred.
- Excess Production Costs: Gross excess production costs applicable to the Subject Interests reached $1.6 million as of June 30, 2020. Under the trust indenture, 75% ($1.2 million) is allocated to the Trust, meaning these costs must be recovered from future net proceeds before further royalty income is paid.
- June 2020 Distribution: There was no distributable income declared for June 2020 due to the combination of low prices, production declines, and the recovery of excess costs.
Outlook, Risks, and Management Commentary
- Commodity Price Risk: The Trust's income is heavily influenced by natural gas prices, which were depressed in Q2 2020 due to the COVID-19 pandemic and global oversupply. While OPEC production cuts were agreed upon in June 2020, price volatility remains a significant risk.
- True-Up Uncertainty: Hilcorp continues to reconcile actual revenues and severance taxes against estimates for periods dating back to 2017 and 2018. Future distributions may be subject to further negative adjustments (true-ups) and rebooking of prior periods.
- Specific Contingency: Hilcorp included $1.0 million in "Other" revenue estimates for December 2017 and January 2018 that has not yet been trued-up. Finalization could result in a negative adjustment of up to $2.0 million to future Royalty Income.
- COVID-19 Impact: Hilcorp does not anticipate materially reducing production or taking wells offline due to the pandemic, but the Trust notes that personnel availability and price declines could impact future results.
- Liquidity: The Trust withdrew approximately $0.1 million from its cash reserve in June 2020 to cover administrative expenses. Total cash reserves stood at approximately $0.9 million as of June 30, 2020.
Investor Verification Checklist
- Excess Cost Recovery: Verify the timeline for recovering the $1.2 million in net excess production costs allocated to the Trust, as this will delay future distributions.
- Pending True-Ups: Monitor updates regarding the reconciliation of the $2.0 million "Other" revenue estimate from late 2017/early 2018 and the ongoing adjustments for 2018 production months.
- Commodity Prices: Track natural gas pricing trends in the San Juan Basin, as the Trust's income is highly sensitive to price fluctuations.
- Capital Expenditures: Confirm Hilcorp's adherence to the reduced $0.3 million capital spending plan for fiscal 2020 and its impact on future production volumes.
- Cash Reserve Status: Monitor the replenishment of the cash reserve, which was drawn down to cover administrative expenses during the zero-income month of June 2020.