Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Fiscal Year Ended December 31, 2019
Structure: The Trust holds a 75% net overriding royalty interest in oil and natural gas properties (Subject Interests) located in the San Juan Basin, New Mexico. The Trustee is BBVA USA. The operator of the Subject Interests is Hilcorp San Juan L.P. (Hilcorp).
Operations: The Trust is a passive entity that distributes net proceeds from the Subject Interests to Unit Holders. It has no employees or officers. As of December 31, 2019, 98% of proved reserves were natural gas.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Royalty Income | $9,899,548 | $19,429,923 |
| Total Revenue (Royalty + Interest) | $9,925,444 | $19,467,266 |
| Distributable Income | $8,090,960 | $17,975,968 |
| Distributable Income per Unit | $0.173594 | $0.385678 |
| General & Administrative Expenses | $1,834,484 | $1,491,298 |
| Trust Corpus (End of Period) | $5,452,207 | $5,844,727 |
| Cash and Short-Term Investments | $1,079,421 | $2,125,838 |
| Cash Reserves | $1,000,000 | $1,000,000 |
Production Data (Attributable to Royalty):
- Natural Gas: 2,192,560 Mcf (2019) vs. 10,406,632 Mcf (2018)
- Oil/Condensate: 40,179 Bbls (2019) vs. 32,191 Bbls (2018)
- Average Natural Gas Price: $1.79/Mcf (2019) vs. $1.89/Mcf (2018)
- Average Oil Price: $45.11/Bbl (2019) vs. $52.23/Bbl (2018)
Material Changes vs. Prior Period
- Revenue Decline: Royalty Income decreased by approximately 49% ($9.5 million) compared to 2018. This was driven by a 79% drop in natural gas volumes attributable to the Royalty and lower commodity prices.
- Capital Expenditures: Capital expenditures deducted from gross proceeds increased by 228% to $7.9 million in 2019 from $2.4 million in 2018, due to well recompletions and one new horizontal well.
- Production Costs: Total production costs rose to $41.5 million in 2019 from $38.5 million in 2018. Average production costs per unit increased to $1.48 from $1.17.
- Reserves: Proved natural gas reserves declined significantly to 49,334 MMcf in 2019 from 75,844 MMcf in 2018, primarily due to lower natural gas prices affecting the economic viability of reserves.
- Distribution Interruption: Due to excess production costs, the Trust received no Royalty Income from June 2019 through October 2019, resulting in zero distributions for those months.
Guidance, Outlook, and Risks
- 2020 Capital Plan: Hilcorp's 2020 capital budget is estimated at $0.3 million for facility projects (natural gas compression). No new drilling or recompletions are planned for 2020 due to low natural gas prices, though the plan is subject to revision based on price changes.
- Reporting Adjustments: Hilcorp is in the process of reconciling ("true-ups") revenue and severance tax estimates for production months from November 2017 through July 2019. Future distributions may be adjusted to reflect these reconciliations, potentially resulting in negative adjustments (reimbursements) of up to $2.0 million related to prior "Other" gross proceeds estimates.
- Market Risk: The Trust's income is heavily dependent on natural gas prices. Lower prices reduce both the revenue per unit and the volume of economically producible reserves.
- Operational Risk: The Trust has no control over Hilcorp's operations. Hilcorp may abandon wells or reduce expenditures, which could accelerate production decline. Additionally, permitting delays (e.g., BLM lawsuits) may stall capital projects.
- Termination Trigger: The Trust will terminate if gross revenue is less than $1 million for two successive years. While 2019 revenue was above this threshold, the significant decline warrants monitoring.
Investor Verification Checklist
- True-Up Adjustments: Verify the status of Hilcorp's reconciliation of prior period revenue and tax estimates, specifically the potential $2.0 million negative adjustment.
- Production Volumes: Confirm the cause of the drastic 79% drop in natural gas volumes attributable to the Royalty in 2019 compared to 2018.
- Capital Spending Impact: Assess how the increase in capital expenditures ($7.9M) impacted net proceeds and whether future spending plans align with current commodity prices.
- Reserve Revisions: Review the independent engineer's report (Cawley, Gillespie & Associates) regarding the 35% reduction in proved natural gas reserves.
- Monthly Distributions: Monitor upcoming monthly distribution announcements for any further delays or reductions due to excess production costs.