SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Fiscal Year Ended December 31, 2015
Structure: The Trust is a passive entity holding a 75% net overriding royalty interest in oil and natural gas properties (the "Underlying Properties") located in the San Juan Basin of northwestern New Mexico. The properties are operated by Burlington Resources Oil & Gas Company LP (a subsidiary of ConocoPhillips). The Trustee is Compass Bank.
Operations: The Trust does not operate the properties or engage in business activities. It collects net proceeds (Royalty Income) from the operator and distributes them to Unit Holders. As of December 31, 2015, 96% of estimated proved reserves were natural gas.

Key Financial Metrics

Production Costs (2015): Total production costs (including capital expenses) were $51.03 million. Average production cost per unit was $1.75. Lease operating expenses were $30.06 million.

Material Changes vs. Prior Period

• Revenue Decline: Royalty Income decreased 68% from 2014 to 2015. Gross proceeds from the Underlying Properties dropped 46% to $76.9 million, primarily due to significant declines in commodity prices.
• Commodity Prices: Average natural gas price fell from $4.47/Mcf in 2014 to $2.60/Mcf in 2015. Average oil price fell from $82.99/Bbl to $47.00/Bbl.
• Production Volumes: Natural gas production from the Underlying Properties decreased slightly from 30.9 Bcf in 2014 to 29.1 Bcf in 2015. Oil production increased slightly from 60,002 Bbls to 63,588 Bbls.
• Capital Expenditures: Capital expenditures deducted from net proceeds increased 96% to $12.8 million in 2015 (from $6.5 million in 2014), driven by the completion of wells commenced in prior years and maintenance projects.
• Reserve Reduction: Proved natural gas reserves declined 37% (45.1 Bcf) due to price revisions and reduced development activity. Consequently, the discounted future net cash flows declined 67% to $103.1 million.
• Distribution Interruptions: No distributions were made in April or May 2015 because general and administrative expenses exceeded Royalty Income, and available income was used to replenish cash reserves.

Guidance, Outlook, Risks, and Contingencies

• 2016 Capital Plan: Burlington estimates 2016 capital expenditures at $4.8 million, allocated entirely to facilities projects. No capital is allocated to drilling due to depressed natural gas prices, though the operator plans to restart drilling if prices improve.
• Cash Reserves: Due to prolonged low prices, the Trustee increased cash reserves by $150,000 in early 2016 and expects to increase total reserves to approximately $1.0 million during 2016, which will reduce cash available for distribution.
• Litigation (Burlington Matter): The Trust is engaged in litigation against Burlington seeking over $12 million regarding unresolved audit exceptions and the allocation of a $4.9 million "Qui Tam Settlement." The case is set for trial in September 2016.
• Litigation (Jicarilla Matter): An ongoing dispute regarding royalty valuation methods (major portion analysis) on Native American leases remains unresolved. The Trust cannot currently estimate a range of loss.
• Market Risk: The Trust has no hedging contracts. Distributions are highly sensitive to natural gas prices. The Trustee notes that lower prices may lead to the abandonment of marginal wells, further reducing future income.
• Termination Risk: The Trust will terminate if gross revenue is less than $1 million for two successive years or if 75% of Unit Holders vote for termination.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current natural gas prices in the San Juan Basin against the $2.60/Mcf average realized in 2015 to assess near-term distribution viability.
• Drilling Activity: Monitor Burlington's announcements regarding the restart of the drilling program, as the 2016 budget includes zero drilling capital.
• Litigation Status: Track the progress of the "2014 Litigation" against Burlington, as a favorable outcome could result in significant retroactive payments.
• Reserve Revisions: Review the next quarterly reserve report to confirm if the 37% decline in proved reserves stabilizes or continues to decline due to price assumptions.
• Cash Reserve Utilization: Monitor monthly distribution announcements to see if the Trustee continues to draw down or add to the cash reserve, impacting per-unit payouts.