Business Context and Reporting Period
The San Juan Basin Royalty Trust (the "Trust") is a widely held fixed investment trust created under Texas law. It holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The Trust is a passive entity with no employees or officers; Compass Bank serves as the Trustee. The underlying properties are operated by Burlington Resources Oil & Gas Company LP ("Burlington"). This filing covers the fiscal year ended December 31, 2012.
Key Financial Metrics
| Metric | 2012 | 2011 | 2010 |
|---|---|---|---|
| Royalty Income | $34,485,777 | $68,029,748 | $79,971,751 |
| Distributable Income | $33,481,687 | $67,190,000 | $78,355,835 |
| Distributions per Unit | $0.718358 | $1.441573 | $1.681139 |
| Total Assets (Dec 31) | $13,583,556 | $20,246,377 | $19,969,007 |
| Trust Corpus (Dec 31) | $12,163,460 | $13,145,058 | $14,745,884 |
| Units Outstanding | 46,608,796 | 46,608,796 | 46,608,796 |
Production and Pricing (2012): Gas production attributable to the Royalty was 10,259,791 Mcf at an average price of $3.56 per Mcf. Oil production was 16,369 Bbls at an average price of $84.36 per Bbl. Total production costs (including capital expenses) for the underlying properties were $67,790,539.
Material Changes vs. Prior Period
- Revenue Decline: Royalty Income decreased by approximately 49% from 2011 to 2012, dropping from $68.0 million to $34.5 million. This was primarily driven by a significant decrease in natural gas prices (average price dropped from $4.76 in 2011 to $3.56 in 2012).
- Production Costs: While total production costs decreased slightly from $70.8 million in 2011 to $67.8 million in 2012, capital expenditures increased from $21.1 million to $22.2 million.
- Reserve Reduction: Proved natural gas reserves declined significantly from 135,941 Mcf in 2011 to 104,448 Mcf in 2012. This reduction was attributed to natural production decline and lower gas prices rendering some reserves uneconomic.
- Calculation Error Correction: A calculation error by Burlington in 2012 resulted in an overpayment of approximately $3.4 million to the Trust for the period of April through July. This was recovered by Burlington through reduced royalty payments in August through November 2012.
Outlook, Risks, and Contingencies
- Guidance: The Trustee does not provide forward-looking projections for future distributions due to the speculative nature of the business and lack of control over operations. Burlington estimates 2013 capital expenditures at $28.5 million, with a potential range of $15 million to $45 million depending on gas prices and regulatory approvals.
- Market Risk: Distributions are highly sensitive to natural gas prices. The Trust has no control over production volumes, costs, or marketing.
- Legal Contingencies:
- Jicarilla Apache Nation Litigation: A dispute regarding royalty valuation methods ("major portion" calculation) remains outstanding. The U.S. Court of Appeals remanded the matter to the Department of the Interior in 2011. Burlington cannot currently estimate a range of loss for the Trust.
- BP Settlement: The Trust is a member of a plaintiff class in a case against BP regarding royalty underpayments. A settlement of $10 million plus interest was reached in December 2012, pending court approval. The materiality of any distribution to the Trust is uncertain.
- Contract Expirations: Gas sales contracts with PG&E and Shell are set to terminate on March 31, 2013. Burlington is soliciting bids for replacement contracts.
Investor Verification Checklist
- Verify the current market price of natural gas in the San Juan Basin and its impact on the Trust's net proceeds calculation.
- Review the status of the Jicarilla Apache Nation litigation and any potential liability for past royalty underpayments.
- Confirm the terms of new gas sales contracts replacing the expiring PG&E and Shell agreements.
- Monitor Burlington's capital expenditure plans and their effect on future net proceeds (higher capex reduces current distributions).
- Check the Trust's quarterly distribution announcements for any further adjustments related to the 2012 calculation error or other audit settlements.