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; administrative functions are performed by Compass Bank (the "Trustee"), and the properties are operated by Burlington Resources Oil & Gas Company LP ("BROG"). This Form 10-K covers the fiscal year ended December 31, 2011.
Key Financial Metrics
| Metric | 2011 | 2010 | 2009 |
|---|---|---|---|
| Royalty Income | $68,029,748 | $79,971,751 | $31,888,681 |
| Distributable Income | $67,190,000 | $78,355,835 | $30,173,056 |
| Distributions per Unit | $1.441573 | $1.681139 | $0.647367 |
| Total Assets (Dec 31) | $20,246,377 | $19,969,007 | $22,185,213 |
| Trust Corpus (Dec 31) | $13,145,058 | $14,745,884 | $16,843,731 |
| Units Outstanding | 46,608,796 | 46,608,796 | 46,608,796 |
Production and Pricing (2011): Gas production attributable to the Royalty was 15,265,827 Mcf at an average price of $4.76 per Mcf. Oil production was 26,981 Bbls at an average price of $81.08 per Bbl. Total production costs (including capital expenses) for the Underlying Properties were $70,849,834.
Material Changes Versus Prior Period
- Revenue Decline: Royalty Income decreased by approximately 15% from 2010 to 2011. This decline was primarily driven by lower natural gas prices and material increases in capital expenditures ($21.05 million in 2011 vs. $13.10 million in 2010).
- Production Volumes: Total gas production from the Underlying Properties decreased slightly to 32,964,647 Mcf in 2011 from 33,378,855 Mcf in 2010, reflecting natural decline rates not fully offset by new production.
- Reserve Estimates: Proved natural gas reserves decreased slightly to 135,941,000 Mcf at year-end 2011 from 142,106,000 Mcf in 2010. However, the estimated future net revenue increased slightly due to higher prices for liquids products.
- Contractual Changes: Several gas sales contracts expired in March 2011 and were replaced by new agreements with Chevron, PG&E, and Salt River Project. Additionally, a force majeure event in early 2012 terminated the contract with New Mexico Gas Company (NMGC), with volumes redirected to Chevron.
Outlook, Risks, and Contingencies
Guidance and Outlook: The Trustee does not provide forward-looking projections for future distributions due to the speculative nature of the oil and gas industry and the Trust's lack of control over operations. BROG estimated a 2012 capital expenditure budget of $20.8 million, though actual spending could range from $5 million to $35 million depending on regulatory approvals and gas prices.
Key Risks:
- Price Volatility: Distributions are highly sensitive to natural gas and oil prices, which fluctuate based on global supply, demand, and geopolitical factors.
- Depleting Assets: The underlying properties are depleting assets. Without significant development projects, production and distributions will decline over time.
- Regulatory and Legal: The Trust is subject to extensive federal and state regulations. A significant contingency involves the "Jicarilla Apache Nation v. Department of Interior" case regarding royalty valuation methods (major portion analysis). A court ruling in 2010 remanded the matter to the Department of the Interior, and the potential financial impact on the Trust remains unquantifiable.
- Operational Control: The Trust has no control over the operation or development of the properties, relying entirely on BROG's business judgment.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as they are the primary driver of monthly distributions.
- Capital Expenditure Impact: Monitor BROG's capital spending plans, as higher development costs directly reduce net proceeds available to the Trust.
- Legal Contingencies: Review updates on the Jicarilla Apache Nation litigation and the Abraham et al. v. BP America Production Company case, as outcomes could materially affect royalty calculations.
- Reserve Revisions: Track annual reserve reports from Cawley, Gillespie & Associates, Inc., noting that reserve quantities are estimates subject to change based on price and cost assumptions.
- Contract Expirations: Confirm the status of gas sales contracts, particularly those expiring in 2012 and 2013, to ensure continuity of revenue streams.