Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Trustee: Compass Bank
Operator: Burlington Resources Oil & Gas Company LP ("BROG")
Units Outstanding: 46,608,796
The Trust is a passive entity holding a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. It does not operate the properties; BROG manages operations and calculates net proceeds. The Trust's income is derived primarily from natural gas sales.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Royalty Income | $9,550,576 | $25,576,418 |
| Total Revenue | $9,553,181 | $25,740,797 |
| Distributable Income | $8,969,436 | $25,130,723 |
| Distribution per Unit | $0.192440 | $0.539184 |
| Cash and Short-term Investments | $2,584,262 | $7,449,767 |
| Net Overriding Royalty Interest (Asset) | $17,680,989 | $17,927,498 |
| Distributions Payable | $2,428,473 | $7,293,978 |
Production Data (Q1 2009 vs Q1 2008):
- Average Gas Price: $4.04/Mcf vs $6.97/Mcf
- Average Oil Price: $40.50/Bbl vs $88.58/Bbl
- Gas Sales Volume: 8,558,550 Mcf vs 8,559,117 Mcf (flat)
- Oil Sales Volume: 10,982 Bbls vs 12,698 Bbls
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 63% compared to Q1 2008. This was driven primarily by a 42% drop in average natural gas prices ($2.93/Mcf decrease) and a 54% drop in average oil prices ($48.08/Bbl decrease).
- Production Volumes: Total gas sales volumes remained nearly flat, with a slight decrease attributed to natural production decline curves. Oil volumes decreased slightly.
- Costs: Capital expenditures deducted in calculating royalty income increased to approximately $9.9 million in Q1 2009 from $6.2 million in Q1 2008. Lease operating expenses increased to $9.0 million from $8.1 million due to higher contract service costs and an adjusted overhead rate.
- Liquidity: Cash and short-term investments declined by approximately $4.9 million, reflecting lower royalty receipts and distributions paid.
Outlook, Risks, and Contingencies
Management Commentary and Guidance
- Capital Budget: BROG estimates a 2009 capital budget of $25.2 million for the Underlying Properties, plus approximately $12.1 million for prior year budgets. Actual expenditures could range from $10 million to $45 million depending on regulatory approvals and gas prices.
- Drilling Activity: BROG anticipates 431 projects in 2009, including 49 new wells. Approximately 12% of the budget is allocated to Fruitland Coal formation projects.
- Gas Sales Contracts: Contracts with ChevronTexaco and Coral Energy expired March 31, 2009. BROG has entered into four new contracts effective April 1, 2009, with Chevron, PG&E, BP, and Macquarie Cook Energy. The PNM contract was assigned to New Mexico Gas Company (NMGC) and extended through at least March 31, 2011.
Risks and Legal Proceedings
- Litigation with BROG: The Trust is suing BROG regarding an arbitration award of $7,683,699. While BROG paid four of five issues, the fifth issue (approx. $5 million) was vacated by a Texas appellate court. The Trust filed suit in New Mexico seeking damages of $5,025,000 plus interest and punitive damages. A hearing on summary judgment motions is set for June 15, 2009, with a trial scheduled for April 2010.
- Settlement Reduction: In March 2008, distributions were reduced by $4.9 million related to a settlement of royalty underpayment claims (Wright v. AGIP). The Trust continues to analyze the applicability of this settlement.
- Market Risk: The Trust is highly sensitive to natural gas and oil price volatility. The filing notes that future results may vary materially based on commodity prices, production volumes, and regulatory changes.
Investor Verification Checklist
- Verify the status of the pending litigation against BROG regarding the $5 million arbitration award and the outcome of the June 15, 2009 summary judgment hearing.
- Monitor natural gas price trends in the San Juan Basin, as the Trust's revenue is heavily dependent on gas prices which dropped significantly in Q1 2009.
- Review BROG's actual capital expenditures for 2009 against the $25.2 million budget, as higher costs directly reduce distributable income.
- Confirm the terms and pricing indices of the new gas sales contracts entered into in April 2009 with Chevron, PG&E, BP, and Macquarie Cook Energy.
- Assess the impact of potential regulatory changes regarding surface disturbances and drilling fluid disposal on future drilling activity and costs.