Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarterly period ended June 30, 2009 (Form 10-Q)
Trustee: Compass Bank
Outstanding Units: 46,608,796 as of August 10, 2009
The Trust is a passive entity holding a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The working interest owner and operator is Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips. The Trust does not operate properties or engage in business activities; it collects net proceeds from BROG and distributes them to Unit Holders.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Royalty Income | $2,474,109 | $35,612,146 | $12,024,685 | $61,188,564 |
| Total Revenue | $2,474,915 | $35,631,879 | $12,028,096 | $61,372,676 |
| Distributable Income | $1,788,227 | $35,039,101 | $10,757,663 | $60,169,824 |
| Distributable Income per Unit | $0.038367 | $0.751770 | $0.230807 | $1.290954 |
| Cash and Short-term Investments | $433,162 | $7,449,767 | $433,162 | $7,449,767 |
| Net Overriding Royalty Interest | $17,572,134 | $17,927,498 | $17,572,134 | $17,927,498 |
| Trust Corpus | $17,572,134 | $17,927,498 | $17,572,134 | $17,927,498 |
Production Data (Three Months Ended June 30, 2009):
- Gas Sales: 8,511,072 Mcf (Average Price: $2.82/Mcf)
- Oil Sales: 15,293 Bbls (Average Price: $36.58/Bbl)
Material Changes Versus Prior Period
- Revenue Decline: Royalty income decreased by approximately 93% in the second quarter of 2009 compared to the same period in 2008. This was primarily driven by a collapse in natural gas prices, which fell from an average of $8.51 per Mcf in Q2 2008 to $2.82 per Mcf in Q2 2009. Oil prices also dropped significantly, from $94.81 to $36.58 per barrel.
- Volume Increase: Despite the price collapse, gas production volumes increased. Total gas sales rose from 7,837,532 Mcf in Q2 2008 to 8,511,072 Mcf in Q2 2009.
- Liquidity Reduction: Cash and short-term investments dropped from $7.45 million at year-end 2008 to $433,162 at June 30, 2009, reflecting the lower cash flow from operations.
- Expense Increases: General and administrative expenses increased slightly in 2009 due to timing differences and increased litigation costs.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
BROG anticipates capital expenditures for the Underlying Properties in 2009 to range between $10 million and $45 million, with a budgeted amount of $25.2 million. Approximately 12% of planned expenditures are allocated to Fruitland Coal formation projects. BROG expects to complete 431 projects in 2009. New gas sales contracts were entered into effective April 1, 2009, with purchasers including Chevron, PG&E, BP, and Macquarie Cook Energy, extending through at least March 31, 2011.
Risks and Contingencies
- Price Volatility: The Trust's income is heavily dependent on natural gas prices, which are subject to significant market volatility and global economic conditions.
- Capital Expenditures: High capital costs deducted by BROG before calculating net proceeds can significantly reduce royalty income. In Q2 2009, capital costs were approximately $11 million.
- Legal Proceedings:
- Arbitration Award Litigation: The Trust is suing BROG to recover approximately $5.025 million related to an arbitration award vacated by an appellate court in 2007. A trial on the merits was originally set for April 2010 but has been rescheduled due to a judge conflict.
- Attorneys' Fees: BROG sought approximately $200,000 in attorneys' fees from the Trust; the District Court ruled in favor of the Trust on June 3, 2009, but BROG may appeal.
- Settlement Reduction: In March 2008, distributions were reduced by $4.92 million due to a settlement regarding royalty underpayments. Consultants are still analyzing the impact.
- Regulatory Risk: New rules regarding surface disturbances and drilling fluid disposal could increase compliance costs and reduce the number of projects.
Investor Verification Checklist
- Gas Price Sensitivity: Verify current natural gas prices in the San Juan Basin, as a small change in price significantly impacts distributable income due to the 75% royalty structure and high operating/capital costs.
- Capital Expenditure Deductions: Monitor BROG's actual capital spending versus the budgeted $25.2 million, as these costs are deducted from gross proceeds before the Trust receives income.
- Litigation Status: Track the rescheduled trial date for the $5 million arbitration award dispute and any potential appeals regarding the attorneys' fees ruling.
- Contract Expirations: Note that new gas sales contracts run through March 31, 2011, with potential remarketing of the Chevron contract after March 2010.
- Production Volumes: Confirm if the increase in gas volumes (Mcf) observed in Q2 2009 is sustainable or if it is offset by declining well productivity.