Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2021
Trustee: BBVA USA
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The Trust has no employees; all administrative functions are performed by the Trustee. Income is derived from net proceeds of production after deducting production costs, taxes, and other charges.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Royalty Income | $8,212,088 | $5,068,407 |
| Total Income | $8,212,500 | $5,071,969 |
| Distributable Income | $7,751,242 | $4,618,262 |
| Distributable Income per Unit | $0.166304 | $0.099085 |
| Cash and Short-Term Investments | $3,472,277 | $1,286,468 (Dec 31, 2020) |
| Net Overriding Royalty Interest (Net of Amortization) | $4,758,683 | $5,123,834 (Dec 31, 2020) |
| General & Administrative Expenses | $(461,258) | $(453,707) |
| Cash Reserves | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased by approximately 62% ($3.14 million) compared to Q1 2020. This was driven primarily by higher natural gas prices and lower lease operating expenses, despite a decrease in production volumes.
- Commodity Prices: The average natural gas price rose from $2.02 per Mcf in Q1 2020 to $2.64 per Mcf in Q1 2021. Oil prices decreased from $51.94 per Bbl to $36.13 per Bbl.
- Production Volumes: Natural gas production from Subject Interests decreased from 6,863,999 Mcf in Q1 2020 to 5,703,850 Mcf in Q1 2021. Oil production decreased from 7,425 Bbls to 8,865 Bbls.
- Cost Reductions: Lease operating expenses and property taxes decreased by 47% ($3.3 million) year-over-year. This reduction included a $450,000 credit from Hilcorp related to the settlement of audit exceptions regarding compressor maintenance services.
- True-Ups: Hilcorp performed "true-ups" (reconciliations of estimated vs. actual revenue) for prior periods, resulting in an additional $483,000 net Royalty Income revenue in Q1 2021.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Hilcorp's 2021 capital project plan calls for total spending of $0.3 million. Capital expenditures for Q1 2021 were $221,887, an increase of $167,000 from the prior year due to timing differences.
- Regulatory Environment: The Trust notes potential impacts from the Biden Administration's climate policies, including rejoining the Paris Agreement and new methane emission regulations. However, Hilcorp does not believe current actions regarding federal leases will impact existing Subject Interests.
- Pandemic Impact: Hilcorp reports that the Covid-19 pandemic has not had a material impact on operations or payments to date, though the Trust continues to monitor personnel availability and production effects.
- Accounting Adjustments: Future distributions may be adjusted due to ongoing "true-ups" for production months of January 2021 (operated) and November 2020 through January 2021 (non-operated) as Hilcorp transitions to a new accounting system.
- Subsequent Event: On April 20, 2021, the Trust announced a cash distribution of $0.095794 per Unit ($4,464,842.99 total), payable May 14, 2021, based on February 2021 production. This increase was attributed to higher natural gas prices due to severe winter weather.
Investor Verification Checklist
- True-Up Adjustments: Verify the magnitude and timing of future "true-up" adjustments from Hilcorp for the January 2021 and late 2020 production months, which could alter future distributions.
- Production Decline: Monitor the trend of natural gas production volumes, which declined 17% year-over-year despite higher prices, to assess long-term income sustainability.
- Regulatory Risks: Assess the potential long-term impact of new federal methane regulations and climate policies on Hilcorp's capital expenditure requirements and operational constraints.
- Cost Credits: Confirm whether the $450,000 credit received for compressor maintenance services is a one-time event or indicative of ongoing cost reductions.
- Reserve Life: Review the amortization of the net overriding royalty interest ($365,151 in Q1 2021) to understand the depletion rate of the Trust's corpus.