Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter ended March 31, 2007
Trustee: Compass Bank
Underlying Asset: 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico, operated by Burlington Resources Oil & Gas Company LP ("BROG").
Units Outstanding: 46,608,796 as of May 10, 2007.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Royalty Income | $23,948,749 | $50,481,086 |
| Interest Income | $624,781 | $491,660 |
| Total Income | $24,573,530 | $50,972,746 |
| General & Administrative Expenses | $565,648 | $482,550 |
| Distributable Income | $24,007,882 | $50,490,196 |
| Distribution per Unit | $0.515094 | $1.083276 |
| Cash and Short-term Investments | $5,525,326 | $4,657,886 (Dec 31, 2006) |
| Net Overriding Royalty Interest (Asset) | $21,448,676 | $21,823,390 (Dec 31, 2006) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 53% compared to Q1 2006. This was driven by a decrease in average gas prices (from $8.44/Mcf to $6.04/Mcf) and a reduction in gas volumes.
- Volume Adjustments: BROG attributed the volume decrease to natural production decline and a correction in Q1 2007 for overaccruals of gas production allocated to the Trust in 2006.
- Cost Reductions: Production costs were approximately $2.1 million lower than Q1 2006, primarily due to lower natural gas severance taxes.
- Interest Income: Increased due to additional interest paid by BROG in January and February 2007 resulting from the granting of certain audit exceptions.
- Capital Expenditures: Capital costs deducted in Q1 2007 were approximately $10.9 million. BROG estimates a 2007 budget of $28.0 million, with a potential range of $20.0 million to $50.0 million depending on regulatory approvals and gas prices.
Outlook, Risks, and Contingencies
- Legal Proceedings: A significant arbitration award of $7,683,699 was issued in favor of the Trust in 2005. While a portion was paid in 2006, the balance remains pending BROG's appeal in the First Court of Appeals in Houston, Texas. Oral arguments were heard in April 2007; a ruling is pending.
- Operational Shift: BROG is shifting development toward conventional gas and reducing infill drilling in the Fruitland Coal formation. The 2007 budget includes 112 new wells.
- Contractual Obligations: Gas sales contracts with ChevronTexaco, Coral Energy Resources, and PNM Gas Services were extended through at least March 31, 2009, as no termination notices were given by March 31, 2007.
- Market Risk: The Trust is exposed to volatility in oil and gas prices. The Trustee believes the Trust is not subject to material interest rate risk or foreign currency risk.
- Accounting Basis: Financial statements are prepared on a basis differing from GAAP (e.g., revenues not accrued in month of production, amortization charged to trust corpus).
Investor Verification Checklist
- Verify the status of the appeal regarding the $7.68 million arbitration award and the potential timeline for resolution.
- Monitor BROG's actual capital expenditures for 2007 against the estimated range of $20.0 million to $50.0 million, as this directly impacts net proceeds.
- Track natural gas price trends in the San Juan Basin, as the Trust's income is highly sensitive to price fluctuations.
- Review future filings for updates on the correction of 2006 gas production overaccruals and their impact on future distributions.
- Confirm the impact of the Compass Bancshares acquisition by BBVA on the Trustee's administrative functions, though the Trustee remains Compass Bank.