Business Context and Reporting Period
Company: San Juan Basin Royalty Trust
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1995
Trustee: Bank One, Texas, NA
Outstanding Units: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. Financial statements are prepared on a modified cash basis, not GAAP. Royalty income is calculated based on proceeds from production less costs, multiplied by 75%.
Key Financial Metrics
| Metric | Q3 1995 | Q3 1994 | 9 Months 1995 | 9 Months 1994 |
|---|---|---|---|---|
| Royalty Income | $3,542,265 | $3,923,746 | $13,476,447 | $19,918,042 |
| Interest Income | $9,400 | $8,561 | $28,432 | $30,012 |
| General & Admin Costs | $219,876 | $142,087 | $896,817 | $578,275 |
| Distributable Income | $3,331,789 | $3,790,220 | $12,608,062 | $19,369,779 |
| Distributable Income per Unit | $0.071482 | $0.081320 | $0.270507 | $0.415582 |
| Cash & Short-term Investments | $1,047,906 | $589,365 | As of Sept 30, 1995 | |
| Net Overriding Royalty Interest (Asset) | $70,827,330 | $74,942,040 | As of Sept 30, 1995 |
Production Data (Q3 1995 vs Q3 1994):
- Gas Sales (Properties): 8,905,543 Mcf vs 7,821,361 Mcf
- Average Gas Price: $1.08/Mcf vs $1.43/Mcf
- Oil Sales (Properties): 22,314 Bbls vs 29,025 Bbls
- Average Oil Price: $13.82/Bbl vs $14.82/Bbl
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 9.7% in Q3 and 32.3% for the nine-month period compared to 1994. The primary driver was a significant decrease in average gas prices ($1.08 vs $1.43 per Mcf in Q3).
- Expense Increase: General and administrative costs rose 54.7% in Q3 and 55.1% for the nine-month period, primarily due to litigation expenses.
- Capital Costs: Capital costs incurred by the operator (Southland) dropped significantly to $1.12 million in Q3 1995 from $2.82 million in Q3 1994, attributed to fewer well recompletions.
- Production Volume: While gas sales volume increased in Q3 1995 due to higher production from conventional wells, the lower price per unit resulted in lower total proceeds.
Outlook, Risks, and Contingencies
Legal Proceedings
The Trust is engaged in significant litigation against Meridian Oil Inc. (MOI) and Southland Royalty Company. The Trustee alleges breach of contract, breach of fiduciary duty, and failure to account for volumes and revenues.
- Status: The case was remanded to Santa Fe County, New Mexico. Mediation in June 1995 was unsuccessful.
- Recent Rulings: In June 1995, the court dismissed the Trustee's claims of breach of fiduciary duty but denied motions to dismiss claims regarding the covenant of good faith and fair dealing.
- Counterclaims: Southland filed counterclaims seeking declaratory relief regarding royalty calculations and the Trustee's authority. The court dismissed several of these counterclaims in October 1995.
- Timeline: Trial is currently set for February 1996.
A resolution favorable to the Trust could materially affect distributable income.
Contracts and Operations
- Gas Sales: A new gas sales agreement with Gas Company (PNM Gas Services) effective November 1995 utilizes a monthly published index rather than fixed prices.
- Processing Facilities: Williams Field Service purchased the Kutz and Lybrook processing plants effective July 1, 1995, with new gathering agreements in place.
- Tax Credits: Unit holders are eligible for federal tax credits on coal seam gas production (approx. $0.03 per unit in Q3 1995).
Investor Verification Checklist
- Gas Price Sensitivity: Verify current spot market prices for natural gas in the San Juan Basin, as revenue is highly correlated with price fluctuations.
- Litigation Outcome: Monitor the February 1996 trial date and any potential settlements regarding the breach of contract and accounting disputes with MOI/Southland.
- Production Costs: Review future capital expenditure plans and lease operating expenses, as these are deducted before the 75% royalty calculation.
- Contract Terms: Confirm the impact of the new index-based gas sales agreement on future revenue stability compared to previous fixed-price contracts.
- Tax Implications: Verify individual eligibility for Section 29 tax credits on coal seam gas production.