Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Quarter ended September 30, 2024 (Unaudited)
Trustee: Argent Trust Company (succeeded PNC Bank on February 15, 2024)
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, operated primarily by Hilcorp San Juan L.P. The Trust is a passive entity that distributes net proceeds from production to unit holders after deducting production costs and administrative expenses.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 |
|---|---|---|---|
| Royalty Income | $0 | $6,945,974 | $49,256,075 |
| Total Income | $18,463 | $7,019,305 | $49,375,150 |
| Distributable Income | $0 | $5,158,229 | $48,005,830 |
| Distributable Income per Unit | $0.00 | $0.110670 | $1.029974 |
| Cash and Short-Term Investments | $1,099,699 | As of Sep 30, 2024 | |
| Net Overriding Royalty Interest (Net Book Value) | $2,677,617 | As of Sep 30, 2024 | |
| Cumulative Excess Production Costs | $11,517,368 | As of Sep 30, 2024 |
Material Changes vs. Prior Period
- Cessation of Distributions: Royalty income was $0 for the three months ended September 30, 2024, compared to $4.32 million in the same period in 2023. Consequently, no distribution was declared for the quarter.
- Revenue Decline: Total Gross Proceeds decreased 36.8% for the quarter and 60.5% for the nine-month period compared to 2023. This was driven by a sharp decline in natural gas prices (average price dropped from $5.42/Mcf to $2.20/Mcf for the nine-month period) and lower production volumes.
- Excess Production Costs: For the first time in the reported periods, Production Costs exceeded Gross Proceeds. A cumulative balance of $11.52 million in excess costs must be recovered from future net proceeds before royalty income is paid to the Trust.
- Capital Expenditures: Hilcorp's capital expenditures increased significantly ($10.45 million for the quarter) due to the 2024 capital project plan, which includes drilling and well recompletions. These costs are deducted from gross proceeds, directly reducing distributable income.
Outlook, Risks, and Management Commentary
- Future Distributions: On October 21, 2024, the Trust announced it would not declare a distribution for October 2024 due to lower natural gas prices and increased production costs exceeding proceeds in August 2024.
- Liquidity Strategy: The Trustee increased cash reserves to $1.8 million in April 2024 to cover administrative expenses during revenue shortfalls. Reserves were drawn down to $1.1 million by September 30, 2024. The Trustee plans to replenish reserves to $2.0 million before resuming distributions.
- Recovery Mechanism: Under the Trust Indenture, the cumulative excess production costs of $11.52 million must be recovered from future net proceeds before any royalty income is paid to the Trust. The Trust is not liable for these costs if future proceeds are insufficient.
- Operational Risks: The Trust's income is heavily dependent on natural gas prices and Hilcorp's capital spending decisions. The Trustee has limited control over production costs or commodity prices.
Investor Verification Checklist
- Excess Cost Recovery: Monitor future reports to determine when Gross Proceeds will exceed Production Costs to clear the $11.52 million deficit.
- Natural Gas Pricing: Track the El Paso Natural Gas Company, San Juan Basin Index, as it heavily influences the Trust's revenue.
- Hilcorp Capital Plan Execution: Verify the actual spend against the $34.0 million 2024 capital budget, as higher spending delays distribution resumption.
- Cash Reserve Levels: Confirm the Trustee's ability to maintain administrative operations without borrowing if royalty income remains zero.
- Compliance Audits: Review ongoing audit results regarding Hilcorp's reporting of revenues and costs, as past discrepancies have resulted in settlements.