Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter ended March 31, 2011
Trustee: Compass Bank
Operator: Burlington Resources Oil & Gas Company LP ("BROG")
Structure: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. It is a passive entity that distributes net proceeds to Unit Holders. There are 46,608,796 Units outstanding.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Royalty Income | $15,389,129 | $22,002,516 |
| Total Revenue | $15,390,595 | $22,210,829 |
| Distributable Income | $14,868,910 | $21,529,318 |
| Distributable Income per Unit | $0.319015 | $0.461915 |
| Cash and Short-term Investments | $4,567,457 | $5,223,123 (Dec 31, 2010) |
| Net Overriding Royalty Interest (Asset) | $14,342,274 | $14,745,884 (Dec 31, 2010) |
| Distributions Payable | $4,411,668 | $5,067,334 (Dec 31, 2010) |
Production Data (Q1 2011 vs Q1 2010):
- Gas Sales: 8,098,905 Mcf (Avg Price: $4.39/Mcf) vs 8,528,870 Mcf (Avg Price: $5.16/Mcf)
- Oil Sales: 13,294 Bbls (Avg Price: $71.86/Bbl) vs 13,160 Bbls (Avg Price: $67.66/Bbl)
Material Changes
- Revenue Decline: Royalty income decreased by approximately 30% compared to the prior year quarter. This was driven by a decrease in average natural gas prices ($0.77/Mcf lower) and a reduction in gas production volumes due to weather-related drilling delays.
- Expense Reduction: General and administrative expenditures decreased to $521,685 from $681,511, primarily due to lower litigation costs following a settlement in April 2010.
- Operating Costs: Lease operating expenses and property taxes increased to $8.98 million from $8.01 million, attributed to unseasonably dry weather in late 2010 allowing for increased road maintenance and pad work.
- Capital Expenditures: Capital costs deducted by BROG were approximately $3.65 million in Q1 2011, compared to $3.43 million in Q1 2010.
Outlook, Risks, and Contingencies
Capital Budget: BROG estimates a 2011 capital budget of $13.6 million, though actual expenditures could range from $5 million to $35 million depending on regulatory approvals and gas prices. Approximately 38 new wells are planned.
Contractual Updates: Three new gas sales contracts with Chevron, PG&E, and Salt River Project became effective April 1, 2011. A tentative agreement was reached in March 2011 regarding a new gathering and processing contract with Enterprise Field Services, LLC, resolving a dispute over rates and services.
Legal Proceedings and Risks:
- Jicarilla Apache Nation Litigation: A dispute regarding "major portion" royalty calculations remains outstanding. The U.S. Court of Appeals remanded the case to the Department of Interior in July 2010. BROG believes a judgment could entitle it to reimbursement from the Trust, but no estimate of potential loss has been provided.
- Abraham v. BP America: The Trust is a member of a plaintiff class that received a $9.74 million verdict in March 2011 regarding royalty underpayments. The final judgment is pending, and the materiality of any distribution to the Trust is uncertain.
- Market Risk: The Trust is highly sensitive to natural gas prices and production volumes. It has no long-term debt or derivative instruments.
Investor Verification Checklist
- Verify the impact of the pending Jicarilla Apache Nation litigation on future royalty calculations and potential reimbursement claims by BROG.
- Monitor the finalization of the gas gathering contract with Enterprise Field Services, LLC, and any associated cost changes.
- Track natural gas price trends in the San Juan Basin, as they are the primary driver of distributable income.
- Review the status of the Abraham v. BP America case to determine if the Trust will receive a material distribution from the $9.74 million verdict.
- Confirm BROG's actual capital expenditure pace against the $13.6 million budget, as higher spending reduces net proceeds available for distribution.