SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 1996
Trustee: Bank One, Texas, NA
Outstanding Units: 46,608,796 (as of August 14, 1996)
Business Overview: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico, operated by Burlington Resources Oil & Gas Company ("Burlington"). Financial statements are prepared on a modified cash basis.

Key Financial Metrics

Production Data (Q2 1996 vs Q2 1995):
- Gas Sales: 9,885,383 Mcf (Avg Price $1.09) vs 8,752,030 Mcf (Avg Price $1.31)
- Oil Sales: 19,475 Bbls (Avg Price $20.13) vs 18,965 Bbls (Avg Price $15.36)

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased by approximately 26% in Q2 1996 compared to Q2 1995. This was primarily driven by a decrease in average gas prices ($1.09 vs $1.31 per Mcf) despite an increase in gas production volume.
• Expense Surge: General and administrative expenses increased significantly (168% increase in Q2) due to legal, consulting, and accounting fees related to ongoing litigation against Burlington.
• Capital Expenditures: Capital costs attributable to the properties increased to $1,288,864 in Q2 1996 from $735,105 in Q2 1995, reducing net profits available for royalty calculation.
• Liquidity: Cash and short-term investments decreased from $421,446 to $311,128, reflecting lower distributable income and higher operating costs.

Outlook, Risks, and Management Commentary

Litigation Status: The Trust is engaged in significant litigation against Burlington Resources Oil & Gas Company (formerly Meridian Oil Inc. and Southland Royalty Company).

• Claims: Breach of contract, fraud, and unjust enrichment regarding royalty payments, lease operating expenses, and gas marketing.
• Current Status: Trial was originally set for July 1996 but was continued to an unspecified date. Settlement negotiations are ongoing with a tentative agreement on underpayment claims and operating expenses. The primary unresolved issue is the mechanism for marketing Trust gas going forward.
• Next Steps: If negotiations fail, the trial may resume as early as September 9, 1996.

Operational Outlook: Gas production increased due to well recompletions and a new compression program. However, lower spot market prices for gas continue to pressure revenue. Oil prices were higher in 1996 due to increased posted prices.

Tax Considerations: Unit holders are entitled to a federal income tax credit for non-conventional fuels (coal seam gas), estimated at approximately $0.04 per Unit for Q2 1996.

Investor Verification Checklist

• Litigation Resolution: Verify the final terms of the settlement with Burlington, specifically regarding the "marketing mechanism" for gas, as this is the remaining hurdle to a final agreement.
• Gas Price Sensitivity: Monitor spot market gas prices, as the Trust's revenue is highly sensitive to price fluctuations despite volume increases.
• Capital Expenditure Impact: Review future capital expenditure plans by Burlington, as high capital costs directly reduce the net profits from which the 75% royalty is calculated.
• Production Volumes: Confirm the success of the compression program and well recompletions in sustaining the increased production volumes seen in 1996.
• Tax Credit Eligibility: Confirm individual eligibility for the Section 29 tax credit on coal seam gas production.