Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2018
Trustee: Compass Bank
Operator/Owner of Subject Interests: Hilcorp San Juan L.P. (acquired assets from Burlington Resources on July 31, 2017)
Units Outstanding: 46,608,796
The Trust holds a 75% net overriding royalty interest in oil and natural gas properties in the San Juan Basin, New Mexico. Financial statements are prepared on a modified cash basis, not GAAP. Royalty income is derived from net proceeds of production after costs, taxes, and deductions.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Royalty Income | $6,646,813 | $8,608,220 |
| Total Income | $6,652,101 | $8,609,603 |
| Distributable Income | $6,227,399 | $8,147,010 |
| Distributable Income per Unit | $0.133610 | $0.174796 |
| Cash and Short-term Investments | $2,435,597 | $4,415,851 |
| Net Overriding Royalty Interest (Asset) | $6,336,043 | $6,577,380 |
| Trust Corpus | $6,336,043 | $6,577,380 |
| General & Administrative Expenses | $(424,702) | $(462,593) |
Production Data (Royalty Share):
- Natural Gas: 3,103,857 Mcf (Avg Price: $2.03/Mcf)
- Oil and Condensate: 8,911 Bbls (Avg Price: $46.01/Bbl)
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 23% ($1.96 million) compared to Q1 2017. This was primarily driven by a decrease in the average natural gas price from $2.93/Mcf in 2017 to $2.03/Mcf in 2018.
- Gross Proceeds: Total gross proceeds from Subject Interests decreased by 13% ($2.59 million) due to lower natural gas prices.
- Capital Expenditures: Increased by approximately 72% ($0.14 million) to $334,113, attributed to planned well recompletion and facility projects by Hilcorp.
- Operating Expenses: Lease operating expenses and property taxes increased slightly by 2% ($0.13 million).
- Interest Income: Increased to $5,288 from $1,383 due to higher yields on short-term investments.
Outlook, Risks, and Contingencies
- Operator Transition Impact: Following the acquisition of assets by Hilcorp in July 2017, revenue for production months August 2017 through November 2017 was estimated. Hilcorp intends to reconcile actual revenue and severance tax numbers against estimates and true-up distributions as needed. This reconciliation has not yet occurred and may result in adjustments to future distributions.
- Capital Budget: Hilcorp's estimated 2018 capital expenditure budget for the Subject Interests is $0.54 million. Existing wells will continue to be operated.
- Liquidity: The Trust maintains cash reserves of $1.00 million to cover general and administrative expenses. The Trustee does not anticipate increasing reserves in 2018.
- Market Risk: The Trust's income is heavily influenced by natural gas prices. There have been no material changes to market risk disclosures since the 2017 10-K.
- Legal Proceedings: Reference is made to the 2014 Litigation discussed in the 2017 10-K. No new material legal proceedings were reported in this filing.
Investor Verification Checklist
- Verify the status of the revenue reconciliation between Hilcorp's estimated figures (Aug-Nov 2017) and actual figures, and the potential impact on future distributions.
- Monitor natural gas price trends in the San Juan Basin, as they are the primary driver of Royalty Income.
- Confirm the 2018 capital expenditure budget execution by Hilcorp ($0.54 million estimate) and its impact on net proceeds.
- Review the Trust's cash reserves ($1.00 million) relative to monthly general and administrative expenses to assess liquidity coverage.
- Check for updates on the 2014 Litigation referenced in prior filings.