Business Context and Reporting Period
The San Juan Basin Royalty Trust (the "Trust") is a widely held fixed investment trust created under Texas law. It holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin of northwestern New Mexico. The Trust is a passive entity with no employees, officers, or directors; all administrative functions are performed by the Trustee, Compass Bank. The operator of the underlying properties is Burlington Resources Oil & Gas Company LP (a subsidiary of ConocoPhillips). This filing covers the fiscal year ended December 31, 2013.
Key Financial Metrics
| Metric | 2013 | 2012 | 2011 |
|---|---|---|---|
| Royalty Income | $38,042,603 | $34,485,777 | $68,029,748 |
| Distributable Income | $36,492,592 | $33,481,687 | $67,190,000 |
| Distributions per Unit | $0.782955 | $0.718358 | $1.441573 |
| Total Assets (Dec 31) | $15,619,678 | $13,583,556 | $20,246,377 |
| Trust Corpus (Dec 31) | $10,968,996 | $12,163,460 | $13,145,058 |
| Units Outstanding | 46,608,796 | 46,608,796 | 46,608,796 |
Production and Pricing (2013): Gas production attributable to the Royalty was 10,131,009 Mcf at an average price of $3.88 per Mcf. Oil production was 18,308 Bbls at an average price of $86.38 per Bbl. Total production costs (including capital expenses) for the underlying properties were $73,909,480.
Material Changes vs. Prior Period
- Income Increase: Royalty Income increased by approximately 10.3% from 2012 to 2013, driven primarily by slightly higher natural gas production volumes and increased average gas prices ($3.88 in 2013 vs. $3.56 in 2012).
- Capital Expenditures: Capital expenses deducted in calculating Royalty Income were $21.5 million in 2013, compared to $22.2 million in 2012. This decrease reflects a moratorium on new drilling announced by Burlington in March 2013.
- Reserve Revisions: Proved natural gas reserves increased to 104,518,000 Mcf in 2013 from 104,448,000 Mcf in 2012. This upward revision was primarily due to higher natural gas prices used in the reserve calculation ($3.98/Mcf in 2013 vs. $3.30/Mcf in 2012).
- Calculation Errors: The Trust noted a "2012 Calculation Error" where lease operating expenses and capital expenditures were understated in April-July 2012 and overstated in August-September 2012. This resulted in an overpayment to the Trust of approximately $3.4 million, which was offset against distributions in late 2012.
Outlook, Risks, and Contingencies
Outlook and Guidance: The Trustee does not provide forward-looking projections. Burlington, the operator, indicated it expects no new horizontal or vertical drilling activity in the San Juan Basin in 2014 due to the challenged price environment for natural gas. The 2014 capital expenditure budget is estimated at $4.8 million, primarily for maintenance and prior-year projects.
Material Risks:
- Commodity Price Volatility: Distributions are highly dependent on natural gas prices. Lower prices reduce net proceeds and may render certain reserves uneconomic.
- Depleting Assets: The underlying properties are depleting assets. Without significant new development, production will decline over time.
- Regulatory and Legal: The Trust is subject to federal and state regulations regarding environmental protection and production. There are ongoing legal proceedings regarding royalty calculations (e.g., the Jicarilla Apache Nation case) which could impact future income, though the Trustee cannot currently estimate the range of loss.
Contingencies: In February 2014, Burlington notified the Trustee of a failure to properly allocate approximately $4.3 million of severance taxes between 2007 and 2012, resulting in an alleged overpayment to the Trust of approximately $3.25 million. Burlington proposes to recoup this amount in installments during 2014. The Trustee is analyzing this claim.
Investor Verification Checklist
- Drilling Moratorium: Verify the status of Burlington's drilling program in the San Juan Basin and the impact of the 2014 suspension on future production volumes.
- Severance Tax Claim: Monitor the resolution of the $3.25 million severance tax overpayment claim by Burlington and its impact on 2014 distributions.
- Gas Price Sensitivity: Assess the sensitivity of future distributions to fluctuations in natural gas prices, given the Trust's heavy reliance on gas revenue.
- Reserve Estimates: Review the independent petroleum engineer's report (Cawley, Gillespie & Associates) to understand the assumptions used for reserve estimates, particularly regarding price decks.
- Legal Proceedings: Track the status of the Jicarilla Apache Nation litigation regarding "major portion" royalty calculations, as a settlement could require reimbursement from the Trust.