Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Reporting Period: Quarter ended March 31, 2023
Structure: The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin, New Mexico. Hilcorp San Juan L.P. is the principal operator. The Trust has no employees; PNC Bank, National Association serves as Trustee.
Units Outstanding: 46,608,796 as of May 15, 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Royalty Income | $36,416,704 | $14,890,491 |
| Total Income | $36,453,640 | $14,890,698 |
| Distributable Income | $35,971,276 | $14,369,227 |
| Distributable Income per Unit | $0.771771 | $0.308294 |
| Cash and Short-Term Investments | $20,095,066 | $5,488,194 (Dec 31, 2022) |
| Net Overriding Royalty Interest (Asset) | $2,858,092 | $2,968,707 (Dec 31, 2022) |
| Distributions Payable | $19,095,066 | $4,488,194 (Dec 31, 2022) |
| Cash Reserves | $1,000,000 | $1,000,000 |
Production Data (Q1 2023 vs Q1 2022):
- Natural Gas Production: 5,863,499 Mcf (vs 6,231,076 Mcf)
- Average Natural Gas Price: $10.53/Mcf (vs $4.79/Mcf)
- Oil Production: 5,604 Bbls (vs 6,040 Bbls)
- Average Oil Price: $70.48/Bbl (vs $65.97/Bbl)
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 145% year-over-year, driven primarily by a 120% increase in the average natural gas price ($4.79 to $10.53 per Mcf), which offset a 6% decline in natural gas production volumes.
- Cost Fluctuations: Total production costs increased to $13.7 million from $11.3 million. Severance taxes rose 77% due to higher revenues. Conversely, capital expenditures decreased 58% to $33,660, and lease operating expenses decreased 8% to $6.8 million.
- Liquidity Position: Cash and short-term investments grew significantly to $20.1 million from $5.5 million at the end of 2022, reflecting the higher cash inflows from royalty distributions.
- Trust Corpus: The Trust corpus decreased slightly to $2.9 million due to amortization of the net overriding royalty interest ($110,615), though this was offset by the recognition of distributable income.
Outlook, Risks, and Unusual Items
- Capital Expenditure Plan: Hilcorp estimates 2023 capital expenditures at $4.4 million, primarily for 25 well recompletions/workovers ($3.7 million) and facilities projects ($0.5 million). Actual costs may vary.
- Accounting Adjustments: Hilcorp completed a review of production volume allocations for 2017–2020. Initial proposed adjustments for 2017 revenues were presented in February 2023 and remain under review; these may result in additional revenues to the Trust. A new accounting system transitioned in 2021 has led to "true-ups" and adjustments in reporting.
- Operational Risks: Net proceeds are sensitive to commodity price volatility, weather disruptions (winter storms), and the timing of capital expenditures. The Trust relies entirely on Hilcorp for accurate reporting of production and costs.
- Subsequent Event: On April 18, 2023, the Trust announced a cash distribution of $0.103807 per Unit ($4,838,334.88 total), paid on May 12, 2023, based on February 2023 production.
- Depletion: The Subject Interests are depleting assets. Hilcorp cannot estimate the productive life of the interests, and future income depends on capital investments to offset reserve reductions.
Investor Verification Checklist
- Verify the status of the 2017 revenue adjustments proposed by Hilcorp and their potential impact on future distributions.
- Monitor natural gas price trends, as they are the primary driver of the Trust's income.
- Review Hilcorp's actual 2023 capital expenditures against the $4.4 million estimate to assess impact on Net Proceeds.
- Confirm the Trustee's ongoing audit of Hilcorp's production costs and pricing to ensure compliance with the Conveyance.
- Track the Trust's cash reserves ($1.0 million) to ensure sufficiency for liabilities and contingencies.