Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2022
Trustee: PNC Bank, National Association
Operator: Hilcorp San Juan L.P.
Outstanding Units: 46,608,796
The Trust 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 fixed investment trust taxed as a grantor trust; it has no employees, officers, or directors. Income is derived solely from the production of natural gas and oil by the operator, Hilcorp.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 |
|---|---|---|
| Royalty Income | $21,345,765 | $49,959,187 |
| Total Income | $21,358,058 | $49,973,516 |
| Distributable Income | $21,111,477 | $48,823,746 |
| Distributable Income per Unit | $0.452950 | $1.047521 |
| General & Administrative Expenses | $(246,581) | $(1,149,770) |
| Cash and Short-Term Investments | $6,794,280 | (As of Sep 30, 2022) |
| Cash Reserves | $1,000,000 | (As of Sep 30, 2022) |
| Net Overriding Royalty Interest (Net of Amortization) | $3,130,450 | (As of Sep 30, 2022) |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 252% for the three months ended September 30, 2022, compared to the same period in 2021 ($21.3M vs. $6.1M). For the nine-month period, income increased 129% ($49.9M vs. $21.8M).
- Commodity Prices: The increase is primarily driven by higher natural gas prices. The average natural gas price rose from $2.74/Mcf in Q3 2021 to $6.32/Mcf in Q3 2022. For the nine-month period, the average price increased from $2.72/Mcf to $5.21/Mcf.
- Production Volumes: Despite higher prices, production volumes declined. Natural gas production decreased 5.9% in Q3 2022 (6.03M Mcf vs. 6.41M Mcf) and 6.6% for the nine-month period (18.3M Mcf vs. 19.6M Mcf).
- Expenses: Lease operating expenses and property taxes decreased 28.4% in Q3 2022 compared to Q3 2021, largely due to decreased activity and the exclusion of true-up credits received in the prior year. General and administrative expenses decreased 36% in Q3 2022.
- Capital Expenditures: Capital expenditures incurred increased 127% in Q3 2022 ($149,182) compared to Q3 2021 ($65,640), though the prior year included a credit of $(105,409) due to true-ups.
Guidance, Outlook, and Risks
- Capital Plan: Hilcorp's 2022 capital project plan allocates approximately $1.9 million, with $1.5 million dedicated to 24 well recompletions and workovers to address natural depletion. No new drill projects were conducted in 2021 or to date in 2022.
- Depletion: The Subject Interests are depleting assets. Hilcorp has informed the Trust it is unable to estimate the productive life of the interests. Future income depends on capital investments to offset natural decline.
- Accounting Adjustments: Hilcorp continues to reconcile actual revenue and severance taxes to previously reported estimates ("true-ups"). Distributions may include adjustments for prior periods plus interest. Hilcorp transitioned to reporting actual revenue (rather than estimates) for operated wells beginning with the June 2021 production month.
- Risks:
- Commodity Price Volatility: Income is heavily influenced by natural gas and oil prices, which are subject to market uncertainty and geopolitical factors (e.g., conflict in Ukraine).
- Regulatory Environment: Potential impacts from federal regulations regarding methane emissions, hydraulic fracturing, and leasing on federal lands could affect production costs or volumes.
- Weather: Winter storms can disrupt access to production fields.
- Subsequent Event: On October 21, 2022, the Trust announced a cash distribution of $0.349121 per Unit ($16,272,132.13 total), payable November 15, 2022, based primarily on August 2022 production.
Investor Verification Checklist
- Production Decline vs. Price Increase: Verify the extent to which rising commodity prices are offsetting the natural decline in production volumes (6.6% decline YTD).
- Capital Expenditure Execution: Monitor Hilcorp's execution of the $1.9 million 2022 capital plan, specifically the 24 well recompletions, to determine if they successfully mitigate future production declines.
- True-Up Adjustments: Review future distribution reports for significant "true-up" adjustments or reversals of prior period revenue, as Hilcorp refines its reporting processes.
- Regulatory Impact: Assess the potential long-term impact of federal climate policies and methane regulations on Hilcorp's operating costs and production capabilities.
- Depletion Rate: Acknowledge that the Trust cannot acquire new assets; verify the rate of depletion of the net overriding royalty interest (accumulated amortization was $130.1M as of Sep 30, 2022).