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, 2021
Trustee: PNC Bank, National Association (succeeded BBVA USA in October 2021)
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 in the San Juan Basin. Financial statements are prepared on a modified cash basis, not GAAP. Distributions are based on net proceeds from production after deducting production costs, taxes, and operating expenses.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 |
|---|---|---|---|
| Royalty Income | $6,059,606 | $21,837,483 | $6,039,129 |
| Total Income | $6,059,843 | $21,838,489 | $6,045,139 |
| Distributable Income | $5,673,933 | $20,591,183 | $5,203,505 |
| Distributable Income per Unit | $0.121735 | $0.441787 | $0.111642 |
| Cash and Short-term Investments | $2,724,289 | (As of Sep 30, 2021) | |
| Cash Reserves | $1,000,000 | ||
| Net Overriding Royalty Interest (Net) | $4,029,336 | (As of Sep 30, 2021) | |
| Total Assets | $6,753,625 |
Production Data (Nine Months Ended Sep 30, 2021):
- Natural Gas: 19,631,861 Mcf (Average Price: $2.72/Mcf)
- Oil and Condensate: 33,396 Bbls (Average Price: $50.23/Bbl)
Material Changes vs. Prior Period
- Revenue Surge: Royalty income for the nine months ended September 30, 2021, increased by approximately 262% compared to the same period in 2020. This was driven primarily by a significant increase in natural gas prices (from $1.47/Mcf in 2020 to $2.72/Mcf in 2021).
- Q3 2020 Comparison: There was no royalty income distributed in the three months ended September 30, 2020, due to excess production costs. In contrast, Q3 2021 generated over $6 million in royalty income.
- Expense Increases: Lease operating expenses and property taxes increased by 69% in Q3 2021 compared to Q3 2020, largely due to true-ups and corrections for prior months and increased operational activity.
- Trustee Transition: PNC Bank succeeded BBVA USA as Trustee in October 2021 following an acquisition.
Outlook, Risks, and Unusual Items
Unusual Items and Accounting Adjustments
- August 2021 Distribution: No cash distribution was declared for August 2021 due to excess production costs incurred in June 2021. The cash reserve was utilized to cover monthly expenses during this period.
- Reimbursements and True-ups: In November 2021, Hilcorp identified accounting errors and estimation discrepancies. They agreed to reimburse the Trust approximately $3.13 million (including interest) for errors in gross proceeds, severance tax estimates, and mislabeled general ledger accounts for January through July 2021. These payments are expected to be included in the November distribution.
- Estimates vs. Actuals: Due to Hilcorp's transition to a new accounting system, revenue and cost data for several months in early 2021 were based on estimates. True-up processes are ongoing, with the April 2021 production month expected to be finalized by the end of 2021.
Risks and Contingencies
- Commodity Price Volatility: The Trust's income is heavily dependent on natural gas prices, which are subject to wide fluctuations.
- Regulatory Environment: New federal regulations regarding methane emissions and climate change policies could impact production costs or volumes, though Hilcorp does not currently anticipate material impacts on existing leases.
- Operator Reliance: The Trust relies entirely on Hilcorp for accurate reporting of production, revenues, and costs. Delays or errors in Hilcorp's reporting (as seen in the 2021 true-ups) directly affect distribution timing and amounts.
Investor Verification Checklist
- True-up Completion: Verify the finalization of the April 2021 production month true-up and the inclusion of the $3.13 million reimbursement in the November 2021 distribution.
- Production Costs: Monitor future lease operating expenses to ensure the increase seen in Q3 2021 is not a recurring trend that could erode margins.
- Natural Gas Pricing: Track natural gas price trends, as the Trust's profitability is highly sensitive to price movements above the cost of production.
- Cash Reserve Utilization: Confirm that the cash reserve remains at $1.0 million and has not been depleted by future periods of excess production costs.
- Trustee Transition: Ensure the transition from BBVA USA to PNC Bank has not resulted in administrative delays or reporting discrepancies.