Business Context and Reporting Period
Company: San Juan Basin Royalty Trust (SJT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2020
Trustee: BBVA USA
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, New Mexico. Financial statements are prepared on a modified cash basis, not GAAP. Distributions depend on net proceeds from production after costs, taxes, and capital expenditures.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 |
|---|---|---|---|
| Royalty Income | $0 | $6,039,129 | $8,957,770 |
| Total Income | $396 | $6,045,139 | $8,981,117 |
| Distributable Income | $0 | $5,203,505 | $8,011,540 |
| Distributable Income per Unit | $0.000000 | $0.111642 | $0.171890 |
| Cash and Short-term Investments | $602,910 (Sep 30, 2020) | $1,079,421 (Dec 31, 2019) | |
| Cash Reserves | $602,910 (Sep 30, 2020) | $1,000,000 (Dec 31, 2019) | |
| Net Overriding Royalty Interest (Net) | $5,172,070 | $5,452,207 |
Production Costs vs. Gross Proceeds: For the three months ended September 30, 2020, production costs exceeded gross proceeds by $1,480,811, resulting in no Royalty Income. As of September 30, 2020, gross excess production costs applicable to the Subject Interests were $92,000 ($69,000 net to the Trust).
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the nine months ended September 30, 2020, decreased by approximately 33% compared to the same period in 2019. This was driven by lower natural gas prices (average $1.47/Mcf vs. $1.86/Mcf) and reduced production volumes.
- Zero Distributions in Q3: No distributions were made in the third quarter of 2020 due to excess production costs from the April 2020 production month and negative true-ups from prior periods.
- Capital Expenditures: Capital expenditures dropped significantly, decreasing 99% in the third quarter and 98% for the nine-month period compared to 2019, reflecting Hilcorp's reduced 2020 capital spending plan.
- True-ups and Adjustments: The Trust recorded a reduction of $1.5 million in "Other" gross proceeds in Q3 2020, related to a $2.0 million estimate included in late 2017/early 2018 distributions. A remaining $0.5 million adjustment is expected to be finalized.
Outlook, Risks, and Management Commentary
- Commodity Prices: Income remains heavily influenced by natural gas and oil prices. While prices stabilized in Q3 2020, they remain below pre-pandemic levels. Future negative true-ups are possible if prices remain low.
- Covid-19 Impact: Hilcorp does not anticipate materially reducing production or taking wells offline due to the pandemic, though personnel availability and market conditions are monitored.
- Liquidity: The Trust withdrew approximately $0.3 million from cash reserves in Q3 to cover administrative expenses. The Trustee replenished reserves to $1.0 million in October 2020.
- Subsequent Event: On October 20, 2020, the Trust reported a monthly distribution of $0.013969 per Unit ($651,100.95 total) based on August 2020 production.
- Accounting Basis: The Trust operates on a modified cash basis. Revenues are not accrued in the month of production; expenses are recorded when paid. Amortization is charged directly to trust corpus.
Investor Verification Checklist
- Excess Production Costs: Verify the status of the $92,000 gross excess production costs and the timeline for their recovery from future net proceeds before distributions resume.
- True-up Adjustments: Monitor the finalization of the remaining $0.5 million "Other" gross proceeds adjustment and potential future negative true-ups from 2017-2019 periods.
- Commodity Price Sensitivity: Assess the impact of current natural gas prices (approx. $1.47/Mcf) on future net proceeds, given the Trust's high exposure to gas revenue.
- Cash Reserve Usage: Track the Trust's cash reserve balance, which was drawn down to $0.6 million in Q3 and replenished to $1.0 million in October, to ensure sufficient liquidity for administrative expenses during low-income periods.
- Operator Reporting: Note that financial reporting relies entirely on Hilcorp's data; verify the accuracy of Hilcorp's production and cost estimates as they continue to reconcile prior periods.