SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust (the "Trust")
Reporting Period: Quarter ended March 31, 2010
Trustee: Compass Bank
Operator: Burlington Resources Oil & Gas Company LP ("BROG"), a subsidiary of ConocoPhillips.
Business Model: The Trust holds a 75% net overriding royalty interest in oil and gas properties in the San Juan Basin, New Mexico. It is a passive entity that distributes net proceeds from production to Unit Holders. The Trust has no employees or operating activities; all functions are performed by the Trustee or the operator.

Key Financial Metrics

Production Data (Q1 2010 vs Q1 2009):
- Gas Sales: 8,528,870 Mcf (Avg Price: $5.16/Mcf) vs 8,558,550 Mcf (Avg Price: $4.04/Mcf).
- Oil Sales: 13,160 Bbls (Avg Price: $67.66/Bbl) vs 10,982 Bbls (Avg Price: $40.50/Bbl).

Material Changes vs. Prior Period

• Revenue Surge: Total revenue increased by approximately 133% year-over-year, driven primarily by a 130% increase in royalty income.
• Price Drivers: The increase in royalty income is attributed to higher commodity prices. Average gas prices rose $1.12 per Mcf, and average oil prices rose $27.16 per barrel compared to Q1 2009.
• Production Volume: Gas production volumes remained relatively flat (down slightly), while oil production volumes increased by approximately 20%.
• Capital Expenditures: Capital costs deducted by BROG in calculating royalty income decreased significantly to approximately $3.4 million in Q1 2010, compared to $9.9 million in Q1 2009.
• Liquidity: Cash and short-term investments increased by $3.2 million to $8.6 million.

Guidance, Outlook, and Risks

Outlook and Capital Budget

BROG estimates a 2010 capital expenditure budget of $17.9 million for the Underlying Properties, with an additional $6.8 million expected from prior year budgets. However, BROG notes that actual expenditures could range from $10 million to $45 million depending on regulatory approvals, project mix, and natural gas prices. Approximately 305 projects are anticipated for 2010.

Contractual Updates

Contracts with Chevron, BP Energy, and Macquarie Cook Energy LLC are set to terminate on March 31, 2011. Requests for proposals for new contracts are expected to be circulated. Contracts with PG&E and NMGC have been automatically extended through at least March 31, 2012. New 15-year gathering contracts with Williams Four Corners, LLC took effect April 1, 2010.

Legal Proceedings and Contingencies

• Settlement with BROG: On April 29, 2010, the Trust settled litigation regarding a 2005 arbitration award. BROG agreed to pay the Trust $2.6 million, and both parties released claims for attorney's fees. The payment is expected in May 2010.
• Historical Settlement: A 2008 reduction in distribution of $4.9 million related to a False Claims Act settlement is still being analyzed by Trust consultants.
• Regulatory Risk: Potential new air quality rules and surface disturbance regulations could increase compliance costs and reduce the number of drilling projects.
• Market Risk: The Trust is highly sensitive to natural gas prices, as a high percentage of income is derived from gas sales. The Trust has no foreign currency or interest rate risk exposure.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current natural gas and oil prices against the Q1 2010 averages ($5.16/Mcf and $67.66/Bbl) to assess future distribution potential.
• Capital Expenditure Impact: Monitor BROG's actual capital spending against the $10M-$45M range, as higher spending reduces net proceeds available for royalty distributions.
• Contract Renewals: Track the outcome of the RFP process for gas sales contracts expiring March 31, 2011, to ensure pricing terms remain favorable.
• Settlement Receipt: Confirm the receipt of the $2.6 million settlement payment from BROG in May 2010.
• Regulatory Environment: Watch for new New Mexico environmental regulations that could restrict drilling activity or increase operating costs.