8-K: San Juan Basin Royalty Trust Announces No April Distribution Due to Excess Production Costs

San Juan Basin Royalty Trust will not declare a monthly cash distribution for April 2025 as net proceeds are applied to cover excess production costs from Hilcorp's drilling activities.

Summary

• San Juan Basin Royalty Trust (SJT) announced it will not declare a monthly cash distribution for April 2025.
• This is due to the application of $3,435,269 in net proceeds to cover excess production costs.
• These costs resulted from Hilcorp San Juan L.P.'s drilling of two new horizontal wells in 2024.
• The cumulative excess production costs are approximately $17,159,588 gross ($12,869,691 net to the Trust).
• Hilcorp will continue to charge the balance of excess production costs to the Trust's net proceeds each month.
• No cash distributions will be made until future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves.
• Hilcorp reported $7,869,451 of total revenue from the Subject Interests for February 2025.
• This revenue consists of $7,685,519 from gas and $183,932 from oil.
• Production costs for the Subject Interests were $3,289,092 for February 2025.
• Trust administrative expenses totaled $142,466 for the month.
• Gas volumes for the Subject Interests for February 2025 totaled 2,287,310 Mcf (2,541,456 MMBtu).
• The average gas price for February 2025 was $3.36 per Mcf ($3.02 per MMBtu), a decrease from January 2025.
• The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions.
• The Trustee is evaluating credit options to cover administrative expenses until excess production costs are repaid.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the lack of distribution and the presence of excess production costs. However, the decrease in the deficit and the ongoing audit process provide some reassurance.

Positives

• The balance of cumulative excess production costs decreased by $4,580,359 gross ($3,435,269 net to the trust) from last month's reporting period.
• The Trust's auditing process includes detailed analysis of Hilcorp's pricing and rates charged.
• Interest income of $1,742 will be applied to cover a portion of the Trust's administrative expenses.

Negatives

• No cash distribution will be made for April 2025.
• The Trust will not receive royalty income until the balance of excess production costs is paid in full.
• Gas volumes decreased from 2,689,216 Mcf in January 2025 to 2,287,310 Mcf in February 2025.
• The average gas price decreased from $3.74 per Mcf in January 2025 to $3.36 per Mcf in February 2025.
• Cash reserves in the amount of $140,724 will be utilized to cover the balance of Trust administrative expenses which will bring the balance of cash reserves maintained by the Trustee to $117,797.

Risks

• The Trust's future distributions are contingent on sufficient net proceeds to cover liabilities and replenish cash reserves.
• Lower commodity prices and increased capital expenditures and lease operating expenses could result in revenue shortfalls.
• The Trust is reliant on information provided by Hilcorp, which could be inaccurate.
• Volatility of oil and gas prices could impact future revenue.
• Governmental regulation or action could impact future revenue.
• Litigation could impact future revenue.
• Uncertainties about estimates of reserves could impact future revenue.

Future Outlook

The Trust will not make cash distributions until future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves. The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions and is evaluating credit options to cover administrative expenses.

Management Comments

• The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust.
• The Trusts auditing process has also included detailed analysis of Hilcorps pricing and rates charged.

Industry Context

The announcement reflects the challenges faced by royalty trusts in a volatile commodity price environment, where capital expenditures and production costs can significantly impact distributable income. Similar trusts tied to oil and gas production are likely experiencing similar pressures.

Comparison to Industry Standards

• Comparing SJT to other royalty trusts like Permian Basin Royalty Trust (PBT) or Cross Timbers Royalty Trust (CRT) shows similar sensitivity to commodity prices and production costs.
• However, the impact of Hilcorp's capital project and the resulting excess production costs are a specific factor affecting SJT's distribution in this period.
• Other trusts may have different cost structures or hedging strategies that mitigate the impact of price fluctuations.

Stakeholder Impact

• Unit holders will not receive a cash distribution for April 2025.
• The Trust's ability to pay future distributions is dependent on Hilcorp's production and cost management.
• The Trustee is working to manage expenses and replenish cash reserves.

Next Steps

• Hilcorp will continue to charge the balance of excess production costs to the Trust's net proceeds each month.
• The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions.
• The Trustee is evaluating credit options to cover administrative expenses.
• The Trusts auditing process will continue to analyze compliance with all the underlying operative Trust agreements and evaluate potential remedies in the event there is suspected non-compliance.

Key Dates

Keywords

San Juan Basin Royalty Trust, distribution, excess production costs, Hilcorp, royalty income, gas prices, oil revenues, production costs, cash reserves, SJT