8-K: San Juan Basin Royalty Trust Announces No Cash Distribution for May 2025 Due to Excess Production Costs

San Juan Basin Royalty Trust will not declare a May 2025 cash distribution due to the application of $1,499,498 in net proceeds to cover excess production costs from Hilcorp's drilling activities.

Summary

• San Juan Basin Royalty Trust (SJT) will not declare a monthly cash distribution for May 2025.
• This is due to the application of $1,499,498 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 $15,160,257 gross ($11,370,193 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 $6,984,564 of total revenue from the Subject Interests for March 2025.
• This revenue consists of $6,904,591 of gas revenues and $79,973 of oil revenues.
• Production costs for the Subject Interests were $4,985,233 for March 2025.
• Trust administrative expenses totaled $85,694 for the month.
• Gas volumes for the Subject Interests for March 2025 totaled 2,448,569 Mcf (2,720,632 MMBtu).
• The average gas price for March 2025 was $2.82 per Mcf ($2.54 per MMBtu).
• 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: 3

Explanation: The sentiment is negative due to the suspension of cash distributions and the continued impact of excess production costs. While there are some positive aspects, such as the decrease in excess production costs, the overall impact on unit holders is unfavorable.

Positives

• The balance of cumulative excess production costs decreased by $1,999,331 gross ($1,499,498 net to the trust) from last month's reporting period.
• Gas volumes for the Subject Interests increased from 2,287,310 Mcf in February 2025 to 2,448,569 Mcf in March 2025.
• Trust administrative expenses decreased due to timing differences in the receipt and payment of certain expenses.
• The Trustee is evaluating credit options to cover administrative expenses, which could provide short-term financial flexibility.

Negatives

• No cash distribution will be made to unit holders for May 2025.
• Net proceeds are being used to cover excess production costs instead of being distributed as royalty income.
• The Trust will not receive royalty income until the balance of excess production costs is paid in full.
• Average gas price decreased by $0.54 per Mcf compared to February 2025.
• Cash reserves have been utilized to pay Trust administrative expenses, reducing the balance to $32,959.

Risks

• Volatility of oil and gas prices could impact future revenues.
• Governmental regulation or action could affect the Trust's operations.
• Litigation could pose a financial risk to the Trust.
• Uncertainties about estimates of reserves could impact future royalty income.
• The Trust's ability to make future distributions is dependent on Hilcorp's operations and commodity prices.
• The ongoing comprehensive audit process by the Trust's professional consultants and outside counsel could reveal non-compliance issues.

Future Outlook

The Trust will not receive royalty income until the balance of excess production costs is paid in full. No cash distributions will be made 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

• Argent Trust Company, as the trustee, reported that it will not declare a monthly cash distribution to the holders of its Units of beneficial interest.
• The Trustee is currently evaluating credit options on behalf of the Trust, the funds from which would be utilized to pay the Trust's administrative expenses until such time as the excess production costs are repaid and the Trust begins receiving royalty income again.

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. Many royalty trusts are subject to the operational decisions of the underlying asset operators, making them vulnerable to changes in capital spending and production strategies.

Comparison to Industry Standards

• Comparing SJT to other royalty trusts like Permian Basin Royalty Trust (PBT) or Cross Timbers Royalty Trust (CRT), the impact of capital expenditures on distributions is a common theme.
• Similar to SJT, these trusts often experience periods of reduced or suspended distributions due to operator-driven capital projects or fluctuating commodity prices.
• For example, PBT's distributions are heavily influenced by the capital spending decisions of its operator, ConocoPhillips, and CRT's distributions are affected by XTO Energy's (ExxonMobil) operational strategies.
• The average gas price of $2.82 per Mcf for SJT in March 2025 can be compared to the Henry Hub natural gas spot price, a benchmark for North American natural gas prices, to assess its relative performance.

Stakeholder Impact

• Unit holders will not receive a cash distribution for May 2025.
• The Trust's ability to pay future distributions is dependent on Hilcorp's operations and commodity prices.
• The Trustee is working to manage expenses and replenish cash reserves to ensure the long-term viability of the Trust.

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 include detailed analysis of Hilcorp's pricing and rates charged.

Key Dates

Keywords

San Juan Basin Royalty Trust, Cash Distribution, Excess Production Costs, Hilcorp, Royalty Income, Gas Prices, Production Costs, Trustee, SJT