8-K: San Juan Basin Royalty Trust Announces No February Distribution Due to Low Gas Prices, High Production Costs

San Juan Basin Royalty Trust will not declare a February cash distribution due to continued low natural gas prices and excess production costs in December 2024.

Summary

• San Juan Basin Royalty Trust (SJT) announced it will not declare a monthly cash distribution for February 2025.
• The decision is attributed to continued low natural gas prices and cumulative excess production costs during December 2024.
• December 2024 total revenue from Subject Interests was $8,687,779, including $8,390,577 from gas and $297,202 from oil.
• Production costs for December 2024 were $6,459,217, including lease operating expenses of $2,751,758, severance taxes of $825,059, and capital costs of $2,882,401.
• Cumulative excess production costs are approximately $27,278,204 gross ($20,458,653 net to the Trust), a decrease of $2,228,562 gross ($1,671,422 net to the trust) from last month.
• Trust administrative expenses for the month totaled $141,887, partially offset by interest income of $2,703.69.
• Cash reserves of $139,183 will be used to cover the remaining administrative expenses, bringing the cash reserve balance to $512,140.
• The Trustee plans to replenish cash reserves to $2.0 million before future distributions.
• Gas volumes for December 2024 totaled 2,669,858 Mcf (2,966,509 MMBtu), compared to 2,261,819 Mcf (2,513,132 MMBtu) for November 2024.
• The average gas price for December 2024 was $3.14 per Mcf ($2.83 per MMBtu), compared to $2.10 per Mcf ($1.89 per MMBtu) for November 2024.
• Hilcorp estimates its 2025 capital expenditures for the Subject Interests to be approximately $9.0 million, allocated to new vertical drill projects, recompletions/workovers, and facilities projects.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the announcement of no distribution, which is unfavorable for investors. However, there are some positives, such as increased gas volumes and prices, and a decrease in cumulative excess production costs, preventing a lower score.

Positives

• Gas volumes increased in December 2024 compared to November 2024.
• The average gas price increased in December 2024 compared to November 2024.
• Cumulative excess production costs decreased from the previous month.

Negatives

• No cash distribution will be declared for February 2025.
• Continued low natural gas prices are impacting revenue.
• Excess production costs continue to exceed proceeds.
• Cash reserves are being utilized to cover administrative expenses.
• Distributions will not resume until cash reserves are replenished and future net proceeds are sufficient.

Risks

• Volatility of oil and gas prices could impact future revenue.
• Governmental regulation or action could affect operations.
• Litigation could pose a risk to the Trust.
• Uncertainties about estimates of reserves could impact future production.
• Hilcorp's 2025 capital project plan is subject to revision, and actual capital costs may vary from estimates.

Future Outlook

The Trustee plans to replenish cash reserves to $2.0 million before future distributions to Unit Holders. Hilcorp's 2025 capital project plan estimates $9.0 million in capital expenditures for the Subject Interests, but this plan is subject to revision.

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 ongoing challenges faced by royalty trusts tied to natural gas production in a period of fluctuating commodity prices and increasing operating costs. Other royalty trusts and energy companies are likely facing similar pressures, requiring careful management of expenses and capital investments.

Comparison to Industry Standards

• Comparing SJT's average gas price of $3.14 per Mcf in December 2024 to the Henry Hub natural gas spot price, a benchmark for North American natural gas, provides context on whether SJT is achieving market-competitive pricing.
• Companies like BP, Chevron, and ExxonMobil, while significantly larger, also manage extensive oil and gas operations and their capital expenditure decisions and production costs can be used as a benchmark for Hilcorp's operations.
• Comparing SJT's administrative expenses as a percentage of revenue to other similar-sized royalty trusts can provide insights into the efficiency of the Trust's operations.

Stakeholder Impact

• Unit holders will be negatively impacted by the lack of a February distribution.
• The Trust's ability to meet its obligations to stakeholders depends on future net proceeds and the replenishment of cash reserves.

Next Steps

• The Trustee plans to replenish cash reserves to $2.0 million.
• The Trust's auditing process will continue to analyze Hilcorp's compliance with underlying operative Trust agreements.
• Hilcorp will proceed with its 2025 capital project plan, subject to potential revisions.

Key Dates

Keywords

San Juan Basin Royalty Trust, Distribution, Natural Gas Prices, Production Costs, Hilcorp, Capital Expenditures, Cash Reserves, Gas Volumes, Oil Revenues, Trustee