10-K/A: San Juan Basin Royalty Trust Files Amended 10-K, Cites Increased Natural Gas Prices and Production

The San Juan Basin Royalty Trust filed an amendment to its annual report, highlighting increased royalty income due to higher natural gas prices and production, along with details on capital expenditures and operational updates.

Summary

• The San Juan Basin Royalty Trust filed an amendment to its annual report on Form 10-K, primarily to include updated certifications.
• The Trust's royalty income increased significantly due to higher natural gas prices, rising from an average of $3.20 per Mcf in 2021 to $5.54 per Mcf in 2022.
• Oil prices also increased, from an average of $54.72 per Bbl in 2021 to $86.73 per Bbl in 2022.
• The Trust received approximately $79.0 million in royalty income in 2022, compared to $37.6 million in 2021.
• Distributable income to unit holders was approximately $77.6 million in 2022, up from $36 million in 2021.
• Hilcorp, the operator of the Subject Interests, plans to spend $4.4 million in capital expenditures in 2023, primarily on well recompletions and workovers.
• The Trust's proved natural gas reserves were estimated at 146,641 MMcf and crude oil and condensate reserves at 353 MBbls as of December 31, 2022.
• The Trust relies on Hilcorp for operational data and is subject to the risks associated with Hilcorp's operations and decisions.
• The Trust's financial statements are prepared on a modified cash basis, which differs from U.S. GAAP.

Sentiment

Score: 8

Explanation: The document reflects a positive outlook due to increased revenue and distributable income, driven by higher commodity prices. However, there are inherent risks associated with the Trust's structure and reliance on Hilcorp.

Positives

• The Trust experienced a significant increase in royalty income due to higher natural gas and oil prices.
• Distributable income to unit holders more than doubled year-over-year.
• Hilcorp's planned capital expenditures for 2023 indicate continued investment in the Subject Interests.
• The Trust maintains a cash reserve of $1.0 million.
• The Trust has implemented a formal protocol for compliance audits of Hilcorp's books and records.

Negatives

• The Trust is dependent on Hilcorp for operational data and is subject to the risks associated with Hilcorp's operations and decisions.
• The Subject Interests are depleting assets, and the Trust cannot acquire new assets.
• The Trust has limited control over production costs and capital expenditures.
• The Trust's financial statements are prepared on a modified cash basis, which differs from U.S. GAAP.
• The Trust is subject to regulatory risks and environmental regulations that could impact operations and costs.

Risks

• The Trust is heavily reliant on natural gas prices, which are subject to market volatility.
• Hilcorp's operational decisions and capital allocation can significantly impact the Trust's income.
• Environmental regulations and climate change policies could increase operating costs or reduce demand for natural gas and oil.
• The Trust is subject to the risk of potential delays or inaccuracies in Hilcorp's reporting of financial and operational data.
• The Trust's reserves are subject to revisions based on new information and economic factors.

Future Outlook

Hilcorp's 2023 capital expenditure plan includes $4.4 million for well recompletions, facilities projects, and permitting costs, indicating continued investment in the Subject Interests. The Trust does not anticipate any increase or decrease to the cash reserves in 2023.

Management Comments

• Hilcorp has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance.
• Hilcorp has informed the Trust that it completed the transition to its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month.
• Hilcorp has informed the Trust that it has implemented additional controls to enhance the reporting process to reduce the need for future corrections.
• Hilcorp informed the Trust it does not anticipate that the current state of the Covid-19 pandemic will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust.
• Hilcorp informed the Trust that it does not have anything specifically to comment on regarding the war in Ukraine.

Industry Context

The increase in natural gas prices and production reflects broader trends in the energy market, where demand and prices have been volatile. The Trust's performance is tied to the San Juan Basin's production and the market prices for natural gas and oil.

Comparison to Industry Standards

• The San Juan Basin is a mature producing region, and the Trust's reliance on existing wells and recompletions is typical for such areas.
• The Trust's royalty structure is common in the oil and gas industry, where royalty trusts are used to distribute income from producing assets.
• The Trust's financial performance is directly linked to the operational performance of Hilcorp, which is a common arrangement for royalty trusts.
• The Trust's reserve estimates are prepared by an independent engineering firm, which is a standard practice in the industry.
• The Trust's modified cash basis accounting is consistent with SEC guidelines for royalty trusts, but differs from GAAP used by most operating companies.

Stakeholder Impact

• Unit holders will benefit from increased distributions due to higher royalty income.
• The Trust's performance is directly tied to Hilcorp's operational decisions, which could impact future distributions.
• The Trust's financial health is dependent on the market prices for natural gas and oil, which can be volatile.

Next Steps

• Hilcorp will proceed with its 2023 capital expenditure plan, focusing on well recompletions and facilities projects.
• The Trust will continue to monitor Hilcorp's operations and financial reporting.
• The Trust's compliance auditors will continue to audit payments made by Hilcorp to the Trust.
• The Trustee will continue to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust.

Key Dates

Keywords

San Juan Basin Royalty Trust, natural gas, oil, royalty income, Hilcorp, production, reserves, capital expenditures, distributable income, unit holders