10-Q: San Juan Basin Royalty Trust Reports Q3 Loss, Suspends Distributions Amid Debt and Production Costs

San Juan Basin Royalty Trust reported a net loss for the third quarter and first nine months of 2025, suspending distributions to unit holders due to significant Excess Production Costs and reliance on a new $2 million line of credit.

Summary

• The Trust reported no Royalty Income for the three and nine months ended September 30, 2025, compared to $6,945,974 for the nine months ended September 30, 2024.
• A distributable loss of $(111,352) was recorded for the three months ended September 30, 2025, and $(274,135) for the nine months ended September 30, 2025, resulting in no distributions to Unit Holders.
• Cash and short-term investments significantly decreased to $29,160 as of September 30, 2025, from $760,920 at December 31, 2024.
• The Trust established a $2,000,000 Line of Credit with Texas Bank on May 21, 2025, and has utilized $274,135 as of September 30, 2025, to cover administrative expenses.
• Cumulative Excess Production Costs, primarily from Hilcorp's drilling of two new horizontal wells, stood at approximately $13,593,734 gross ($10,195,300 net to the Trust) as of September 30, 2025.
• Distributions will not resume until Excess Production Costs are repaid, a $2,000,000 cash reserve is replenished, and the Line of Credit is repaid in full.
• Natural gas production volumes from Subject Interests increased by 21.6% for the three months ended September 30, 2025, and 101.4% for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Average realized natural gas price increased to $2.11 per Mcf for the three months ended September 30, 2025, and $2.63 per Mcf for the nine months ended September 30, 2025, compared to $1.49 and $2.20 respectively in 2024.

Sentiment

Score: 2

Explanation: The Trust is facing severe financial distress, evidenced by zero royalty income, significant losses, depletion of cash reserves, and reliance on a line of credit. The explicit 'going concern' doubt and suspension of distributions highlight a critical situation, despite some positive trends in natural gas prices and production volumes which are currently offset by high production costs.

Positives

• Natural gas production volumes from the Subject Interests increased by 1,227,472 Mcf (21.6%) for the three months ended September 30, 2025, and by 5,594,006 Mcf (103.7%) for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Average realized natural gas prices increased to $2.11 per Mcf for the three months ended September 30, 2025, and to $2.63 per Mcf for the nine months ended September 30, 2025, compared to $1.49 and $2.20 respectively in 2024.
• Gross Proceeds from the Subject Interests increased by approximately $5.8 million (62.1%) for the three months ended September 30, 2025, and by $19.4 million (50.0%) for the nine months ended September 30, 2025, primarily due to higher natural gas prices and production volumes.
• General and administrative expenses decreased by $270,968 (70.1%) for the three months ended September 30, 2025, and by $1,143,872 (52.9%) for the nine months ended September 30, 2025, compared to the same periods in 2024.

Negatives

• The Trust reported no Royalty Income for the three and nine months ended September 30, 2025, compared to $6,945,974 for the nine months ended September 30, 2024.
• A distributable loss of $(111,352) was recorded for the three months ended September 30, 2025, and $(274,135) for the nine months ended September 30, 2025, resulting in no distributions to Unit Holders.
• Cash and short-term investments decreased significantly from $760,920 at December 31, 2024, to $29,160 at September 30, 2025.
• The Trust utilized a $2,000,000 Line of Credit, with an outstanding balance of $274,135 as of September 30, 2025, to cover administrative expenses.
• Cumulative Excess Production Costs totaled approximately $13,593,734 gross ($10,195,300 net to the Trust) as of September 30, 2025, which must be recovered before Royalty Income payments and distributions can resume.
• The average realized oil price per Bbl decreased for both the three and nine months ended September 30, 2025, compared to the same periods in 2024, primarily due to a decrease in the WTI benchmark oil price.
• Oil production volumes decreased for the Subject Interests by 3,336 Bbls (30.0%) for the three months ended September 30, 2025, and by 1,797 Bbls (7.0%) for the nine months ended September 30, 2025, compared to the same periods in 2024.

Risks

• Substantial doubt exists about the Trust's ability to continue as a going concern within one year due to the anticipated deficit in income to pay liabilities.
• The Trust has not received Royalty Income from May 2024 through September 2025, and interest income has been insufficient to cover liabilities.
• Distributions to Unit Holders are suspended and will not resume until the balance of Excess Production Costs (approximately $10,195,300 net to the Trust) is repaid, a $2,000,000 cash reserve is replenished, and the $274,135 Line of Credit is repaid in full.
• The Trust's income and monthly distributions are heavily influenced by the fluctuating prices of natural gas and oil, which are subject to market uncertainty and factors beyond the Trustee's control.
• The Subject Interests are depleting assets, and the Trust cannot acquire new natural gas and oil assets, making Royalty Income dependent on existing volumes.
• Hilcorp's capital investments and production costs directly impact Net Proceeds and Royalty Income, and the Trust has limited authority to control these amounts and timing.
• Disruptions caused by weather, particularly winter storms, could impact Hilcorp's ability to access fields and maintain production.
• The Trust relies on Hilcorp for accurate and timely reporting of financial and operational information, and ongoing audits are necessary to ensure compliance.
• The Trust is not a party to Hilcorp's natural gas purchase, gathering, or processing contracts, limiting its knowledge and ability to influence terms.

Future Outlook

The Trust anticipates no distributions to Unit Holders until the cumulative Excess Production Costs, currently at approximately $10.2 million net to the Trust, are fully recovered, a cash reserve of $2.0 million is replenished, and the $274,135 Line of Credit is repaid. Hilcorp's 2025 capital plan includes $9.0 million for 29 projects, with $7.70 million spent as of September 30, 2025, which may impact future production and costs. The Trust's ability to continue as a going concern is in substantial doubt within one year.

Management Comments

• "The anticipated deficit in income to pay the Trust's liabilities described above raises substantial doubt about the Trust's ability to continue as a going concern within one year after issuance date of the financial statements."
• "The Line of Credit is intended to cover the Trust's administrative expenses until the Trust receives Royalty Income in amounts sufficient to (a) repay the balance of Excess Production Costs, (b) replenish a reserve in the amount of $2,000,000, and (c) repay the Note in full, after which time, the Trust will resume distributions to the holders of the Trust's Units of beneficial interest."
• "The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust's third-party compliance auditors continue to audit payments made by Hilcorp to the Trust, inclusive of sales revenues, production costs, capital expenditures, adjustments, actualizations, and recoupments."
• "The Trustee has evaluated the Trust's internal disclosure controls and procedures as of September 30, 2025, and has concluded that such disclosure controls and procedures are effective, at the reasonable assurance level."

Industry Context

The Trust's performance is heavily influenced by natural gas and oil commodity prices, which have seen mixed trends with natural gas prices increasing and oil prices decreasing during the period. The ongoing capital expenditures by Hilcorp, the operator of the underlying assets, reflect continued investment in drilling and workover projects, which is a common industry practice to maintain or increase production from depleting assets. However, the significant Excess Production Costs and the Trust's inability to generate royalty income highlight the challenges faced by royalty trusts when operator costs outweigh gross proceeds, especially in a volatile commodity price environment. The reliance on a line of credit for administrative expenses underscores the financial strain, a situation that could be exacerbated by sustained low commodity prices or higher-than-expected operator costs.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders (Unit Holders): Directly impacted by the suspension of distributions and the distributable losses. Future distributions are contingent on significant financial recovery. The value of their units is likely negatively affected by the going concern doubt and debt.
• Creditors (Texas Bank): The $2,000,000 Line of Credit is secured by substantially all of the Trust's assets, providing some collateral, but the going concern doubt indicates elevated risk.
• Hilcorp San Juan L.P. (Operator): Continues to operate the Subject Interests and incur capital expenditures. The recovery of Excess Production Costs directly impacts when the Trust receives royalty income.
• Employees: The Trust has no employees, so no direct impact.

Next Steps

• Continue efforts to recover the balance of cumulative Excess Production Costs from future Net Proceeds.
• Replenish the cash reserve to $2,000,000.
• Repay the $2,000,000 Line of Credit in full.
• Resume monthly cash distributions to Unit Holders once the above conditions are met.
• The Trustee will continue to engage with Hilcorp and its third-party compliance auditors to audit payments, sales revenues, production costs, capital expenditures, and pricing.
• Hilcorp plans to continue with its 2025 capital project plan, which includes 29 projects with an estimated budget of $9.0 million.

Key Dates

Recommendation

The Trust is in a precarious financial position, explicitly stating 'substantial doubt about its ability to continue as a going concern.' It has reported zero royalty income for an extended period (May 2024 through September 2025), incurred significant distributable losses, and completely suspended distributions to unit holders. The Trust has resorted to a $2 million line of credit to cover administrative expenses, with an outstanding balance of $274,135, and its cash reserves are nearly depleted. A massive $10.2 million (net to Trust) in Excess Production Costs must be recovered before any distributions can resume, which is a significant hurdle given the current operational and commodity price environment. While natural gas production and prices showed some positive trends, these are currently insufficient to offset the accumulated costs and debt. The fundamental purpose of a royalty trust is to distribute income, and with no foreseeable distributions and severe liquidity issues, the investment thesis is fundamentally broken. Investors face high risk of further capital erosion and potential termination of the Trust.

Keywords

Royalty Trust, Oil and Gas, San Juan Basin, SJT, SEC Filing, 10-Q, Financial Results, Distributable Income, Excess Production Costs, Line of Credit, Going Concern, Natural Gas Prices, Oil Prices, Hilcorp, Energy Sector, Trustee, Distributions, Capital Expenditures