10-Q: San Juan Basin Royalty Trust Reports Zero Distributable Income for Q1 2025 Amid Rising Production Costs

San Juan Basin Royalty Trust reports no distributable income for the quarter ended March 31, 2025, due to increased capital expenditures and declining natural gas prices.

Summary

• The San Juan Basin Royalty Trust reported financial results for the quarter ended March 31, 2025.
• There was no distributable income for the quarter, a significant decrease from the $4,092,544 reported for the same period in 2024.
• This decline is primarily attributed to increased capital expenditures by Hilcorp and a decrease in natural gas prices.
• Royalty income was $0 for the quarter, compared to $5,091,060 in the first quarter of 2024.
• Gross proceeds from subject interests increased to $23,720,413 from $18,230,985.
• However, production costs also increased significantly to $24,212,351 from $11,442,905.
• Excess production costs have accumulated to $21,739,946 gross ($16,304,960 net to the Trust) as of March 31, 2025.
• The Trust's cash reserves have decreased to $258,521 as of March 31, 2025.
• The Trustee is evaluating commercial lending options to cover the Trust's liabilities once cash reserves are depleted.
• The Trust's ability to continue as a going concern is in doubt due to the anticipated deficit in income to pay liabilities.
• Hilcorp's estimated 2025 capital expenditures for the Subject Interests are approximately $9.0 million.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the lack of distributable income, declining cash reserves, and the uncertainty surrounding the Trust's ability to continue as a going concern. The reliance on Hilcorp's capital expenditure plans and commodity price fluctuations adds to the negative outlook.

Positives

• Gross proceeds from the subject interests increased by approximately $5.5 million, or 30.1%, compared to the same period last year.
• Natural gas production from the Subject Interests increased from 5,595,016 Mcf to 7,620,893 Mcf.
• The Trustee is actively seeking a commercial line of credit to address potential cash shortfalls.

Negatives

• There was no distributable income for the quarter ended March 31, 2025.
• Royalty income was $0 for the quarter.
• Excess production costs have accumulated to $21,739,946 gross ($16,304,960 net to the Trust).
• The Trust's cash reserves have decreased to $258,521.
• The Trust's ability to continue as a going concern is in doubt.
• General and administrative expenses were $510,636.

Risks

• The Trust's income is heavily influenced by the price of natural gas and oil, which are subject to market fluctuations.
• The Trust is dependent on Hilcorp's operations and capital expenditures, which can impact net proceeds.
• The Trust's ability to make distributions is contingent on Hilcorp extinguishing the balance of excess production costs.
• The Trust's cash reserves are dwindling, and the Trustee is seeking a commercial line of credit to cover liabilities.
• The Trust's ability to continue as a going concern is in doubt.

Future Outlook

The Trust expects to continue to draw on cash reserves for all Trust liabilities not covered by interest income until such time as the Trust begins receiving Royalty Income again. The Trustee is currently evaluating commercial lending options available to the Trust to cover the Trust's liabilities once cash reserves are depleted.

Management Comments

• Hilcorp has informed the Trust that it is unable to estimate the productive life of the Subject Interests.
• Hilcorp further informed the Trust that its planned project status for 2025 is subject to revision if Hilcorp revises its assumptions underlying the 2025 Plan, and that actual capital costs may vary from these estimates.

Industry Context

Royalty trusts are particularly vulnerable to commodity price fluctuations and capital expenditure decisions made by the operators of the underlying properties. The San Juan Basin is a mature gas-producing region, and the economics of continued production are highly sensitive to gas prices and operating costs.

Comparison to Industry Standards

• Comparing the San Juan Basin Royalty Trust to other royalty trusts, such as the Permian Basin Royalty Trust (PBT) or the Mesa Royalty Trust (MTR), reveals that the performance of each trust is highly dependent on the specific geological characteristics of its underlying assets and the operational decisions of the operators.
• For example, PBT may be experiencing different results due to higher oil prices and different capital expenditure strategies by its operator, while MTR's performance is tied to its specific gas and oil properties.
• Industry benchmarks for operating costs and production efficiency in the San Juan Basin can be compared to Hilcorp's reported figures to assess their relative performance.
• However, direct comparisons are challenging due to the unique royalty structure of each trust and the varying reporting practices of the operators.

Stakeholder Impact

• Unit holders will not receive a distribution for the quarter.
• The Trust's ability to meet its obligations to creditors is uncertain.
• The Trust's future is dependent on Hilcorp's operations and commodity prices.

Next Steps

• The Trustee will continue to engage with Hilcorp regarding its accounting and reporting practices.
• The Trustee will continue to evaluate commercial lending options to cover the Trust's liabilities.
• The Trust will monitor Hilcorp's capital expenditure plans and their impact on royalty income.

Key Dates

Keywords

San Juan Basin Royalty Trust, Royalty Income, Distributable Income, Hilcorp, Excess Production Costs, Natural Gas, Oil, Production Costs, Trustee, Cash Reserves