8-K: San Juan Basin Royalty Trust Suspends June Distribution Due to High Production Costs and Low Gas Prices

The San Juan Basin Royalty Trust will not distribute cash to unit holders for June 2024 due to production costs exceeding revenue in April 2024.

Summary

• The San Juan Basin Royalty Trust has announced it will not declare a cash distribution for June 2024.
• This decision is due to production costs exceeding proceeds during the production month of April 2024.
• Lower natural gas prices also contributed to the lack of distributable cash.
• Hilcorp reported total revenue of $2,470,705 from the Subject Interests for April 2024, with $2,224,435 from gas and $246,270 from oil.
• Production costs for the same period were $3,261,156, including lease operating expenses, severance taxes, and capital costs.
• The Trust will use cash reserves to cover administrative expenses of $92,364.
• Excess production costs of approximately $1,222,748 gross ($917,061 net to the Trust) will be charged to the next month's distribution.
• No cash distributions will be made until future net proceeds are sufficient to cover liabilities and replenish cash reserves.
• Gas volumes for April 2024 were 1,788,912 Mcf (1,987,680 MMBtu), down from 1,909,338 Mcf (2,121,487 MMBtu) in March 2024.
• The average gas price for April 2024 was $1.24 per Mcf ($1.12 per MMBtu), compared to $1.50 per Mcf ($1.35 per MMBtu) in March 2024.
• The Trustee increased cash reserves to $1.8 million as of April 30, 2024, and plans to increase them to $2.0 million.
• Cash reserves of $82,913 will be used to pay June 2024 administrative expenses, bringing the balance to $1,467,743.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the suspension of distributions and the significant impact of high production costs and low gas prices. While the trust is taking steps to manage the situation, the immediate outlook is unfavorable for unit holders.

Positives

• The Trustee is actively managing cash reserves to cover expenses and future distributions.
• The Trust is engaging with Hilcorp regarding accounting and reporting.
• The Trust's third-party compliance auditors are auditing payments made by Hilcorp.
• The Trust is conducting a comprehensive audit process to analyze compliance with underlying agreements.

Negatives

• No cash distribution will be made to unit holders for June 2024.
• Production costs exceeded revenue for the month of April 2024.
• There was a significant decrease in natural gas prices.
• Gas production volumes decreased in April compared to March.

Risks

• The Trust is subject to the volatility of oil and gas prices.
• There are risks associated with information provided by Hilcorp.
• Governmental regulations and potential litigation pose risks.
• Uncertainties exist regarding estimates of reserves.

Future Outlook

The Trust plans to replenish cash reserves and increase them to $2.0 million before any future distributions to unit holders. The Trust will continue to monitor Hilcorp's operations and conduct audits.

Management Comments

• The Trustee reported that it will not declare a monthly cash distribution due to excess production costs and lower natural gas pricing.
• The Trustee is authorized to retain a cash reserve for payment of Trust liabilities.
• The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust.

Industry Context

The announcement reflects the challenges faced by oil and gas royalty trusts due to fluctuating commodity prices and operational costs. The decrease in natural gas prices and increased production costs are impacting the profitability and distribution capacity of the trust.

Comparison to Industry Standards

• Many royalty trusts are facing similar challenges due to the volatility in commodity prices.
• The decrease in gas prices is a common issue affecting the profitability of many natural gas producers and royalty trusts.
• The level of production costs reported by Hilcorp is within the range of what is expected for similar operations, but the impact on the trust's distribution is significant.
• Other trusts with similar exposure to natural gas prices are likely experiencing similar pressures on their distributions.

Stakeholder Impact

• Shareholders will not receive a cash distribution for June 2024.
• The Trust's ability to provide future distributions is dependent on improved commodity prices and reduced production costs.
• The Trust's management is focused on maintaining financial stability and compliance.

Next Steps

• The Trustee plans to replenish cash reserves and increase them to $2.0 million.
• The Trust will continue to engage with Hilcorp regarding accounting and reporting.
• The Trust's third-party compliance auditors will continue to audit payments made by Hilcorp.
• The Trust will continue its comprehensive audit process to analyze compliance with underlying agreements.

Key Dates

Keywords

San Juan Basin Royalty Trust, Cash Distribution, Production Costs, Natural Gas Prices, Hilcorp, Trustee, Reserves, Audit