8-K: San Juan Basin Royalty Trust Suspends March Distribution Due to Excess Production Costs

San Juan Basin Royalty Trust announces no cash distribution for March 2025 as net proceeds are applied to cover excess production costs from Hilcorp's drilling activities.

Summary

• San Juan Basin Royalty Trust will not declare a monthly cash distribution for March 2025.
• This is due to the application of $4,153,693 in net proceeds to cover excess production costs.
• These costs resulted from Hilcorp San Juan L.P.'s drilling of two new horizontal wells in 2024.
• The cumulative excess production costs are approximately $21,739,947 gross ($16,304,960 net to the Trust).
• Hilcorp will continue to charge the balance of excess production costs to the Trust's net proceeds each month until it is fully paid.
• No cash distributions will be made until future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves.
• Hilcorp reported $10,152,016 of total revenue from the Subject Interests for January 2025.
• This revenue consists of $10,063,934 from gas and $88,082 from oil.
• Production costs for January 2025 were $4,613,759, including lease operating expenses, severance taxes, and capital costs.
• Trust administrative expenses for the month totaled $255,657.
• Gas volumes for January 2025 totaled 2,689,216 Mcf (2,988,018 MMBtu).
• The average gas price for January 2025 was $3.74 per Mcf ($3.37 per MMBtu).
• Cash reserves in the amount of $253,619 will be utilized to cover the balance of Trust administrative expenses which will bring the balance of cash reserves maintained by the Trustee to $258,521.
• The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions.
• Hilcorp estimates its 2025 capital expenditures for the Subject Interests to be approximately $9.0 million.
• The Trustee is currently evaluating credit options on behalf of the Trust.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the suspension of the March distribution, but there are some positives such as the decrease in the deficit of excess production costs and the increase in gas prices. The evaluation of credit options is a neutral factor.

Positives

• The deficit of excess production costs decreased by $5,538,257 gross ($4,153,693 net to the trust) from last month's reporting period.
• Average gas price increased to $3.74 per Mcf in January 2025, up from $3.14 per Mcf in December 2024.
• The Trustee is evaluating credit options to cover administrative expenses until royalty income resumes.
• Hilcorp's 2025 capital project plan includes projects aimed at increasing production.

Negatives

• No cash distribution will be made to unit holders for March 2025.
• The Trust is currently not receiving royalty income due to the application of net proceeds to excess production costs.
• Cash reserves are being utilized to cover administrative expenses.
• The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions.

Risks

• Volatility of oil and gas prices could impact future revenues.
• Governmental regulation or action could affect operations.
• Litigation could pose financial risks.
• Uncertainties about estimates of reserves could impact future production.
• The 2025 capital project plan is subject to revision by Hilcorp, and actual capital costs may vary from estimates.

Future Outlook

The Trust will not make cash distributions until future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves. The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions. Hilcorp's 2025 capital project plan is estimated at $9.0 million.

Management Comments

• The Trustee is currently evaluating credit options on behalf of the Trust.
• Production from the Subject Interests continues to be gathered, processed, and sold under market sensitive and customary agreements, as recommended for approval by the Trust's Consultant.
• The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust.

Industry Context

This announcement reflects the challenges faced by royalty trusts in a fluctuating commodity price environment, where capital expenditures can temporarily outweigh revenues, impacting distributions to unit holders. Other royalty trusts may face similar situations depending on the capital expenditure programs of the operators of their underlying assets.

Comparison to Industry Standards

• Comparing San Juan Basin Royalty Trust to other royalty trusts like Permian Basin Royalty Trust (PBT) or Cross Timbers Royalty Trust (CRT), the impact of capital expenditures on distributions is a common factor.
• However, the specific details of the underlying assets, operator strategies (like Hilcorp's drilling program), and hedging policies differentiate each trust's performance.
• For example, if PBT's operator were to undertake a significant drilling program, it could similarly impact their near-term distributions.
• The average gas price of $3.74 per Mcf is within the range of realized gas prices for many producers in the US, but the profitability depends heavily on the cost structure of the specific wells.

Stakeholder Impact

• Unit holders will not receive a cash distribution for March 2025.
• The Trust's ability to cover administrative expenses is being maintained through cash reserves and potential credit options.

Next Steps

• Hilcorp will continue to charge the balance of excess production costs to the Trust's net proceeds each month.
• The Trustee plans to replenish cash reserves to $2.0 million prior to any future distributions.
• The Trustee will continue to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust.
• The Trusts auditing process will continue to include detailed analysis of Hilcorps pricing and rates charged.

Key Dates

Keywords

San Juan Basin Royalty Trust, cash distribution, excess production costs, Hilcorp, royalty income, gas prices, capital expenditures, production costs, Trust administrative expenses, cash reserves