8-K: San Juan Basin Royalty Trust Suspends September Distribution Amidst High Costs and Low Gas Prices

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

Summary

• The San Juan Basin Royalty Trust has announced it will not declare a cash distribution for September 2024.
• This decision is due to production costs and capital expenditures exceeding gross proceeds during the production month of July 2024.
• The primary drivers are continued low natural gas prices and significant lease operating expenses and capital expenditures related to Hilcorp's 2024 capital project plan.
• Hilcorp reported total revenue of $3,905,235 for July 2024, with $3,670,009 from gas and $235,226 from oil.
• Production costs for the same period were $6,966,097, including $2,598,942 in lease operating expenses, $413,728 in severance taxes, and $3,953,427 in capital costs.
• Excess production costs of approximately $11,517,368 gross ($8,638,026 net to the Trust) will be charged to future distributions.
• The Trust's administrative expenses for the month totaled $145,121, partially offset by $5,679 in interest income.
• Gas volumes for July 2024 were 1,891,889 Mcf (2,102,099 MMBtu), compared to 1,828,685 Mcf (2,031,872 MMBtu) in June 2024.
• The average gas price for July 2024 was $1.94 per Mcf ($1.75 per MMBtu), up from $1.41 per Mcf ($1.27 per MMBtu) in June 2024.
• The Trust's cash reserves, which were $1.8 million as of April 30, 2024, will be reduced to $1,099,699 after covering administrative expenses this month.
• The Trustee plans to replenish cash reserves to $2.0 million before any future distributions to unit holders.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the suspension of distributions, high production costs, and reduction in cash reserves. While there was a slight increase in gas prices, the overall financial situation is concerning.

Positives

• Gas volumes increased from 1,828,685 Mcf in June 2024 to 1,891,889 Mcf in July 2024.
• The average gas price increased from $1.41 per Mcf in June 2024 to $1.94 per Mcf in July 2024.
• The Trust's administrative expenses decreased due to timing differences in payments.

Negatives

• Production costs significantly exceeded revenue, resulting in no cash distribution for September 2024.
• Excess production costs of $11,517,368 gross ($8,638,026 net to the Trust) will be charged to future distributions.
• Cash reserves have been reduced to $1,099,699 to cover administrative expenses.
• The Trust will not make distributions until future net proceeds are sufficient to cover liabilities and replenish cash reserves.

Risks

• Continued low natural gas prices could further impact the Trust's revenue.
• High production costs and capital expenditures may continue to strain the Trust's finances.
• The Trust's ability to make future distributions is dependent on Hilcorp's operational performance and commodity prices.
• There is a risk that the Trust's ongoing audit process may reveal further issues with Hilcorp's accounting and reporting.

Future Outlook

The Trust will not make distributions until future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves. The Trustee plans to increase cash reserves to $2.0 million before any future distributions to unit holders. The Trust continues to engage with Hilcorp regarding its ongoing accounting and reporting.

Management Comments

• Argent Trust Company, as the trustee, reported that it will not declare a monthly cash distribution due to excess production costs and low 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 in a volatile commodity price environment, particularly with increased capital expenditures. The increase in gas prices from June to July is a positive sign, but the high production costs are a significant concern. The industry is seeing increased focus on cost management and capital discipline.

Comparison to Industry Standards

• Other royalty trusts and energy companies are also facing similar challenges with fluctuating commodity prices and rising operational costs.
• Companies like Permian Basin Royalty Trust (PBT) and Sabine Royalty Trust (SBR) have also experienced volatility in distributions due to similar factors.
• The level of capital expenditure reported by Hilcorp is higher than some other operators, which is impacting the Trust's cash flow.
• The increase in gas prices is in line with general market trends, but the high production costs are a specific issue for this Trust.

Legal Proceedings

• The Trust's ongoing comprehensive audit process by the Trusts professional consultants and outside counsel is to analyze compliance with all the underlying operative Trust agreements and evaluate potential remedies in the event there is suspected non-compliance.

Stakeholder Impact

• Unit holders will not receive a cash distribution for September 2024.
• Unit holders may experience reduced distributions in the future until the Trust's financial situation improves.
• The Trust's financial performance is directly linked to Hilcorp's operational performance and commodity prices.

Next Steps

• The Trustee plans to replenish cash reserves 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.

Key Dates

Keywords

San Juan Basin Royalty Trust, Cash Distribution, Natural Gas Prices, Production Costs, Capital Expenditures, Hilcorp, Oil Revenues, Gas Revenues, Trust Reserves