San Juan Basin Royalty Trust Declares No Cash Distribution for December 2024 and Announces Production Costs in Excess of Proceeds

Rhea-AI Summary

San Juan Basin Royalty Trust (NYSE: SJT) announced no cash distribution for December 2024 due to excess production costs and low natural gas prices. Hilcorp reported total revenue of $3,674,540 from Subject Interests for October 2024, but faced production costs of $7,059,218. The excess production costs of approximately $21.2 million gross will be charged to next month's distribution.

Gas volumes totaled 1,880,071 Mcf with an average price of $1.92 per Mcf for October 2024, compared to September's $1.42 per Mcf. The Trust's cash reserves will decrease to $760,919 after covering administrative expenses. The Trustee plans to replenish and increase cash reserves to $2.0 million before future distributions to Unit Holders.

Positive

• Gas volumes increased slightly from 1,869,291 Mcf in September to 1,880,071 Mcf in October 2024
• Average gas price improved from $1.42 to $1.92 per Mcf month-over-month

Negative

• No cash distribution declared for December 2024
• Excess production costs of $21.2M gross ($15.9M net to Trust)
• Production costs ($7.06M) significantly exceeded revenues ($3.67M)
• Cash reserves declining from $1.8M to $760,919
• Continued low natural gas pricing affecting distributions

Insights

Financial Analyst

This is a critical financial development for San Juan Basin Royalty Trust, revealing severe operational challenges. The Trust reported $3,674,540 in total revenue against $7,059,218 in production costs for October 2024, resulting in significant excess production costs of approximately $21,248,008 gross ($15,936,006 net to the Trust). The absence of a cash distribution and the substantial negative cash flow position indicates severe financial strain.

The Trust's cash reserves have been depleted from $1.8 million in April 2024 to just $760,919, primarily due to ongoing administrative expenses and insufficient revenue. Natural gas pricing remains problematic at $1.92 per Mcf, though showing slight improvement from September's $1.42 per Mcf. The Trust's plan to rebuild reserves to $2.0 million before resuming distributions suggests an extended period without income for unitholders.

The combination of high lease operating expenses, significant capital expenditures and low commodity prices creates a concerning financial outlook. Hilcorp's 2024 capital project plan appears to be straining the Trust's financial resources beyond sustainable levels.

Energy Market Analyst

The operational metrics reveal concerning trends in the Trust's natural gas business. While production volumes remained relatively stable at 1,880,071 Mcf in October compared to 1,869,291 Mcf in September, the revenue generation is severely impaired by the cost structure. The $4,262,867 in capital costs and $2,468,962 in lease operating expenses are disproportionately high relative to the revenue stream.

The ongoing comprehensive audit of Hilcorp's pricing and rates suggests potential concerns about the operational efficiency and cost management of the Subject Interests. The market-sensitive gathering and processing agreements, while standard in the industry, may not be providing optimal terms in the current low-price environment. This situation exemplifies the vulnerabilities of royalty trust structures during periods of commodity price weakness and high operational costs.

DALLAS, Dec. 20, 2024 /PRNewswire/ -- Argent Trust Company, as the trustee (the "Trustee") of the San Juan Basin Royalty Trust (the "Trust") (NYSE: SJT), today reported that it will not declare a monthly cash distribution to the holders of its Units of beneficial interest (the "Unit Holders") due to excess production costs for the Trust's subject interests ("Subject Interests") during the production month of October 2024, as well as continued low natural gas pricing. Excess production costs occur when production costs and capital expenditures exceed the gross proceeds for a certain period. Excess production costs for this reporting period are due primarily to significant lease operating expenses and capital expenditures associated with Hilcorp San Juan L.P.'s ("Hilcorp") 2024 capital project plan.

Hilcorp reported $3,674,540 of total revenue from the Subject Interests for the production month of October 2024, consisting of $3,602,210 of gas revenues and $72,330 of oil revenues. For the Subject Interests, Hilcorp reported $7,059,218 of production costs (excluding excess production costs) for the production month of October 2024, consisting of $2,468,962 of lease operating expenses, $327,389 of severance taxes, and $4,262,867 of capital costs.

Hilcorp will charge the excess production costs of approximately $21,248,008 gross ($15,936,006 net to the Trust) to the next month's distribution. No cash distributions will be made by the Trust until future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves. This month's Trust administrative expenses totaled $204,336. The increase in administrative expenses was attributable to differences in timing of the receipt and payment of certain expenses by the Trust. Interest income received by the Trust in the amount of $3,689 will be applied to cover a portion of this month's Trust administrative expenses, with cash reserves utilized to pay the remaining administrative expenses.

Based upon information provided to the Trust by Hilcorp, gas volumes for the subject interests for October 2024 totaled 1,880,071 Mcf (2,088,968 MMBtu), as compared to 1,869,291 Mcf (2,076,989 MMBtu) for September 2024. Dividing gas revenues by production volume yielded an average gas price for October 2024 of $1.92 per Mcf ($1.72 per MMBtu), as compared to an average gas price for September 2024 of $1.42 per Mcf ($1.28 per MMBtu).

Pursuant to the Amended and Restated Royalty Trust Indenture, dated December 12, 2007 (as amended on February 15, 2024, by the First Amendment to the Amended and Restated Royalty Trust Indenture), the Trustee is authorized to retain, in its sole discretion, a cash reserve for payment of Trust liabilities that are contingent or uncertain or otherwise not currently due and payable. To cover Trust expenses during any period of revenue shortfall, which has resulted and may continue to result from lower commodity prices and increased capital expenditures and lease operating expenses under Hilcorp's 2024 capital project plan for the Subject Interests, the Trustee increased the cash reserves in March and April of 2024, such that total cash reserves were $1.8 million as of April 30, 2024. Interest income and cash reserves were utilized to pay Trust administrative expenses each month from May through November of 2024. This month, cash reserves in the amount of $200,647 will be utilized to cover the balance of Trust administrative expenses which will bring the balance of cash reserves maintained by the Trustee to $760,919. Prior to any future distributions to Unit Holders, the Trustee plans to replenish the cash reserves and continue to increase the cash reserves to $2.0 million.

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, 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 Trust's auditing process has also included detailed analysis of Hilcorp's pricing and rates charged. As previously disclosed in the Trust's filings, these revenues and costs (along with all costs) are the subject of the Trust's ongoing comprehensive audit process by the Trust's professional consultants and outside counsel to analyze compliance with all the underlying operative Trust agreements and evaluate potential remedies in the event there is suspected non-compliance.

Forward Looking Statements. Except for historical information contained in this news release, the statements in this news release are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements generally are accompanied by words such as "estimates," "anticipates," "could," "plan," or other words that convey the uncertainty of future events or outcomes. Forward-looking statements and the business prospects of San Juan Basin Royalty Trust are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties include, among other things, certain information provided to the Trust by Hilcorp, volatility of oil and gas prices, governmental regulation or action, litigation, and uncertainties about estimates of reserves. These and other risks are described in the Trust's reports and other filings with the Securities and Exchange Commission.

Contact:

San Juan Basin Royalty Trust Argent Trust Company, Trustee Nancy Willis, Director of Royalty Trust Services Toll-free: (855) 588-7839 or (866) 809-4553 Fax: (214) 559-7010 Website: www.sjbrt.com Email: trustee@sjbrt.com

 

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SOURCE San Juan Basin Royalty Trust

FAQ

Why did SJT suspend distributions for December 2024?

SJT suspended distributions due to excess production costs and low natural gas prices, with production costs of $7.06M exceeding revenues of $3.67M for October 2024.

What is the current excess production cost for SJT as of October 2024?

The excess production costs are approximately $21.2 million gross ($15.9 million net to the Trust) which will be charged to the next month's distribution.

What are SJT's current cash reserves and target level?

SJT's cash reserves will decrease to $760,919, with plans to increase reserves to $2.0 million before resuming distributions to Unit Holders.

How did SJT's gas prices change from September to October 2024?

Gas prices increased from $1.42 per Mcf in September to $1.92 per Mcf in October 2024.

When will SJT resume cash distributions to unit holders?

SJT will resume distributions only when future net proceeds are sufficient to pay Trust liabilities and replenish cash reserves to $2.0 million.