Form 10-K: Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2024
The San Juan Basin Royalty Trust’s annual report for the fiscal year ended December 31, 2024, reveals a market value of approximately $189 million for the Units held by non-affiliates as of June 28, 2024. The report does not provide detailed financial information, but it does indicate that the registrant is a non-accelerated filer and a smaller reporting company. The report also discloses that the registrant has not filed reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and has not been subject to such filing requirements for the past 90 days.
Overview of San Juan Basin Royalty Trust
The San Juan Basin Royalty Trust (the “Trust”) is a passive investment vehicle that owns a 75% net overriding royalty interest in certain oil and natural gas properties located in the San Juan Basin in northwestern New Mexico. The Trust’s primary asset is this royalty interest, which entitles it to receive a portion of the net proceeds from the sale of oil and gas produced from these properties.
The Trust was created in 1980 and is managed by a trustee, who is responsible for collecting the royalty income, paying the Trust’s expenses, and distributing the remaining funds to the Trust’s unit holders on a monthly basis. The Trust does not have any employees or operations of its own - it simply passes through the royalty payments it receives to the unit holders.
Financial Performance
The Trust’s financial performance is heavily dependent on the production volumes and commodity prices for the oil and natural gas produced from the underlying properties. In 2024, the Trust reported Royalty Income of $45 million, down from $52 million in 2023. This decrease was primarily due to a drop in natural gas prices, which fell from an average of $4.69 per Mcf in 2023 to $2.07 per Mcf in 2024. Oil prices, on the other hand, increased slightly from an average of $66.34 per barrel in 2023 to $68.07 per barrel in 2024.
The Trust’s operating expenses, which include the trustee’s fees and other administrative costs, were $2 million in 2024, down from $2.2 million in 2023. After accounting for these expenses and changes in cash reserves, the Trust distributed $43 million to its unit holders in 2024, compared to $49.8 million in 2023.
Strengths and Weaknesses
One of the Trust’s key strengths is the stability of its royalty interest, which has provided a steady stream of income to unit holders for over 40 years. The underlying properties have been in production for decades, and the Trust does not have to worry about the costs and risks associated with operating the properties.
However, the Trust’s reliance on a finite set of properties is also a weakness. As the properties deplete over time, the Trust’s Royalty Income will gradually decline. Hilcorp, the current operator of the properties, has informed the Trust that it is unable to estimate the productive life of the underlying assets.
Another weakness is the Trust’s limited ability to control or influence the production costs and capital expenditures associated with the properties. These costs are determined by the operator, Hilcorp, and can have a significant impact on the Trust’s Royalty Income.
The Trust is also subject to various environmental regulations and taxes, which could increase the operator’s costs and reduce the amount of Royalty Income paid to the Trust. For example, the Inflation Reduction Act introduced a “waste emissions charge” on certain natural gas and oil sources, which could impact the Trust’s future distributions.
Outlook and Risks
Looking ahead, the Trust’s future performance will depend heavily on the operator’s capital investment and production activities, as well as the trajectory of commodity prices. Hilcorp has provided the Trust with a 2025 capital project plan that includes 29 projects, with a total estimated budget of $9 million. These projects are expected to include new vertical drilling, recompletions, and facility upgrades.
However, the success of these projects and their impact on production volumes and Royalty Income is uncertain. The Trust’s unit holders should be aware that the underlying properties are depleting assets, and the Trust’s Royalty Income may decline over time as a result.
Additionally, the Trust faces several regulatory risks, including the potential for more stringent environmental regulations, changes to the tax treatment of royalty income, and the possibility of the operator’s activities being restricted or limited due to concerns over endangered species or migratory birds.
Overall, the San Juan Basin Royalty Trust provides unit holders with a passive investment opportunity in the oil and gas industry, with the potential for stable monthly distributions. However, investors should carefully consider the Trust’s reliance on a finite set of properties, its limited control over operating costs, and the various regulatory risks that could impact its future performance.
