San Juan Basin Royalty Trust Decision on Cash Distribution Insights
San Juan Basin Royalty Trust Announces Distribution Update
In a recent update, Argent Trust Company, acting as the trustee for the San Juan Basin Royalty Trust (NYSE: SJT), shared significant news regarding cash distributions for its Unit Holders. Due to rising production costs that have outstripped revenues during the most recent production month, the Trust will not issue a monthly cash distribution.
Understanding the Financial Situation
This decision follows a challenging production month where costs exceeded gross proceeds significantly. The primary driver for this situation has been substantial lease operating expenses and capital expenditures associated with Hilcorp San Juan L.P.'s capital projects planned for this year.
Revenue vs. Expenses Analysis
For November’s production, Hilcorp reported total revenue from the Trust's subject interests amounting to $4,880,618. This included $4,752,207 from gas revenues and $128,411 from oil. However, the production costs for that same month were reported at $13,139,376, which illustrates the financial strain on the Trust. This figure breaks down into lease operating expenses of approximately $2,634,510, severance taxes of $597,211, and capital costs of around $9,907,655.
Impact of Excess Production Costs
When production costs exceed revenues, it results in excess production costs that need to be accounted for. The Trust will carry forward approximately $29,506,766 in excess production costs to future distributions, significantly impacting cash flow and the potential for future distributions to Unit Holders. Until there are sufficient net proceeds, the Trust will refrain from cash distributions.
Cash Reserves and Administrative Expenses
The Trust's administrative expenses for this month totaled $113,093, a decrease attributed to the timing of expense payments. Interest income of $3,497 will help mitigate some of these administrative costs, but cash reserves will also be utilized. The total cash reserves held as of now will be approximately $651,323 after accounting for current expenses.
Future Financial Strategies
The Trustee has made arrangements to ensure that cash reserves are maintained at a level that can cover potential liabilities. The strategy includes an increase of cash reserves planned to reach $2.0 million pre-distribution. This indicates a commitment to financial stability even amid ongoing production challenges.
Engagement and Oversight
Production from the subject interests continues under standard market-sensitive agreements, and Hilcorp remains in close communication with the Trust regarding its accounting practices. The Trust engages third-party compliance auditors to review transactions, ensuring transparency and compliance with all agreements.
Auditing Processes
The auditing process by the Trust's professionals ensures a thorough evaluation of revenues and costs, including a detailed scrutiny of prices and rates charged by Hilcorp. This level of diligence is vital to safeguard the interests of Unit Holders and maintain operational integrity.
Frequently Asked Questions
Why has the San Juan Basin Royalty Trust not declared a cash distribution for this month?
The Trust has cited excess production costs that outpace revenues as the main reason for the lack of cash distributions.
What are the current production costs and how do they affect distributions?
Production costs have significantly exceeded revenue, totaling about $13 million, which directly impacts cash flow and future distributions.
How much is the planned cash reserve for future distributions?
The Trustee aims to increase cash reserves to $2.0 million before considering any future distributions to Unit Holders.
What role does Hilcorp play in this situation?
Hilcorp manages the production interests and has reported the financial performance related to the Trust’s interests, impacting operational costs and revenues.
How does the Trust ensure compliance and proper auditing?
The Trust employs third-party auditors to conduct thorough audits of all transactions and engagements with Hilcorp to maintain transparency and regulatory compliance.
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