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Item 8. Financial Statements and Supplementary Data

2024-04-01 compared with 2023-03-31 · 129 added, 108 removed, 249 unchanged (49% of the section changed)

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Report of Independent Registered Public Accounting Firm

PNC Bank, National Association, Trustee

San Juan Basin Royalty

Argent Trust Company, Trustee

San Juan Basin Royalty Trust

Opinion on the Financial Statements

We have audited the accompanying statements of assets, liabilities, and trust corpus of San Juan Basin Royalty Trust

(the Trust) as of December 31, 2022 and 2021, and the related statements of distributable income and changes in trust corpus for the years then ended, and the related notes (collectively referred to as the financial

statements).

In our opinion, the financial statements present fairly, in all material respects, the assets, liabilities and trust corpus of San Juan Basin Royalty Trust as of December 31, 2022 and 2021, and its distributable income and

changes in trust corpus for the years then ended, on the basis of accounting described in Note 3 to the financial statements.

described in Note 3 to the financial statements, these financial statements were prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted in the United States of America.

We have audited the accompanying statements of assets, liabilities, and trust corpus of San Juan Basin Royalty Trust (the Trust) as

of December 31, 2023 and 2022, and the related statements of distributable income and changes in trust corpus for the years then ended, and the related notes (collectively referred to as the financial statements).

In our opinion,

the financial statements present fairly, in all material respects, the assets, liabilities and trust corpus of San Juan Basin Royalty Trust as of December 31, 2023 and 2022, and its distributable income and changes in trust corpus for the years

then ended, on the basis of accounting described in Note 3 to the financial statements.

As described in Note 3 to the financial

statements, these financial statements were prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted in the United States of America.

Basis for Opinion

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federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards

require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Trust is not required to have, nor were we engaged to perform, an

audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the

Trusts internal control over financial reporting.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to

error or fraud.

The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial

reporting but not for the purpose of expressing an opinion on the effectiveness of the Trusts internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing

procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the

amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

believe that our audits provide a reasonable basis for our opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or

fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting

principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

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(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical

audit matters.

We determined that there are

no critical audit matters.

WEAVER AND TIDWELL, L.L.P.

We have served

as San Juan Basin Royalty Trusts auditor since 2001.

have served as San Juan Basin Royalty Trusts auditor since 2001.

Austin, Texas

March 31, 2023

April 1, 2024

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Burlington is an indirect wholly-owned subsidiary of ConocoPhillips.

Through an acquisition completed on March 24, 2006, Compass Bank succeeded TexasBank as Trustee (herein so called) of the Trust.

September 7, 2007, Compass Bancshares, Inc.

Through an acquisition completed on March 24, 2006, Compass Bank succeeded TexasBank as trustee of the Trust.

On September 7, 2007, Compass

Bancshares, Inc.

was acquired by Banco Bilbao Vizcaya Argentaria, S.A.

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Effective June 10, 2019, Compass Bank changed its name to BBVA USA.

June 1, 2021, The PNC Financial Services Group, Inc.

On June 1, 2021, The PNC Financial

Services Group, Inc.

(PNC) announced that it had completed the purchase of BBVA USA Bancshares, Inc., a financial holding company, including its U.S.

banking subsidiary, BBVA USA, an Alabama-chartered

bank and trustee of the Trust (BBVA USA).

On October 8, 2021, PNC Bank, an indirect wholly-owned subsidiary of PNC, succeeded BBVA USA as the trustee of the Trust following BBVA USAs merger with and into PNC Bank.

On November 3, 1980, 46,608,796 Units in the Trust were distributed to the Trustee for the benefit of Southland shareholders of record as

of November 3, 1980, who received one Unit in the Trust for each share of Southland common stock held.

banking subsidiary, BBVA USA, an Alabama-chartered bank and trustee of the Trust

(BBVA USA).

On October 8, 2021, PNC Bank, an indirect wholly-owned subsidiary of PNC, succeeded BBVA USA as the trustee

of the Trust following BBVA USAs merger with and into PNC Bank.

On February 15, 2024, Argent Trust Company succeeded PNC Bank as the trustee of the Trust following the resignation of PNC Bank.

The defined term Trustee as used

herein shall refer to PNC Bank for periods from October 8, 2021 through February 14, 2024, and shall refer to Argent Trust Company for periods on and after February 15, 2024.

For all periods prior to October 8, 2021, use of the

defined term Trustee herein shall refer to the entity serving as Trustee of the Trust during the applicable time period.

November 3, 1980, 46,608,796 Units in the Trust were distributed to the Trustee for the benefit of Southland shareholders of record as of November 3, 1980, who received one Unit in the Trust for each share of Southland common stock held.

The Trusts initial public offering was completed in 1980.

The Units are traded on the New York Stock Exchange.

Holders of Units are

referred to herein as Unit Holders.

Holders of Units are referred to herein as Unit Holders.

The terms of the Trust Indenture provide, among other things, that:

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the sum of liabilities paid and any increase in cash reserves.

If the Monthly Distribution Amount for any monthly period is a negative number, then the distribution will be zero for such month and such negative amount will be carried forward and

deducted from future monthly distributions until the cumulative distribution calculation becomes a positive number, at which time a distribution will be made.

Unit Holders of record will be entitled to receive the calculated Monthly Distribution

Amount for each month on or before 10 business days after the monthly record date, which is generally the last business day of each calendar month.

The cash received by the Trustee consists of the Net Proceeds generated by the owner of the Subject Interests multiplied by 75%.

The initial carrying value of the Royalty of $133,275,528 represented Southlands historical net book value at the date of the transfer

of the Trust.

If the Monthly Distribution Amount for any monthly period is a negative number, then the distribution

Notes to Financial Statements (Continued)

will be zero for such month and such negative amount will be carried forward and deducted from future monthly distributions until the cumulative distribution calculation becomes a positive

number, at which time a distribution will be made.

Unit Holders of record will be entitled to receive the calculated Monthly Distribution Amount for each month on or before 10 business days after the monthly record date, which is generally the last

business day of each calendar month.

The cash received by the Trustee consists of the Net Proceeds generated by the owner of the Subject

Interests multiplied by 75%.

The initial carrying value of the Royalty of $133,275,528 represented Southlands historical net book

value at the date of the transfer of the Trust.

Accumulated amortization as of December 31, 2023 and 2022 were $130,522,279 and $130,306,821, respectively.

Basis of Accounting

The financial statements of the Trust are prepared on the following basis and are not intended to present financial position and results of

operations in conformity with U.S.

financial statements of the Trust are prepared on the following basis and are not intended to present financial position and results of operations in conformity with U.S.

generally accepted accounting principles:

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Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

The Trustee routinely reviews its royalty interests in oil and gas properties for impairment whenever events or circumstances indicate that

the carrying amount of an asset may not be recoverable.

If an impairment event occurs and it is determined that the carrying value of the Trusts royalty interests may not be recoverable, an impairment will be recognized as measured by the

amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and recorded as a reduction of trust corpus.

There was no impairment of the

assets as of December 31, 2022 or 2021.

Notes to Financial Statements (Continued)

The Trustee routinely reviews its royalty interests in oil and gas properties for impairment

whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

If an impairment event occurs and it is determined that the carrying value of the Trusts royalty interests may not be recoverable, an

impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and recorded as a reduction of

trust corpus.

There was no impairment of the assets as of December 31, 2023 or 2022.

Federal Income Taxes

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ability to influence such terms.

As part of the 1996 settlement of litigation filed by the Trustee in 1992 against Burlington and Southland, the Trustee and Burlington established a formal protocol pursuant to which compliance auditors, retained by

the Trustee, have access to Burlington and its successors books and records, which protocol has been adopted by Hilcorp.

As part of the 1996 settlement of litigation filed by the Trustee in 1992 against Burlington and Southland, the

Notes to Financial Statements (Continued)

Trustee and Burlington established a formal protocol pursuant to which compliance auditors, retained by the Trustee, have access to Burlington and its successors books and records, which

protocol has been adopted by Hilcorp.

Significant Customers

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calculating royalty income paid to the Trust in calendar year 2023.

Hilcorp estimated its 2021 capital expenditure budget at

$0.3 million.

Actual capital expenditures of approximately $0.3 million were included in calculating royalty income paid to the Trust in calendar year 2021.

On January 20, 2021, President Biden signed an executive order that reversed the United States withdrawal from the Paris Agreement,

and the United States formally rejoined the Paris Agreement on February 19, 2021.

At the federal regulatory level, both the EPA and the BLM have adopted regulations for the control of methane emissions, which also include leak detection and

repair requirements, from the oil and gas industry.

Additionally, President Biden has issued an executive order seeking to adopt new regulations and policies to address climate change and suspend, revise or rescind prior agency actions that are

identified as conflicting with the Biden Administrations climate policies.

In addition, President Biden has declared that he supports federal government efforts to limit or prohibit hydraulic fracturing and banning new leases for production of

minerals on federal properties, including onshore lands.

Any of these actions could require Hilcorp to increase capital expenditures for the Subject Interests, decrease demand for natural gas and oil production, or limit the Subject Interests

ability to produce natural gas or oil production.

The Trust is unable to determine what, if any, the effects of such actions will have on the Subject Interests ability to produce natural gas and oil, and Hilcorps ability to pay royalty

income to the Trust.

On February 16, 2024, the Trust announced that Hilcorp had provided

the Trust with its 2024 capital project plan for the Subject Interests (the 2024 Plan), and Hilcorp has estimated its 2024 capital expenditures for the Subject Interests to be $36.0 million.

This plan was updated on March 6,

2024, with a reduction of approximately $2.0 million, bringing the total estimate of 2024 capital expenditures to $34.0 million.

Hilcorp informed the Trust that its 2024 Plan will allocate approximately $25.0 million of the 2024

Plans budget toward two drilling projects in the Mancos formation.

Approximately $8.0 million of the 2024 Plans budget will be allocated to 36 well recompletions and workovers scheduled to be completed in the Mesaverde and Fruitland

Coal formations.

Approximately $1.0 million of the 2024 Plans budget will be allocated to facilities projects related to natural gas compression.

Hilcorp further informed the Trust that its planned project status for 2024 is subject to

revision if Hilcorp revises its assumptions underlying the 2024 Plan, in which event the actual capital costs may vary from these estimates.

Settlements and Litigation

March 8, 2024, Plaintiffs First Amended Petition was filed in a lawsuit styled Michael Tollett v.

Enterprise Products Partners, LP, Primoris Energy Services Corporation, and Bayou Electrical Services, LLC, No.

2023-79550 in

the 127 th District Court in Harris County, Texas.

That amended petition named additional defendants, including among others, Hilcorp San Juan Basin Royalty Trust (sic).

The litigation seeks

damages for an alleged personal injury.

Following discussions between counsel for the Trust and the Plaintiffs counsel, a proposed Plaintiffs Motion to Nonsuit without Prejudice (the Motion) was agreed upon and filed.

Motion was granted by the court on March 27, 2024, releasing the Trust from the litigation.

Notes to Financial Statements (Continued)

Supplemental Oil and Gas Reserve Information (Unaudited)

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obtained from development drilling and production history and from changes in economic factors.

The following table presents a reconciliation of proved reserve quantities attributable to

the Royalty from December 31, 2019, to December 31, 2022:

The following table presents a

reconciliation of proved reserve quantities attributable to the Royalty from December 31, 2020, to December 31, 2023:

Crude Oil and

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reserves could vary significantly from year to year.

Accordingly, the information presented below should not be viewed as an estimate of the fair market value of the Trusts oil and natural gas reserves or the costs that would be incurred to

acquire equivalent reserves.

A market value determination would require the analysis of additional parameters.

Accordingly, the information presented

Notes to Financial Statements (Continued)

below should not be viewed as an estimate of the fair market value of the Trusts oil and natural gas reserves or the costs that would be incurred to acquire equivalent reserves.

value determination would require the analysis of additional parameters.

(in thousands)

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These prices were based on a 12-month unweighted average of the

first-day-of-the-month pricing of $6.36 per MMBtu of Henry Hub natural gas and $93.67 per

Bbl of West Texas Intermediate oil.

The increase in reserve quantities for 2022 is due primarily to higher natural gas prices.

first-day-of-the-month pricing of $2.637 per MMBtu of Henry Hub natural gas and $78.22

per Bbl of West Texas Intermediate oil.

The decrease in reserve quantities for 2023 is due primarily to lower natural gas prices.

2022, $6.09 per Mcf of natural gas and $83.28 per Bbl of oil were used in determining future net revenue.

These prices were based on a 12-month unweighted average of the first-day-of-the-month pricing of $6.36 per MMBtu of Henry Hub natural gas and $93.67 per Bbl of West Texas Intermediate oil.

The increase in reserve quantities for 2021 is due primarily to higher natural gas prices.

Notes to Financial Statements (Continued)

Quarterly Schedule of Distributable Income (Unaudited)

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Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders.

Covid-19 Pandemic .

The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the Covid-19 pandemic and the recent fluctuations in oil and gas pricing.

Hilcorp informed the Trust it does not anticipate that the current state of the Covid-19 pandemic will

have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust and it does not have anything else to specifically to comment on regarding the Covid-19

Geo-Political Uncertainties.

Prices for goods and services have risen during

2022, and inflationary pressures have accelerated during 2022, as regional and global commodity prices have risen in response to the conflict in Ukraine.

Hilcorp informed the Trust that it does not have anything specifically to comment on regarding

the war in Ukraine.

Prices for goods and services have risen during 2023, and inflationary pressures have accelerated during 2023, as regional and global commodity prices have risen in response to the

conflicts in Ukraine and the Middle East.

Hilcorp informed the Trust that it does not have any specific comments regarding these conflicts.

Gross Proceeds and Production Cost Estimates .

Hilcorps process of reconciling actual revenue and

severance taxes to previously reported estimates (which the Trust refers to as true-ups) were still occurring and being reported in 2021 and 2022.

At the beginning of 2021, Hilcorp informed the

Trust that it planned to refine further its estimating and reporting processes and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods.

As part of that review

process, Hilcorpho informed the Trust that it may reverse and rebook revenue for certain periods.

Thus, distributions to the Trust from Hilcorp in certain months during 2021 and 2022 were subject to adjustments based upon prior months true-ups and rebooking, plus interest.

Hilcorp informed the Trust that it completed the transition to

its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August 2021 reporting month) and that it has reversed and rebooked revenue for certain prior

The true-ups of revenues for non-operated properties for the 2021 distribution periods were completed in the February and March 2022 reporting months.

Hilcorp made total actualizations and other adjustments resulting in $10,951,453 additional Royalty Income paid to the Trust.

Of this amount, $1,391,619 was for prior period non-operated true-ups and revenue for granted audit exceptions and interest, and $9,559,834 was related to adjustments associated with Hilcorp process reviews and adjustments.

Hilcorp has informed the Trustee that it has

implemented additional controls to enhance the reporting process and reduce the need for future corrections.

As of December 31, 2022, Hilcorp has informed the Trust that it believes that all prior month actualizations have occurred, and does

not expect to need to report any further actualizations in future distribution reports.

However, the Trustee continues to engage with

Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trusts 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.

Hilcorp began transitioning to a new accounting system effective with January 2021

production (March 2021 reporting month), and initially reported estimated revenues and severance taxes on the distributions to the Trust.

Hilcorp informed the Trust that it completed the transition to its new accounting system and began to report

actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August 2021 reporting month).

Hilcorps process of reconciling actual revenue and severance taxes to the previously reported

estimates, and the reversal and rebooking of the actualized revenues for 2021 production months for non-operated properties, was completed in the February and March 2022 reporting months.

During 2022, various adjustments were made for the 2021 and 2022 production periods as a result of Hilcorps process review of the new

accounting system.

Hilcorp has informed the Trustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections.

Hilcorp has indicated that it will coordinate with the Trustee on the timing

of any further adjustments, following which the Trustee will communicate that timing to investors.

In January 2023, Hilcorp notified the

Trust that the accounting project, begun in 2021 to review the production volume allocations for 2017 through 2020, had been completed.

These reallocations affected the

Notes to Financial Statements (Continued)

volumes for many of the Trust properties and may result in future revisions to previously reported revenues and severance taxes.

On February 17, 2023, Hilcorp presented initial proposed

adjustments for 2017 revenues.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trusts 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 Trusts auditing process has also included detailed analysis of Hilcorps pricing and rates charged.

As previously disclosed in the Trusts filings, these revenues and costs (along

with all costs) are the subject of the Trusts ongoing comprehensive audit process by our professional consultants and outside counsel to ensure full compliance with all the underlying operative Trust agreements and evaluating all available

potential remedies in the event there is evidence of non-compliance.

As previously

disclosed in the Trusts filings, these revenues and costs (along with all costs) are the subject of the Trusts ongoing comprehensive audit process by the Trusts professional consultants and outside counsel to ensure full compliance

with all the underlying operative Trust agreements and evaluating all available remedies in the event there is evidence of non-compliance.

In the course of the most recent audit process by the Trustee, certain exceptions to the several different categories of expenses

(specifically offsite labor, overhead, operator-owned compressors and saltwater disposal facilities) for the years 2017 through 2020 were identified that the Trustee believed resulted in an underpayment of royalties owed to the Trust for those

The Trustee engaged in extensive discussions with Hilcorp regarding these exceptions that culminated in Hilcorps payment of the sum of $1,037,093.45, which included the accumulated interest incurred as a result of the underpayment.

audit settlement payment was included in the September 2023 distribution to Unit Holders.

The Trustee continues to engage with Hilcorp

regarding its ongoing accounting and reporting to the Trust, and the Trusts third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments, true-ups,

and recoupments.

In addition, the Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

Subsequent Events

Since January 1, 2023, the Trust has announced the following three monthly cash distributions to the holders of its Units:

January 1, 2024, the Trust has announced the following monthly cash distributions to the holders of its Units:

On January 19, 2024, the Trust announced a cash distribution of $758,308.20 or $0.016270 per Unit, based

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data