Item 5. Market for Registrant’s Common Equity
ITEM 5.
MARKET FOR REGISTRANT S UNITS, RELATED UNIT HOLDER
MATTERS AND ISSUER PURCHASES OF UNITS
Units of Beneficial Interest
The Trusts units of beneficial interest (the Units) are traded on the New York Stock Exchange under the symbol
SJT.
Cash Distributions
The Trust makes monthly cash distributions to the Unit Holders. The aggregate monthly distribution amount is the excess of (i) the Royalty
Income attributable to the Royalty paid to the Trustee of the Trust, plus any decrease in cash reserves previously established for liabilities and contingencies of the Trust, over (ii) the expenses and payments of liabilities of the Trust, plus
any net increase in cash reserves. Future payments of cash distributions are dependent on such factors as prevailing natural gas and oil prices, expenses, increases in cash reserves and the actual production from the Subject Interests. True-ups from prior periods may also impact the ability of the Trust to pay distributions or may affect the amount of distributions payable to the Unit Holders.
Unit Holders
According to the records of
the Trusts transfer agent, as of March 22, 2024, there were 46,608,796 Units outstanding held by 753 Unit Holders of record. The actual number of Unit Holders is greater than these numbers of Unit Holders of record and includes Unit
Holders who are beneficial owners, but whose shares are held in street name by brokers and nominees. The number of Unit Holders of record also does not include Unit Holders whose Units may be held in trust by other entities.
Equity Compensation Plans
The Trust has
no directors, executive officers, or employees. Accordingly, the Trust does not maintain any equity compensation plans, and there are no Units reserved for issuance under any such plans.
ITEM 6.
RESERVED
ITEM 7.
TRUSTEE S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As discussed herein under Part II, Item 9A (Controls and Procedures),
due to the pass-through nature of the Trust, Hilcorp is the primary source of the information disclosed in this Annual Report on Form 10-K and the other periodic reports filed by the Trust with the SEC.
Although the Trustee receives periodic updates from Hilcorp regarding activities which may relate to the Trust, the Trusts ability to timely report certain information required to be disclosed in the Trusts periodic reports is dependent
on Hilcorps timely and accurate delivery of the information to the Trust.
Overview
The principal asset of the Trust is the Royalty, which consists of a 75% net overriding royalty interest that burdens the Subject Interests
located in the San Juan Basin. The primary function of the Trustee is to collect the Royalty Income, to pay all expenses and charges of the Trust and to distribute the remaining available income to the Unit Holders. The amount of income
distributable to Unit Holders, which is referred to herein as Distributable Income, depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash
reserves.
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Royalty Income . The Royalty functions generally as a net profits interest in the
Subject Interests. The Royalty Income paid to the Trust is 75% of Net Proceeds from the Subject Interests. The term Net Proceeds, as used in the Conveyance, means the excess of Gross Proceeds received by Hilcorp during a particular
period over production costs for such period. Gross Proceeds means the amount received by Hilcorp (or any subsequent owner of the Subject Interests) from the sale of the production attributable to the Subject Interests, subject to
certain adjustments (e.g., fuel, gathering, and transportation).
The amount of Gross Proceeds attributable to the Subject Interests
depends on prevailing natural gas prices and, to a lesser extent, crude oil prices. As a result, commodity prices affect the amount of Royalty Income available for distribution to the Unit Holders. During 2023, the price of natural gas Gross
Proceeds for production from the Subject Interests decreased from an average price for natural gas of $5.54 per Mcf in 2022 to $4.69 per Mcf in 2023. The price for oil Gross Proceeds decreased from an average price of $86.73 per Bbl in 2022 to
$66.34 per Bbl in 2023.
The amount of Gross Proceeds depends on the volumes of natural gas and oil produced from the Subject Interests.
Under the terms of the Indenture, the Trust cannot acquire new natural gas and oil assets, and, as a result, Royalty Income is dependent on the natural gas and oil volumes attributable to the Subject Interests. Although Hilcorp and other operators
of the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets; Hilcorp has informed the Trust that it is unable to estimate the productive life of the Subject Interests.
The reduction in proved reserve quantities is a common measure of depletion. Hilcorps (or a future operators) capital investments in the Subject Interests will affect the quantity of proved reserves and can offset any reduction in proved
reserves. Lower commodity prices may also cause Hilcorp to reduce drilling operations, workover, and/or recompletions, thus reducing the volume of natural gas and oil produced from the Subject Interests. Hilcorp did not conduct any new drill
projects within the Subject Interests in 2023 or 2022; however, it did conduct 20 recompletes and workovers in 2023.
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.
Under the terms
of the Conveyance, production costs are deducted from Gross Proceeds in calculating Royalty Income. Production costs generally means costs incurred on an accrual basis by Hilcorp in operating the Subject Interests, including both capital
and non-capital costs. For example, these costs include development drilling, production and processing costs, applicable taxes and operating charges. However, Hilcorp informed the Trust that, for wells
operated by Hilcorp, it generally did not intend to accrue lease operating expenses to the Trust. If production costs exceed Gross Proceeds in any month, the excess is recovered out of future Gross Proceeds prior to the making of further payment to
the Trust, but the Trust is not otherwise liable for any production costs or other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom. If at any time the Trust receives more than the amount due under the
Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. The Trust and the Trustee has very limited authority
to control the amount and timing of production costs.
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Distributable Income . In addition to Royalty Income, the Trust receives interest
income, typically from interest paid on cash deposits. General and administrative expenses constitute the Trusts primary expense and include, among other items, the Trustees fees, audit, consulting, and legal fees and reporting costs.
The Trustee is authorized to determine in its discretion the amount of cash reserves needed to pay liabilities and contingencies of the
Trust. Total cash reserves were $1.0 million as of December 31, 2022, and 2023. The Trustee anticipates increasing the established amount of cash reserves to $2.0 million in 2024, in response to the substantial increase in capital
expenditures projected by Hilcorp for 2024 (under Hilcorps 2024 Plan) and the potential that such increase materially reduces or eliminates distributions to the Trust for a period of time.
Hilcorp
The sale of San Juan Basin
assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017. Hilcorp has advised the Trust that for certain months (since the closing of its purchase of the assets), it has reported estimates of cash revenues and
expenses based on the best information available to it at the time, instead of reporting actual amounts. Hilcorp further has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance, and the Trust
and its advisors continue to review such estimates for compliance with the Conveyance.
Natural Gas and Oil. The sale of San Juan
Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017. Under the terms of the sale, Hilcorp is required to make payments to Burlington if natural gas prices are above a certain price. Hilcorp has
confirmed that in accordance with the Conveyance, Hilcorp will not charge the Trust any portion of such payments.
Gross Proceeds and
Severance Tax Estimates . Hilcorp began their transition 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 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 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.
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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 years. 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. The audit settlement payment was included in the September 2023 distribution to Unit Holders.
The amount
of Gross Proceeds also depends on the volumes of natural gas and oil produced from the Subject Interests. Under the terms of the Indenture, the Trust cannot acquire new natural gas and oil assets, and as a result, Royalty Income is dependent on the
natural gas and oil volumes attributable to the Subject Interests. Although Hilcorp and other operators of the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets;
Hilcorp has informed the Trust that it is unable to estimate the productive life of the Subject Interests. The reduction in proved reserve quantities is a common measure of depletion. Hilcorps (or a future operators) capital investments
in the Subject Interests will affect the quantity of proved reserves and can offset any reduction in proved reserves. Lower commodity prices may also reduce the volume of natural gas and oil produced from the Subject Interests by Hilcorp.
Results of Operations
Royalty Income
consists of 75% of the monthly Net proceeds attributable to the Royalty. Royalty Income for the two years ended December 31, 2023, was determined as shown in the following table:
For the years ended December 31,
2023
2022
Gross Proceeds from the Subject Interests:
Natural Gas
$
110,070,615
$
135,603,914
Oil
2,916,121
3,069,153
Other
1,492,304
(1)
10,951,453
(2)
Total
114,479,040
149,624,520
Production Costs:
Severance tax natural gas
13,629,222
16,712,086
Severance tax oil
315,641
353,559
Lease operating expense and property tax
27,348,678
26,229,213
Capital expenditures
2,198,741
984,349
Total
43,492,282
44,279,207
Net profits
70,986,758
105,345,313
Net overriding royalty interest
75
%
75
%
Royalty Income
$
53,240,068
$
79,008,985
(1)
Revenue comprised of an audit settlement payment and related interest for the 2017 through 2020 disputed
expenses audit, and revenue related to a February 2023 true-up for documented October 2022 revenues missing from the January 2023 revenue distribution, plus interest.
(2)
Revenue and estimated revenue related to audit exceptions with interest, revenue from prior period non-operated revenue true-ups and related interest, revenue from non-operated properties offset by Hilcorps true-ups, adjustments of non-operated revenue for the production months November 2020 through October 2021, and revenue and interest related to corrections associated with
Hilcorps process reviews.
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Gross Proceeds from Subject Interests. Gross Proceeds decreased $35.1 million,
or 23.5%, to $114.5 million for the year ended December 31, 2023, as compared to $149.6 million for the year ended December 31, 2022. The decrease was due primarily to lower natural gas prices.
Capital Expenditures . The capital expenditures reported by Hilcorp for 2023 included amounts attributable to the capital budgets
for prior years because capital expenditures are deducted in calculating Net Proceeds in the month they accrue, and projects within a given years budget often extend into subsequent years. With respect to any wells operated by third
parties other than Hilcorp, Hilcorps share, if any, of capital expenditures for the year ended December 31, 2023, may not be paid until 2024 or later. For a summary of Hilcorps planned 2024 capital expenditures, see Liquidity and
Capital Resources.
Capital expenditures increased approximately $1.2 million, or 123.4%, to $2.2 million for the year ended
December 31, 2023, as compared to $1.0 million for the year ended December 31, 2022. Hilcorp allocated its 2023 capital spending primarily toward well recompletions and workovers. Hilcorp did not conduct any new drill projects within
the Subject Interests in 2023.
Severance Taxes. Aggregate severance taxes decreased $3.1 million, or 18.3%, to
$13.9 million for the year ended December 31, 2023, as compared to $17.1 million for the year ended December 31, 2022. The decrease was primarily attributable to lower revenue in 2023.
Lease Operating Expenses and Property Taxes. Lease operating expenses and property taxes increased $1.1 million, or 4.3%, to
$27.3 million for the year ended December 31, 2023, as compared to $26.2 million for the year ended December 31, 2022. Monthly lease operating expenses of the Subject Interests, including property taxes, in 2023 averaged
approximately $2.3 million, compared to $2.2 million in 2022. The increase is primarily due to repairs, maintenance, recompletes, and workovers.
Distributable Income
For the years ended December 31,
2023
2022
Royalty Income
$
53,240,068
$
79,008,985
Interest Income
147,371
57,186
Total Income
53,387,439
79,066,171
Expenditures General and Administrative
1,749,519
1,466,718
Distributable Income
$
51,637,920
$
77,599,453
Distributable Income per Unit (46,608,796 Units)
$
1.107901
$
1.664908
Distributable Income decreased $26.0 million, or 33.5%, to $51.6 million ($1.107901 per Unit) for
the year ended December 31, 2023, as compared to $77.6 million ($1.664908 per Unit) for the year ended December 31, 2022. The decrease in Distributable Income from 2022 to 2023 was primarily attributable to lower natural gas prices,
which resulted in decreased Royalty Income in 2023.
Interest Income. Interest Income in 2023 increased as compared to 2022 due to
higher yields on short-term investments.
General & Administrative Expenses. General and administrative
expenses increased $0.28 million, or 19%, to $1.75 million for the year ended December 31, 2023, as compared to $1.5 million for the year ended December 31, 2022. The increase was primarily attributable to differences in
timing in the receipt and payment of certain expenses by the Trust, as well as to costs associated with the proxy solicitation process and Unit Holder meetings.
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Liquidity and Capital Resources
The Trusts principal source of liquidity and capital is Royalty Income. The Trusts distribution of income to Unit Holders is funded
by Royalty Income after payment of Trust expenses. The Trust is not liable for any production costs or liabilities attributable to the Royalty. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to
return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. If the Trustee determines that the Trust does not have sufficient funds to pay its
liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be made to Unit Holders until such borrowings are repaid in full. The Trustee may not sell or dispose of any part of the assets of the Trust
without the affirmative vote of the Unit Holders of 75% of all the Units outstanding; however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any
12-month period without the consent of the Unit Holders.
In the event the Trust does not receive
sufficient Royalty Income from Hilcorp, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trusts operating expenses for the following 12-month period.
Cash Reserves. Total cash reserves did not change in 2023. Total cash reserves
were $1.0 million as of December 31, 2022 and 2023. The Trustee is authorized to determine in its discretion the amount of cash reserves needed to pay liabilities and contingencies of the Trust. The Trustee anticipates increasing the
established amount of cash reserves to $2.0 million in 2024, in response to the substantial increase in capital expenditures projected by Hilcorp for 2024 (under Hilcorps 2024 Plan) and the potential that such increase materially reduces
or eliminates distributions to the Trust for a period of time.
2024 Capital Expenditure Budget
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.
Contractual Obligations
As of December 31, 2023, the Trust had no obligations or commitments to make future contractual payments other than the trustee fee
payable to the Trustee. Under the Indenture, the Trustee is entitled to an administrative fee for its administrative services and the preparation of quarterly and annual statements, computed as (i) 1/20 of 1% of the first $100.0 million of the
annual gross revenue of the Trust, and 1/30 of 1% of the annual gross revenue of the Trust in excess of $100 million and (ii) the Trustees standard hourly rates for time in excess of 300 hours annually. The minimum administrative fee
due under items (i) and (ii) is $36,000 per year. Administrative fees paid to the Trustee were $120,108 and $90,815 for the years ended December 31, 2023 and 2022, respectively.
Off-Balance Sheet Arrangements
None.
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Critical Accounting Policies and Estimates
For a description of critical accounting policies and estimates, see Item 8. Financial Statements and Supplementary Data, Note 3.
Results of the 4th Quarters of 2023 and 2022
For the three months ended December 31, 2023, Distributable Income decreased to $3.6 million ($0.077927 per Unit), or 88%, as
compared to $28.8 million ($0.617388 per Unit) for the three months ended December 31, 2022.
The decrease in Distributable
Income in the fourth quarter of 2023 compared to the fourth quarter of 2022 was primarily attributed to decreased production and lower revenue due to lower natural gas pricing in the fourth quarter of 2023, and to higher revenue from sales of
natural gas and oil and certain adjustment payments received from Hilcorp in the fourth quarter of 2022 as discussed below.
In the
October 2022 reporting month, the Trust received $10,078,805 in other revenues and interest related to adjustments associated with Hilcorp process reviews. In the December 2022 reporting month, other revenue was reduced by $497,181 to correct the
prior months settlement differences and related interest. Hilcorp has informed the Trustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections.
Royalty Income of the Trust for the fourth quarter is based on actual gas and oil production during August through October of each year. Gas
and oil sales for the quarters ended December 31, 2023 and 2022 were as follows:
Three months ended December 31,
2023
2022
Subject Interests
Gas Mcf
5,980,620
6,145,461
Mcf per Day
65,007
66,798
Average Gross Proceeds Price (per Mcf)
$
2.57
$
6.52
Oil Bbls
11,957
8,125
Bbls per Day
130
88
Average Gross Proceeds Price (per Bbl)
$
70.85
$
78.32
Attributable to the Royalty
Gas Mcf
1,507,989
3,687,334
Oil Bbls
7,976
5,345
The average price of gas decreased in the fourth quarter of 2023 compared to the same period of 2022 by $3.95
per Mcf. The average price per barrel of oil during the fourth quarter of 2023 was $7.47 lower than the price during the fourth quarter of 2022.
Capital costs for the fourth quarter of 2023 totaled approximately $1.6 million as compared to approximately $0.7 million in the
fourth quarter of 2022. The increased capital costs in the fourth quarter of 2023 were primarily due to workovers and recompletion projects.
Lease operating expenses and property taxes for the fourth quarter of 2023 averaged $2.3 million per month compared to $2.1 million
per month in the fourth quarter of 2022. Lease operating expenses and property taxes were higher in the fourth quarter of 2023 than for the fourth quarter of 2022 due primarily to repairs and maintenance in preparation for winter 2023 and non-operated joint interest billing actualizations.
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Based on 46,608,796 Units outstanding, the per-Unit
distributions during the fourth quarters of 2023 and 2022 were as follows:
Three months ended December 31,
2023
2022
October
0.048694
0.349121
November
0.016910
0.171971
December
0.012323
0.096295
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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