Distribution Drop May Spell Trouble for San Juan Royalty Trust

Mar.21.07 | About: San Juan (SJT)

Let's take a look at San Juan Royalty Trust (NYSE:SJT), which currently trades at $30.26

I’ll be brief. From time to time, I play this with puts or calls depending on the direction I think natural gas prices are headed -- so I thought I’d write it up. SJT has a pretty high correlation to natural gas. I won’t short it, because it pays a monthly dividend, and I find it disturbing if I have to pay those while I wait out the fall (although I may reconsider my stance if the monthlies continue to ebb). I wouldn’t buy and hold the stock either, as the production that underlies the trust is slipping, so I don’t think the yield will hold.

A Quick Description

  • The San Juan Basin royalty trust holds a 75% net overriding royalty interest carved out of certain oil and gas leasehold and royalty interests in properties owned by Burlington Resources. The underlying reserves are located in the long-reserve-life San Juan Basin of New Mexico. After expenses, the trust pays a monthly dividend to unit holders. Simple enough.
  • The production underlying SJT’s interest is 99% natural gas.
  • Underlying production is operated by Burlington Resources, which is now owned by ConocoPhillips (NYSE:COP) (more on COP’s gas history in a subsequent post). Essentially SJT has no control over or ability to increase production. They’re just along for the ride.
  • Burlington has indicated it plans to carry out 416 projects in San Juan in 2007, down from 476 in 2006.

Annual Distribution Statement

SJT Distribution Statement 21 03 2007

Two important takeaways:

  • Unit distribution is highly sensitive to gas price. Even as production fell nearly 3% from 2004 to 2005, a 34% jump in realized gas equivalent prices yielded a stout distribution for the year.
  • In the following year, higher capital spending on the underlying properties severely dented the trust’s distribution, despite continued strength in gas prices.

Long-term production from the San Juan basin underlying assets is declining...

Long Term SJ Basin 21 03 2007

The monthly chart going back to 2005 shows the most recent two months aren’t an anomaly, but the continuation of a trend:

Monthly production to 2005 21 03 2007

A look at the two most recently announced distributions further demonstrates the great sensitivity that production and gas prices exert on monthly distributions:

Two latest months distribution 21 03 2007

Monthly distributions are highly correlated to SJT’s share price. I generally don’t try to forecast the monthly numbers as, 1) the realized price can stray pretty far from the San Juan posted price, and 2) the stock moves more closely with natural gas prices and is less volatile on the monthly distribution posting day than it once was.

SJT Dividend and Share Price 21 03 2007