20
Mar

San Juan Production Slide Could Spell Trouble For SJT

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March 20, 2007 

San Juan Royalty Trust (SJT) - $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 and I thought I'd write it up. It 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 and I therefore don't think the yield will hold.

A Quick Description of the Royalty Trust.

  • 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.
  • The underlying production is operated by Burlington Resources which is now owned by COP. More on COP's gas history in a subsequent post but 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 the San Juan in 2007, down from 476 in 2006.

Annual Distribution Statement: Two important takeaways from the follow statement:

  • 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.
  • But in the following year, higher capital spending on the underlying properties severely dented the trust's distribution despite continued strength in gas prices


sjt-annual-2.JPG

Long Term Production From The San Juan Basin Underlying Assets Is Declining...

sjt-lt-production.JPG

...And The Monthly Chart Going Back Into 2005 Shows The Most Recent Two Months Aren't An Anomoly But The Continuation Of A Trend.

sjt-monthly-production.JPG

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

Isjt-2-months.JPG

...And Monthly Distribtutions 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-shares-vs-dividend.JPG

One Response to “San Juan Production Slide Could Spell Trouble For SJT”

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