San Juan Basin Royalty Trust in Low Payout Period

SJT's monthly distribution declared last week was low at $0.02 per unit compared to a peak of $.40 per unit earlier this year.  Volume was strong.  While royalty trusts theoretically have declining volume, the properties in SJT are producing at their highest rates since the first well came onstream fifty years ago.  Natural gas price was down as expected.  A negative factor was a high level of cash withheld to fund further development of producing capacity.  Of course, that negative factor is a positive factor long term, as the new capacity will repay its development cost many times.

The next declaration to be made a month from now may also be low at perhaps $0.01 per unit.  The unusual factor may be natural gas price.  The trust apparently sells its product on a monthly index basis, as do most producers.  Index prices are usually set in the last week of the previous month.  The practice can lead to realizations far out of line with daily prices.  That may have been the case in October, the month of operations that fund the distribution to be declared in December.  For example, Bloomberg reports a San Juan index price for October of only $1.41 per mmbtu.  The trust seems to realize 88% of the index reported by Bloomberg, which would be just $1.24.  That is much lower than the $1.92 the trust received in September.  Yet daily prices for the industry in October were higher than in September.

Producers apparently believe that monthly index prices work out the same as average daily prices over time.  We are skeptical as the practice appears subject to conflicts of interest.

More important, current futures prices for natural gas continue to trace a steep upward slope.  That translates to our projected distribution for 2002 of $0.99 a unit, for a 9.6% distribution yield at the current price.  Our estimated present value is $14.80 a unit, down $0.10 in the past week consistent with rising long-term interest rates.  A low McDep Ratio of 0.70 justifies our continuing recommendation.