December 10, 2001; Project Monthly Distributions for San Juan Basin Royalty Trust

Despite knowing that anticipating the amount of monthly distribution can be frustrating because of all the sources of fluctuation, we nonetheless now do just that.   A new table details our projected declarations of a low $0.01 per unit in December rebounding to $0.07 per unit in January 2002 (see Table SJT-3 in Meter Reader Tables). 

The main difference between the two months is that we understand that the San Juan Basin monthly index price for October was only $1.41 per mmbtu and it rebounded in November to $2.69.  The actual price applies to the distribution to be declared two months later.  For the past year the price reported for the trust ranged from 0.86 to 0.90 times the monthly index published by Bloomberg.  Over the same period the price ranged more widely from 0.76 to 0.81 times the daily price at Henry Hub, the Louisiana pricing point for the industry.  We also know the index at the beginning of the month whereas the daily average cannot be known until the end of the month. 

There are ranges around other variables, too, that make projected monthly results subject to wide variation.  Mechanically, we use trailing twelve months averages in estimating volume and deductions. 

Knowledge is power.  The main reason for projecting monthly results is to make surprises understandable.  No one need sell the units of SJT on a low distribution without having some feel as to whether the causes of the low number were likely to persist.  The reverse is also true.  If there is selling pressure on the declaration of a low distribution, a buyer may be more confident if the negative factors appear temporary.

Some would say that the fluctuations in the monthly distribution are a disadvantage because the volatility causes the price of the units to be lower.  Understanding the source of volatility can turn it to advantage.  The long-term return on the natural gas royalty trusts we cover is likely to be higher, in our opinion, than on some similar investments that promise a steadier payout.