UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

for the Quarterly Period Ended June 30, 2022

or

for the transition period from _____ to _____

Commission File No. 001-08032

SAN JUAN BASIN ROYALTY TRUST

(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)

PNC Bank, National Association

PNC Asset Management Group

2200 Post Oak Blvd, Floor 18

Houston, Texas 77056

(Address of principal executive offices) (Zip Code)

(866) 809-4553

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☐    No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No ☒

Number of Units of beneficial interest outstanding at May 16,August 15, 2022: 46,608,796

Table of Contents

SAN JUAN BASIN ROYALTY TRUST

PART I

FINANCIAL INFORMATION

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

The Trustee routinely reviews the Trust’s royalty interests in oilnatural gas and natural gasoil properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows and is charged directly to trust corpus instead of as an expense. There was no impairment of the Trust’s assets as of March 31,June 30, 2022.

For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment trust (“WHFIT”) classified as a non-mortgage widely held fixed investment trust (“NMWHFIT”) for federal income tax purposes. The Trustee is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.

The Royalty constitutes an “economic interest” in oilnatural gas and natural gasoil properties for federal income tax purposes. Unit Holders must report their share of the production revenues of the Trust as ordinary income from oilnatural gas and natural gasoil royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.

Under present law, the Trust’s production and sale of natural gas from Coal Seam Wells does not qualify for tax credit under Section 45K of the Code (the “Section 45 Tax Credit”). Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trust’s current production for such credit has been enacted. No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.

The classification of the Trust’s income, for purposes of the passive loss rules, may be important to a Unit Holder. Royalty Income, such as that derived through the Trust, will generally be treated as portfolio income that may not be offset or reduced by passive losses.

Tax positions taken by the Trust related to the Trust’s pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that the material tax positions it has taken would more likely than not be sustained by examination. As of March 31,June 30, 2022, the Trust’s tax years 2018 and thereafter remain subject to examination.

Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holder’s interest in the Trust.

Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders. See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to recovery of costs.

Covid-19 Pandemic. The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that future Covid-19 restrictions or outbreaks may have on production, including as it relates to personnel availability in New Mexico and other Subject InterestInterests’ areas. Hilcorp further informed the Trust that it does not anticipate that the current state of the Covid-19 pandemic will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the impact of the continued Covid-19 pandemic, including a resurgence of COVID-19 lockdowns in Asia, may extend existing supply chain disruptions and order backlogs for materials or future restrictionsservices needed to maintain production in the Subject Interest areas, or outbreakshave other unknown impacts on Hilcorp and the Subject Interests, is still unknown and any such impact could result in actual results being different from Hilcorp’s expectations.

Geo-Political Uncertainties. Prices for goods and services have risen over the last 12 months, and inflationary pressures have accelerated in the first half of 2022, as regional and global commodity prices have risen in response to the conflict in Ukraine. The impact of ongoing or extended conflict on Hilcorp’s ability to produce from the Subject Interests or on commodity prices is unknown.

Gross Proceeds and Severance Tax EstimatesProduction Cost Estimates..

Hilcorp’s process of reconciling Gross Proceedsactual revenue and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) during fiscal years 2018 and 2020 were still occurring and being reported in 2021. At the beginning of 2021, Hilcorp has informed the Trust that as it continuesplanned to refine further its estimating and reporting processes.processes and that Hilcorp willwould review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods, to ensure greater accuracy and consistency.periods. As part of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in any givencertain months during 2021 were subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

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 in 2022 may include adjustments(August 2021 reporting month) and that it has reversed and rebooked revenue for certain prior periods. As of December 31, 2021, Hilcorp believes that all prior month true-ups have been completed for operated wells. The true-ups of revenues for non-operated properties for the reversal2021 distribution periods were completed in the February and rebookingMarch 2022 reporting months.

The amount of prior months’ revenue, plus interest.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. Hilcorp’s (or a future operator’s) 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 by Hilcorp. Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021 or to date in 2022.

None.

On AprilJuly 19, 2022, the Trust announced a cash distribution of $3,863,096.64$6,766,905.11 or $0.082883$0.145185 per Unit, based primarily upon production during the month of FebruaryMay 2022, which was paid on May 13,August 12, 2022.

Overview

The Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980, between Southland and The Fort Worth National Bank (the “Original Indenture”). The Original Indenture was amended and restated on September 30, 2002, and further amended and restated on December 12, 2007, which the Trust refers to as the “Indenture” in this Quarterly Report on Form 10-Q. As a result of a series of mergers and other transactions, the current Trustee of the Trust is PNC Bank.

The Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance (the “Conveyance”) effective November 1, 1980, Southland conveyed the Royalty that burdens the Subject Interests in properties located in the San Juan Basin of northwestern New Mexico to the Trust. Subsequent to the Conveyance of the Royalty, through a series of sales, assignments and mergers, Southland’s successor became Hilcorp, which acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (“Burlington”), an indirect wholly owned subsidiary of ConocoPhillips, on July 31, 2017.

The Royalty constitutes the principal asset of the Trust. The beneficial interest in the Royalty is divided into 46,608,796 units (the “Units”), representing undivided fractional interests in the beneficial interest of the Trust, equal to the number of shares of Southland common stock shares outstanding as of the close of business on November 3, 1980. Each stockholder of Southland of record at the close of business on November 3, 1980, received one freely tradable Unit for each share of the Southland common stock of Southland then held. Holders of Units in the Trust are referred to herein as “Unit Holders.”

The Trustee

The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining available income to the Unit Holders. The amount of income distributable to Unit Holders, which we refer to 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. The Trust has no employees, officers, or directors. The Trustee performs all administrative functions of the Trust.

Hilcorp

Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with the Trust, for marketing the oilnatural gas and natural gasoil production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances. A very high percentage of the Royalty Income is attributable to the production and sale by Hilcorp of natural gas, from the Subject Interests.Interests, by Hilcorp. Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

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.

Under the terms of the Conveyance, production costs are deducted from Gross Proceeds in calculating Net Proceeds, which is multiplied by 75% to calculate Royalty Income. “Production costs”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 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 payments to the Trust. However, the Trust is not otherwise liable for any production costsProduction 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.Production Costs.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust’s third-party compliance auditors continue to audit all payments made by Hilcorp to the Trust, including adjustments, true-ups, and recoupments. In addition, the Trustee continues to consult with outside counsel to review the rights of the Trust with respect to these matters and to evaluate any available potential legal remedies.

Factors that Affect Net Proceeds. Generally, Net Proceeds are affected by (a) disruptions caused by weather, particularly winter storms that disrupt access to the production fields, (b) the timing and size of Hilcorp’s capital expenditures, and (c) commodity prices.

Weather. Hilcorp has advised the Trust that it is possible for it to experience disruptions during the winter months that could impact Hilcorp’s ability to access fields and maintain production.

Results of Operations – for the Three and Six Months Ended MarchJune 2022 and 2021

Royalty Income

Royalty Income consists of 75% of the monthly Net Proceeds attributable to the Royalty. Royalty Income for the three and six months ended March 31,June 30, 2022, and 2021 was determined as shown in the following table:

Severance Taxes. Aggregate severance taxes increaseddecreased approximately $3.1 million,$204,000, or 374%5.3%, for the three months ended March 31,June 30, 2022, compared to the three months ended March 31,June 30, 2022, and increased approximately $2.9 million, or 61%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The percentage increasedecrease in severance taxes in the three-month period is primarily attributable to increased revenuethe overestimation of severance taxes of $1.0 million for the February to April 2021 production months which offset the increase in severance taxes attributable to higher Gross Proceeds. The increase in severance taxes in the six-month period was primarily attributable to higher Gross Proceeds and byalso to corrections made in the first quarter of 2021 to the June 2018 through December 2018 production months, which reduced reported severance taxes in the three months ended March 31, 2021for this period by $1.4 million. The corrections included the reversal of severance tax estimates and tax only adjustments associated with the Jicarilla tribe. Excluding these corrections, severanceApache Nation. Severance taxes represented approximately 13% of Gross Proceeds for the three months ended March 31,June 30, 2022, compared to approximately 14%18% for the same period of 2021. Severance taxes represented approximately 13% of Gross Proceeds for the six months ended June 30, 2022. Excluding the $1.4 million correction in the first quarter of 2021, severance taxes were approximately 16% of Gross Proceeds for the six months ended June 30, 2021.

Lease Operating Expenses and Property Taxes. Lease operating expenses and property taxes increased $3.7decreased $1.1 million, or 103%15%, for the three months ended March 31,June 30, 2022, compared to the three months ended March 31,June 30, 2021. The decrease is primarily due to decreased activity at the Subject Interests by Hilcorp. Specifically, production decreased by 1,603,525 MMBtu, or 19.20%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. Lease operating expenses and property taxes increased $2.6 million, or 23% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase is primarily due to increased expenses includein the first quarter of 2022 which included approximately $0.5 million in non-operated lease operating expense true-ups, the payment of approximately $1 million for year-end salaries and bonuses for Hilcorp employees, and differences in the timing in the receipt and payment of these costs, offset by a $450,000 credit by Hilcorp to the Trust in 2021 due to the settlement of certain audit exceptions related to compressor maintenance services. The Trust and its consultants are conducting a detailed analysis of these expenses associated with the year-end salaries and bonuses for Hilcorp employees to determine if they comport with the Conveyance and other operative agreements.

Monthly lease operating expenses offor the Subject Interests, including property taxes, for the three months ended March 31,June 30, 2022, averaged approximately $2.5$2.1 million, compared to $1.2$2.5 million for the three months ended March 31,June 30, 2021. Monthly lease operating expenses of the Subject Interests, including property taxes, for the six months ended June 30, 2022, averaged $2.3 million, compared to an average of $1.9 million for the six months ended June 30, 2021.

Distributable Income

Distributable Income. Distributable Income increased from $7.8$7.2 million ($0.1663040.153748 per Unit) for the three months ended March 31,June 30, 2021, to $14.4$13.3 million ($0.3082940.286277 per Unit) for the three months ended March 31,June 30, 2022. The increase in Distributable Income was primarily attributable to higher natural gas prices. Distributable Income increased by approximately $12.8 million, or 86%, to $27.7 million (0.594571 per Unit) for the six months ended June 30, 2022, from $14.9 million ($0.320052 per Unit) for the six months ended June 30, 2021. The increase in Distributable Income was primarily attributable to higher natural gas prices.

General & Administrative Expenses. General and administrative expenses increaseddecreased approximately 13%,4.6 % for the three months ended March 31,June 30, 2022, compared to the three months ended March 31,June 30, 2021, and increased approximately 4.9% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase waschanges for both periods were primarily attributable to differences in timing in the receipt and payment of certain expenses by the Trust.

Cash Reserves. Total cash reserves were $1.0 million as of March 31,June 30, 2022. The primary purpose of the cash reserves is to have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses. The Trustee does not anticipate any increases to the cash reserve above a level of $1.0 million in 2022, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.

Liquidity and Capital Resources

The Trust’s principal source of liquidity and capital is Royalty Income. The Trust’s distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses. The Trust is not liable for any production costsProduction 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 of 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 Royalty Income from Hilcorp sufficient to pay its liabilities, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trust’s operating expenses until its cash reserve can be replenished from subsequent Royalty Income payments from Hilcorp.

OilNatural gas and Natural GasOil Production

The natural gas volumes reported to the Trust by Hilcorp are based on plant residue gas volumes plus equivalent volumes for natural gas liquids. Hilcorp converts one barrel of natural gas liquids to six Mcf of natural gas using industry standards.

Royalty Income for the three months ended March 31,June 30, 2022, is associated with oil and natural gas and oil production during November 2021February through JanuaryApril 2022 from the Subject Interests.

Production of oilnatural gas and natural gasoil and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended March 31,June 30, 2022, and 2021 were as follows:

Production of natural gas and oil and related average sales prices attributable to each of the Subject Interests and the Royalty for the six months ended June 30, 2022, and 2021 were as follows:

Based on Hilcorp’s reporting methodology, the Trust recognizes production during the month in which the related Royalty Income is paid to the Trust. Royalty Income for a calendar year is based on the actual oilnatural gas and natural gasoil production during the period beginning with November of the preceding calendar year through October of the current calendar year. Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oilnatural gas and natural gas,oil, respectively, by the prices received for sales of such volumes from the Subject Interests, taking into consideration production taxes attributable to the Subject Interests. Because the oilnatural gas and natural gasoil sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including capital expenditures, the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty.

For information on the Trust’s exposure to market risk, please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2021.

PART II

OTHER INFORMATION

None.

Not required.

None.

None.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 16,August 15, 2022

(The Trust has no directors or executive officers.)

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