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Monthly Dividend Stock In Focus: San Juan Basin Royalty Trust


Updated on September 18th, 2024 by Felix Martinez

San Juan Basin Royalty Trust (SJT) has a dividend yield of more than 3%, based on its annualized distributions for 2024.

San Juan Basin has a very enticing payout, considering the S&P 500 Index has a ~1.3% dividend yield right now. That means San Juan Basin offers about three times as much dividend income as the average stock in the S&P 500.

San Juan Basin also pays its dividend each month, rather than each quarter like most other stocks. This gives investors the benefit of more frequent dividend payouts.

San Juan Basin is one of only 78 monthly dividend stocks we currently track. You can download our full list of monthly dividend stocks (along with important financial metrics like dividend yields and payout ratios) by clicking on the link below:

 

Click here to instantly download your free spreadsheet of all 78 monthly dividend stocks now, along with important investing metrics.

However, San Juan Basin’s dividend may not be as attractive as it seems. The payout has been slashed repeatedly in recent years, and royalty trusts are a highly risky type of security.

This article will discuss why investors should be skeptical of royalty trusts like San Juan Basin.

Business Overview

San Juan Basin is a royalty trust, established in November 1980. The trust is entitled to a 75% royalty interest in various oil and gas properties across over 150,000 gross acres, in the San Juan Basin of northwestern New Mexico.

On July 31st, 2017, Hilcorp San Juan LP completed its purchase of San Juan Basin assets from Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips (COP).

More than 90% of the trust’s production is comprised of gas, with the remainder consisting of oil. The trust does not have a specified termination date. It will terminate if royalty income falls below $1,000,000 annually over a consecutive two-year period.

The past four years have been difficult for San Juan Basin. Not surprisingly, this was due to lower oil and gas prices. Things became even more challenging in 2020, as the coronavirus pandemic resulted in a steep decline in oil and gas prices.

The average realized price of natural gas for San Juan Basin decreased from $1.79 in 2019 to $1.51 in 2020. The average realized price of oil decreased from $45.11 per barrel in 2019 to $31.47 per barrel in 2020. As a result, its distributable income per unit dipped 9%, from $0.174 in 2019 to $0.159 in 2020. Due to its poor cash flows, the trust suspended its distribution for 6 months in 2019 and another 4 months in 2020.

Fortunately, San Juan Basin recovered strongly in 2021 and 2022 thanks to the recovery of the energy market from the pandemic. Thanks to the impressive rally of the price of natural gas, which resulted from pent-up demand after the pandemic and tight supply, distributable income per unit nearly quintupled, from $0.159 in 2020 to $0.77 in 2021. Last year, in 2022,  the total distributable income was over $1.57.

Even better, the price of natural gas has rallied to a 13-year high this year due to the sanctions of European countries on Russia. Europe generates 31% of its electricity from natural gas provided by Russia, but it is now doing its best to reduce its reliance on Russia. As a result, there has been a huge increase in LNG exports from the U.S. to Europe. Consequently, the U.S. natural gas market has become extremely tight and hence the price of U.S. natural gas has recently rallied to a 13-year high.

Growth Prospects

There are two significant growth catalysts for San Juan Basin moving forward. The first is higher commodity prices, which would help San Juan Basin generate higher cash flows. Specifically, higher gas prices would be a huge boost for San Juan Basin, since gas accounts for the vast majority of production.

The other major growth catalyst for San Juan Basin will be if the trust’s oil and gas properties are produced for longer than expected. San Juan Basin is not exactly sure of the lifespan of the trust. It has hired independent petroleum engineers, who conservatively estimated that the trust is likely to continue to produce for at least another 10-15 years.

These two factors will determine whether San Juan Basin is a good investment. The trust is not permitted to engage in any business activity, which includes using any portion of the trust estate to acquire additional properties.

In the second quarter of 2024, the Trust reported royalty income of approximately $1.85 million, significantly lower than the $8.52 million earned during the same period in 2023. This decline was primarily driven by a sharp decrease in natural gas prices and production revenues from the San Juan Basin. Gross proceeds from natural gas sales dropped to $10.46 million in Q2 2024, compared to $20.72 million in Q2 2023. Oil sales remained relatively stable, contributing $627,839 in revenue for the quarter.

Production costs also increased, rising from $9.96 million in Q2 2023 to $10.45 million in Q2 2024. This jump in costs was attributed to higher capital expenditures, which increased to $829,872 as Hilcorp implemented its 2024 capital project plan. These expenditures were focused on drilling and completions within the Mancos and Mesaverde formations. Additionally, lease operating expenses and property taxes contributed to the higher overall production costs.

Due to higher expenses and lower revenues, net profits for the quarter decreased sharply. The Trust reported net royalty profits of only $818,175 in Q2 2024, compared to $11.36 million in Q2 2023. These figures underscore the volatile nature of natural gas markets and the significant impact of production costs on the Trust’s financial performance during this period.

Dividend Analysis

As a trust, San Juan Basin’s distributions are classified as royalty income. Distributions are considered ordinary income, and are taxed at the individual’s marginal tax rate. Since gas prices are so important to royalty trusts’ cash flow, it is no surprise that San Juan Basin’s dividends have declined when gas prices have declined, such as from 2014 to 2016 and again in 2020.

San Juan Basin made the following distributions since the previous oil and gas industry downturn:

Despite an uptick in distributions in 2017, declining commodity prices have caused San Juan Basin’s fundamentals to deteriorate steadily since 2014. This, in turn, led to lower distribution payments.

On the bright side, San Juan Basin recovered strongly from the pandemic year and last year. However, in the last three months of this year, it has offered distributions per unit of $0.11. San Juan Basin would pay approximately $0.11 per unit for the full year at this rate. This payout level would represent a yield of 3.0% based on the current unit price of $3.57.

If oil and gas prices can maintain current levels or increase further, San Juan Basin’s distributions could increase to a level that makes the stock attractive. For example, if the trust lasts another 10 years, investors will want a dividend yield well in excess of 10% annually to make San Juan Basin a successful investment.

Of course, there is no guarantee of a longer life span nor guarantee that oil and gas prices will remain around their multi-year highs. As a result, royalty trusts are a particularly risky way to invest in the energy sector.

Final Thoughts

Investing in San Juan Basin right now is essentially making a bet on two things—high oil and gas prices, and a longer-than-expected lifespan of the trust.

Royalty trusts can be a good source of dividend income thanks to their high yields. But investors need to make sure the trust’s assets will not run out before the initial investment is paid back. It appears that San Juan Basin investors will need the extremely high prices of natural gas and oil to remain in place for years in order to make the stock a good investment.

We view this favorable scenario as highly unlikely. As such, investors looking for less risk from a dividend stock are encouraged to avoid royalty trusts like San Juan Basin.

Don’t miss the resources below for more monthly dividend stock investing research.

And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.

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