San Juan Basin Royalty Trust (SJT) Investment Analysis

1. Executive Summary:

The San Juan Basin Royalty Trust (the "Trust") represents a unique, passive investment vehicle designed to provide unitholders with direct economic exposure to the production and sale of natural gas and crude oil in one of the most prolific hydrocarbon provinces in North America. Established on November 1, 1980, through an indenture between Southland Royalty Company and the Fort Worth National Bank, the Trust was created to hold a 75% net overriding royalty interest (the "Royalty") in specific oil and gas leasehold and royalty interests—collectively known as the "Subject Interests"—located in the San Juan Basin of northwestern New Mexico and southwestern Colorado. Unlike a traditional operating corporation, the Trust is organized as a grantor trust under the Internal Revenue Code, meaning it is not a taxable entity and is prohibited from engaging in any active business or commercial activity, such as acquiring new properties or operating wells.

The Trust’s primary function is the collection of monthly royalty income and the distribution of these funds to its unitholders after the deduction of administrative expenses and the maintenance of necessary cash reserves. The revenue generation mechanism is a "Net Profit Interest" (NPI) structure. Under this arrangement, the owner and operator of the Subject Interests—currently Hilcorp San Juan L.P. ("Hilcorp"), which acquired the majority of these interests from ConocoPhillips in 2017—collects all gross revenues from the sale of produced natural gas, natural gas liquids, and oil. Hilcorp then deducts all applicable production and development costs, including lease operating expenses (LOE), capital expenditures (CAPEX), and severance taxes, to calculate the "Net Proceeds". The Trust is entitled to 75% of these Net Proceeds.

The Trust’s primary product is natural gas, which historically accounts for more than 95% of its total royalty revenue, with minor contributions from crude oil and condensate. Its customers are the various third-party purchasers of the hydrocarbons produced at the wellhead or processed through regional gathering and processing systems, with pricing typically realized at regional hubs such as the San Juan Basin or El Paso benchmarks. The Trust’s unitholders, who are the ultimate beneficiaries of the cash flow, include a mix of retail income seekers and institutional investors, such as Horizon Kinetics Asset Management, which has significantly increased its stake in recent years to over 13%.

As of January 2026, the Trust is navigating a complex financial recovery period. Following an aggressive multi-well horizontal drilling program initiated by Hilcorp in 2024 and a period of depressed natural gas prices, the Trust entered a state of "Excess Production Costs" (EPC). This occurs when the operator’s development and operating costs exceed gross revenues for the period, resulting in a deficit that must be "paid back" from future net proceeds before any royalty income is recognized by the Trust. This has led to a suspension of monthly cash distributions since mid-2024. The investment case for the Trust currently hinges on the pace at which Hilcorp can clear this cost overhang, replenish the Trust's mandated $2.0 million cash reserve, and repay a $2.0 million line of credit used to fund administrative expenses during the shortfall. RECOVERY OPTION PLAY

2. Business Drivers & Strategic Overview:

The underlying value and operational success of the San Juan Basin Royalty Trust are dictated by a triumvirate of drivers: the volatility of regional natural gas benchmarks, the capital allocation strategy of the operator (Hilcorp), and the geological maturation of the San Juan Basin. Because the Trust is a passive entity, these drivers function as exogenous forces that unitholders must analyze to forecast future distributable cash flows.

The Commodity Price Engine and Realization Dynamics

Natural gas price realizations are the single most significant driver of the Trust’s revenue. The San Juan Basin, being a "mature" gas play, often faces regional pricing challenges that diverge from the national Henry Hub benchmark. For much of 2024 and 2025, the basin experienced significant price weakness. For instance, in May 2025, realized gas prices for the Subject Interests bottomed out at approximately $1.62 per Mcf. By the production month of November 2025, prices had improved slightly to an average of $2.30 per Mcf.

The sensitivity of the Trust to these prices is nonlinear due to the NPI structure. Because lease operating expenses (LOE) are relatively fixed—covering maintenance, utilities, and labor required to keep existing wells flowing—a price decline from $3.00/Mcf to $2.00/Mcf does not just reduce revenue by 33%; it can often eliminate "Net Proceeds" entirely if the remaining $2.00 is insufficient to cover the LOE and CAPEX for that month. Conversely, any increase in gas prices above the operational breakeven point flows almost entirely to the Net Proceeds calculation, providing unitholders with substantial leverage to a commodity recovery.

Operator Strategy: The Shift to Horizontal Mancos Development

The strategic direction of Hilcorp, the Trust’s operator, underwent a tectonic shift in 2024 that continues to impact the Trust’s financial health in 2026. Historically, the San Juan Basin was developed through vertical wells targeting the Fruitland Coal, Mesaverde, and Dakota formations. However, Hilcorp identified significant potential in the Mancos Shale, an unconventional "basin-centered" gas play.

In 2024, Hilcorp transitioned from a maintenance-level CAPEX budget of $2.2 million in 2023 to a development-heavy budget of $34.0 million. The centerpiece of this plan was the drilling of two massive horizontal wells in the Mancos formation, costing approximately $24.6 million. While horizontal drilling offers significantly higher initial production (IP) rates—sometimes exceeding 20 MMcfe/d compared to 1-2 MMcfe/d for legacy vertical wells—the upfront costs are immense. For a royalty trust that pays out its cash flow monthly, such a capital-intensive program acts as a "short-term pain for long-term gain" trade-off. The immediate effect was the accumulation of the multi-million dollar Excess Production Cost (EPC) deficit that suspended distributions.

For the 2025 and 2026 calendar years, Hilcorp has adopted a more conservative strategic posture. The 2025 capital plan was slashed by 73.5% to approximately $9.0 million, focusing on seven vertical drill projects and 22 recompletions in the Fruitland Coal formation. This reduction in CAPEX is a deliberate strategic move to allow the increased production from the 2024 horizontal wells to "catch up" with the costs incurred, thereby clearing the EPC balance and restoring the Trust's liquidity.

Geological Maturation and Reservoir Management

The San Juan Basin is one of the oldest gas-producing regions in the United States, having reached peak production around 2010 at approximately 3.4 Bcf/d. Since then, the basin has seen a steady decline, falling to roughly 1.8 Bcf/d by 2023. The Trust’s "Subject Interests" are part of this mature base, which requires constant maintenance and "workover" projects to mitigate the natural 5-10% annual decline rate of the wells.

The "Size of the Prize" for future growth lies in the Mancos B and C intervals. Technical reports suggest the Mancos Shale in the San Juan Basin could hold nearly 3 Tcf of natural gas potential. Modern drilling techniques, including 3-mile and 4-mile laterals, are being used by regional peers like LOGOS Energy to prove that the Mancos can compete with top-tier Appalachian or Permian gas plays. For SJT unitholders, the long-term strategic value is no longer just in the declining "legacy" production, but in the "call option" on Hilcorp’s ability to unlock this unconventional resource without permanently impairing the Trust’s ability to pay monthly income.

Competitive Advantages and Structural Constraints

The Trust’s primary competitive advantage is its extreme capital efficiency for the end-investor. There is no corporate overhead, no sprawling headquarters, and no management team to pay with stock options. This "pure-play" exposure is rare in the energy sector. Furthermore, the 75% NPI is one of the highest royalty percentages available in any public security, offering unmatched sensitivity to natural gas prices.

However, these advantages are coupled with structural constraints. The Trust is a "limited-life" vehicle; if gross revenues fall below $1 million for two consecutive years, the Trust must terminate and liquidate its assets. Additionally, the Trust is entirely dependent on Hilcorp for all operational data, accounting, and capital timing. This lack of control is the "Achilles' heel" of the Trust, as the operator’s corporate objectives (which might include tax-loss harvesting or long-term infrastructure building) may not always align with the unitholder's desire for immediate monthly cash. COMMODITY LEVERAGED MATURITY

3. Financial Performance & Valuation:

The financial narrative of the San Juan Basin Royalty Trust in 2024 and 2025 has been one of extreme volatility, transitioning from a high-yield income producer to a net-loss vehicle struggling with liquidity.

Historical Performance Summary (2024-2025)

In 2023, the Trust was highly profitable, distributing approximately $1.11 per unit to its holders. However, 2024 marked a severe inflection point. Total royalty income for 2024 plummeted to approximately $7.03 million, an 86.8% decrease from the prior year. This collapse was driven by the dual impact of lower year-over-year gas prices and the massive $33.6 million capital expenditure program initiated by Hilcorp.

By 2025, the Trust's royalty income effectively hit zero. For the twelve-month period ending September 30, 2025, the Trust reported total revenue of a mere $24,560. This is because the Excess Production Costs (EPC) from the 2024 horizontal drilling program became so large that they fully absorbed all "Net Proceeds" generated from the sale of gas. Under the NPI accounting rules, until the operator recovers 100% of these excess costs from future production, the Trust receives no cash.

Liquidity and the Line of Credit

With zero royalty income flowing into the Trust, the Trustee faced a critical liquidity crisis in early 2025. To continue paying necessary administrative expenses (legal, accounting, and trustee fees), the Trust entered into a promissory note with Texas Bank on May 21, 2025, to establish a $2.0 million line of credit (LOC).

As of the January 2026 reporting period, the outstanding principal on this line of credit has grown to $476,983. Furthermore, the Trust's internal cash reserves have been depleted from a target of $1.0 million to just $20,626 as of January 2026. The Trustee has explicitly stated that no distributions will resume until three conditions are met: the EPC deficit is cleared, the cash reserve is replenished to a new target of $2.0 million, and the line of credit is repaid in full.

The "Excess Production Cost" (EPC) Deficit Analysis

The "Net EPC" balance represents the cumulative amount that Hilcorp must recover before it sends another check to the Trust. The trajectory of this balance is the most important metric for investors in 2026.

The data shows a consistent, albeit slow, reduction in the deficit. From July 2025 to January 2026, the net deficit has been reduced by approximately $6.3 million. At the current average recovery rate of roughly $0.9 million per month, the EPC deficit would be cleared by late Q3 or early Q4 2026, assuming stable gas prices and no new major CAPEX projects.

Valuation Multiples and Asset Value

Valuing SJT is currently a challenge because traditional earnings-based metrics (P/E) are non-meaningful.

• Price-to-Earnings (TTM): -1,037.29x.

• Price-to-Book (P/B): 117.3x. This extreme ratio is a result of the Trust’s depreciated book value ($2.7 million) relative to its market capitalization ($285 million). It indicates that the market views the Trust as having significant "unbooked" value in its underlying reserves.

• PV-10 Value: At the end of 2024, the standardized measure of discounted future net cash flows was calculated at $76.89 million. At a market cap of $285 million, SJT is trading at 3.7x its PV-10 value. This suggests that the market is pricing in a significant future recovery in gas prices (well above the SEC-mandated pricing used for the PV-10) or significant future discoveries in the Mancos Shale that are not yet "Proved".

• Historical Yield: While the current yield is 0%, the 10-year average annual distributable cash flow has been $0.59 per unit. If the Trust returns to this average, the "implied" forward yield at a $6.05 share price would be approximately 9.75%.

The Trust is effectively being priced as a long-duration call option on natural gas prices with a strike price near the current EPC recovery level. DISTRESSED CASH OPTION

4. Risk Assessment & Macroeconomic Considerations:

Investors in San Juan Basin Royalty Trust must navigate a landscape fraught with commodity, operational, and regulatory risks, many of which are amplified by the Trust’s passive structure.

Macroeconomic Forces: Natural Gas and LNG

The Trust’s fate is inextricably linked to the U.S. natural gas macro environment. The EIA forecasts a relatively tight market for 2026-2027, with Henry Hub prices expected to rise to an annual average of $4.59/MMBtu in 2027. This growth is driven by the massive expansion of U.S. LNG export capacity, including projects like Golden Pass and Plaquemines LNG, which will increase the "pull" on domestic supply.

However, San Juan Basin producers face specific "basis" risks. The basin competes for pipeline egress with the Permian Basin to the south. If Permian production (which is largely "associated gas" produced as a byproduct of oil) grows too quickly, it can saturate the EPNG and Transwestern pipeline systems, forcing San Juan producers to accept deep discounts to get their gas to market. Any macroeconomic slowdown that reduces industrial gas demand or a warmer-than-average winter (similar to late 2024) could keep realized prices below the breakeven level required to clear the EPC deficit.

Operational and Concentration Risk

The Trust is 100% dependent on Hilcorp for its revenue. As a private entity, Hilcorp does not have the same transparency requirements as public peers. There is a risk that Hilcorp may prioritize its own operational efficiencies over the Trust’s need for monthly distributions. For example, Hilcorp could decide to front-load capital projects in a high-price environment, which would "eat up" the Net Proceeds and prevent unitholders from benefiting from the price spike. Furthermore, the concentration of assets in a single basin means any regional infrastructure failure (e.g., a major gathering line explosion or processing plant fire) would result in a total cessation of revenue for the Trust.

New Mexico Regulatory Landscape

Regulatory risk is particularly acute in New Mexico. Governor Michelle Lujan Grisham’s administration has enacted some of the strictest methane regulations in the nation. The New Mexico "Methane Waste Rule" requires operators to capture 98% of their natural gas by December 31, 2026. While this is environmentally beneficial, the costs to upgrade existing pneumatic controllers, install leak detection systems, and build gas capture infrastructure are significant. These costs are categorized as production expenses and are deducted from the Trust’s Net Proceeds. Investors must consider if a "permanent" increase in operating costs will lower the Trust's future distribution ceiling.

The "Trump Effect" and Trade Policy

The 2025 presidential administration shift has introduced new variables. While executive orders like "Unleashing American Energy" have sought to expedite federal permitting (which is beneficial for San Juan acreage), new tariffs on steel and aluminum have increased the cost of casing, piping, and other drilling equipment. For a high-CAPEX program like horizontal Mancos drilling, these material price inflations can add millions to the cost of a single well, further extending the "payout" period for unitholders.

Technical Termination and Reserve Depletion

As a wasting asset, SJT faces the ultimate risk of depletion. At the end of 2024, Proved reserves were only 8,212 BOE, with zero Proved Undeveloped (PUD) reserves remaining. Without further successful exploration and development of the Mancos Shale, the Trust is on a countdown to zero. If at any point the annual gross revenue stays below $1 million for two years, the Trust is legally required to liquidate. While current revenues are well above this on a "gross" basis at the wellhead, the "Net Proceeds" calculation is what matters for unitholder distributions. STRUCTURAL COMMODITY EXPOSURE

5. 5-Year Scenario Analysis:

This scenario analysis projects the potential total return for SJT unitholders from 2026 through 2030, based on the current unit price of $6.05. The projections assume the current 46,608,796 units outstanding remain unchanged.

Fundamental Assumptions Table

Scenario 1: Base Case (The Gradual Normalization)

In the Base Case, natural gas prices follow the EIA’s upward trajectory towards $4.50/MMBtu by 2027 before stabilizing. Hilcorp maintains a moderate development program, clearing the EPC deficit by October 2026. Distributions resume in early 2027 at a modest level of $0.04/month, growing as the reserve replenishment is completed.

• Key Drivers: Recovery in gas prices and steady 5% annual production decline. No major new horizontal spending occurs until the LOC is repaid.

• Detailed Financials: 2027 Royalty Income of $18M; 2030 Royalty Income of $25M.

• Projected Payouts: 2027: $0.35/unit; 2028: $0.48/unit; 2029: $0.52/unit; 2030: $0.55/unit.

• Terminal Valuation: 10x 2030 DPU = $5.50 + $1.90 cumulative distributions.

• Outcome: $7.40 total value.

Scenario 2: High Case (The Mancos Renaissance)

The High Case assumes the Mancos Shale becomes a top-tier resource. Hilcorp’s 2024 horizontal wells prove to be "type-well" performers, and the operator initiates a 3-rig program in 2027. Gas prices surge to $5.50/Mcf due to massive LNG export demand.

• Key Drivers: Production doubles by 2029. High volumes more than offset the high CAPEX.

• Detailed Financials: 2028 Royalty Income of $45M; 2030 Royalty Income of $65M.

• Projected Payouts: 2027: $0.60/unit; 2028: $0.95/unit; 2029: $1.25/unit; 2030: $1.40/unit.

• Terminal Valuation: 12x 2030 DPU = $16.80 + $4.20 cumulative distributions.

• Outcome: $21.00 total value.

Scenario 3: Low Case (The Regulatory Stagnation)

The Low Case is conservative. Natural gas prices stay depressed at $2.25/Mcf due to oversupply from the Permian. New Mexico's methane compliance costs add 20% to LOE. Hilcorp halts all new drilling, and the EPC deficit isn't cleared until 2028.

• Key Drivers: 10% annual production decline. Regulatory drag prevents meaningful "Net Proceeds."

• Detailed Financials: 2028 Royalty Income of $2M; 2030 Royalty Income of $5M.

• Projected Payouts: 2027: $0.00; 2028: $0.05/unit; 2029: $0.10/unit; 2030: $0.12/unit.

• Terminal Valuation: 6x 2030 DPU = $0.72 + $0.27 cumulative distributions.

• Outcome: $0.99 total value.

Share Price Trajectory Table

Probability Weighted Outcome

• High Case Contribution: $21.00 0.25 = $5.25

• Base Case Contribution: $7.40 0.45 = $3.33

• Low Case Contribution: $0.99 * 0.30 = $0.30

• Estimated 5-Year Price Target: $8.88

This target assumes a successful resumption of distributions but incorporates a heavy "Low Case" penalty for the risk of resource depletion and regulatory cost inflation. LEVERAGED RECOVERY BET

6. Qualitative Scorecard:

The following metrics assess the Trust’s intrinsic qualities and risks on a scale of 1–10.

• Management Alignment: 2/10 Alignment is fundamentally problematic in the grantor trust structure. The Trustee, Argent Trust, is a passive fiduciary paid through set fees and has no equity-based incentive to maximize unitholder returns. The operator, Hilcorp, is a private entity that owns the working interest but does not report its own ownership of SJT Units on standard SEC Form 3 or 4 filings, though they are known to be the primary "partner" in the field. There is a lack of institutional alignment beyond the shared interest in maximizing well-level production.

• Revenue Quality: 3/10 Revenue quality is poor due to extreme volatility and the "all-or-nothing" nature of the NPI distribution. The fact that royalty income can—and did—drop from $7 million to $24,000 in a year highlights that this is not "steady" income, but rather a variable commodity play.

• Market Position: 5/10 The Trust occupies a solid position within its niche as one of the few ways to play the San Juan Basin directly. However, the basin itself is losing market share to the Permian and Appalachian basins, which have better economics and larger reserve bases.

• Growth Outlook: 6/10 The outlook is binary. If the Mancos Shale development is successful, the Trust has years of potential growth ahead. If development stalls due to costs or low prices, the growth outlook is zero. Recent results from regional peers are encouraging.

• Financial Health: 4/10 While the Trust has essentially zero debt (outside the $0.5M LOC), its current cash position of ~$20k is dangerously low. It lacks the flexibility to survive a prolonged downturn without further borrowing.

• Business Viability: 4/10 Viability is threatened by the aging nature of the asset and the regulatory "choke point" of New Mexico's environmental rules. The durability of the Trust depends on finding a new geological "second wind" in the Mancos Shale.

• Capital Allocation: 3/10 Capital allocation is entirely out of the Trust’s hands. Hilcorp’s decision to spend $34M in 2024 was arguably poor allocation for the "Trust" unitholders, as it led to a distribution suspension, even if it was a good long-term decision for the "field".

• Analyst Sentiment: 2/10 Wall Street sentiment is overwhelmingly negative, with Weiss Ratings and MarketBeat both maintaining "Sell" or "Strong Sell" stances. Most institutional research focuses on the "yield trap" risk.

• Profitability: 1/10 Currently reporting net losses with a TTM net profit margin of -400%.

• Track Record: 6/10 Historically, the Trust has been a legendary income vehicle since 1980. However, the 2024-2025 performance has severely tarnished its reputation for "stable" distributions.

OVERALL BLENDED SCORE: 3.6 / 10 SPECULATIVE INCOME RECOVERY

7. Conclusion & Investment Thesis:

The San Juan Basin Royalty Trust is currently at its most precarious point in a forty-five-year history. The transition from a legacy maintenance play to an unconventional development play under Hilcorp’s operatorship has created a temporary but severe liquidity crunch.

The investment thesis rests on the "Mean Reversion" of the EPC deficit. Current monthly reporting shows that Hilcorp is successfully working down the cost overhang at a rate of approximately $0.7M to $1.4M per month. This puts the Trust on a trajectory to resume distributions by the fourth quarter of 2026, provided that natural gas prices remain above the $2.00/Mcf floor.

The primary catalysts for the stock are:

1. EPC Clearance: Any monthly announcement showing the deficit has been fully repaid will likely cause a significant rerating of the unit price as income-seeking investors return to the name.

2. Mancos Production Data: If the 2024 horizontal wells show higher-than-expected IP30 and IP60 rates, the market may begin to value SJT as a "growth" trust rather than a "wasting" trust.

3. LNG Demand Pull: As the Gulf Coast LNG facilities ramp up in 2027, the regional pricing for San Juan gas should improve, significantly widening the profit margin for the 75% Royalty interest.

However, the risks are equally profound. The Trust is highly vulnerable to a "perfect storm" of low gas prices and rising regulatory costs in New Mexico. If the recovery of the EPC deficit stalls, the Trust may be forced to draw further on its line of credit, creating a debt spiral that impairs future distributions. Furthermore, as a grantor trust, the entity has no mechanism to "fix" its own problems, leaving unitholders at the mercy of the commodity market and the operator's whims.

For the patient investor with a high risk tolerance, SJT offers a leveraged, non-dilutive play on the 2026-2030 natural gas cycle. For the conservative income investor, the Trust is currently a "show-me" story that must prove its ability to restore payouts before it can be considered a core holding. BINARY COMMODITY SPECULATION

8. Technical Analysis, Price Action & Short-Term Outlook:

The price action of SJT in early 2026 has been surprisingly bullish despite the continued suspension of distributions. The stock recently crossed above its 200-day moving average of $5.82 and is currently trading in a consolidated range between $6.05 and $6.15. This technical strength suggests that the market is "front-running" the eventual EPC recovery, supported by a 31% year-over-year increase in share price from January 2025. Short-term outlook is neutral to slightly positive as the market awaits the next monthly "Material Issues" report to see if the EPC deficit continues its current $0.9M/month decline. TECHNICAL BREAKOUT PENDING