Units of San Juan Basin Royalty Trust (SJT -2.03%) plummeted more than 17% by 10:30 a.m. EDT on Friday. Weighing on the natural gas stock was its decision not to pay a cash distribution to its investors this month.
San Juan Basin Royalty Trust, a royalty trust with a 75% net overriding royalty interest in the San Juan Basin of New Mexico, declared no cash distribution to its investors for August. While the Trust reported nearly $1.4 million of net profits, this was more than offset by true-ups and corrections of prior period true-ups, which caused excess production costs.
Hilcorp Energy, the oil and gas company operating the natural gas wells underlying the Trust's royalty interest, informed the Trust that it made an error in the true-ups it made last month and the capital cost categories from January through April. As a result, the Trust recorded a $1.5 million net reduction in profits to correct for the error. The Trust used its cash reserves to pay its expenses, while Hiltop will charge a portion of the excess production costs to next month's distribution. Because of that, the Trust won't be able to make any distributions until it covers these liabilities and replenishes its cash reserves.
San Juan's monthly distribution ebbs and flows with commodity prices. The Trust has had months where it didn't make a payment in the past. However, the reason behind this month's decision not to pay a distribution isn't related to commodity prices, but instead is due to an accounting issue. That's a huge red flag.