SAN JUAN BASIN ROYALTY TRUST

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.  ☐

On July 31, 2014, the Trustee filed a lawsuit (the “2014 Litigation”) against Burlington in New Mexico State Court. The Trust asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing, and seeks a declaratory judgment arising out of a number of unresolved revenue and expense audit exceptions asserted by the Trust’s auditors. More particularly, the Trust claims that Burlington failed to properly account for and pay net overriding royalty interests to the Trust with respect to oil and natural gas production from numerous properties in the San Juan Basin of northwestern New Mexico. The Trust seeks monetary relief (including actual and punitive damages, costs, expenses, interest and attorney fees) in excess of $12 million, along with specific performance of certain contractual obligations, declaratory relief and a judgment for other relief to which it may show itself to be justly entitled. To facilitate the continued settlement discussions and to provide additional time to complete discovery if agreement is not reached on settlement terms, the previous March 2017 non-jury trial setting was moved to January 16, 2018. The parties intend to continue settlement discussions and, if necessary, complete discovery within the timeframe set forth in the new pre-trial scheduling order. For more information about the 2014 Litigation, see Part I, Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2016.

In an April 13, 2017 news release, ConocoPhillips announced that it had entered into a definitive agreement to sell its interests in the San Juan Basin to an affiliate of Hilcorp Energy Company for up to $3.0 billion in total proceeds, comprised of $2.7 billion in cash and a contingent payment of $300 million. The news release stated that the transaction is subject to the satisfaction of specific conditions precedent, including regulatory approval, and is expected to close in the third quarter of 2017. It cannot be determined at this time whether the transaction will close as expected or, if the closing occurs, the purchaser’s plans (if any) to operate the Subject Interests. The sale may increase the Trust’s general and administrative expenses in the form of increased accounting, audit, legal, and administrative costs.

Distributable Income increased by approximately $6.4 million or 356% to $8.1 million ($0.174796 per Unit) for the three months ended March 31, 2017 from $1.8 million ($0.038335 per Unit) for the three months ended March 31, 2016. The increase in Distributable Income was primarily attributable to an increase in Royalty Income over the period and decreased General and Administrative Expenses.

Burlington has informed the Trust that its 2017 budget for capital expenditures for the Subject Interests is estimated to be $1.7 million. Burlington reports that based on its actual capital requirements, the pace of regulatory approvals, the mix of projects and swings in the price of natural gas, the actual capital expenditures for 2017 are subject to change.

Burlington’s announced 2017 capital plan for the Subject Interests anticipates capital expenditures of $1.7 million, of which $0.64 million is allocated to 10 maintenance and facilities projects, $0.42 million is allocated to three well recompletions, and $0.64 million is allocated to 10 facilities projects attributable to the budgets for prior years. Primarily due to depressed pricing for natural gas, Burlington has not allocated any capital expenditures for 2017 to its drilling program in the San Juan Basin. Existing wells will continue to be operated.