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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.


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 Royalty Company (“Southland”) and The Fort Worth National 
Bank. Effective as of September 30, 2002, the original indenture was amended 
and restated and, effective as of December 12, 2007, the restated indenture was 
amended and restated, which we refer to as the “Indenture.” As a result of a 
series of mergers and other transactions, the current Trustee of the Trust is 
Compass Bank, which is a wholly-owned subsidiary of Banco Bilbao Vizcaya 
Argentaira, S.A.

The Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance (the “Conveyance”) effective 
November 1, 1980, Southland conveyed to the Trust a 75% net overriding royalty 
interest (the “Royalty”) that burdens certain of Southland’s oil and natural 
gas interests (the “Subject Interests”) in properties located in the San Juan 
Basin of northwestern New Mexico. Subsequent to the Conveyance of the Royalty, 
through a series of assignments and mergers, Southland’s successor became 
Burlington Resources Oil & Gas Company LP (“Burlington”), which is an indirect 
wholly-owned subsidiary of ConocoPhillips.

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 the common stock of Southland 
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 common stock of Southland then 
held. Holders of Units 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. All administrative functions of the Trust are performed by the 
Trustee.

ConocoPhillips

Affiliates of ConocoPhillips are the principal operators of the majority of the 
Subject Interests. Burlington also is responsible, subject to the terms of an 
agreement with the Trust, for marketing the 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 in the 
circumstances. A very high percentage of the Royalty Income is attributable to 
the production and sale by Burlington of natural gas from the Subject 
Interests. Accordingly, the market price 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.

Sale of Burlington’s Interest in the San Juan Basin

In a July 31, 2017 news release, ConocoPhillips announced that the sale of its 
San Juan Basin assets to Hilcorp, which includes the Subject Interests, closed 
on July 31, 2017. ConocoPhillips informed the Trust that the last production 
month that ConocoPhillips is responsible for is July 2017.

Results of Operations – Three and Six Months Ended June 30, 2017 and 2016

Royalty Income

Royalty Income consists of monthly net proceeds attributable to the Royalty. 
Royalty Income for the three and six months ended June 30, 2017 The Royalty 
Income distributed to the Trust for the three and six months ended June 30, 
2017 was higher than that distributed during the same periods of 2016 primarily 
due to higher natural gas prices. The average natural gas price increased from 
$1.43 per Mcf and $1.61 per Mcf for the three and six months ended June 30, 
2016, respectively, to $2.63 per Mcf and $2.78 per Mcf for the three and six 
months ended June 30, 2017, respectively.

Gross Proceeds from Subject Interests. Gross proceeds increased $7.0 million or 
70% for the three months ended June 30, 2017 compared to the three months ended 
June 30, 2016 and increased $13.7 million or 59% for the six months ended June 
30, 2017 compared to the six months ended June 30, 2016. Such increases for 
these periods were primarily attributable to higher natural gas and oil prices 
offset by lower production volumes.

Capital Expenditures. Capital expenditures decreased $0.19 million or 71% for 
the three months ended June 30, 2017 compared to the three months ended June 
30, 2016 and decreased $0.6 million or 68% for the six months ended June 30, 
2017 compared to the six months ended June 30, 2016. Such decreases for these 
periods were primarily attributable to the challenging price environment for 
natural gas and natural gas liquids along with fewer maintenance and facility 
projects.

Severance Taxes. Aggregate severance taxes increased $0.7 million or 61% for 
the three months ended June 30, 2017 compared to the three months ended June 
30, 2016 and increased $1.3 million or 54% for the six months ended June 30, 
2017 compared to the six months ended June 30, 2016. Such increases were 
primarily attributable to higher gross proceeds during these periods. Severance 
taxes represented 10.3% of gross proceeds for the three months ended June 30, 
2017 compared to 10.9% for the same period of 2016. Severance taxes represented 
10.3% of gross proceeds for the six months ended June 30, 2017 compared to 
10.6% for the same period of 2016.

Lease Operating Expenses and Property Taxes. Lease operating expenses and 
property taxes increased $0.03 million or 0.04% for the three months ended June 
30, 2017 compared to the three months ended June 30, 2016 and decreased $1.1 
million or 8% for the six months ended June 30, 2017 compared to the six months 
ended June 30, 2016. Lease operating expenses increased slightly during the 
second quarter of 2017 compared to second quarter of 2016. The decrease in 
lease operating expenses over the six month period of 2017 compared to the same 
period in 2016 was primarily attributable to 1) Burlington’s efforts to reduce 
contracted maintenance and repair costs; and 2) Burlington’s efforts to reduce 
costs on compression equipment. Property taxes decreased $41,277 in the second 
quarter of 2017 compared to the second quarter of 2016 and decreased $243,188 
in the first half of 2017 compared to the first half of 2016 because actual 
taxes for 2016 were less than accrued, which resulted in a decrease in the 
current accruals based on a new estimate of ad valorem taxes for 2017.


Monthly lease operating expenses of the Subject Interests, including property 
taxes, in second quarter 2017 averaged approximately $2.2 million, as compared 
to $2.2 million in the second quarter of 2016. Monthly lease operating expenses 
of the Subject Interests, including property taxes, in the first half of 2017 
averaged approximately $2.1 million, as compared to $2.3 million in the first 
half of 2016.

Distributable Income

Distributable Income. Distributable Income increased by approximately $5.6 
million or 1,287% to $6 million ($0.128333 per Unit) for the three months ended 
June 30, 2017 from $0.4 million ($0.009251 per Unit) for the three months ended 
June 30, 2016. Distributable income increased $11.9 million or 537% to $14.1 
million ($0.303129 per Unit) for the six months ended June 30, 2017 from $2.2 
million ($0.047586 per Unit) for the six months ended June 30, 2016. Such 
increases in Distributable Income were primarily attributable to an increase in 
Royalty Income over these periods and decreased general and administrative 
expenses directly related to audit and legal costs incurred in the 2014 
Litigation.

Interest Income. Interest income was higher for the three and six months ended 
June 30, 2017 as compared to the three and six month periods ended June 30, 
2016 primarily due to increased funds available for investment.

General & Administrative Expenses. General and administrative expenses 
decreased $0.4 million or 47% for the three months ended June 30, 2017 compared 
to the three months ended June 30, 2016 and decreased $1.0 million or 51% for 
the six months ended June 30, 2017 compared to the six months ended June 30, 
2016. Such decreases were primarily due to decreased audit costs and legal 
costs incurred related to the 2014 Litigation.

Cash Reserves. Total cash reserves for litigation expenses were $1.0 million as 
of June 30, 2017. The Trustee did not increase the cash reserves during the 
first half of 2017 and does not anticipate any increases in 2017.

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 
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 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.

2017 Capital Expenditure Budget

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.

Following the sale to Hilcorp, the budget for capital expenditures for the 
Subject Interests for the remainder of 2017 is subject to change, which could 
include increases to capital expenditures and that may adversely affect 
Distributable Income.

Oil and Natural Gas Production

Royalty Income for the quarter ended June 30, 2017 is associated with actual 
oil and natural gas production during February 2017 through April 2017 from the 
Subject Interests. Royalty Income for the six months ended June 30, 2017 is 
associated with actual gas and oil production during November 2016 through 
April 2017 from the Subject Interests.

The Trust recognizes production during the month in which the related net 
proceeds attributable to the Royalty are paid to the Trust. Royalty Income for 
a calendar year is based on the actual natural gas and oil 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 oil 
and natural gas, 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 oil and natural gas 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.

The fluctuations in natural gas production that have occurred during the 
three-month and six-month periods ended June 30, 2017 and 2016, respectively, 
generally resulted from changes in the demand for natural gas during that time, 
market conditions, and variances in capital spending to generate production 
from new and existing wells, as offset by the natural production decline curve. 
Also, production from the Subject Interests is influenced by the line pressure 
of the natural gas gathering systems in the San Juan Basin. As noted above, oil 
and natural gas sales attributable to the Royalty are based on an allocation 
formula dependent on many factors, including oil and natural gas prices and 
capital expenditures.

Marketing

There were no changes to the contracts pursuant to which ConocoPhillips sells 
production from the Subject Interests and for the gathering and processing of 
production during the first half of 2017.

Off-Balance Sheet Arrangements

None.



ConocoPhillips Information

As a holder of a net overriding royalty interest, the Trust relies on 
ConocoPhillips for information regarding ConocoPhillips and its affiliates, 
including Burlington; the Subject Interests, including the operations, acreage, 
well and completion count, working interests, production volumes, sales 
revenues, capital expenditures, operating expenses, reserves, drilling plans, 
drilling results and leasehold terms related to the Subject Interests, and 
factors and circumstances that have or may affect the foregoing.

In a July 31, 2017 news release, ConocoPhillips announced that the sale of its 
San Juan Basin assets to Hilcorp, which includes the Subject Interests, closed 
on July 31, 2017. ConocoPhillips informed the Trust that the last production 
month that ConocoPhillips is responsible for is July 2017 and therefore the 
last monthly distribution report that the Trust will receive from 
ConocoPhillips will be in September 2017. Commencing in October 2017, the Trust 
will receive distribution reports from Hilcorp (relating to August 2017 
production). Hilcorp’s reporting of revenue and expenses may differ from 
ConocoPhillips’ reporting.


Controls and Procedures.


The Trust maintains a system of disclosure controls and procedures that is 
designed to ensure that information required to be disclosed in the Trust’s 
filings under the Exchange Act is recorded, processed, summarized, and reported 
within the time periods specified in the SEC’s rules and forms. Due to the 
pass-through nature of the Trust, ConocoPhillips provides much of the 
information disclosed in this Form 10-Q and the other periodic reports filed by 
the Trust with the SEC. Consequently, the Trust’s ability to timely disclose 
relevant information in its periodic reports is dependent upon ConocoPhillips’s 
delivery of such information. Accordingly, the Trust maintains disclosure 
controls and procedures designed to ensure that ConocoPhillips accurately and 
timely accumulates and delivers such relevant information to the Trustee and 
those who participate in the preparation of the Trust’s periodic reports to 
allow for the preparation of such periodic reports and any decisions regarding 
disclosure.

The Indenture does not require Burlington to update or provide information to 
the Trust. However, the Conveyance transferring the Royalty to the Trust 
obligates Burlington to provide the Trust with certain information, including 
information concerning calculations of net proceeds owed to the Trust. Pursuant 
to the settlement of litigation in 1996 between the Trust and Burlington, 
Burlington agreed to newer, more formal financial reporting and audit 
procedures as compared to those provided in the Conveyance. In connection with 
the Hilcorp transaction, the Trust and its third party compliance auditors have 
been coordinating with Hilcorp to transition these controls and procedures.

In order to help ensure the accuracy and completeness of the information 
required to be disclosed in the Trust’s periodic reports, the Trust engages 
independent public accountants, compliance auditors, marketing consultants, 
attorneys and petroleum engineers. These outside professionals advise the 
Trustee in its review and compilation of this information for inclusion in this 
Form 10-Q and the other periodic reports provided by the Trust to the SEC.

The Trustee has evaluated the Trust’s disclosure controls and procedures as of 
June 30, 2017 and has concluded that such disclosure controls and procedures 
are effective, at the “reasonable assurance” level (as such term is used in 
Rule 13a-15(f) of the Exchange Act), to ensure that material information 
related to the Trust is gathered on a timely basis to be included in the 
Trust’s periodic reports and recorded, processed, summarized and reported 
within the time periods specified in the SEC’s rules and forms. In reaching its 
conclusion, the Trustee has considered the Trust’s dependence on ConocoPhillips 
to deliver timely and accurate information to the Trust.

Additionally, during the quarter ended June 30, 2017 there were no changes in 
the Trust’s internal control over financial reporting (as such term is used in 
Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably 
likely to materially affect, the Trust’s internal control over financial 
reporting. Because the Trust does not have, nor does the Indenture provide for, 
officers, a board of directors or an independent audit committee, the Trustee 
has reviewed neither the Trust’s disclosure controls and procedures nor the 
Trust’s internal control over financial reporting in concert with management, a 
board of directors or an independent audit committee.


Risk Factors.

Hilcorp completed its acquisition of the Subject Interests from ConocoPhillips, 
which may result in certain administrative disruptions for the Trust, may 
increase costs and expenses or may adversely affect Distributable Income.

Prior to July 31, 2017, Burlington, a wholly-owned subsidiary of 
ConocoPhillips, was the principal operator of the Subject Interests. On July 
31, 2017, Hilcorp announced that it completed its acquisition of the Subject 
Interests from ConocoPhillips, and as a result, Hilcorp or its affiliate(s) 
will replace Burlington as the principal operator of the Subject Interests. 
Although ConocoPhillips, on behalf of Burlington, must require Hilcorp to 
assume Burlington’s obligations with respect to the Subject Interests, the 
Hilcorp acquisition may not necessarily be in the best interests of the Trust 
and the Unit Holders. The Subject Interests will continue to be subject to the 
Royalty following the Hilcorp transaction, but the Distributable Income will 
now be calculated and paid by Hilcorp. The Trust is in the process of 
transitioning certain reporting processes and procedures to Hilcorp, which 
transition could result in administrative disruptions for the Trust. Hilcorp 
may lack Burlington’s experience in the Subject Interests or its 
creditworthiness. Furthermore, the Hilcorp acquisition may increase the Trust’s 
general and administrative expenses in the form of increased accounting, audit, 
legal, and administrative costs. Hilcorp may also increase the budget for 
capital expenditures for the Subject Interests, which may adversely affect 
Distributable Income.