The preceding condensed statement of assets, liabilities and trust corpus as of December 31, 2021,2022, which has been derived from audited financial statements, and the unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2021.2022. In the opinion of PNC Bank, National Association, the trustee of the Trust (“PNC Bank” or the “Trustee”), and based upon information provided to the Trust by Hilcorp San Juan L.P. (“Hilcorp”), the present owner of certain oil and gas interests (the “Subject Interests”) originally owned by Southland Royalty Company (“Southland”) in properties located in the San Juan Basin of northwestern New Mexico, all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at March 31, 2022,2023, and the distributable income and changes in trust corpus for the three-month periods ended March 31, 20222023 and 2021.2022. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

The financial statements of the Trust are prepared on the following basis and are not intended to present the financial position and results of operations of the Trust in conformity with U.S. generally accepted accounting principles (“GAAP”):

The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for liabilities and contingencies, which would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid, instead of when incurred; and amortization of the Royalty is calculated on a unit-of-production basis and is charged directly to trustthe Trust corpus instead of as an expense. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received, or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements. This comprehensive basis of accounting corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Gross Proceeds and Severance Tax EstimatesJune 2021 production month (August 2021 reporting month). Hilcorp’s process of reconciling Gross Proceedsactual revenue and severance taxes to the previously reported estimates (which the Trust refers to as “true-ups”), during fiscal years 2018 and 2020 were still occurring and being reported in 2021. Hilcorp has informed the Trust that as it continues to refine further its estimating and reporting processes. Hilcorp will review both prior periods, as well as future reporting periods, to ensure greater accuracy and consistency. As part of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in any given month in 2022 may include adjustments for the reversal and rebooking of prior months’ revenue, plus interest.the actualized revenues for 2021 production months for non-operated properties, was completed in the February and March 2022 reporting months.

Gross Proceeds and Severance Tax Estimates.Estimates Hilcorp’s process. In January 2023, Hilcorp notified the Trust that the accounting project begun in 2021 to review the production volume allocations for 2017 through 2020 had been completed. These reallocations affected the volumes for many of reconciling Gross Proceedsthe Trust properties and may result in revisions to revenues and severance taxes; adjustments will be forthcoming. On February 17, 2023, Hilcorp presented initial proposed adjustments for 2017 revenues, but these adjustments are still under review by the Trustee and Hilcorp. The 2017 adjustments may result in additional revenues to the Trust. Upon completion of the final adjustments for 2017 revenues, proposed adjustments for subsequent years will be presented by Hilcorp.

Hilcorp began transitioning to a new accounting system effective with January 2021 production (March 2021 reporting month), and it initially reported estimated revenues and severance taxes to previously reported estimates (whichon the Trust refers to as “true-ups”) were still occurring and being reported in 2021. At the beginning of 2021, Hilcorp informed the Trust that it planned to refine further its estimating and reporting processes, and that Hilcorp would review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods. As part of that review process, Hilcorp informed the Trust that it may reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in certain months during 2021 were subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

Trust. Hilcorp informed the Trust that it completed the transition to its new accounting system and began to report actual, not estimated, revenue and expenses for operated wells beginning with the June 2021 production month (August 2021 reporting month),. Hilcorp’s process of reconciling actual revenue and that it has reversedseverance taxes to the previously reported estimates (which the Trust refers to as “true-ups”), and rebooked revenuethe reversal and rebooking of the actualized revenues for certain prior periods. As of December 31, 2021 Hilcorp believes that all prior month true-ups have been completed for operated wells. The true-up of revenuesproduction months for non-operated properties for the 2021 distribution periods was completed in the February and March 2022 reporting months.

During 2022, various adjustments were made for 2021 and 2022 production periods as a result of Hilcorp’s process review of the new accounting system. Hilcorp has informed the Trustee that it has implemented additional controls to enhance the reporting process and reduce the need for future corrections. Hilcorp has indicated that it will coordinate with the Trustee on the timing of any further adjustments, following which the Trustee will communicate that timing to investors.

The Trustee continues to engage with Hilcorp regarding its ongoing accounting and reporting to the Trust, and the Trust’s third-party compliance auditors continue to audit payments made by Hilcorp to the Trust, inclusive of sales revenues, production costs, capital expenditures, adjustments, actualizations, and recoupments. The Trust’s auditing process has also included detailed analysis of Hilcorp’s pricing and rates charged. As previously disclosed in the Trust’s filings, these revenues and costs (along with all costs) are the subject of the Trust’s ongoing comprehensive audit process by our professional consultants and outside counsel to ensure full compliance with all the underlying operative Trust agreements and evaluating all available potential remedies in the event there is evidence of non-compliance.

The amount of Gross Proceeds also depends on the volumes of oilnatural gas and natural gasoil produced from the Subject Interests. Under the terms of the Indenture, the Trust cannot acquire new oilnatural gas and natural gasoil assets, and as a result, Royalty Income is dependent on the oilnatural gas and natural gasoil volumes attributable to the Subject Interests. Although Hilcorp and other operators of the Subject Interests may conduct drilling operations or well recompletions in the near term, the Subject Interests are depleting assets andassets; Hilcorp has informed the Trust that it is unable to estimate the productive life of the Subject Interests. The reduction in proved reserve quantities is a common measure of depletion. Hilcorp’s (or a future operator’s) capital investments in the Subject Interests will affect the quantity of proved reserves and can offset any reduction in proved reserves. Lower commodity prices may also reduce the valuevolume of the oil and natural gas and oil produced from the Subject Interests by Hilcorp. Hilcorp did not conduct any new drill projects or recompletions within the Subject Interests in 2021.

Relatedly, because of Hilcorp’s prior process of providing production estimates rather than actual production, a simple year-over-year comparison from the prior distribution reports from Hilcorp will not reflect the actual comparable production amounts. For example, a comparison of the January 2021 estimated production with the January 2022 actual production would reflect a decline of almost 25%. However, comparing the November 2021 actualizations of January 2021 production to January 2022 actual production, the decline is just under 5.5%. In reviewing the Distribution Reports on an annual basis, the total 2020 MMBtu production was 28,643,237 as compared to 2021 MMBtu of 26,899,877, which results in an annual decline of 6.09% year-over-year.

On February 17, 2022,2023, the Trust announced that Hilcorp had provided the Trust with its 20222023 capital project plan for the Subject Interests (the “2022“2023 Plan”), and Hilcorp has estimated its 20222023 capital expenditures for the Subject Interests to be $1.9$4.4 million. The objective of this capital project plan is to address the natural depletion of oil and gas assets. Specifically, Hilcorp informed the Trust that its 20222023 Plan wouldwill allocate approximately $1.5$3.7 million of the 20222023 Plan’s budget towards 2425 well recompletions and workovers scheduled to be completed in the Mesaverde, Pictured Cliffs and Fruitland Coal formations. Approximately $300,000$0.5 million of the 20222023 Plan’s budget will be allocated to facilities projects related to natural gas compression, and approximately $100,000$0.2 million will be spent for permitting and surveying costs for potential future new drill projects that are being considered for 2023 and 2024.projects. Hilcorp further informed the Trust that its planned project status for 20222023 is subject to revision if itHilcorp revises its assumptions underlying the 20222023 Plan, and that in any event actual capital costs may vary from these estimates.

Under the terms of the Conveyance, production costs are deducted from Gross Proceeds in calculating Net Proceeds, which is multiplied by 75% to calculate Royalty Income. “Production costs”Costs” generally means costs incurred on an accrual basis by Hilcorp in operating the Subject Interests, including both capital and non-capital costs. For example, these costs include development drilling, production and processing costs, applicable taxes and operating charges. However, Hilcorp informed the Trust that for wells operated by Hilcorp it did not intend to accrue lease operating expenses to the Trust. If production costs exceed Gross Proceeds in any month, the excess is recovered out of future Gross Proceeds prior to the making of further payments to the Trust. However, the Trust is not otherwise liable for any production costsProduction Costs or other costs or liabilities attributable to the Subject Interests or the minerals produced therefrom. 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. The Trust and the Trustee hashave very limited authority to control the amount and timing of production costs.Production Costs.

Capital Expenditures.The timing and size of capital expenditures by Hilcorp may impact Net Proceeds. CapitalHilcorp’s capital expenditures by Hilcorp decreased approximately $142,400$45,800, or 58%, for the three months ended March 31, 2022,2023, compared to the three months ended March 31, 2021.2022. The decrease was primarily attributable to differences in timing inof the payment offor these expenditures along with capital expenditures attributable to the prior year’s budget.

Commodity Prices. The Trust’s income and monthly distributions from the Subject Interests are heavily influenced by the price of oilnatural gas and natural gas.oil. These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oilnatural gas and natural gasoil based on market uncertainty or a variety of additional factors that are beyond the Trustee’s control.

Hilcorp has multiple gas purchase agreements that set forth the prices that it will receive for the oilnatural gas and natural gasoil produced from the Subject Interests. There is a differential in the prices reflected in the market indices and the prices received and reported because the prices received and reported vary by purchase agreement, and they are determined after deducting gathering, processing, and marketing costs for both gas and natural gas liquids. These purchase agreements and costs are subject to a comprehensive audit process by professional accountants and consultants.

On January 20, 2021, President Biden signed an executive order that reversed the United States withdrawal from the Paris Agreement, and the United States formally rejoined the Paris Agreement on February 19, 2021. At the federal regulatory level, both the Environmental Protection Agency and the Bureau of Land Management have adopted regulations for the control of methane emissions, which also include leak detection and repair requirements, from the oil and gas industry. Additionally, President Biden has issued an executive order seeking to adopt new regulations and policies to address climate change and suspend, revise or rescind prior agency actions that are identified as conflicting with the Biden Administration’s climate policies. In addition, President Biden has declared that he supports federal government efforts to limit or prohibit hydraulic fracturing and banning new leases for production of minerals on federal properties, including onshore lands. Any of these actions could require Hilcorp to increase capital expenditures for the Subject Interests, decrease demand for oil and natural gas production, or limit the Subject Interests’ ability to produce natural gas or oil production. The Trust is unable to determine what, if any, the effects of such actions will have on the Subject Interests’ ability to produce oil and natural gas, and Hilcorp’s ability to pay Royalty Income to the Trust.

Hilcorp previously informed the Trust that it does not believe that recent actions undertaken by the Biden’s administration to curtail future leases for oil and natural gas drilling on federally owned land will impact the Subject Interests because as currently enacted, they do not impact current leases.

Results of Operations – for the Three Months Ended March 20222023 and 20212022

Royalty Income

Royalty Income consists of 75% of the monthly Net Proceeds attributable to the Royalty. Royalty Income for the three months ended March 31, 20222023, and 20212022 was determined as shown in the following table:

Based on 46,608,796 Units outstanding, the per-Unit distributions during the first quarter of 20222023 were as follows:

Interest Income. Interest income was lowerhigher for the three months ended March 31, 2022,2023, as compared to the same period in 20212022, due primarily to loweran increase in funds available for investment and to higher yields on short-term investments.

General & Administrative Expenses. General and administrative expenses increaseddecreased approximately 13%8%, for the three months ended March 31, 2022,2023, compared to the three months ended March 31, 2021.2022. The increasedecrease was primarily attributable to differences in timing inof the receipt and payment offor certain expenses by the Trust.

Cash Reserves. Total cash reserves were $1.0 million as of March 31, 2022.2023. The primary purposeTrustee is authorized to determine in its discretion, the amount of cash reserves needed to pay liabilities and contingencies of the cash reserves is to have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses.Trust. The Trustee does not anticipate any increases toincreasing or decreasing the established amount of cash reserve above a level of $1.0 millionreserves in 2022,2023, although it cannot guarantee that the Trusteepredict whether it will not increase suchneed to utilize some portion of those cash reserves in the future.during 2023.

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 of 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.

In the event the Trust does not receive Royalty Incomesufficient net cash payments from Hilcorp, sufficient to pay its liabilities, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trust’s operating expenses until its cash reserve can be replenished from subsequent Royalty Income payments from Hilcorp.for the following 12-month period.

Oil and Natural Gas and Oil Production

The natural gas volumes reported to the Trust, by Hilcorp, are based on plant residue gas volumes plus equivalent volumes for natural gas liquids. Hilcorp converts one barrel of natural gas liquids to six Mcf of natural gas using industry standards.

Royalty Income for the three months ended March 31, 2022,2023, is associated with oilnatural gas and natural gasoil production during November 20212022 through January 20222023 from the Subject Interests. Production of oilnatural gas and natural gasoil and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended March 31, 2022,2023, and 20212022 were as follows:

The fluctuations in natural gas production that have occurred during the three-month period ended March 31, 2022 and 2021, respectively, generally resulted from non-operated true-ups in February and March 2022 for November 2020 thru October 2021 production, operated true-ups in January and February 2021 for June 2018 thru December 2018 production, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve. Also, productionProduction from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin. As noted above, oilnatural gas and natural gasoil sales attributable to the Royalty are based on an allocation formula dependent on many factors, including oilnatural gas and natural gasoil prices and capital expenditures.

Marketing

There were noFrom time to time, changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and processing of production during the three months ended March 31, 2022.may be made. The gas continues to be sold to creditworthy buyers at market related prices.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that impact the Trust’s financial statements, see Part I, Item 1. Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8. Financial Statements and Supplemental Data contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.

Information Regarding Forward-Looking Information

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may involve or may concern, among other things, the amount and variability in capital expenditures by Hilcorp, drilling activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trust’s activities, the differences between Hilcorp’s estimated revenue and actual revenue, and regulatory matters. Such forward-looking statements generally are accompanied by words such as “may,” “will,” “based,” “estimate,” “expect,” “predict,” “project,” “anticipate,” “believe,” “plan,” “intend,” or other words that convey the uncertainty of future events or outcomes. Such statements are based on certain assumptions of the Trustee and by Hilcorp, with respect to future events; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Hilcorp; and involve risks and uncertainties. However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and Hilcorp in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to, or effects on, Hilcorp’s business and the Trust. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements, except as required by applicable law.

Hilcorp Information

As a holder of a net overriding royalty interest, the Trust’s reporting of financial information is reliant upon Hilcorp to accurately and timely report information regarding Hilcorp and its affiliates; 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. See Part I, Item 4. Controls and Procedures.