# TO OUR UNIT HOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_SJT_2018/NYSE_SJT_2018.mmd` · pages 2-8_

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TO OUR UNIT HOLDERS

We are pleased to present the 2018 Annual Report of the San Juan Basin Royalty Trust (the "Trust"). The report includes a copy of the Trust's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") for the year ended December 31, 2018, without exhibits. The Form 10-K contains important information concerning the Subject Interests, as defined below, including the oil and gas reserves attributable to the 75% net overriding royalty interest owned by the Trust. Production figures and other information relating to the Subject Interests in this letter and in the accompanying Annual Report on Form 10-K are based on information provided to the Trust by Burlington Resources Oil & Gas Company LP ("Burlington") and Hilcorp San Juan L.P. ("Hilcorp"). Hilcorp acquired the Subject Interests from Burlington on July 31, 2017, and is the current owner of the Subject Interests and the successor, through a series of sales, assignments and mergers, to Southland Royalty Company ("Southland").

The Trust was established in November 1980 by Southland. Pursuant to the Indenture that governs the operations of the Trust, Southland conveyed to the Trust a 75% net overriding royalty interest (similar to a net profits interest) (the "Royalty") that burdens certain oil and natural gas interests (the "Subject Interests") in properties in the San Juan Basin of northwestern New Mexico.

The Royalty constitutes the principal asset of the Trust. The beneficial interest of the Royalty is divided into 46,608,796 units (the "Units") representing undivided fractional interests in the beneficial interests of the Trust. Holders of Units are referred to herein as "Unit Holders." Under the Indenture governing the Trust, the function of Compass Bank, as Trustee ("Trustee"), is to collect the net proceeds attributable to the Royalty ("Royalty Income"), to pay all expenses and charges of the Trust, and to distribute the remaining available income to the Unit Holders. Distributable income for 2018 consisted of Royalty Income and interest income of approximately \(19.5 million, less administrative expenses of \)1.5 million. As a result, income distributed to Unit Holders in 2018 was approximately \(18.0 million or \)0.385678 per Unit.
The Subject Interests consist of working interests, royalty interests, overriding royalty interests and other contractual rights in 151,900 gross (119,000 net) producing acres in the San Juan, Rio Arriba and Sandoval Counties of northwestern New Mexico. According to the information provided by Hilcorp, there were, as of December 31, 2018, 4,322 gross (828.1 net) wells on the properties underlying the Subject Interests, calculated on a well bore basis and not including multiple completions as separate wells, of which approximately 988 gross (274.7 net) wells were multiple completion wells, resulting in a total of 5,382 gross (1,134.7 net) completions.

Hilcorp has informed the Trust that all of the subject acreage is held by production, and even though it has not been fully developed in every formation, Hilcorp has classified all of such acreage as developed. Production from conventional natural gas wells is primarily from the Pictured Cliffs, Mesaverde and Dakota formations, ranging in depth from 1,500 to 8,000 feet. Additional production is attributable to coal seam reserves in the Fruitland Coal formation.

Approximately 96% of the gross proceeds from the Subject Interests in 2018 was attributable to the production and sale of natural gas by Hilcorp. During 2018, the prices of natural gas decreased significantly from an average price for natural gas of \(2.68 per Mcf in 2017 to \)1.89 per Mcf in 2018. The price for oil increased from an average price of \(35.75 per Bbl in 2017 to \)52.23 per Bbl in 2018. Natural gas production from the Subject Interests increased from 25,779,802 Mcf in 2017 to 32,501,962 Mcf in 2018. Hilcorp's reporting of natural gas volumes differs from the reporting of gas volumes by Burlington and ConocoPhillips. Such differences could significantly affect the comparison of reported natural gas volumes and average pricing in 2018 to those from prior years. For further information on natural gas and oil prices, production volumes, and volume calculated methodology see "Trustee's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of the accompanying Annual Report on Form 10-K.

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As of December 31, 2018, proved reserves were estimated by independent engineers to be 75,844 MMcf of natural gas and 203 MBbls of crude oil and condensate.

Hilcorp has informed the Trust that its current 2019 budget for capital expenditures for the Subject Interests (the "2019 Plan") is estimated to be \(2,653,000. Hilcorp also informed the Trust that the 2019 Plan includes six capital projects. Hilcorp has allocated towards these six capital projects approximately \)728,000 for five well recompletions scheduled to be completed in the Mesaverde and Fruitland Coal formations, and an additional approximately $1,925,000 for one horizontal well to be drilled in the Mancos formation. Hilcorp will be the operator of all the projects included in the 2019 Plan, and has further informed the Trust that its planned project status for 2019 is fluid and that additional projects may be added. Due to this fluidity in the 2019 Plan, Hilcorp has advised the Trust that actual capital costs may vary from these estimates.

Certain Royalty Income is generally considered portfolio income under the passive loss rules of the Internal Revenue Code of 1986, as amended. Therefore, Unit Holders should generally not consider the taxable income from the Trust to be passive income in determining net passive income or loss. Unit Holders should consult their tax advisors for further information. Unit Holders of record will receive an annual individualized tax information letter and a Form 1099 for the year ending December 31, 2018. Unit Holders owning Units in nominee name may obtain monthly tax information from the Trust's website or from the Trustee upon request. Please visit our website at www.sjbrt.com to access news releases, reports, Commission filings and tax information.

Compass Bank, Trustee

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BY: JOSHUA R. PETERSON
Senior Vice President and Trust Officer