# TO OUR UNIT HOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_SJT_2017/NYSE_SJT_2017.mmd` · pages 2-8_

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TO OUR UNIT HOLDERS

We are pleased to present the 2017 Annual Report of the San Juan Basin Royalty 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, 2017, 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 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 of Southland's 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. Income distributed to Unit Holders in 2017 was approximately \(39.1 million or \)0.839547 per Unit. Distributable income for 2017 consisted of Royalty Income and interest income of approximately $33.2 million, \(7.5 million received for settlement of the 2014 Litigation, less administrative expenses of \)1.6 million.

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 San Juan, Rio Arriba and Sandoval Counties of northwestern New Mexico. According to the information provided by Burlington and Hilcorp, there were, as of December 31, 2017, 4,376 gross (829.8 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 980 gross (281.9 net) wells were multiple completion wells, resulting in a total of 5,430 gross (1,143.6 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 86% of the gross proceeds from the Subject Interests in 2017 was attributable to the production and sale of natural gas by Burlington and Hilcorp as well as other proceeds. The gross proceeds exclude settlement proceeds from the

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The Canyon Towhee is common to the dry foothills and canyons of the Southwest.

2014 Litigation. During 2017, the prices of natural gas and oil increased significantly from an average price for natural gas of \(1.89 per Mcf in 2016 to \)2.68 per Mcf in 2017, and the price for oil increased from an average price of \(30.01 per Bbl in 2016 to \)35.75 per Bbl in 2017. Natural gas production from the Subject Interests decreased from 28,003,159 Mcf in 2016 to 25,779,802 Mcf in 2017. For further information on natural gas and oil prices and production volumes, 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.

As of December 31, 2017, proved reserves were estimated by independent engineers to be 97,764 MMcf of natural gas and 257 MBbls of crude oil and condensate. As of December 31, 2017, the present value of estimated future net cash flows, using an annual discount factor of 10%, was $137 million.

Hilcorp's announced 2018 capital plan for the Subject Interests anticipates capital expenditures of \(547,800 which include two facilities projects and seven well recompletions. While no new drilling activity is planned on the Subject Interests for 2018, existing wells will continue to be operated. 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, 2017. 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

Vice President and Senior Trust Officer

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