STJ Ventures, LLC (together with its affiliates, “STJ”) today reiterated its call for fundamental improvements in the management of Sabine Royalty Trust (NYSE: SBR) (the “Trust” or “SBR”), and expressed its disappointment with the Trustee’s inaction on matters that are fundamental to its fiduciary responsibility to the Trust and its unitholders. STJ and its affiliates are longtime holders of a substantial number of SBR units, and STJ continues to believe there is significant unrealized value within the Trust and its world-class mineral assets. STJ has consistently called for enhancement and modernization of the Trust’s mineral management and disclosure practices, and supported a recent change in Trustee to further these objectives. Initial indications from the new Trustee, however, suggest a risk of the same complacency that preceded the change.
“The steps called for by STJ hardly require implementation of costly or cutting-edge techniques. Rather, they represent the bare minimum management and oversight that should be expected of a Trustee to fulfill its obligations to this Trust and its beneficiaries (unitholders),” said Joe Peacock, Jr., manager of STJ Ventures.
According to STJ, the improvements can be easily summarized in three basic categories:
- Supervision of Executive Rights Holder – The executive rights to all of the Trust’s minerals are held by a third party. This is extremely unusual if not unprecedented for a large mineral portfolio. The origin of the arrangement dates to the creation of the Trust, when executive rights were retained by the Trust’s sponsor, who was aligned with the Trust, and who importantly provided that the executive rights would revert to the minerals upon future termination of the Trust. But the alignment was eliminated upon the subsequent sale of the executive rights by the sponsor, resulting in an arrangement that presents unique and material risks due to inherent conflicts of interest and the significant impact that lease negotiation has on future cash flow.
For context on the importance of this issue, the holder of the executive rights to minerals has the right to negotiate the terms of oil & gas leases but only receives cash lease bonuses and rentals, while the Trust as mineral owner receives only royalties subject to the terms that have been negotiated. The executive rights holder does have legal duties to the mineral owner when negotiating a mineral lease, however, its only financial incentive is related to the cash bonus terms and not the other terms that are critical to the mineral owner such as royalty rate, commodity marketing and payment, allowable deductions, drilling commitments, drainage, unitization, etc. These terms can be complex and are critical to the future development of the Trust’s minerals and maximization the Trust’s future income. Expert supervision is essential, and to our knowledge, the Trust has not engaged in such supervision or disclosed details regarding such. STJ calls on the Trustee to establish formal procedures for examining the activities and decisions of the executive rights holder and reporting its findings to unitholders at least annually.
- Actively Audit and Manage Key Mineral Tracts – As STJ has previously noted, oil and gas minerals (royalties) need active management to ensure that the operators are adhering to the terms of the leases. Many oil & gas companies manage tens of thousands of leases, and they often do so by exception and only acknowledge error when a claim is brought. Absent active management by the owner of mineral properties, it is inevitable that violations – inadvertent or deliberate – will occur and continue. The resulting impairment of value can be very significant and permanent and must be avoided. STJ calls on the Trustee to immediately (and annually) identify the Trust’s highest impact assets, engage an experienced advisor to audit the operators for compliance with the terms of the leases, verify calculations of royalties due the Trust, pursue claims for any exceptions, and report its results to unitholders at least annually.
- Rectify Inadequate 10K Disclosure – The Trust’s 10K filed annually under the ’34 Act is woefully inadequate with respect to its description of the Trust’s assets. The regulations under the ’34 Act require disclosure of information material to an investment decision and the NYSE listing standards are intended to “ensure timely disclosure of information that may affect security values or influence investment decisions.” The Trust Agreement gives the Trustee responsibility for complying with securities laws and NYSE listing standards. The Trust’s public filings should disclose all material information about the Trust’s holdings. A review of peer mineral companies reveals the type of disclosure that investors obviously deem to be material: (1) tabular disclosure of the details of mineral interests by basin/play area, (2) information about producing horizontal well count, rig count, gross and net undeveloped locations, and DUC conversions, and (3) drilling activity and the identities of the main operators that are active on the acreage. STJ has expressed these concerns to the prior Trustee and the new Trustee, and yet the newly filed 2022 10-K is yet another do-over of prior years’ inadequate disclosure. STJ calls on the Trustee to amend the Trust’s 2022 10-K as soon as possible to include updated disclosure consistent with other publicly traded oil & gas mineral-holding entities.
Peacock concluded, “The aforementioned actions are fundamental to the Trustee’s role and its fiduciary responsibilities to the Trust and the unitholders. The steps share another characteristic in common: there is no other party able to take these basic and important steps on behalf of the Trust. In other words, neither STJ nor any other unitholder can take these steps on behalf of itself or the Trust, the executive rights holder cannot be expected to supervise itself, the oil & gas operators cannot be expected to supervise themselves, and the 10K cannot be expected to update itself (and hasn’t done so in 40 years). This is the work of the Trustee, and that work needs to be done now.”
SBR unitholders with questions may contact info@stjventures.com.
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