The Trustee of Sabine Royalty Trust (NYSE: SBR) (the “Trust” or “SBR”) has submitted its resignation as Trustee and has nominated Argent Trust Company as successor Trustee. STJ Ventures, LLC (together with its affiliates, “STJ”) is an experienced minerals investor and manager, and a longtime holder of a substantial number of SBR units. STJ believes there is significant unrealized value within the Trust and strongly supports this proposed change.
Sabine Royalty Trust is a 40-year-old minerals Trust that owns world class minerals and has an impressive track record of consistent production and reserve replacement. STJ has long believed, based on its own research into the Trust’s mineral assets, that there are numerous steps that should be taken by the Trustee to ensure that the Trust realizes the full potential of its assets. STJ outlined those steps in a letter to the current Trustee (Simmons Bank) and requested that the Trustee convey the letter to SBR unitholders of record. The letter details specific examples of recent drilling on some of the Trust’s mineral tracts, explains how value may be created (or lost) based on the effectiveness of the mineral management, and expresses support for the transition to the proposed successor Trustee given its track record of successful active management of oil and gas mineral properties.
STJ is making its fellow unitholders aware of the letter so that they have the benefit of its views. STJ has no relationship with Trustee or proposed successor Trustee and is not soliciting proxies in respect of the unitholder vote on the matter.
The full text of the letter is reproduced below. SBR unitholders with questions may contact info@stjventures.com.
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February 7, 2022
Holders of Units of Beneficial Interest
Sabine Royalty Trust
c/o Simmons Bank, Trustee
2200 W 7th Street, Suite 210
Fort Worth, Texas 76107
Attn: Mr. Tod M. Miller
Regional President Trust Division
Dear Mr. Miller:
As you know from our previous correspondence, STJ Ventures and affiliates are substantial holders of the units of Sabine Royalty Trust. We began investing in the units over 4 years ago. In that time, we have spent hundreds of hours researching the Trust, its properties, and its business. Our proprietary database of SBR’s mineral ownership was developed through courthouse research in 57 key counties, where we ultimately identified and digitally mapped over 2,400 tracts covering over 850,000 gross acres and 95,000 net acres. We read the Trust’s recent disclosure that Simmons Bank plans to resign as Trustee, nominate Argent Trust Company as successor Trustee, and submit the proposed change to the Trust’s unitholders for approval. We have long believed that active management of the Trust’s mineral assets would materially improve value for its unitholders. Argent possesses strong mineral management expertise, and we therefore support this proposed change and wish to share our views and rationale with our fellow unitholders.
Active management can add significant value to oil & gas mineral and royalty interests over time. We know this from decades of experience investing in and managing our own mineral portfolios. An active owner of minerals will know the details of its mineral rights, any oil & gas leases, geography, geology, operator performance, and activity/performance in the surrounding area. Such an owner will study monthly check stubs and compare against public data and the terms of the relevant lease. Discrepancies or new trends will be pursued to ensure that the mineral rights are capturing the full value they are due under the lease and state law.
From our discussions we understand that in the short time Simmons has been Trustee, you have begun more active management. We applaud your efforts and believe that Argent, with their strong minerals background, will expand active management to include public disclosure of key activities and more detail on the Trust’s holdings. We are familiar with Argent and their track record as a mineral manager, and have discussed with them their plans for management of the Trust’s mineral assets. Argent has been in the mineral management business since 2005 and manages a portfolio of over 3,000,000 acres in thirty states. In addition to its regular services, Argent has recovered in excess of $30 million for third party clients as a result of its auditing engagements. We believe Argent is an outstanding choice for successor Trustee, and brings the expertise and organizational capability that the Trust’s world-class mineral portfolio deserves. From inception, the Trust has suffered from a structural impediment to maximizing value through management. When the Trust was formed, the executive rights to the minerals were retained by the sponsor but later transferred to an unaffiliated third party. Thus, there is a potential conflict of interest between the Trust (holder of the minerals and royalty revenues) and the holder of the executive rights to the Trust minerals (lease bonus and rental revenue). A Trustee with a sophisticated understanding of oil & gas mineral management is best suited to navigate these structural challenges.
A couple of examples are useful to demonstrate this point. We know from our research that the Trust’s sizeable core Permian assets includes a tract of approximately 1,590 net mineral acres in Reagan County, TX. We have digitally mapped this tract and monitored as 70 horizontal wells were drilled on Trust acreage, observed the public production reports and watched the impact to the Trust’s production and distributable cash. These wells have produced approximately 463,555 barrels (BBL) of oil and 2.27 billion cubic feet (BCF) of gas net to the Trust royalty interest. At commodity prices of $80.00/BBL and $4.00/one thousand cubic feet (MCF) this would equate to approximately $46 million of gross revenue to the Trust, before severance taxes and other deductions. We wonder whether the royalties are being paid properly – is the Trust’s interest being calculated properly, are the marketing provisions being followed, are there any improper deductions, etc. These are important questions given the magnitude of these producing wells – and their impact on distributable revenues to the unitholders. This particular property has room for a substantial number of additional development wells to be drilled targeting multiple producing horizons.
Similarly, the Trust has a substantial mineral position (~30,000 net mineral acres) in Panola County, TX with a very high net revenue interest. This acreage was the source of a recent production spike when Rockcliff Energy completed 8 new horizontal Haynesville wells with lateral lengths of 9,600’ to 11,000’, leading to a material jump in the Trust’s distribution. We have the same questions here as we have regarding the Permian acreage. Furthermore, these new wells appear to involve only 4% of the Trust’s Panola County acreage. Given the impressive productivity of the initial 8 wells, it is imperative that leases be examined to ensure that royalties are paid properly, and that any unleased acreage is handled carefully to maximize the value to the Trust. There are currently 8 drilling rigs active in Panola County.
These are only two examples from the Trust’s many high-quality properties, but they illustrate the importance of skilled and active management. The successor Trustee should begin by quickly identifying, mapping and analyzing all of the Trust’s highest impact assets, as we have done. It should then take immediate steps to ensure that third parties with duties to the mineral owner (such as operators and holders of executive rights) are fulfilling their obligations to the Trust. There will inevitably be discrepancies, and these should be resolved in a manner most advantageous to the Trust’s long-term interests. Finally, the successor Trustee should explore whether structural changes to the Trust would be in the best interests of its beneficiaries/unitholders, as we believe they are, and propose such changes to the unitholders for consideration.
We believe Argent Trust Company is well-qualified to take these steps and strongly support Argent’s appointment as successor Trustee. Please take steps to make this letter available to our fellow unitholders so that they may have the benefit of our perspective on the proposed change in Trustee.
Respectfully,
STJ Ventures, LLC
Joe R. Peacock, Jr.
Manager
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