Mesa Royalty Trust (MTR) - Form 10-Q Summary
Business Context and Reporting Period
Company: Mesa Royalty Trust (MTR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2021
Units Outstanding: 1,863,590
Business Overview: MTR is a passive trust owning an overriding royalty interest equal to 11.44% of 90% of the Net Proceeds from specific oil and gas properties in the Hugoton field (Kansas) and the San Juan Basin (New Mexico and Colorado). The Trust has no employees; administrative functions are performed by The Bank of New York Mellon Trust Company, N.A. Income is derived solely from royalty payments from Working Interest Owners (Scout, Hilcorp, Simcoe, and Red Willow).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 |
Three Months Ended June 30, 2020 |
Six Months Ended June 30, 2021 |
Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Royalty Income | $594,172 | $275,119 | $630,687 | $653,403 |
| Interest Income | $31 | $1,314 | $58 | $5,642 |
| General & Admin Expenses | ($61,851) | ($75,656) | ($96,153) | ($93,295) |
| Distributable Income | $532,352 | $200,777 | $532,352 | $565,750 |
| Distributable Income Per Unit | $0.2857 | $0.1077 | $0.2857 | $0.3036 |
| Cash and Short-Term Investments | $1,611,077 (as of June 30, 2021) | |||
| Contingent Reserve | $1,073,346 (included in cash) |
Material Changes vs. Prior Period
- Q2 2021 Royalty Income Surge: Royalty income increased 116% to $594,172 in Q2 2021 compared to $275,119 in Q2 2020. This increase was driven almost entirely by payments from Simcoe (San Juan Basin-Colorado) in May and June 2021, which included adjusted proceeds for prior periods and unusually high pricing due to extreme winter weather in early 2021.
- Zero Income from Other Operators: The Trust received $0 royalty income from Scout (Hugoton) and Hilcorp (San Juan Basin-New Mexico) for the three months ended June 30, 2021. Both operators withheld payments to recover excess production costs from prior periods where expenses exceeded revenues.
- YTD Decline: For the six months ended June 30, 2021, total royalty income decreased slightly (3%) to $630,687 compared to $653,403 in the prior year period, reflecting the withholding of proceeds by Scout and Hilcorp.
- Excess Production Costs: Total excess production costs recoverable by Working Interest Owners increased to $867,004 as of June 30, 2021, up from $486,215 at year-end 2020. The majority of this increase ($470,412) is attributable to Hilcorp.
Guidance, Outlook, Risks, and Unusual Items
- Future Distribution Uncertainty: The Trustee states there is no indication if or when future distributions may be announced. Distributions were suspended from May 2020 until July 2021 due to excess costs. Future income from Simcoe is subject to further adjustments and withholdings for expenses Simcoe is entitled to deduct.
- Withholding of Proceeds: Scout and Hilcorp are actively recovering excess production costs by withholding Net Proceeds that would otherwise be payable to the Trust. Hilcorp has a remaining balance of $470,412 to recover from future proceeds.
- Contingent Reserve Increase: The Trustee intends to increase the Contingent Reserve to exceed current levels. Future royalty income may be withheld to fund this reserve before any distributions are made to unitholders.
- System Conversion Delays: Hilcorp is undergoing a system conversion, delaying the provision of current information. For Q2 2021, Hilcorp used estimated revenues and expenses based on December 2020 production, which may not be representative of future quarters.
- Commodity Price Risk: Income is heavily influenced by oil and natural gas prices. While prices recovered in early 2021, the Trust notes that market uncertainty and demand fluctuations remain significant risks.
Key Facts for Investor Verification
- Source of Q2 Income: Verify that the Q2 2021 income spike was a one-time event driven by Simcoe's prior period adjustments and weather-related pricing, rather than a sustainable operational trend.
- Recovery of Excess Costs: Monitor the status of excess production cost recoveries by Hilcorp ($470,412 remaining) and Scout ($348,983 remaining), as these directly block future distributions.
- Simcoe Adjustments: Confirm if Simcoe has finalized its expense deductions for the May/June 2021 payments, as further withholdings could reduce future cash flow.
- Contingent Reserve Policy: Review future filings for the Trustee's specific target level for the Contingent Reserve, as this will dictate how much of any future royalty income is retained versus distributed.
- Hilcorp Reconciliation: Track the completion of Hilcorp's system conversion and the subsequent "true-up" of estimated versus actual revenues/expenses, which could result in significant adjustments to reported income.