Mesa Royalty Trust (MTR) - Q1 2019 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2019. Mesa Royalty Trust is a passive entity created in 1979 that holds an overriding royalty interest equal to 11.44% of 90% of the Net Proceeds from specific oil and gas properties in Kansas (Hugoton), New Mexico, and Colorado (San Juan Basin). The Trust has no employees; administrative functions are performed by The Bank of New York Mellon Trust Company, N.A. The Trust is a smaller reporting company with 1,863,590 units outstanding.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Royalty Income | $726,869 | $747,618 |
| Interest Income | $7,972 | $4,557 |
| General & Administrative Expense | ($47,546) | ($116,757) |
| Distributable Income | $687,295 | $635,418 |
| Distributable Income Per Unit | $0.3688 | $0.3410 |
| Distributions Paid Per Unit | $0.3591 | $0.3753 |
| Cash and Short-Term Investments | $1,725,661 | $1,604,884 |
| Net Overriding Royalty Interest (Book Value) | $1,701,573 | $1,753,646 |
| Trust Corpus | $2,757,934 | $2,792,012 |
Note: The Trust has no debt. Liquidity is derived solely from royalty income and interest on cash reserves.
Material Changes vs. Prior Period
- Royalty Income: Decreased approximately 3% to $726,869 from $747,618. The decline was driven by lower natural gas liquids (NGL) prices, decreased NGL production volumes, and higher operating expenses. These factors were partially offset by higher natural gas prices and lower capital expenditures.
- Operating Expenses: Hugoton Royalty Properties operating costs increased 43% to $345,590, primarily due to higher ad valorem taxes. San Juan Basin operating costs remained relatively stable.
- Administrative Expenses: Decreased significantly to $47,546 from $116,757. The prior year included a one-time payment of $70,460 for expenses incurred in December 2017.
- Production Volumes: Net production volumes for natural gas increased slightly, while NGL volumes decreased. Oil and condensate volumes remained negligible.
Outlook, Risks, and Contingencies
- Revenue Reconciliation Risk: Hilcorp, the operator of the San Juan Basin-New Mexico Properties, pays estimated Net Proceeds pending the installation of new revenue decks. A future reconciliation of estimated versus actual revenue could result in a material reduction of distributions if actual revenues are lower than estimates. Hilcorp may withhold future payments to recover any overpayments.
- Contingent Reserve: The Trustee maintains a Contingent Reserve of $1,056,359 (included in cash) for unknown future liabilities. During Q1 2019, the reserve was increased by $56,793 and decreased by $38,798 due to refunds and adjustments.
- Interest Rate Environment: The Trust Indenture requires cash to earn interest at 1.5% below the prime rate (4.00% annualized for Q1 2019). Due to low market rates, the Trustee allocated a portion of its fees to meet this minimum requirement.
- Legal Proceedings: No pending litigation where the Trust is a named party. However, the Trust may be subject to litigation regarding the Royalty Properties, which could materially impact future income if settled adversely.
Investor Verification Checklist
- Hilcorp Reconciliation Timeline: Verify if Hilcorp has provided an updated timeline for reconciling estimated versus actual revenue for the San Juan Basin-New Mexico Properties, as this poses a direct risk to future cash flow.
- Ad Valorem Tax Trends: Monitor the trajectory of ad valorem taxes in the Hugoton field, which drove a 43% increase in operating costs for the quarter.
- Commodity Price Exposure: Assess the sensitivity of distributions to natural gas and NGL price fluctuations, given the Trust's reliance on these commodities.
- Contingent Reserve Usage: Track changes in the $1.05 million Contingent Reserve to understand the Trustee's assessment of future liabilities.