Mesa Royalty Trust 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2016. Mesa Royalty Trust is a passive entity holding a 90% overriding royalty interest (reduced to 11.44% of the original interest due to a 1985 assignment) in specified oil and gas properties in the Hugoton field (Kansas), San Juan Basin (New Mexico and Colorado), and Yellow Creek field (Wyoming). The Trust distributes cash to unitholders quarterly. As of May 13, 2016, there were 1,863,590 units outstanding.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Royalty Income | $204,645 | $790,090 |
| Interest Income | $257 | $0 |
| General & Administrative Expense | ($48,680) | ($164,931) |
| Distributable Income | $156,222 | $625,159 |
| Distributable Income Per Unit | $0.0838 | $0.3355 |
| Distributions Available for Distribution | $149,484 ($0.0802/unit) | $742,777 ($0.3986/unit) |
| Cash and Short-Term Investments | $1,149,484 | $1,408,413 (Dec 31, 2015) |
| Total Assets | $3,843,125 | $4,143,131 (Dec 31, 2015) |
| Net Overriding Royalty Interest (Book Value) | $2,693,641 | $2,734,718 (Dec 31, 2015) |
Note: The Trust holds a $1.0 million reserve for future unknown contingent liabilities and expenses within cash and short-term investments.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 74% year-over-year, driven by significantly lower natural gas, natural gas liquids (NGL), and oil prices, as well as reduced production volumes.
- Price Volatility: Average sales prices for natural gas dropped from $3.35/Mcf in Q1 2015 to $1.98/Mcf in Q1 2016. NGL prices fell from $13.88/Bbl to $10.69/Bbl, and oil prices fell from $44.88/Bbl to $26.79/Bbl.
- Production Volumes: Net production volumes attributable to the royalty decreased across all commodities. Natural gas production fell from 179,286 Mcf to 75,111 Mcf.
- Expense Reduction: General and administrative expenses decreased significantly to $48,680 from $164,931, largely due to reimbursements from working interest owners and lower trustee fee allocations.
- Excess Production Costs: As of March 31, 2016, excess production costs (costs exceeding revenue that must be recovered before royalty payments) totaled $27,460, down from $78,591 at year-end 2015.
Outlook, Risks, and Unusual Items
- Operator Bankruptcy (Critical Risk): On May 11, 2016, Linn Energy, LLC (parent of Linn, the operator of the Hugoton properties) filed for Chapter 11 bankruptcy protection. While Linn expects operations to continue in the ordinary course, the filing introduces significant uncertainty regarding future production and distributions.
- Market Risk: The Trust's cash flow is highly dependent on commodity prices, which are subject to global economic conditions, weather, and supply/demand dynamics beyond the Trust's control.
- Legal Proceedings: No pending legal proceedings name the Trust as a party. However, operators (Linn, ConocoPhillips, BP) are subject to ordinary course litigation that could materially impact royalty income if settled adversely.
- Interest Rate Environment: The Trustee was unable to secure an account yielding the required 1.5% below prime rate (2.00% target). Consequently, the Trustee is allocating a portion of its fees to offset interest due to the Trust until the remaining $43,665 is fully offset.
Investor Verification Checklist
- Verify the status of Linn Energy's Chapter 11 restructuring and its specific impact on Hugoton field operations and royalty payments.
- Monitor commodity price trends (natural gas, NGL, oil) as they directly dictate distributable income.
- Review future quarterly reports for changes in "excess production costs," which can delay or eliminate royalty distributions.
- Confirm the Trustee's ability to maintain the $1.0 million reserve for contingent liabilities given the reduced cash flow.
- Check for any updates on the termination of the Gas Transportation Agreement with Oneok and the transition to Linn Midstream for gathering services.