Mesa Royalty Trust - 10-Q Summary (Q1 2013)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2013. Mesa Royalty Trust is a passive entity holding a 90% overriding royalty interest (reduced to 11.44% of the original interest via a 1985 assignment) in oil and gas properties located in the Hugoton field (Kansas), San Juan Basin (New Mexico and Colorado), and Yellow Creek field (Wyoming). The Trust distributes cash to unitholders quarterly based on net proceeds from production. As of May 10, 2013, there were 1,863,590 units outstanding.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Royalty Income | $1,039,075 | $1,269,367 |
| Distributable Income | $986,131 | $1,201,144 |
| Distributable Income Per Unit | $0.5292 | $0.6445 |
| General & Administrative Expenses | $(52,985) | $(68,261) |
| Cash and Short-Term Investments | $1,986,131 | $1,830,390 (Dec 31, 2012) |
| Net Overriding Royalty Interest (Book Value) | $4,251,869 | $4,484,813 (Dec 31, 2012) |
| Debt | None reported | None reported |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 18% year-over-year, primarily driven by lower natural gas and natural gas liquids prices.
- Production Volumes:
- Hugoton Field: Natural gas production decreased to 61,794 Mcf (from 77,228 Mcf), while natural gas liquids increased to 4,480 barrels (from 3,899 barrels).
- San Juan Basin (NM): Natural gas production increased to 104,067 Mcf (from 85,892 Mcf), while liquids decreased slightly to 12,057 barrels (from 12,766 barrels).
- San Juan Basin (CO): Natural gas production decreased to 36,258 Mcf (from 54,285 Mcf).
- Cost Reductions: Capital expenditures and operating costs decreased across most properties, partially offsetting the revenue decline. Hugoton capital expenditures dropped to $0 from $1,039.
- Trust Corpus: Decreased to $5,251,869 from $5,484,813 at year-end 2012, reflecting amortization of the royalty interest ($232,944) and distributions paid.
Outlook, Risks, and Contingencies
- Market Risk: Distributions are highly dependent on natural gas prices, which fluctuate based on global economic conditions, weather, and supply/demand dynamics. The Trust does not hedge against these risks.
- Legal Proceedings: No pending litigation names the Trust directly. However, working interest owners (Pioneer, ConocoPhillips, BP) are subject to ordinary course litigation. A specific tax assessment by the Kansas Department of Revenue was settled in December 2011 for $2 million; the Trust's portion ($84,719) was withheld from distributions in January 2012.
- Contingent Liabilities: The Trustee withheld $1.0 million in 2011 for future unknown contingent liabilities. This amount remains in cash and short-term investments as of March 31, 2013.
- Termination Trigger: The Trust will terminate if royalty income falls below $250,000 for two successive years. Current income levels are well above this threshold.
Investor Verification Checklist
- Verify the current market price of natural gas and natural gas liquids to assess future distribution potential.
- Confirm the status of the $1.0 million reserve held for contingent liabilities and whether any new reserves are being established.
- Monitor production volumes from the Hugoton and San Juan Basin fields, as these are the primary revenue drivers.
- Review the settlement status of any ongoing litigation involving working interest owners (Pioneer, ConocoPhillips, BP) that could impact royalty payments.
- Check for any changes in the amortization rate of the overriding royalty interest, which directly reduces the Trust Corpus.