Business Context and Reporting Period
Company: MESA ROYALTY TRUST
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2013
Units Outstanding: 1,863,590
The Trust is a passive entity holding a 90% overriding royalty interest (reduced to 11.44% of the original interest following a 1985 assignment) in specified oil and gas properties. The properties are located in the Hugoton field (Kansas), the San Juan Basin (New Mexico and Colorado), and the Yellow Creek field (Wyoming). Operations are managed by working interest owners Pioneer Natural Resources, ConocoPhillips, and BP. The Trust distributes all distributable income to unitholders quarterly.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 |
Three Months Ended June 30, 2012 |
Six Months Ended June 30, 2013 |
Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Royalty Income | $690,404 | $919,695 | $1,729,479 | $2,189,062 |
| Interest Income | $43 | $59 | $84 | $97 |
| G&A Expenses | $(37,148) | $(38,703) | $(90,133) | $(106,964) |
| Distributable Income | $653,299 | $881,051 | $1,639,430 | $2,082,195 |
| Distributable Income Per Unit | $0.3505 | $0.4728 | $0.8797 | $1.1173 |
| Cash & Short-Term Investments | $1,653,299 (as of June 30, 2013) | |||
| Net Overriding Royalty Interest | $4,097,176 (Net of amortization) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 25% in Q2 2013 and 21% in the first six months of 2013 compared to the same periods in 2012.
- Production Volumes: Net production volumes attributable to the Royalty decreased significantly. Natural gas production dropped from 192,471 Mcf (Q2 2012) to 148,941 Mcf (Q2 2013). Oil and NGL production fell from 14,335 Bbls to 8,529 Bbls in the same period.
- Price Realization: Average realized prices for natural gas increased (from $2.13 to $2.98 per Mcf in Q2), while prices for oil and NGLs decreased (from $35.51 to $28.91 per Bbl in Q2).
- Cost Drivers: The decline in income was primarily driven by increased capital expenditures and operating costs, particularly in the San Juan Basin (New Mexico), and lower NGL prices. Hugoton field capital expenditures were $0 in Q2 2013 compared to $102 in Q2 2012.
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: There are no pending legal proceedings where the Trust is a named party. However, working interest owners are subject to ordinary litigation. A specific tax assessment dispute with 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. As of June 30, 2013, this amount remains included in cash and short-term investments.
- 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.
- Management Commentary: The Trustee relies entirely on working interest owners for operational data and reserve estimates. No forward-looking guidance on future production or prices is provided beyond historical trends.
Investor Verification Checklist
- Production Decline: Verify the sustainability of the natural production decline in the Hugoton field and the impact of reduced drilling in the San Juan Basin on future cash flows.
- Cost Recovery: Monitor the ratio of capital and operating costs to gross proceeds, as excess costs must be recovered before royalty payments are made.
- Commodity Prices: Assess the sensitivity of future distributions to fluctuations in natural gas and NGL prices, given the Trust's lack of hedging.
- Contingent Reserve: Confirm the status of the $1.0 million reserve held for unknown liabilities and whether it will be released or utilized.
- Operator Reliance: Acknowledge the risk that the Trustee has no control over operations and relies on third-party operators (Pioneer, ConocoPhillips, BP) for accurate reporting.