Mesa Royalty Trust 2013 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Mesa Royalty Trust (MTR)
Reporting Period: Fiscal year ended December 31, 2013
Structure: A Texas grantor trust created in 1979 holding a 90% overriding royalty interest in net proceeds from specified oil and gas properties. The Trust has no employees; administrative functions are performed by The Bank of New York Mellon Trust Company, N.A.
Assets: Interests in the Hugoton field (Kansas) and the San Juan Basin (New Mexico and Colorado). Operations are managed by working interest owners: Pioneer Natural Resources (Hugoton), ConocoPhillips/XTO Energy (San Juan NM), and BP (San Juan CO).
Key Financial Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Royalty Income | $3,625,454 | $3,781,422 |
| Distributable Income | $3,462,518 | $3,601,394 |
| Distributable Income Per Unit | $1.8580 | $1.9325 |
| Total Assets (Year End) | $5,669,212 | $6,315,203 |
| Cash and Short-Term Investments | $1,939,254 | $1,830,390 |
| Trust Corpus | $4,729,958 | $5,484,813 |
| Units Outstanding | 1,863,590 | 1,863,590 |
Liquidity: The Trust maintains a $1.0 million cash reserve for future unknown contingent liabilities and expenses, established in 2011. There is no debt; the Trustee may borrow funds to pay liabilities but currently holds no borrowings.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 4.1% to $3.63 million in 2013 compared to $3.78 million in 2012. This was primarily driven by lower natural gas and natural gas liquids prices, partially offset by higher gas prices in the Hugoton field.
- Expense Reduction: General and administrative expenses decreased 37% to $163,043 in 2013 from $260,203 in 2012. The 2012 figure included non-recurring joint venture auditor costs.
- Interest Income: Interest income dropped significantly to $107 in 2013 from $80,175 in 2012 due to low interest rates (1.5% below prime).
- Regional Performance:
- Hugoton: Income fell 23% due to increased capital expenditures ($414,300 vs $6,220 in 2012) despite higher gas prices.
- San Juan (NM): Income fell 3% due to lower NGL prices and higher operating costs.
- San Juan (CO): Income increased 81% to $528,473 due to higher gas prices and a transportation credit.
Outlook, Risks, and Unusual Items
Subsequent Event (Settlement): On February 21, 2014, the Trustee and Pioneer Natural Resources (PNR) entered a settlement agreement. PNR agreed to pay the Trust approximately $747,000 regarding audit exceptions for payments made between 2006 and 2012. This amount is expected to be received in 2014.
Reserves: As of December 31, 2013, proved reserves totaled 4,967 MMcf of gas and 312 Mbbl of liquids. The standardized measure of future net royalty income (discounted at 10%) was $14.0 million.
Key Risks:
- Commodity Prices: Distributions are highly sensitive to natural gas and NGL prices, which are volatile.
- Depletion: The Trust holds depleting assets; production decline is natural, and future development depends on working interest owners' decisions.
- Operator Control: Unitholders have no control over operations, development, or marketing decisions made by working interest owners.
- Regulatory/Environmental: Risks include changes in hydraulic fracturing regulations, greenhouse gas emissions rules, and potential environmental liabilities.
Investor Verification Checklist
- Settlement Receipt: Verify the receipt of the $747,000 settlement from Pioneer Natural Resources in 2014 distributions.
- Commodity Prices: Monitor natural gas and NGL spot prices, as they directly dictate royalty income.
- Capital Expenditures: Review operator capital spending plans, as high capital costs (as seen in Hugoton in 2013) reduce net proceeds available for distribution.
- Reserve Revisions: Track annual reserve reports from DeGolyer and MacNaughton for changes in estimated production volumes.
- Termination Threshold: Note that the Trust terminates if royalty income falls below $250,000 for two successive years (current income is well above this threshold).