Mesa Royalty Trust - 10-Q Summary (Q1 2010)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Mesa Royalty Trust is a passive entity holding a net overriding royalty interest 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 based on net proceeds from production. As of May 10, 2010, there were 1,863,590 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Royalty Income | $1,770,559 | $1,134,774 |
| Distributable Income | $1,730,239 | $1,085,935 |
| Distributable Income Per Unit | $0.9284 | $0.5827 |
| Cash and Short-Term Investments | $1,730,239 | $1,194,604 (Dec 31, 2009) |
| Net Overriding Royalty Interest (Asset) | $42,498,034 | $42,498,034 |
| Accumulated Amortization | ($36,333,821) | ($36,112,034) |
| Trust Corpus | $6,164,213 | $6,386,000 (Dec 31, 2009) |
| Debt | None reported | None reported |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased approximately 56% year-over-year, driven primarily by higher natural gas and natural gas liquid prices and decreased capital costs.
- Production Volumes:
- Hugoton Field: Net production of natural gas increased to 99,700 Mcf (from 83,091 Mcf in 2009), while actual production volumes decreased. Capital expenditures dropped 99% due to reduced drilling.
- San Juan Basin (NM): Royalty income rose significantly due to higher prices. Net production of natural gas increased to 146,770 Mcf.
- San Juan Basin (CO): Royalty income increased due to higher gas prices and volumes.
- Costs: General and administrative expenses decreased to $40,409 from $48,974. Operating costs in the Hugoton field decreased 19% due to lower service provider rates.
Outlook, Risks, and Contingencies
- Tax Assessment Contingency: Pioneer Natural Resources (PNR) received a final tax assessment from the Kansas Department of Revenue totaling approximately $4.5 million. The portion net to the Trust is approximately $197,000, which could adversely affect future distributions. PNR intends to challenge this assessment.
- Severance Tax Refund: PNR is preparing to file for a severance tax refund of approximately $2.8 million, with an estimated Trust share of $156,000. As of April 30, 2010, $1.7 million had been filed (Trust share ~$96,000). No assurance is given that the state will agree to the refund.
- Market Risk: Distributions are highly dependent on natural gas prices, which fluctuate based on global economic conditions, weather, and supply/demand dynamics.
- Legal Proceedings: No pending legal proceedings name the Trust directly. However, working interest owners are subject to ordinary course litigation that could materially impact royalty income if settled adversely.
- Guidance: The filing contains no specific forward-looking financial guidance beyond the cautionary statements regarding price volatility and reliance on working interest owners for operational data.
Investor Verification Checklist
- Verify the status of the Kansas tax assessment challenge and the potential $197,000 liability impact on future distributions.
- Monitor the outcome of the severance tax refund filing by PNR, which could provide a partial offset to the tax assessment.
- Review natural gas price trends and their direct correlation to the Trust's distributable income, given the lack of hedging.
- Confirm the amortization schedule and remaining life of the royalty interest, as the Trust corpus decreases by the amortization amount ($221,787 in Q1 2010) regardless of cash flow.
- Assess the reliance on third-party operators (PNR, ConocoPhillips, BP) for accurate production and cost reporting, as the Trustee has no direct control over operations.