Business Context and Reporting Period
Mesa Royalty Trust (MTR) is a Texas grantor trust created in 1979, holding a 90% overriding royalty interest in net proceeds from specified oil and gas properties in the Hugoton field (Kansas) and the San Juan Basin (New Mexico and Colorado). The Trust has no employees; administrative functions are performed by The Bank of New York Mellon Trust Company, N.A. The reporting period covers the fiscal year ended December 31, 2009.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Royalty Income | $4,052,357 | $13,845,456 |
| Distributable Income | $3,844,464 | $13,768,502 |
| Distributable Income Per Unit | $2.0629 | $7.3882 |
| Total Assets (Year End) | $7,580,604 | $9,966,534 |
| Cash and Short-term Investments | $1,194,604 | $2,917,460 |
| Net Overriding Royalty Interest (Gross) | $42,498,034 | $42,498,034 |
| Accumulated Amortization | ($36,112,034) | ($35,462,995) |
| Units Outstanding | 1,863,590 | 1,863,590 |
Note: The filing does not provide specific debt figures as the Trust generally distributes all cash receipts and does not engage in borrowing for operations, though the Trustee has the authority to borrow to pay liabilities.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 71% from 2008 to 2009, dropping from $13.8 million to $4.1 million. This was primarily driven by a significant decrease in natural gas and natural gas liquids prices.
- Price Volatility: Average sales prices for natural gas fell from $7.20 per Mcf in 2008 to $3.00 per Mcf in 2009. Prices for natural gas liquids dropped from $60.27 per barrel to $28.29 per barrel.
- Production Volumes: Net production volumes attributable to the Royalty decreased from 1,267,304 Mcf of gas in 2008 to 817,540 Mcf in 2009. The Hugoton field saw a decline due to natural production decline, while San Juan Basin volumes were impacted by operational factors in the prior year.
- Costs: Operating costs decreased in 2009 compared to 2008 due to cost control measures and reduced repair/maintenance activity, partially offsetting revenue declines.
Outlook, Risks, and Contingencies
- Market Risk: Distributions are highly dependent on natural gas prices, which are volatile and subject to global economic conditions, weather, and supply/demand dynamics. The Trust does not hedge against these price fluctuations.
- Reserve Estimates: Proved reserves are estimated at 6,879,653 Mcf of natural gas and 484,950 barrels of liquids as of December 31, 2009. The standardized measure of future net royalty income (discounted at 10%) was $17.8 million, a significant decrease from $33.4 million in 2008, largely due to lower price assumptions.
- Excess Production Costs: As of December 31, 2009, excess production costs related to the San Juan Basin-Colorado properties operated by BP were approximately $20,606. These costs must be recovered before any royalty income is distributed from those specific properties.
- Legal and Tax Contingencies:
- Tax Assessment: Pioneer Natural Resources (PNR) received a proposed tax assessment from the Kansas Department of Revenue of approximately $4.1 million. The portion net to the Trust is estimated at $181,000. PNR has objected to this assessment.
- Tax Refund: PNR is seeking a severance tax refund of approximately $2.8 million, with an estimated $156,000 share for the Trust. No assurance is given that this will be approved.
- Litigation: While no pending litigation names the Trust directly, working interest owners are subject to ordinary course litigation that could materially impact future royalty income if settled adversely.
- Termination Risk: The Trust will terminate if royalty income falls below $250,000 for two successive years or upon a unitholder vote. Current income levels are well above this threshold.
Investor Verification Checklist
- Price Sensitivity: Verify current natural gas and NGL spot prices against the $3.00/Mcf and $28.29/bbl averages reported for 2009 to assess future distribution potential.
- Excess Cost Recovery: Monitor the status of the $20,606 excess production costs in the San Juan Basin-Colorado region to determine when distributions from that specific asset may resume.
- Tax Dispute Resolution: Track the outcome of the Kansas Department of Revenue assessment ($181,000 exposure) and the severance tax refund claim ($156,000 potential benefit).
- Reserve Revisions: Review future reserve reports for downward revisions driven by sustained low commodity prices, which directly impact the standardized measure of future income.
- Operator Performance: Confirm that working interest owners (Pioneer, ConocoPhillips, BP) continue to operate properties in accordance with the Conveyance, as the Trustee has no control over operations.