Mesa Royalty Trust - 10-Q Summary (Period Ended June 30, 2002)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2002, for Mesa Royalty Trust. The Trust holds a 90% net profits overriding royalty interest in oil and gas properties located in the Hugoton field (Kansas), the San Juan Basin (New Mexico and Colorado), and the Yellow Creek field (Wyoming). As of August 12, 2002, there were 1,863,590 units of beneficial interest outstanding. The Trustee is JPMorgan Chase Bank.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2002 |
|---|---|---|
| Royalty Income | $1,091,185 | $1,994,189 |
| Interest Income | $2,626 | $4,349 |
| General & Administrative Expense | $(12,711) | $(24,508) |
| Distributable Income | $1,081,100 | $1,974,030 |
| Distributable Income Per Unit | $0.5801 | $1.0593 |
| Cash and Short-Term Investments | $1,078,474 (as of June 30, 2002) | |
| Net Overriding Royalty Interest (Net of Amortization) | $10,376,160 (Trust Corpus) |
Material Changes vs. Prior Period
Distributable income decreased significantly compared to the prior year periods due to lower commodity prices and reduced production volumes.
- Quarterly Comparison: Distributable income fell from $3,547,180 ($1.9034 per unit) in Q2 2001 to $1,081,100 ($0.5801 per unit) in Q2 2002, a decrease of approximately 70%.
- Semi-Annual Comparison: Distributable income fell from $7,415,385 ($3.9791 per unit) in the first six months of 2001 to $1,974,030 ($1.0593 per unit) in the first six months of 2002.
- Price Impact: Average natural gas prices dropped from $5.55/Mcf in Q2 2001 to $2.28/Mcf in Q2 2002. Oil/condensate prices dropped from $24.78/Bbl to $13.84/Bbl.
- Volume Impact: Net production volumes for natural gas decreased from 514,747 Mcf in Q2 2001 to 317,454 Mcf in Q2 2002.
Outlook, Risks, and Management Commentary
Operational Drivers: The decline in income is primarily attributed to lower market clearing prices for natural gas and natural gas liquids, as well as lower production volumes. The Hugoton field allowable rates were set by the Kansas Corporation Commission at 141.4 Bcf for the period April 1, 2002, through September 30, 2002, down from 156.2 Bcf in the same period the prior year.
Colorado Properties: No royalty income was received from the San Juan Basin properties in Colorado for the quarter or six months ended June 30, 2002. Costs associated with the Fruitland Coal drilling program have not been fully recovered. A cost carryforward of $304,208 remained at June 30, 2002.
Tax Credits: Production from the Fruitland Coal formation may qualify for tax credits under Section 29 of the Internal Revenue Code, which are set to expire on January 1, 2003, unless extended.
Accounting Change: The Trust dismissed Arthur Andersen LLP as its independent public accountants and engaged KPMG LLP for 2002.
Investor Verification Checklist
- Verify the current market price trends for natural gas and oil in the Hugoton and San Juan Basin regions to assess future royalty income potential.
- Confirm the status of the Fruitland Coal drilling cost recovery in Colorado, as this impacts the timeline for income generation from those specific assets.
- Review the Kansas Corporation Commission's allowable production rates for the Hugoton field for the remainder of 2002.
- Check the expiration status of Section 29 tax credits for unitholders regarding the Fruitland Coal formation.
- Monitor the Trust's cash balance ($1.08 million) relative to quarterly distribution obligations to ensure liquidity sufficiency.