Mesa Royalty Trust: Q3 2002 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 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). The Trustee is JPMorgan Chase Bank. As of November 14, 2002, there were 1,863,590 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q3 2002 | Q3 2001 | YTD 9 Months 2002 | YTD 9 Months 2001 |
|---|---|---|---|---|
| Royalty Income | $1,488,156 | $1,960,706 | $3,482,345 | $9,317,940 |
| Distributable Income | $1,485,982 | $1,979,618 | $3,460,012 | $9,395,003 |
| Distributable Income Per Unit | $0.7974 | $1.0623 | $1.8566 | $5.0413 |
| Cash and Short-Term Investments | $1,482,594 | N/A | $1,482,594 | $1,167,273 (Dec 31, 2001) |
| Net Overriding Royalty Interest (Net of Amortization) | $10,142,217 | N/A | $10,142,217 | $10,865,266 (Dec 31, 2001) |
Note: The Trust has no debt. Liquidity is maintained through cash distributions and short-term investments.
Material Changes vs. Prior Period
- Revenue Decline: Distributable income for the nine months ended September 30, 2002, decreased by approximately 63% compared to the same period in 2001 ($3.46M vs. $9.40M).
- Hugoton Field Performance: Royalty income from the Hugoton field dropped significantly due to lower average sales prices for natural gas ($2.57/Mcf in 2002 vs. $5.44/Mcf in 2001) and natural gas liquids ($13.74/bbl vs. $23.64/bbl). Production volumes also declined due to lower allowable rates set by the Kansas Corporation Commission.
- San Juan Basin Performance: Income from New Mexico properties decreased due to lower commodity prices, despite higher production volumes in Q3 2002 compared to Q3 2001 (which were impacted by plant maintenance). No income was received from Colorado properties due to unrecovered capital costs from the Fruitland Coal drilling program.
- Amortization: Amortization of the net overriding royalty interest increased to $723,049 for the nine months ended September 30, 2002, compared to $585,931 in the prior year period, reducing the Trust Corpus.
Outlook, Risks, and Management Commentary
- Market Pricing: The Trust is highly sensitive to natural gas and oil prices. The filing notes that overall market prices received for natural gas from the Hugoton properties were lower in Q3 2002 compared to Q3 2001. Substantially all San Juan Basin gas is sold on the spot market.
- Colorado Properties: No distributions have been made regarding the Colorado portion of the San Juan Basin since 1990 because capital costs for the Fruitland Coal drilling program have not been fully recovered. A cost carryforward of $318,839 remained at September 30, 2002.
- Controls and Procedures: The Trustee noted limitations in disclosure controls because the Trust relies entirely on working interest owners (Pioneer Natural Resources, Conoco, Amoco) for production data, reserve reports, and financial information. The Trustee does not independently verify this data.
- Forward-Looking Statements: The filing includes standard cautionary statements that actual results may differ materially from expectations due to factors such as commodity price volatility and regulatory changes.
Investor Verification Checklist
- Commodity Price Exposure: Verify current natural gas and oil prices against the Trust's historical performance to assess future distribution potential.
- Colorado Cost Recovery: Monitor the status of the Fruitland Coal drilling program cost recovery in Colorado, as this currently yields zero income for the Trust.
- Production Allowables: Review Kansas Corporation Commission (KCC) allowable rates for the Hugoton field, as these directly cap production volumes.
- Operator Reliance: Acknowledge the risk that financial data is provided by third-party operators (Pioneer, Conoco, Amoco) without independent verification by the Trustee.
- Amortization Impact: Track the unit-of-production amortization, which reduces the Trust Corpus and the remaining life of the royalty interest.