Mesa Royalty Trust (MTR) - Q2 2022 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2022, for Mesa Royalty Trust, a passive entity created in 1979. The Trust holds an overriding royalty interest equal to 11.44% of 90% of the Net Proceeds from specific 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. As of August 15, 2022, there were 1,863,590 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 |
|---|---|---|
| Royalty and Other Income | $1,036,950 | $1,769,844 |
| Interest Income | $1,026 | $1,055 |
| General and Administrative Expense | ($64,707) | ($122,158) |
| Distributable Income | $935,769 | $1,539,241 |
| Distributable Income Per Unit | $0.5021 | $0.8260 |
| Cash and Short-Term Investments | $2,069,912 (as of June 30, 2022) | |
| Contingent Reserve Balance | $1,135,268 (as of June 30, 2022) | |
| Total Assets | $3,509,111 (as of June 30, 2022) |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income for the three months ended June 30, 2022, increased to $1,036,950 from $594,172 in the same period in 2021. The six-month increase was from $630,687 to $1,769,844.
- Recovery of Withholdings: The increase is primarily attributed to the completion of recoveries by Working Interest Owners (Hilcorp and Scout) of excess production costs incurred in prior periods. In 2021, these owners withheld Net Proceeds to recover costs; in Q1 2022, recoveries were completed, allowing full royalty payments to resume in Q2 2022.
- Property-Specific Performance:
- Hugoton (Kansas): Royalty income rose to $345,326 in Q2 2022 from $0 in Q2 2021 due to the timing of Scout's recovery completion.
- San Juan Basin - New Mexico: Royalty income rose to $692,004 in Q2 2022 from $0 in Q2 2021 following Hilcorp's completion of cost recoveries and a true-up of estimated amounts.
- San Juan Basin - Colorado: Royalty income dropped to $0 in Q2 2022 from $594,172 in Q2 2021. The 2021 figure included unusually high pricing and prior period adjustments. In 2022, operator Simcoe is withholding proceeds to recover outstanding expenses ($250,148 balance remaining).
- Operating Costs: Operating costs increased across properties, largely due to corrections to prior periods' expenses and higher severance taxes driven by increased commodity prices.
Guidance, Outlook, and Risks
- Contingent Reserve Increase: The Trustee intends to increase the Contingent Reserve from approximately $1.0 million to $2.0 million. This increase will reduce Net Proceeds available for distribution to unitholders. The timing and amount of additions to the reserve will be determined monthly by the Trustee.
- Future Distributions: There is a risk that unitholders may not receive material distributions in future periods if Royalty income is insufficient to fund the increased Contingent Reserve. Even if payments are received, funds may be withheld for the reserve before distributions are made.
- Commodity Price Volatility: Distributions are heavily influenced by oil and gas prices. While prices were higher in 2022 due to global events (e.g., Russia-Ukraine conflict), volatility remains a significant risk. A decline in prices could substantially reduce or eliminate distributions.
- Operator Adjustments: The Trust relies on Working Interest Owners (Scout, Hilcorp, Simcoe, Red Willow) for data. Future adjustments to historical estimates or new excess production costs could materially reduce income. Specifically, Simcoe continues to recover expenses from Colorado properties, and Hilcorp noted a $11,538 excess cost offset expected in July 2022.
- Interest Rate Environment: The Trustee was unable to obtain an account yielding the required interest rate (1.5% below prime) on cash reserves. Consequently, the Trustee is allocating a portion of its fees to meet the minimum interest obligation to the Trust.
Investor Verification Checklist
- Contingent Reserve Funding: Verify the monthly progress of the Trustee's plan to increase the Contingent Reserve to $2.0 million and its impact on cash available for distribution.
- Simcoe Expense Recovery: Monitor the status of the $250,148 balance of excess production costs being recovered by Simcoe from San Juan Basin - Colorado properties, which currently results in $0 royalty income from this segment.
- Operator Reconciliations: Track ongoing reviews of financial statements by Scout and Hilcorp, as historical adjustments have previously caused significant volatility in reported income.
- Commodity Price Sensitivity: Assess the impact of current and future oil and natural gas prices on Net Proceeds, given the Trust's lack of control over production volumes or marketing.
- Interest Rate Shortfall: Confirm how the Trustee continues to manage the shortfall in interest earnings on cash reserves and the resulting allocation of Trustee fees.