Business Context and Reporting Period
Mesa Royalty Trust (the "Trust") is a Texas trust created in 1979 holding a 90% net profits overriding royalty interest in producing oil and gas properties located in the Hugoton field (Kansas), San Juan Basin (New Mexico and Colorado), and Yellow Creek field (Wyoming). The Trustee is JPMorgan Chase Bank. This Form 10-Q covers the quarterly period ended March 31, 2003. As of May 12, 2003, there were 1,863,590 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Royalty Income | $2,074,269 | $903,004 |
| Interest Income | $2,889 | $1,723 |
| General & Administrative Expense | $(10,230) | $(11,797) |
| Distributable Income | $2,066,928 | $892,930 |
| Distributable Income Per Unit | $1.1091 | $0.4791 |
| Cash and Short-Term Investments | $2,064,039 | $1,351,189 (Dec 31, 2002) |
| Total Assets | $11,964,709 | $11,431,621 (Dec 31, 2002) |
| Net Overriding Royalty Interest (Gross) | $42,498,034 | $42,498,034 |
| Accumulated Amortization | $(32,600,253) | $(32,420,602) |
| Trust Corpus | $9,897,781 | $10,077,432 (Dec 31, 2002) |
Note: The Trust has no debt. Distributions payable of $2,066,928 are recorded as a liability.
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 130% to $2.07 million from $903,004 in Q1 2002. Distributable income per unit rose to $1.1091 from $0.4791.
- Price Drivers: The increase is primarily attributed to higher average sales prices for natural gas and natural gas liquids.
- Hugoton Field: Average natural gas price rose to $3.82/Mcf (from $2.33) and liquids to $19.31/bbl (from $13.69).
- San Juan Basin (NM): Average natural gas price rose to $3.87/Mcf (from $2.49) and liquids to $21.71/bbl (from $13.32).
- Production Volumes: Despite higher prices, actual production volumes declined due to natural depletion.
- Hugoton actual gas production fell to 284,629 Mcf from 344,156 Mcf.
- San Juan Basin actual gas production fell to 293,165 Mcf from 344,156 Mcf.
- Colorado Properties: No royalty income was received from the San Juan Basin properties in Colorado in either period because capital costs associated with the Fruitland Coal drilling program have not been fully recovered.
Outlook, Risks, and Management Commentary
- Market Conditions: Working interest owners expect to continue marketing Hugoton gas under short-term and multi-month contracts at market clearing prices. San Juan Basin gas is sold on the spot market.
- Regulatory Constraints: The Kansas Corporation Commission set the Hugoton field allowable for April 1, 2003, through September 30, 2003, at 126.4 Bcf, a decrease from 141 Bcf in the same period the prior year.
- Cost Recovery: Capital costs incurred for the Fruitland Coal drilling program in Colorado ($344,461 carryforward as of March 31, 2003) must be recovered from future gross proceeds before distributions resume for that portion of the trust.
- Disclosure Controls: The Trustee noted limitations in disclosure controls because it relies entirely on working interest owners (Pioneer Natural Resources, ConocoPhillips, Amoco) for production, cost, and reserve data. The Trustee does not independently verify this data.
Investor Verification Checklist
- Price Sensitivity: Verify current natural gas and NGL spot prices, as the Trust's income is highly sensitive to commodity price fluctuations.
- Production Decline: Monitor the rate of natural production decline in the Hugoton and San Juan Basin fields, which is offsetting price gains.
- Colorado Cost Recovery: Track the status of capital cost recovery for the Fruitland Coal drilling program in Colorado to determine when that portion of the royalty may generate income.
- Regulatory Allowables: Watch for changes in production allowables set by the Kansas Corporation Commission for the Hugoton field.
- Operator Reliance: Acknowledge that financial data is provided by third-party operators (Pioneer, ConocoPhillips, Amoco) and not independently audited by the Trustee on a quarterly basis.