Mesa Royalty Trust (MTR) - Q3 2022 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2022. Mesa Royalty Trust is a passive entity created in 1979 that owns an overriding royalty interest equal to 11.44% of 90% of the 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 Trust's income is derived solely from royalty payments made by Working Interest Owners (Scout, Hilcorp, Simcoe, and Red Willow) and interest on cash reserves.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | YTD 9M 2022 | YTD 9M 2021 |
|---|---|---|---|---|
| Royalty and Other Income | $1,201,758 | $0 | $2,971,601 | $630,687 |
| Interest Income | $5,512 | $35 | $6,568 | $92 |
| General & Administrative Expense | ($56,456) | ($53,641) | ($178,613) | ($149,794) |
| Distributable Income | $1,075,814 | $0 | $2,615,056 | $532,352 |
| Distributable Income Per Unit | $0.5773 | $0.0000 | $1.4032 | $0.2857 |
| Cash and Short-Term Investments | $2,286,082 | N/A | N/A | N/A |
| Contingent Reserve Balance | $1,213,837 | $1,012,425 | N/A | N/A |
| Units Outstanding | 1,863,590 | 1,863,590 | 1,863,590 | 1,863,590 |
Note: The Trust reported $0 royalty income in Q3 2021 due to Working Interest Owners withholding proceeds to recover excess production costs from prior periods.
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased from $0 in Q3 2021 to $1.2 million in Q3 2022. This reversal is primarily due to the completion of cost recovery periods by operators Hilcorp and Scout in Q1 2022, allowing Net Proceeds to flow to the Trust again.
- Commodity Prices: Average sales prices for natural gas, natural gas liquids, and oil/condensate were significantly higher in 2022 compared to 2021, driven by global market conditions including the war in Ukraine and OPEC+ production cuts.
- Operating Costs: Operating costs increased in Q3 2022 compared to Q3 2021 (excluding the impact of prior period adjustments in 2021), largely due to higher severance taxes resulting from increased commodity prices.
- San Juan Basin - Colorado: Royalty income from these properties remained at $0 for Q3 2022. Operator Simcoe continues to withhold Net Proceeds to recover asserted expenses, leaving a balance of $286,665 to be recovered from future proceeds.
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 be funded by withholding future Net Proceeds, which will reduce distributions to unitholders in upcoming periods.
- Operator Reconciliations: The Trust is conducting reviews with third-party consultants regarding financial statements and Net Proceeds calculations from operators Scout and Simcoe. Discrepancies or adjustments in these reconciliations could materially impact future income.
- Market Volatility: Future distributions are heavily dependent on commodity prices. The Trustee warns that if oil and gas prices fall or remain volatile, distributions could be substantially reduced or eliminated.
- Excess Production Costs: While Hilcorp and Scout completed their recoveries in Q1 2022, Simcoe continues to withhold funds. Any future excess production costs incurred by operators will be recovered from future Gross Proceeds before any payment is made to the Trust.
Key Facts for Investor Verification
- Reserve Funding Impact: Verify the timing and magnitude of the $1.0 million increase to the Contingent Reserve, as this will directly reduce cash available for distribution in the near term.
- Simcoe Withholding Status: Monitor the status of the $286,665 balance of excess production costs being recovered by Simcoe from the San Juan Basin-Colorado properties, which currently results in $0 income from this asset.
- Operator Reconciliation Reviews: Track the outcomes of the Trust's third-party reviews of Scout and Simcoe's financial statements, as adjustments could alter historical and future royalty payments.
- Commodity Price Sensitivity: Assess the Trust's exposure to natural gas and oil price fluctuations, as the Trust has no control over production volumes or marketing terms.