MTR

Mesa Royalty Trust (MTR) - Q3 2021 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2021. Mesa Royalty Trust is a passive entity created in 1979, holding 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. The Trust's income is derived solely from these royalties and interest on cash reserves.

Key Financial Metrics

Note: Net Overriding Royalty Interest is calculated as Gross Asset ($42,498,034) less Accumulated Amortization.

Material Changes vs. Prior Period

• Zero Royalty Income in Q3 2021: The Trust received $0 in royalty income for the quarter ended September 30, 2021, compared to $49,984 in Q3 2020. This occurred because actual expenses and adjustments for all Working Interest Owners (Scout, Hilcorp, Simcoe, Red Willow) exceeded actual revenues in current or past periods.
• Excess Production Costs: Total excess production costs (costs recoverable by operators before distributions) increased to $971,552 as of September 30, 2021, from $486,215 at year-end 2020.
  • Hilcorp (San Juan Basin - NM): Recovered $271,947 in Q3 2021, leaving a balance of $198,465 to be recovered.
  • Simcoe (San Juan Basin - CO): Reported significant prior period adjustments, resulting in a balance of $425,073 to be recovered.
  • Scout (Hugoton): Recovered $42,039 in Q3 2021, leaving a balance of $306,944.
• YTD Performance: For the nine months ended September 30, 2021, Royalty Income decreased approximately 10% to $630,687 compared to $703,387 in the prior year period, primarily due to the withholding of proceeds to recover excess costs.

Outlook, Risks, and Management Commentary

• Contingent Reserve Increase: The Trustee intends to increase the Contingent Reserve from $1.0 million to $2.0 million. Future royalty income will be withheld to fund this reserve before distributions are made to unitholders.
• Future Distributions Uncertain: No income was received from any Working Interest Owner in Q3 2021. There is no indication of when future distributions may be announced. Distributions are suspended until excess production costs are recovered and the increased reserve is funded.
• Operator Adjustments:
  • Hilcorp: Is undergoing a system conversion, currently reporting estimated revenues/expenses based on December 2020 data. A true-up of historical amounts is pending.
  • Simcoe: Amounts paid in May and June 2021 are subject to further adjustment for expenses Simcoe asserts it is entitled to deduct. These adjustments may materially reduce future income.
• Commodity Price Risk: While natural gas prices increased in early 2021 due to extreme weather, the Trust notes that prices may fluctuate widely. Contractual pricing may not reflect spot market increases.
• Termination Risk: The Trust will terminate if Royalty income is less than $250,000 per year for two successive years. Current trends of zero income in Q3 2021 heighten this risk.

Key Facts for Investor Verification

• Zero Q3 Income: Verify the impact of zero royalty income in Q3 2021 on the Trust's ability to fund the proposed $2.0 million Contingent Reserve.
• Excess Cost Recovery: Monitor the recovery status of the $971,552 in excess production costs, particularly the $425,073 owed to Simcoe and $198,465 owed to Hilcorp, which block distributions.
• Operator Reconciliations: Track the completion of Hilcorp's system conversion and Simcoe's expense adjustments, as these will determine future Net Proceeds.
• Reserve Funding: Confirm if future royalty receipts will be entirely absorbed by the Contingent Reserve increase, potentially resulting in no distributions for an extended period.
• Termination Threshold: Assess the likelihood of the Trust meeting the $250,000 annual income threshold required to avoid termination.