MTR

Business Context and Reporting Period

Mesa Royalty Trust (MTR) is a passive Texas grantor trust created in 1979. It holds 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 reporting period covers the fiscal year ended December 31, 2019.

Key Financial Metrics

Note: Financial statements are prepared on a modified cash basis of accounting, not U.S. GAAP.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased by approximately 22.5% ($523,941) compared to 2018. This was primarily driven by lower natural gas and natural gas liquids prices, increased operating and capital costs, and lower net production volumes.
• Regional Performance:
  • Hugoton: Income dropped 37% to $475,511 due to lower NGL prices and volumes.
  • San Juan Basin (New Mexico): Income dropped 25% to $871,096 due to lower prices and volumes, partially offset by higher oil prices.
  • San Juan Basin (Colorado): Income increased 13% to $461,771 due to higher gas volumes and prices.
• Operator Changes: In November 2019, Riviera Resources sold its Hugoton assets to Scout Energy Group V, LP, which became the new operator. Hilcorp continues to operate the San Juan Basin-New Mexico properties.
• Production Costs: Average production costs increased significantly for natural gas in the Hugoton field (from $5.49 to $8.40 per Mcf) and San Juan Basin-New Mexico (from $1.30 to $1.65 per Mcf).

Outlook, Risks, and Contingencies

• Reconciliation Risk (Hilcorp): Following Hilcorp's acquisition of San Juan Basin-New Mexico assets, payments were estimated until April 2019. Actual reconciliation of historical amounts began in December 2019. Hilcorp incurred approximately $1.1 million in incremental costs in 2018 for a new well; these costs will reduce future Net Proceeds. Future distributions may be materially reduced if estimated revenues were higher than actuals or costs were lower than actuals in prior periods.
• Commodity Price Volatility: Distributions are highly sensitive to natural gas prices. Henry Hub spot prices fell from $3.17/MMBtu in 2018 to $2.57/MMBtu in 2019. The filing notes significant volatility in oil and gas markets, including the impact of the COVID-19 pandemic and production cuts announced in early 2020.
• Depleting Assets: The Trust holds depleting assets with no proved undeveloped reserves. Future income depends entirely on the Working Interest Owners' decisions to maintain or develop wells, which are influenced by commodity prices.
• Termination Trigger: The Trust will terminate if royalty income falls below $250,000 for two successive years.

Investor Verification Checklist

• Verify the status of Hilcorp's reconciliation of historical Net Proceeds for the San Juan Basin-New Mexico properties and the impact of the $1.1 million incremental well costs on future distributions.
• Monitor natural gas spot prices (Henry Hub) and their correlation to the Trust's quarterly distribution amounts.
• Review the Contingent Reserve balance ($977,212) and any future adjustments that may reduce cash available for distribution.
• Confirm the financial stability of the Working Interest Owners (Scout, Hilcorp, BP, Red Willow), as the Trust has no control over operations and relies on them for payments.
• Check for any updates on the Hugoton field operator transition from Riviera to Scout and its impact on production reporting.