Mesa Royalty Trust - Form 10-Q Summary
Business Context and Reporting Period
Company: Mesa Royalty Trust (MTR)
Reporting Period: Quarter and nine months ended September 30, 2018
Structure: Passive grantor trust owning an overriding royalty interest equal to 11.44% of 90% of Net Proceeds from oil and gas properties in Kansas (Hugoton), New Mexico, and Colorado (San Juan Basin).
Units Outstanding: 1,863,590
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Royalty Income | $449,556 | $626,384 | $1,727,433 | $2,262,152 |
| Interest Income | $6,004 | $3,182 | $16,404 | $6,828 |
| G&A Expenses | ($44,733) | ($35,609) | ($213,587) | ($133,681) |
| Distributable Income | $410,827 | $593,957 | $1,530,250 | $2,135,299 |
| Distributable Income Per Unit | $0.2204 | $0.3187 | $0.8211 | $1.1458 |
| Distributions Paid Per Unit | $0.2162 | $0.3450 | $0.8870 | $1.1465 |
| Cash & Short-Term Investments | $1,399,953 | N/A | N/A | N/A |
| Net Overriding Royalty Interest | $1,801,307 | N/A | N/A | N/A |
Note: Net Overriding Royalty Interest is calculated as Gross ($42,498,034) less Accumulated Amortization ($40,696,727).
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 28% in Q3 2018 and 24% in the first nine months of 2018 compared to the prior year. This was driven by lower natural gas and oil prices, decreased production volumes, and higher operating costs.
- Property-Specific Performance:
- Hugoton (Kansas): Income dropped significantly (56% in Q3) due to lower gas prices and higher transportation costs. Operator changed from Linn Energy to Riviera Resources in August 2018.
- San Juan Basin (New Mexico): Income increased 11% in Q3 due to higher NGL prices and volumes, offsetting lower gas prices. Operator is Hilcorp.
- San Juan Basin (Colorado): Income decreased 56% in Q3 due to lower gas prices and volumes.
- Expense Timing: G&A expenses for the nine months ended Sept 30, 2018, appeared higher ($213,587 vs $133,681) primarily because $70,460 of December 2017 expenses were paid in January 2018.
Outlook, Risks, and Contingencies
- Operator Transition (Hilcorp): Following the acquisition of San Juan Basin assets, Hilcorp is currently paying the Trust based on estimated Net Proceeds while installing new revenue decks. A future reconciliation of estimated vs. actual revenue may result in withholding future payments to recover overpayments, potentially causing a material reduction in distributions.
- Operator Transition (Riviera): Riviera Resources became the operator of Hugoton properties in August 2018 following a spin-off from Linn Energy. The Trustee is discussing the impact of this change with Riviera.
- Interest Rate Environment: The Trustee was unable to secure the contractually 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.
- Excess Production Costs: Total excess production costs (costs exceeding revenue that must be recovered before distribution) were $6,217 as of September 30, 2018, down from $22,014 at year-end 2017.
- Contingent Reserve: A reserve of $997,000 is held for unknown future liabilities. Adjustments to this reserve affect distributable income available for distribution.
Key Facts for Investor Verification
- Revenue Reconciliation Risk: Verify the timeline and potential impact of Hilcorp's reconciliation of estimated vs. actual revenue for the San Juan Basin-New Mexico properties, which account for ~59% of Q3 2018 royalty income.
- Operator Stability: Monitor communications regarding the transition to Riviera Resources as the Hugoton operator and any changes in cost structures or reporting.
- Production Trends: Confirm if the decline in natural gas volumes and prices is a temporary market fluctuation or a structural decline in the mature Hugoton and San Juan Basin fields.
- Fee Allocation: Track the Trustee's use of fee allocations to satisfy the minimum interest rate requirement, as this reduces net cash available for distribution.