Mesa Royalty Trust - 10-Q Summary (Period Ended September 30, 2008)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine months ended September 30, 2008. Mesa Royalty Trust is a passive entity holding a 90% overriding royalty interest (reduced to 11.44% of the original interest due to a 1985 assignment) in oil and gas properties located in the Hugoton field (Kansas), San Juan Basin (New Mexico and Colorado), and Yellow Creek field (Wyoming). The Trust has no operating authority; production is managed by working interest owners Pioneer Natural Resources, ConocoPhillips, and BP. As of August 21, 2009, 1,863,590 units were outstanding.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Royalty Income | $4,535,119 | $3,180,214 | $10,896,240 | $8,406,218 |
| Interest Income | $10,840 | $24,883 | $36,834 | $69,374 |
| G&A Expenses | $(35,801) | $(18,062) | $(96,075) | $(64,904) |
| Distributable Income | $4,510,158 | $3,187,035 | $10,836,999 | $8,410,688 |
| Distributable Income Per Unit | $2.4201 | $1.7102 | $5.8151 | $4.5132 |
| Cash and Short-Term Investments | $4,499,318 (as of Sept 30, 2008) | |||
| Net Overriding Royalty Interest (Net of Amortization) | $7,243,389 (as of Sept 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 43% in Q3 2008 and 30% for the nine-month period compared to 2007. This growth was driven primarily by significantly higher average sales prices for natural gas and natural gas liquids (NGLs), which offset declines in production volumes.
- Price Increases: Average natural gas prices rose from $5.95/Mcf in Q3 2007 to $9.11/Mcf in Q3 2008. Average NGL prices rose from $42.54/Bbl to $65.76/Bbl in the same period.
- Production Decline: Net production volumes attributable to the Royalty decreased slightly. For the nine months ended Sept 30, 2008, natural gas production dropped to 956,096 Mcf from 970,988 Mcf in 2007, and NGL production dropped to 61,958 Bbls from 71,823 Bbls.
- Expense Trends: General and administrative expenses increased due to higher reimbursement rates from working interest owners. Operating costs in the San Juan Basin (New Mexico) increased 23% in Q3 due to repair and maintenance activity.
Outlook, Risks, and Unusual Items
- Market Risk: The Trust's distributions are highly dependent on natural gas prices, which are subject to wide fluctuations based on weather, global economic conditions, and supply/demand dynamics. The Trust does not hedge against these risks.
- Operational Risks: Production volumes are subject to decline due to the mature nature of the fields. Specific operational issues in Q3 included line repairs in the Hugoton field and a gas plant fire in the San Juan Basin (New Mexico) in Q2 2008 that caused temporary shutdowns and slow recovery.
- Legal Proceedings: There are no pending legal proceedings where the Trust is a named party. A 2006 lawsuit settlement regarding royalty calculations in the Hugoton field was finalized in 2007. The Trust received a reimbursement of approximately $1.1 million in late 2007 related to this settlement, as the working interest owner determined the Trust should not bear the cost.
- Regulatory Changes: The Trust is evaluating new SEC reserve reporting rules effective for fiscal years ending after December 31, 2009, which may impact future reserve disclosures.
Investor Verification Checklist
- Price Sensitivity: Verify current natural gas and NGL spot prices to assess the sustainability of the 2008 revenue growth, as production volumes are declining.
- Production Decline Rates: Review the specific decline rates for the Hugoton and San Juan Basin fields to understand the long-term trajectory of distributable income absent price increases.
- Working Interest Owner Reliance: Acknowledge that the Trust relies entirely on third-party operators (Pioneer, ConocoPhillips, BP) for production data, cost calculations, and reserve estimates.
- Amortization Impact: Note that amortization of the royalty interest is charged directly to the Trust Corpus, reducing the book value of the asset over time without affecting distributable income.
- Legal Contingencies: Monitor any future litigation involving the working interest owners that could result in charges against royalty income.