Mesa Royalty Trust (MTR) - 2023 Annual Report Summary
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 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 reporting period covers the fiscal year ended December 31, 2023. As of April 1, 2024, there were 1,863,590 units outstanding.
Key Financial Metrics
- Royalty Income: $3,279,909 for 2023, down from $4,119,378 in 2022.
- Total Income: $3,393,657 (including $99,057 in interest income and $14,691 in other income).
- Distributable Income: $2,856,814 for 2023, compared to $3,682,228 in 2022.
- Distributable Income Per Unit: $1.5330 for 2023, compared to $1.9759 in 2022.
- General and Administrative Expenses: $186,843 for 2023.
- Cash and Short-Term Investments: $2,096,773 as of December 31, 2023.
- Contingent Reserve: $1,730,214 as of December 31, 2023 (Trustee intends to increase this to $2.0 million).
- Excess Production Costs: Total accumulated excess costs increased to $260,731 as of December 31, 2023, from $209,316 in 2022.
- Net Overriding Royalty Interests (Net of Amortization): $1,310,693 ($42,498,034 gross less $41,187,341 accumulated amortization).
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 20% year-over-year. This was primarily driven by lower average sales prices for natural gas, natural gas liquids, and oil/condensate, as well as a decrease in net production volumes for natural gas liquids.
- Hugoton Properties: Generated $0 royalty income in 2023 due to operating and capital costs exceeding gross proceeds. In 2022, these properties generated $1,008,301. No drilling occurred in 2023, whereas two wells were drilled in 2022.
- San Juan Basin - Colorado: Generated $65,082 in 2023 compared to $0 in 2022. The 2022 zero income was due to prior period adjustments being recovered by the operator (Simcoe). As of year-end 2023, the Trust remains in a deficit position with Simcoe regarding joint interest billing amounts, with $59,223 remaining to be recovered.
- San Juan Basin - New Mexico: Remained the primary income source, generating $3,214,827 in 2023 (up from $3,111,077 in 2022), driven by increased net production volumes despite lower commodity prices.
- Interest Income: Increased significantly to $99,057 from $19,832 due to higher U.S. Prime Rates.
Outlook, Risks, and Management Commentary
- Commodity Price Sensitivity: Distributions are highly dependent on natural gas prices. Henry Hub spot prices decreased from $3.52/MMBtu in late 2022 to $2.58/MMBtu in late 2023. Continued volatility or declines could reduce or eliminate future distributions.
- Reserve Economics: According to the independent reserve report by Miller and Lents, volumes from certain properties (specifically Hugoton and parts of San Juan Basin-Colorado) are not currently profitable enough to generate future Net Proceeds due to declining well performance and low prices. Total proved reserves decreased to 5,777,000 Mcf of gas, 388,000 Bbls of NGLs, and 11,000 Bbls of oil/condensate.
- Excess Production Costs: Accumulated excess costs continue to rise. These costs must be recovered from future gross proceeds before any royalty income is paid to the Trust, creating a risk of zero distributions in future periods if costs exceed revenues.
- Contingent Reserve: The Trustee plans to increase the Contingent Reserve to $2.0 million to cover potential future liabilities, which will temporarily reduce cash available for distribution.
- Termination Risk: The Trust will terminate if royalty income falls below $250,000 for two successive years or if unitholders vote for termination.
- Operational Control: The Trustee has no control over the operations of the underlying properties, which are managed by independent Working Interest Owners (Scout, Hilcorp, Simcoe, and Red Willow).
Investor Verification Checklist
- Verify the current status of the deficit position with Simcoe regarding San Juan Basin-Colorado properties and the timeline for recovery of the remaining $59,223.
- Monitor natural gas price trends (Henry Hub) and their direct impact on the Hugoton and San Juan Basin properties, given the Trust's high sensitivity to gas pricing.
- Review the Trustee's progress in increasing the Contingent Reserve to $2.0 million and the impact on quarterly distributions.
- Assess the sustainability of the Hugoton properties, which generated zero income in 2023, and the likelihood of future profitability given the lack of drilling activity.
- Confirm the accuracy of the independent reserve report (Miller and Lents) regarding the economic viability of current proved reserves under current price assumptions.