Mesa Royalty Trust: Q3 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009, for Mesa Royalty Trust, a passive entity holding a 90% overriding royalty interest in specific oil and gas properties (Hugoton, San Juan Basin). The Trust distributes cash flows from these royalties to unitholders. As of November 6, 2009, there were 1,863,590 units outstanding.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | YTD 9M 2009 | YTD 9M 2008 |
|---|---|---|---|---|
| Royalty Income | $923,220 | $4,535,119 | $2,803,368 | $10,896,240 |
| Distributable Income | $862,601 | $4,510,158 | $2,649,860 | $10,836,999 |
| Distributable Income Per Unit | $0.4629 | $2.4201 | $1.4219 | $5.8151 |
| Cash and Short-Term Investments | $862,601 | $2,917,460 (Dec 31, 2008) | N/A | |
| Net Overriding Royalty Interest (Net of Amortization) | $6,611,643 | $7,035,039 (Dec 31, 2008) | N/A | |
| General & Administrative Expenses | $(60,619) | $(35,801) | $(153,723) | $(96,075) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 80% in Q3 2009 compared to Q3 2008, and 74% for the nine-month period. This is primarily attributed to significantly lower natural gas and natural gas liquids prices.
- Price Volatility: Average natural gas prices dropped from $9.11/Mcf in Q3 2008 to $2.53/Mcf in Q3 2009. Oil/condensate prices fell from $65.76/Bbl to $27.31/Bbl over the same period.
- Production Volumes: While actual production volumes in the Hugoton field declined due to natural depletion, volumes in the San Juan Basin (New Mexico) increased slightly due to better gathering run times. However, the San Juan Basin (Colorado) properties generated negligible income due to excess production costs.
- Excess Production Costs: The Trust received no royalty income from San Juan Basin-Colorado properties operated by BP for the nine months ended September 30, 2009, due to unrecovered excess production costs of approximately $50,000.
Outlook, Risks, and Contingencies
- Tax Assessment Risk: Pioneer Natural Resources (PNR) received a proposed tax assessment from the Kansas Department of Revenue totaling approximately $4.1 million. The portion net to the Trust is estimated at $158,000. PNR has objected to the assessment, but no assurance of success is provided.
- Market Risk: Distributions are highly dependent on natural gas prices, which are subject to wide fluctuations based on global economic conditions, weather, and supply/demand dynamics.
- Legal Proceedings: No pending litigation names the Trust directly. However, working interest owners (PNR, ConocoPhillips, BP) are subject to ordinary course litigation that could materially impact future royalty income if settled adversely.
- Termination Trigger: The Trust will terminate if royalty income falls below $250,000 for two successive years. Current income levels remain above this threshold.
Investor Verification Checklist
- Verify the status of the $158,000 Kansas tax assessment and potential impact on future distributions.
- Monitor natural gas price trends, as they are the primary driver of the Trust's revenue.
- Review updates on excess production costs for the San Juan Basin-Colorado properties to determine when income generation might resume.
- Confirm the production decline rates in the Hugoton field versus capital expenditure plans by the operator (PNR).