Mesa Royalty Trust (MTR) - Q2 2023 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2023. Mesa Royalty Trust is a passive entity created in 1979 that owns 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 Trust relies entirely on Working Interest Owners (Scout, Hilcorp, Simcoe, and Red Willow) for operations and royalty payments.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Royalty and Other Income | $1,779,455 | $1,036,950 | $2,624,872 | $1,769,844 |
| Interest Income | $22,936 | $1,026 | $43,023 | $1,055 |
| General & Administrative Expense | ($54,275) | ($64,707) | ($120,349) | ($122,158) |
| Distributable Income | $1,598,116 | $935,769 | $2,322,546 | $1,539,241 |
| Distributable Income Per Unit | $0.8575 | $0.5021 | $1.2463 | $0.8260 |
| Cash and Short-Term Investments | $3,155,822 | $2,356,010 | $3,155,822 | $2,356,010 |
| Contingent Reserve Balance | $1,550,180 | $1,135,268 | $1,550,180 | $1,135,268 |
Note: The Trust has no debt. Liquidity is derived solely from royalty income and interest on cash reserves.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 72% in Q2 2023 compared to Q2 2022, driven primarily by higher natural gas pricing and net production volumes from the San Juan Basin-New Mexico properties (operated by Hilcorp).
- Hugoton Properties: Generated $0 royalty income in Q2 2023 due to excess production costs exceeding revenues. This contrasts with $345,326 in Q2 2022. Operating costs were $378,147.
- San Juan Basin-Colorado: Generated $7,590 in Q2 2023 (up from $0 in Q2 2022), primarily from Red Willow. No income was received from Simcoe due to a deficit position resulting from joint interest billing adjustments.
- Interest Income: Increased significantly due to higher U.S. Prime Rates, with the Trustee crediting interest at rates ranging from 6.00% to 6.75% annualized during the period.
- Contingent Reserve: The Trustee increased the Contingent Reserve by $150,000 in Q2 2023, bringing the total to $1.55 million. The Trustee intends to increase this reserve to $2.0 million, which will reduce immediate distributions.
Outlook, Risks, and Management Commentary
- Reserve Funding: The Trustee plans to increase the Contingent Reserve to $2.0 million to cover future unknown liabilities and termination costs. This will require withholding future royalty income, potentially reducing or eliminating distributions to unitholders until the target is met.
- Operator Disputes and Reviews:
- Scout (Hugoton): The Trust is reviewing Scout's financial statements with a third-party consultant due to ongoing excess production costs and lack of income.
- Simcoe (Colorado): The Trust remains in a deficit position with Simcoe regarding joint interest billing amounts. A review of Simcoe's statements is commencing.
- Hilcorp (New Mexico): The Trust is conducting a review of reconciliation calculations by Hilcorp, expected to conclude in 2023.
- Market Risks: Distributions are heavily influenced by volatile commodity prices. Global uncertainty (Russia/Ukraine, OPEC actions) and inflationary pressures on operating costs pose risks to future Net Proceeds.
- Termination Risk: The Trust will terminate if royalty income falls below $250,000 for two successive years.
Investor Verification Checklist
- Contingent Reserve Impact: Verify the timeline and cash flow impact of the Trustee's plan to increase the reserve to $2.0 million.
- Hugoton Viability: Monitor the outcome of the third-party review of Scout's operations and the timeline for Hugoton properties to return to profitability.
- Simcoe Deficit: Track the resolution of the deficit position with Simcoe regarding joint interest billing and its effect on Colorado property income.
- Hilcorp Reconciliation: Watch for the conclusion of the Hilcorp reconciliation review in 2023 and any potential adjustments to past or future payments.
- Commodity Price Sensitivity: Assess the sensitivity of distributions to fluctuations in natural gas prices, given the heavy reliance on the San Juan Basin-New Mexico properties.