Mesa Royalty Trust 2018 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Mesa Royalty Trust (MTR)
Reporting Period: Fiscal year ended December 31, 2018
Structure: A passive Texas grantor trust with no employees, administered by The Bank of New York Mellon Trust Company, N.A.
Assets: The Trust holds an overriding royalty interest equal to 11.44% of 90% of the Net Proceeds from oil and gas properties in the Hugoton field (Kansas) and the San Juan Basin (New Mexico and Colorado).
Operators: Riviera Resources, Inc. (Hugoton), Hilcorp San Juan LP (San Juan Basin-New Mexico), and BP/Red Willow (San Juan Basin-Colorado).
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Royalty Income | $2,332,319 | $3,028,793 |
| Interest Income | $22,951 | $10,221 |
| General & Administrative Expenses | ($217,138) | ($100,795) |
| Distributable Income | $2,138,132 | $2,938,219 |
| Distributable Income Per Unit | $1.1473 | $1.5766 |
| Total Distributions Paid Per Unit | $1.1910 | $1.5124 |
| Cash and Short-Term Investments | $1,604,884 | $1,801,613 |
| Contingent Reserve Balance | $1,038,364 | $1,119,671 |
| Units Outstanding | 1,863,590 | 1,863,590 |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 23% ($696,474) compared to 2017. This was driven by lower natural gas and condensate prices, increased operating costs, and lower net production volumes.
- Regional Performance:
- Hugoton Properties: Royalty income dropped 43% to $759,039 due to lower gas prices and higher operating costs (up 63% due to processing fees and taxes).
- San Juan Basin-New Mexico: Royalty income increased 7% to $1,165,797, driven by higher NGL prices and volumes, partially offset by lower gas prices.
- San Juan Basin-Colorado: Royalty income decreased 34% to $407,483 due to lower gas prices and volumes.
- Expense Timing: General and administrative expenses increased significantly ($116,343) primarily due to the timing of payments for December 2017 expenses paid in January 2018 and a vendor refund received in late 2018.
- Operator Changes: Riviera Resources became the operator of the Hugoton properties in August 2018 following a spin-off from Linn Energy. Hilcorp continued to operate San Juan Basin-New Mexico properties.
Outlook, Risks, and Contingencies
- Estimated Revenue Reconciliation: Hilcorp is currently paying estimated Net Proceeds for the San Juan Basin-New Mexico properties while finalizing revenue decks. A future reconciliation could result in withholding future payments if estimated revenues exceeded actuals, potentially materially reducing distributions.
- Commodity Price Risk: Distributions are highly sensitive to natural gas prices. Henry Hub spot prices averaged $3.17/MMBtu in 2018. Sustained low prices could reduce net proceeds and necessitate reserve write-downs.
- Depletion: The Trust holds depleting assets with no proved undeveloped reserves. Future distributions depend on the operators' ability to maintain production or develop new wells, which is not controlled by the Trust.
- Contingent Reserve: The Trust maintains a reserve of approximately $1.04 million for unknown contingent liabilities. Adjustments to this reserve affect distributable income but do not represent cash outflows from the Trust corpus.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Royalty income is recorded when paid by operators, not when production occurs.
Key Facts for Investor Verification
- Revenue Reconciliation Status: Verify the timeline for Hilcorp's reconciliation of estimated vs. actual revenues for the San Juan Basin-New Mexico properties, as this poses a direct risk to future cash flow.
- Operator Financial Health: Monitor the financial stability of Riviera, Hilcorp, and BP, as the Trust has no control over operations and relies entirely on these entities to fund production costs and pay royalties.
- Production Decline Rates: Review the reserve report (Exhibit 99.1) to understand the natural decline rates of the Hugoton and San Juan Basin fields, as there are no proved undeveloped reserves to offset depletion.
- Expense Reimbursement: Confirm that Working Interest Owners continue to reimburse the Trust for approximately 88.56% of general and administrative expenses as required by the Trust Indenture.
- Termination Threshold: Note that the Trust will terminate if royalty income falls below $250,000 for two successive years; current income levels are well above this threshold.