Mesa Royalty Trust: Q1 2015 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 2015. 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 distributes cash to unitholders quarterly. As of May 15, 2015, there were 1,863,590 units outstanding.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Royalty Income | $790,090 | $1,244,584 |
| Interest Income | $0 | $35 |
| General & Administrative Expenses | ($164,931) | ($43,448) |
| Distributable Income | $625,159 | $1,201,171 |
| Distributable Income Per Unit | $0.3355 | $0.6445 |
| Distributions Available for Distribution (incl. reserve withdrawal) | $742,777 ($0.3986/unit) | $1,201,171 ($0.6445/unit) |
| Cash and Short-Term Investments | $1,625,159 | $2,117,114 (Dec 31, 2014) |
| Net Overriding Royalty Interest (Book Value) | $2,923,540 | $3,013,833 (Dec 31, 2014) |
| Trust Corpus | $3,805,922 | $4,013,833 (Dec 31, 2014) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 37% year-over-year. This was primarily driven by lower natural gas and natural gas liquids (NGL) prices and reduced production volumes.
- Expense Increase: General and administrative expenses increased significantly to $164,931 from $43,448 in the prior year, though a portion of these are reimbursed by working interest owners.
- Production and Pricing:
- Hugoton Field: Royalty income dropped to $374,302 from $447,710. While natural gas prices increased slightly ($4.18/Mcf vs $3.83/Mcf), NGL prices fell sharply ($16.59/bbl vs $35.66/bbl), and NGL volumes decreased.
- San Juan Basin (New Mexico): Royalty income fell to $399,492 from $730,296 due to lower prices and reduced NGL production.
- San Juan Basin (Colorado): Royalty income declined to $16,296 from $66,578, primarily due to increased operating expenses offsetting higher gas prices and volumes.
- Reserve Utilization: The Trustee withdrew $117,618 from the reserve for future unknown contingent liabilities and expenses, increasing the distributable income available for distribution to $0.3986 per unit.
Outlook, Risks, and Contingencies
- Market Risk: Distributions are highly dependent on natural gas and NGL prices, which fluctuate based on global economic conditions, weather, and supply/demand dynamics. The Trust has no control over these factors.
- Operator Transition: Linn Energy Holdings, LLC took over as the operator of the Hugoton Royalty Properties effective January 1, 2015, following a transition period where Pioneer Natural Resources provided services.
- Excess Production Costs: As of March 31, 2015, there were $33,837 in excess production costs (costs exceeding revenue) that must be recovered by working interest owners before royalty distributions are made. The majority ($33,359) relates to BP-operated properties in Colorado.
- Legal Proceedings: No pending legal proceedings name the Trust as a party. However, working interest owners are subject to ordinary litigation which could materially impact future royalty income if charges are made against the royalty.
- Termination Trigger: The Trust will terminate if royalty income falls below $250,000 for two successive years. Current income levels remain well above this threshold.
Investor Verification Checklist
- Verify the impact of the operator transition from Pioneer to Linn on future Hugoton field production and cost structures.
- Monitor the status of the $33,837 in excess production costs, particularly regarding the BP-operated Colorado properties, to assess potential delays in future distributions.
- Track natural gas and NGL price trends, as the Trust's revenue is directly correlated with these volatile commodity prices.
- Review the $882,382 reserve for unknown contingent liabilities to understand the Trustee's strategy for releasing or replenishing these funds.
- Confirm the status of any ongoing audits with working interest owners (Linn, ConocoPhillips, BP) that could result in retroactive payments or adjustments.