Mesa Royalty Trust - 10-Q Summary (Q2 2009)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for Mesa Royalty Trust, a passive entity holding a 90% overriding royalty interest in specified oil and gas properties (Hugoton Field, San Juan Basin). The Trust distributes cash receipts to unitholders quarterly. As of September 30, 2009, there were 1,863,590 units outstanding.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Royalty Income | $745,374 | $3,476,622 | $1,880,148 | $6,361,131 |
| Distributable Income | $701,324 | $3,454,825 | $1,787,259 | $6,326,850 |
| Distributable Income Per Unit | $0.3763 | $1.8539 | $0.9590 | $3.3950 |
| Cash & Short-term Investments | $701,244 | $2,917,460 (Dec 31, 2008) | N/A | |
| Net Overriding Royalty Interest (Net of Amortization) | $6,768,816 | $7,035,039 (Dec 31, 2008) | N/A |
Liquidity & Debt: The Trust holds no debt. Liquidity is derived solely from royalty receipts and interest on cash reserves. Cash balances decreased significantly from $2.92 million at year-end 2008 to $0.70 million at June 30, 2009, reflecting lower income and distributions.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for Q2 2009 decreased approximately 79% compared to Q2 2008. YTD 2009 income decreased approximately 70% compared to YTD 2008.
- Price Impact: The decline is primarily attributed to significantly lower natural gas and natural gas liquids prices. Average natural gas prices dropped from $7.28/Mcf in Q2 2008 to $2.98/Mcf in Q2 2009.
- Production Volumes: Net production volumes attributable to the royalty generally decreased due to natural decline, though actual production in the San Juan Basin (New Mexico) increased slightly due to better gathering run times.
- Excess Production Costs: The Trust received no royalty income from San Juan Basin-Colorado properties in Q2 2009 due to excess production costs of approximately $110,000 that must be recovered by operators before distributions resume.
Outlook, Risks, and Unusual Items
- 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, which could adversely affect future distributions. PNR is currently reviewing the assessment.
- 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, operators (PNR, ConocoPhillips, BP) are subject to ordinary course litigation that could impact royalty income if settled adversely.
- Regulatory Changes: The Trust is evaluating new SEC reserve reporting rules effective for fiscal years ending after December 31, 2009.
Investor Verification Checklist
- Verify the status of the $158,000 proposed tax assessment by the Kansas Department of Revenue and its potential impact on upcoming distributions.
- Monitor natural gas price trends, as the Trust's income is directly correlated to commodity prices which have historically been volatile.
- Confirm the recovery status of excess production costs in the San Juan Basin-Colorado properties to determine when income from this segment will resume.
- Review operator reports for updates on production decline rates in the Hugoton and San Juan Basin fields.