MTR

Mesa Royalty Trust (MTR) - Q1 2021 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2021. Mesa Royalty Trust is a passive entity created in 1979 that holds 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. As of May 17, 2021, there were 1,863,590 Units of Beneficial Interest outstanding.

Key Financial Metrics

Note: Net Overriding Royalty Interest is calculated as Gross Asset ($42,498,034) less Accumulated Amortization.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income dropped 90% to $36,515 from $378,284 in Q1 2020. This was primarily due to Working Interest Owners (Scout and Hilcorp) withholding Net Proceeds to recover excess production costs and capital expenditures from prior periods.
• Zero Distributions: No distributions were paid to unitholders for January, February, or March 2021. This marks a continuation of the suspension of distributions that began in May 2020.
• Expense Increases: General and administrative expenses increased to $34,302 from $17,639, largely due to the timing of expense reimbursements from Working Interest Owners.
• Property-Specific Performance:
  • Hugoton Properties: Royalty income was $0 (down from $100,552) due to cost recoveries by Scout.
  • San Juan Basin - New Mexico: Royalty income was $0 (down from $175,986) due to a $975,792 charge from Hilcorp reconciling historical estimates, including ~$1.1 million in incremental costs from a 2018 well.
  • San Juan Basin - Colorado: Royalty income was $36,515 (down from $101,746), reflecting only January revenue as February/March data was delayed during the transition from BP to IKAV.

Outlook, Risks, and Contingencies

• Historical Reconciliation: Hilcorp has completed the true-up reconciliation for estimated revenues/expenses from 2017-2019. However, a balance of $742,358 remains to be recovered from future Net Proceeds of the San Juan Basin-New Mexico Properties. Future distributions will be withheld until this amount is fully recovered.
• Excess Production Costs: Total excess production costs (costs exceeding revenue) stood at $1,189,497 as of March 31, 2021, up from $486,215 at year-end 2020. These must be recovered before any future royalty income is paid to the Trust.
• Contingent Reserve: The Trustee maintains a Contingent Reserve of $1,078,725 (included in cash) to cover future unknown liabilities. This reserve was increased during the quarter to cover unreimbursed expenses and withheld royalty income.
• Market Risks: The Trust remains heavily influenced by commodity prices. While natural gas prices increased in Q1 2021, the Trust notes that the COVID-19 pandemic and market uncertainty continue to pose material risks to future distributions.
• Legal Proceedings: No pending legal proceedings name the Trust as a party, though the Trust may be subject to litigation in the ordinary course of business regarding the Royalty Properties.

Key Facts for Investor Verification

• Distribution Status: Verify the continued suspension of distributions and the specific timeline for when Working Interest Owners expect to recover the outstanding $742,358 charge from Hilcorp.
• Cost Recovery Mechanics: Confirm the calculation of the $1.1 million incremental cost charge from the 2018 well in New Mexico and the Trustee's ongoing review of Hilcorp's reconciliation calculations.
• Operator Transitions: Monitor the transition of operations in the San Juan Basin-Colorado properties from BP to IKAV, specifically regarding the timing of expense reporting for February and March 2021.
• Reserve Adequacy: Assess whether the current cash balance ($1.08M) is sufficient to cover ongoing administrative expenses and potential future liabilities given the zero-revenue environment.