Mesa Royalty Trust (MTR) - Q1 2020 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2020. Mesa Royalty Trust is a passive entity created in 1979, holding 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 is currently operated by Scout Energy (Hugoton), Hilcorp (San Juan Basin-New Mexico), and BP/Red Willow (San Juan Basin-Colorado).
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Royalty Income | $378,284 | $726,869 |
| Interest Income | $4,328 | $7,972 |
| General & Administrative Expense | ($17,639) | ($47,546) |
| Distributable Income | $364,973 | $687,295 |
| Distributable Income Per Unit | $0.1958 | $0.3688 |
| Distributions Available for Distribution | $467,813 ($0.2510/unit) | $669,300 ($0.3591/unit) |
| Cash and Short-Term Investments | $1,342,183 | $1,233,060 |
| Net Overriding Royalty Interest (Net of Amortization) | $1,574,923 | $1,607,310 |
| Units Outstanding | 1,863,590 | 1,863,590 |
Note: The Trust has no debt. Liquidity is derived solely from royalty income and interest on cash reserves.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased approximately 48% year-over-year. The Trustee attributes a significant portion of this decline to timing differences; royalty income from Scout (Hugoton operator) for February and March 2020 was not received until April 2020. Adjusted for this timing, the decline would be approximately 28%.
- Commodity Prices: The decrease was driven by lower natural gas prices and decreased net production volumes, partially offset by higher oil/condensate prices and increased oil production.
- Expense Reduction: General and administrative expenses decreased significantly due to a $23,629 reimbursement from Scout that was received in January 2020 but related to December 2019.
- San Juan Basin Reconciliation: Hilcorp (San Juan Basin-New Mexico operator) reconciled historical amounts for October-December 2017, resulting in additional payments of $10,578. However, significant incremental costs of approximately $1.1 million incurred in 2018 for a new well are expected to reduce future Net Proceeds as they are reconciled.
Outlook, Risks, and Management Commentary
- COVID-19 Impact: The Trustee highlights that the COVID-19 pandemic and associated "shelter in place" orders have severely reduced global demand for oil and natural gas, leading to steep price declines. This is adversely affecting the Working Interest Owners' operations and could materially reduce future distributions.
- Geopolitical Factors: A dispute between OPEC and Russia regarding production cuts has contributed to an oversupply of crude oil, further depressing prices.
- Contingent Reserve: As of March 31, 2020, the Contingent Reserve stood at $874,370. The Trustee increased the reserve by $45,897 and decreased it by $148,737 during the quarter to manage timing differences in cash receipts versus distributions.
- Future Adjustments: Net Proceeds from the San Juan Basin-New Mexico Properties may not be representative of future quarters due to ongoing reconciliations of historical estimates versus actuals by Hilcorp. Hilcorp may withhold future Net Proceeds to recover estimated costs that exceed actuals.
- Termination Trigger: The Trust will terminate if Royalty income falls below $250,000 for two successive years. Current income levels remain above this threshold, but the Trustee notes the uncertainty of future commodity prices.
Key Facts for Investor Verification
- Timing of Cash Receipts: Verify the impact of delayed royalty payments from Scout (Hugoton) on Q1 2020 reported income versus actual economic performance.
- Hilcorp Reconciliation: Monitor the status of the $1.1 million incremental cost reconciliation for the San Juan Basin-New Mexico properties, which poses a risk to future distributions.
- Commodity Price Sensitivity: Assess the Trust's exposure to continued low natural gas and oil prices driven by the pandemic and geopolitical supply issues.
- Contingent Reserve Usage: Track changes in the Contingent Reserve, as withdrawals or additions directly impact the cash available for distribution to unitholders.
- Operator Stability: Confirm the operational status of the Working Interest Owners (Scout, Hilcorp, BP, Red Willow) given the industry-wide financial stress caused by the pandemic.