Mesa Royalty Trust 10-Q Summary
Business Context and Reporting Period
Mesa Royalty Trust is a passive entity created in 1979 holding an overriding royalty interest 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 derived from 90% of the Net Proceeds attributable to these properties. This report covers the quarterly period ended June 30, 2014. As of August 14, 2014, there were 1,863,590 Units of Beneficial Interest outstanding.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Royalty Income | $2,487,660 | $690,404 | $3,732,244 | $1,729,479 |
| Distributable Income | $2,441,265 | $653,299 | $3,642,436 | $1,639,430 |
| Distributable Income Per Unit | $1.3100 | $0.3505 | $1.9545 | $0.8797 |
| Cash and Short-Term Investments | $3,441,265 (as of June 30, 2014) | |||
| Net Overriding Royalty Interest (Book Value) | $3,368,362 (as of June 30, 2014) | |||
| Trust Corpus | $4,368,362 (as of June 30, 2014) |
The Trust holds no debt. Liquidity is derived solely from royalty income and interest on cash reserves. A $1.0 million reserve for future unknown contingent liabilities is included in cash and short-term investments.
Material Changes vs. Prior Period
Royalty income for the second quarter of 2014 increased approximately 260% compared to the same period in 2013. Year-to-date royalty income increased approximately 116%. Key drivers for this growth include:
- One-Time Settlement: The April 2014 distribution included $881,595 resulting from a settlement agreement with a working interest owner following an audit of revenues and expenses for calendar years 2006 through 2013.
- Commodity Prices: Higher average sales prices for natural gas and natural gas liquids compared to 2013.
- Production Volumes: Increased net production volumes of natural gas and liquids in both the Hugoton and San Juan Basin (New Mexico) fields.
- Costs: Decreased capital expenditures in the San Juan Basin offset by slightly higher operating costs in some areas.
Outlook, Risks, and Unusual Items
Subsequent Event (Asset Sale): On August 4, 2014, Pioneer Natural Resources Company (operator of the Hugoton properties) announced an agreement to sell all its assets in the Hugoton field to Linn Energy, LLC. The transaction is expected to close by the end of the third quarter of 2014, with Linn Energy becoming the new operator.
Unusual Items: The $881,595 settlement payment mentioned above is a non-recurring item significantly boosting Q2 and YTD 2014 results.
Risks: The Trust is highly dependent on natural gas prices, which fluctuate based on global economic conditions, weather, and supply/demand. The Trustee relies entirely on working interest owners (Pioneer, ConocoPhillips, BP) for operational data and has no control over the development of the properties. There are no pending legal proceedings naming the Trust, though working interest owners are subject to ordinary litigation.
Investor Verification Checklist
- Verify the closing status and terms of the Hugoton field asset sale to Linn Energy, LLC, and confirm the new operator's payment history.
- Confirm the sustainability of royalty income excluding the $881,595 one-time audit settlement.
- Monitor natural gas and natural gas liquids price trends, as they are the primary drivers of distributable income.
- Review the status of the $1.0 million reserve held for contingent liabilities.
- Check for any updates on the reimbursement of general and administrative expenses by working interest owners, specifically following the temporary suspension by ConocoPhillips in April 2014.