10-Q: Mesa Royalty Trust Reports Significant Drop in Distributable Income for Q1 2024

Mesa Royalty Trust's distributable income per unit decreased significantly in the first quarter of 2024 compared to the same period last year, primarily due to lower commodity prices and increased operating costs.

Summary

• Mesa Royalty Trust's distributable income for the first quarter of 2024 was $122,029, or $0.0655 per unit, a substantial decrease from $724,430, or $0.3887 per unit, in the first quarter of 2023.
• The decline in royalty income was primarily due to lower prices for natural gas, natural gas liquids, and oil and condensate, as well as increased operating and capital expenses.
• The Trust's royalty income decreased from $845,417 in Q1 2023 to $183,657 in Q1 2024.
• The Trust's interest income increased slightly to $24,228 from $20,087 in the same period last year.
• General and administrative expenses decreased to $46,192 from $66,074 year-over-year.
• The Trust is increasing its Contingent Reserve to $2.0 million, which will further reduce distributable income.
• The Trust received no royalty income from the Hugoton Royalty Properties or the San Juan Basin Colorado Properties during the quarter due to excess production costs.
• The majority of the royalty income came from the San Juan Basin New Mexico Properties, but it was still significantly lower than the previous year.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to a significant decrease in distributable income, royalty income, and the need to increase the Contingent Reserve. The lack of income from certain properties and ongoing issues with operators further contribute to the negative sentiment.

Positives

• General and administrative expenses decreased to $46,192 from $66,074 year-over-year.
• Interest income increased slightly to $24,228 from $20,087 in the same period last year.
• Operating costs for the San Juan Basin Colorado Properties decreased by approximately 51.1% year-over-year.

Negatives

• The Trust experienced a significant decrease in distributable income and royalty income.
• The Trust received no royalty income from the Hugoton Royalty Properties or the San Juan Basin Colorado Properties.
• The Trust is increasing its Contingent Reserve to $2.0 million, which will further reduce distributable income.
• Excess production costs continue to impact royalty income.
• The Trust remains in a deficit position with Simcoe for the San Juan Basin Colorado Properties.
• The Trust is engaged with Hilcorp in reviewing the amount of Net Proceeds in past and current periods.

Risks

• The Trust's income is heavily influenced by commodity prices, which are subject to volatility.
• Excess production costs can significantly reduce or eliminate royalty income.
• The Trust is dependent on the Working Interest Owners for information and operations.
• The increase in the Contingent Reserve will reduce distributable income.
• The Trust may be subject to litigation in the ordinary course of business.
• The Trust may not receive additional royalty income adequate to fund the Contingent Reserve and provide sufficient liquidity.
• The Trust may be unable to pay future distributions to unitholders if future royalty income is less than the amount required to fund the increase in the Contingent Reserve.

Future Outlook

The Trust anticipates continued volatility in commodity prices and potential impacts from inflation and supply chain disruptions. The Trustee intends to increase the Contingent Reserve to $2.0 million, which will reduce distributable income. The Trust is also reviewing certain financial and operational statements from Simcoe.

Management Comments

• The Trustee relies on the Working Interest Owners for information regarding the Subject Interests, the Royalty, and the Working Interest Owners themselves.
• The Trustee cannot assure that errors or adjustments or expenses accrued by the Working Interest Owners, whether historical or future, will not affect future royalty income and distributions by the Trust.
• The Trustee intends to allocate certain of its fees due to the Trust to meet the minimum interest rate payable under the Trust Indenture.
• The Trustee intends to increase the Contingent Reserve to a total of $2.0 million.

Industry Context

The report reflects the broader challenges faced by the oil and gas industry, including price volatility, increased operating costs, and supply chain disruptions. The decrease in royalty income is consistent with the general trend of lower commodity prices during the reporting period. The Trust's reliance on Working Interest Owners for operational data and financial reporting is a common structure in the royalty trust sector.

Comparison to Industry Standards

• The decrease in Mesa Royalty Trust's distributable income is more pronounced than some other royalty trusts, likely due to the specific properties and operators involved.
• Compared to larger, more diversified energy companies, Mesa Royalty Trust is more vulnerable to fluctuations in commodity prices and operational issues at specific properties.
• The Trust's reliance on a small number of operators (Scout, Hilcorp, Simcoe, and Red Willow) makes it more susceptible to the financial and operational performance of these entities.
• The level of excess production costs reported by Mesa Royalty Trust is higher than some other royalty trusts, indicating potential issues with the profitability of the underlying properties.
• The decision to increase the Contingent Reserve to $2.0 million is a conservative approach, which is not uncommon for royalty trusts facing uncertainty in commodity prices and operational issues.

Stakeholder Impact

• Shareholders will experience significantly reduced distributions due to lower royalty income and the increase in the Contingent Reserve.
• The Trust's employees (Trustee) will continue to manage the Trust's operations and financial reporting.
• The Working Interest Owners will continue to operate the properties and provide financial information to the Trust.
• The Trust's creditors are not directly impacted by the results, as the Trust has no debt.

Next Steps

• The Trustee will continue to monitor commodity prices and their impact on royalty income.
• The Trustee will continue discussions with Scout regarding financial and operational information.
• The Trust plans to commence a review of certain of Simcoe's financial and operational statements.
• The Trustee will continue to evaluate the adequacy of the Contingent Reserve and may adjust it as necessary.
• The Trustee will continue to allocate a portion of its fees earned for its services to the Trust until all remaining interest due to the Trust is fully offset.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Distributable Income, Commodity Prices, Production Costs, Operating Expenses, Capital Expenditures, Contingent Reserve, Natural Gas, Natural Gas Liquids, Oil, Hugoton, San Juan Basin