Mesa Royalty Trust(MTR) - 2025 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the unaudited financial statements, including statements of distributable income, assets, liabilities, and trust corpus, along with detailed notes and the Trustee's discussion and analysis Item 1. Financial Statements. This section presents the unaudited financial statements, including statements of distributable income, assets, liabilities, and trust corpus, highlighting decreased distributable income and per-unit distributions due to lower royalty income Statements of Distributable Income The Trust's distributable income decreased significantly from $122,029 in Q1 2024 to $80,999 in Q1 2025, primarily due to a reduction in royalty income Statements of Distributable Income (Unaudited) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Royalty income | $110,963 | $183,657 | | Other income | $(432) | $(14,664) | | Interest income | $20,161 | $24,228 | | General and administrative expenses | $(49,693) | $(46,192) | | Income available for distribution prior to cash reserves withheld for Trust expenses | $80,999 | $147,029 | | Cash reserves withheld for current Trust expenses | $— | $(25,000) | | Distributable income | $80,999 | $122,029 | | Distributable income per unit | $0.0435 | $0.0655 | | Units outstanding | 1,863,590 | 1,863,590 | - Royalty income decreased by approximately 39.6% from $183,657 in Q1 2024 to $110,963 in Q1 2025[11] - Distributable income per unit decreased by approximately 33.5% from $0.0655 in Q1 2024 to $0.0435 in Q1 2025[11] Statements of Assets, Liabilities and Trust Corpus As of March 31, 2025, total assets slightly increased to $3,200,869 from $3,187,975 at December 31, 2024 Statements of Assets, Liabilities and Trust Corpus | Metric | March 31, 2025 (Unaudited) | December 31, 2024 | | :--- | :--- | :--- | | ASSETS | | | | Cash and short-term investments | $1,953,024 | $1,930,126 | | Net overriding royalty interest in oil and gas properties | $42,498,034 | $42,498,034 | | Accumulated amortization | $(41,250,189) | $(41,240,185) | | Total assets | $3,200,869 | $3,187,975 | | LIABILITIES AND TRUST CORPUS | | | | Distributions payable | $61,606 | $58,101 | | General and administrative expense payable | $— | $— | | Trust corpus | $3,139,263 | $3,129,874 | | Total liabilities and trust corpus | $3,200,869 | $3,187,975 | - Cash and short-term investments increased by $22,898 from December 31, 2024, to March 31, 2025[12] Statements of Changes in Trust Corpus Trust corpus increased to $3,139,263 by March 31, 2025, from $3,129,874 at the beginning of the period, driven by distributable income partially offset by distributions and amortization Statements of Changes in Trust Corpus (Unaudited) | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Trust corpus, beginning of period | $3,129,874 | $3,040,907 | | Cash reserves withheld for current Trust expenses | $— | $25,000 | | Distributable income | $80,999 | $122,029 | | Distributions to unitholders | $(61,606) | $(114,987) | | Amortization of net overriding royalty interest | $(10,004) | $(10,720) | | Trust corpus, end of period | $3,139,263 | $3,062,229 | - Distributable income for Q1 2025 was $80,999, a decrease from $122,029 in Q1 2024[14] - Distributions to unitholders decreased from $114,987 in Q1 2024 to $61,606 in Q1 2025[14] Notes to Financial Statements These notes detail the Trust's organization, accounting policies, and financial items, emphasizing its passive nature, reliance on royalty interests, modified cash basis accounting, and impact of excess production costs - The Trust is a passive entity, owning an overriding royalty interest (Royalties) equal to 11.44% of 90% of Net Proceeds from specified oil and gas properties[18][27][55] - The Trust's financial statements are prepared on a modified cash basis of accounting, where royalty income is recorded when paid by Working Interest Owners, not when production occurs[38][39] - The Trust has no employees and its administrative functions are performed by The Bank of New York Mellon Trust Company, N.A., as Trustee[17] Note 1—Trust Organization and Provisions This note outlines the Trust's structure, its passive role, and the nature of its overriding royalty interests in oil and gas properties - The Trust owns an overriding royalty interest (Royalties) equal to 11.44% of 90% of the Net Proceeds from oil and gas properties in the Hugoton field of Kansas and the San Juan Basin fields of New Mexico and Colorado[18][21] - The Trust is a passive entity, limited to converting Royalties to cash and distributing it to unitholders, with no control over property operations or marketing[27][28][26] - Working Interest Owners (Scout, Hilcorp, Simcoe, Red Willow) partially reimburse the Trust for general and administrative expenses, with specific percentages: Scout (59.34%), Hilcorp (27.45%), and Simcoe (1.77%)[28] - For Q1 2025, Trustee's fees were $108,288, with Working Interest Owners reimbursing $95,897[30] - Simcoe-operated San Juan Basin—Colorado Properties are in a deficit position as of March 31, 2025, resulting in no royalty income from Simcoe for the three months ended March 31, 2025, due to prior period adjustments for joint interest billing amounts[23] Note 2—Basis of Presentation This note details the modified cash basis of accounting used for financial statements and the Trust's single-segment operational structure - Financial statements are prepared on a modified cash basis, meaning royalty income is recorded when paid by Working Interest Owners, not when production occurs[38][39] - The Trust operates as a single segment, deriving income from its net overriding royalty interest, and the Trustee (CODM) uses this information for cash reserve allocation and distributions[40] - Amortization of the Royalties is computed on a unit-of-production basis and charged directly to trust corpus, as it does not affect distributable income[38] Note 3—Legal Proceedings This note confirms the Trust is not a named party in legal proceedings but acknowledges potential litigation related to Royalty Properties - There are no pending legal proceedings where the Trust is a named party[41] - Working Interest Owners have advised the Trustee that the Trust may be subject to litigation in the ordinary course of business related to Royalty Properties, which could materially impact future royalty income if adjudicated or settled for a significant amount[41][42] Note 4—Income Tax Matters This note clarifies the Trust's grantor trust classification for federal income tax purposes and unitholder tax obligations - The Trust is classified as a grantor trust for federal income tax purposes, incurring no federal income tax liability; unitholders are subject to tax on their pro rata share of income and expense[43] - The Trust is considered a non-mortgage widely held fixed investment trust (WHFIT) for U.S. federal income tax purposes, with middlemen responsible for information reporting to unitholders[45][46] - Unitholders may be subject to the Net Investment Income Tax (NIIT) of 3.8% on investment income derived from the units[44] Note 5—Excess Production Costs This note explains excess production costs and their impact on royalty income, detailing the accumulated balances for various properties - Excess production costs occur when costs exceed revenue from a Royalty Property, and these costs are recoverable by Working Interest Owners before any royalty income is distributed to the Trust[47][49] Excess Production Costs | Property | As of March 31, 2025 | As of December 31, 2024 | | :--- | :--- | :--- | | Hugoton Properties | $840,349 | $734,035 | | San Juan Basin – Colorado Properties – Simcoe | $32,925 | $36,622 | | San Juan Basin – Colorado Properties – Red Willow | $23,672 | $23,181 | | San Juan Basin – New Mexico Properties – Hilcorp | $— | $— | | Total | $896,946 | $793,838 | - Total excess production costs increased by approximately 13% from $793,838 at December 31, 2024, to $896,946 at March 31, 2025, primarily driven by an increase in Hugoton Properties[47] Note 6—Distributable Income Per Unit This note discusses factors influencing distributable income per unit, including commodity price volatility and the Trustee's Contingent Reserve - Distributable income and distributions are heavily influenced by volatile commodity prices for oil and natural gas[50] - The Trustee maintains a 'Contingent Reserve' for future unknown contingent liabilities and expenses, which was $1,891,418 as of March 31, 2025, up from $1,762,256 as of March 31, 2024[51] Distributable Income Available for Distribution | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Income available for distribution prior to cash reserves withheld for Trust expenses | $80,999 | $147,029 | | Increase in the Contingent Reserve | $(130,692) | $(207,884) | | Withdrawal from the Contingent Reserve | $111,299 | $175,842 | | Distributable income available for distribution | $61,606 | $114,987 | | Distributable income available for distribution per unit | $0.0331 | $0.0617 | | Units outstanding | 1,863,590 | 1,863,590 | - Distributable income available for distribution per unit decreased by approximately 46.4% from $0.0617 in Q1 2024 to $0.0331 in Q1 2025[52] Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations. This section reviews the Trust's Q1 2025 financial performance, highlighting decreased royalty and distributable income due to lower commodity prices and higher expenses, and discusses the impact of market volatility and the Contingent Reserve - The Trust is a passive entity, owning an overriding royalty interest in oil and gas properties, with no control over operations or capital expenditures[56][57] - Royalty income and distributions are highly dependent on volatile natural gas and oil prices, which are influenced by global supply/demand, market uncertainty, and geopolitical factors[59][60][65] - The Trustee relies entirely on Working Interest Owners for operating and financial information regarding the Royalty Properties[57] Summary of Royalty Income, Production and Average Prices This section summarizes the Trust's royalty income, production volumes, and average commodity prices, detailing the calculation of net proceeds - Royalty income is calculated after deducting the Trust's proportionate share of capital costs, operating costs, and interest on cost carryforwards from Gross Proceeds[64][68] Summary of Royalty Income, Production and Average Prices (Unaudited) | Metric | Natural Gas (2025) | Natural Gas Liquids (2025) | Oil and Condensate (2025) | Natural Gas (2024) | Natural Gas Liquids (2024) | Oil and Condensate (2024) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | The Trust's proportionate share of Gross Proceeds | $496,562 | $290,329 | $11,684 | $593,568 | $310,644 | $13,987 | | Less the Trust's proportionate share of: | | | | | | | | Capital costs recovered | $(12,165) | $(11,895) | $(766) | $(35,570) | $(27,836) | $(1,795) | | Operating costs | $(497,227) | $(261,241) | $(7,427) | $(596,006) | $(249,953) | $(6,840) | | Net proceeds | $(12,830) | $17,193 | $3,491 | $(38,008) | $32,855 | $5,352 | | Royalty income | $54,904 | $52,568 | $3,491 | $99,696 | $78,609 | $5,352 | | Average sales price (per Mcf/Bbl) | $1.46 | $21.39 | $61.02 | $2.16 | $23.34 | $67.01 | | Average production costs (per Mcf/Bbl) | $13.59 | $111.15 | $143.15 | $13.69 | $82.49 | $108.10 | | Net production volumes attributable to the Royalty paid (Mcf/Bbl) | 37,497 | 2,457 | 57 | 46,146 | 3,367 | 80 | - Royalty income decreased by 39.6% from $183,657 in Q1 2024 to $110,963 in Q1 2025[67] - Average sales prices for Natural Gas, Natural Gas Liquids, and Oil and Condensate all decreased in Q1 2025 compared to Q1 2024[67] Financial Review This review analyzes the Trust's royalty income, interest income, and general and administrative expenses, along with the management of the Contingent Reserve - Royalty income for Q1 2025 was $110,963, a decrease from $183,657 in Q1 2024, primarily due to decreases in pricing and net production for natural gas, natural gas liquids, and oil/condensate, and increases in operating expenses for natural gas liquids and oil/condensate[70] - Interest income decreased from $24,228 in Q1 2024 to $20,161 in Q1 2025[70][73] - General and administrative expenses increased to $49,693 in Q1 2025 from $46,192 in Q1 2024[70][74] - The Trustee intends to allocate a portion of its fees to meet the minimum interest rate payable under the Trust Indenture, as the required 6.00% annualized return was unavailable in the market[75] - The Contingent Reserve balance increased to $1,891,418 as of March 31, 2025, from $1,762,256 as of March 31, 2024. The Trustee intends to increase the Contingent Reserve to a total of $2.0 million[77] Monthly Per Unit Distributions | Month | 2025 | 2024 | | :--- | :--- | :--- | | January | $0.0005 | $0.0252 | | February | $0.0024 | $0.0087 | | March | $0.0302 | $0.0278 | | Total | $0.0331 | $0.0617 | Operational Review This review examines the operational performance of the Trust's royalty properties, considering global market impacts and specific property-level production and costs - Global trade volatility, OPEC+ actions, macroeconomic conditions, and geopolitical risks continue to affect oil and gas market prices, leading to potential reductions or cessation of future distributions[79][80] - Inflationary pressures, high interest rates, and supply chain disruptions are expected to increase Working Interest Owners' expenses and adversely impact royalty income in 2025[80] Global Oil and Gas Market Impact in 2025 This section discusses how global tariffs, trade policies, and geopolitical events contribute to market volatility and increased operating expenses for Working Interest Owners - Tariffs, trade policy, and geopolitical events (e.g., Russia-Ukraine, Middle East) contribute to volatility in global oil and natural gas markets, potentially impacting Working Interest Owners' business and Trust distributions[79][80] - High inflation, interest rates, and supply chain disruptions are expected to increase expenses for Working Interest Owners, negatively affecting royalty income in 2025[80] Hugoton Royalty Properties This section details the Hugoton Royalty Properties' performance, noting no royalty income due to expenses exceeding revenues and changes in operating costs - Hugoton Royalty Properties generated no royalty income for the Trust in Q1 2025 or Q1 2024, primarily because actual expenses exceeded actual revenues as reported by Scout[81][82] - Operating costs for Hugoton Royalty Properties decreased by approximately 11% to $487,403 in Q1 2025 from $550,033 in Q1 2024, mainly due to lower compressor repair costs[84] - Capital expenditures were ($432) in Q1 2025 due to an operator adjustment, compared to $155 in Q1 2024[84] Hugoton Royalty Properties Production and Prices | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Average sales price: | | | | Natural Gas (per Mcf) | $3.65 | $3.55 | | Natural Gas Liquids (per Bbl) | $20.30 | $17.44 | | Oil and Condensate (per Bbl) | $— | $— | | Actual production volumes attributable to the Royalty paid: | | | | Natural Gas (Mcf) | 75,118 | 76,175 | | Natural Gas Liquids (Bbls) | 5,239 | 5,350 | | Oil and Condensate (Bbls) | — | — | | Net production volumes attributable to the Royalty paid: | | | | Natural Gas (Mcf) | — | — | | Natural Gas Liquids (Bbls) | — | — | | Oil and Condensate (Bbls) | — | — | San Juan Basin Royalty Properties This section reviews the performance of San Juan Basin royalty properties, distinguishing between Colorado and New Mexico operations and their respective royalty income contributions - Royalty income from San Juan Basin properties is calculated and paid on a state-by-state basis (Colorado or New Mexico), with the majority attributable to New Mexico properties[86] San Juan Basin—Colorado Properties This section details the San Juan Basin—Colorado Properties' performance, noting no royalty income due to prior period adjustments and changes in operating costs - No royalty income was generated from San Juan Basin—Colorado Properties in Q1 2025 or Q1 2024, due to prior period adjustments for joint interest billing amounts recovered by Simcoe[87][89] - Operating costs decreased to $29,225 in Q1 2025 from $44,491 in Q1 2024. Capital expenditures were $0 in both periods[90] San Juan Basin—Colorado Properties Production and Prices | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Average sales price: | | | | Natural Gas (per Mcf) | $0.58 | $0.73 | | Natural Gas Liquids (per Bbl) | $0.75 | $0.66 | | Oil and Condensate (per Bbl) | $— | $— | | Actual production volumes attributable to the Royalty paid: | | | | Natural Gas (Mcf) | 54,368 | 63,645 | | Natural Gas Liquids (Bbls) | 898 | 1,017 | | Oil and Condensate (Bbls) | — | — | | Net production volumes attributable to the Royalty paid: | | | | Natural Gas (Mcf) | — | — | | Natural Gas Liquids (Bbls) | — | — | | Oil and Condensate (Bbls) | — | — | San Juan Basin—New Mexico Properties This section details the San Juan Basin—New Mexico Properties' performance, highlighting decreased royalty income due to lower pricing and production, and changes in operating and capital expenditures - Royalty income decreased by approximately 40% to $110,963 in Q1 2025 from $183,657 in Q1 2024, due to lower pricing and net production, and increased operating expenses for liquids/condensate[92] - Operating costs decreased by approximately 3% to $249,267 in Q1 2025 from $258,275 in Q1 2024[93] - Capital expenditures decreased by approximately 61% to $25,258 in Q1 2025 from $65,046 in Q1 2024, reflecting fewer major recompletion projects[93] San Juan Basin—New Mexico Properties Production and Prices | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Average sales price: | | | | Natural Gas (per Mcf) | $1.46 | $2.16 | | Natural Gas Liquids (per Bbl) | $21.39 | $23.34 | | Oil and Condensate (per Bbl) | $61.02 | $67.01 | | Actual production volumes attributable to the Royalty paid: | | | | Natural Gas (Mcf) | 130,103 | 127,903 | | Natural Gas Liquids (Bbls) | 8,569 | 9,281 | | Oil and Condensate (Bbls) | 191 | 209 | | Net production volumes attributable to the Royalty paid: | | | | Natural Gas (Mcf) | 37,497 | 46,146 | | Natural Gas Liquids (Bbls) | 2,457 | 3,367 | | Oil and Condensate (Bbls) | 57 | 80 | - Hilcorp may recover past overpayments or under-estimated expenses by withholding future Net Proceeds, potentially reducing future distributions to unitholders[95] Liquidity and Capital Resources This section discusses the Trust's liquidity, focusing on the Contingent Reserve and the impact of excess production costs on future distributions - The Trustee maintains a Contingent Reserve for future unknown liabilities and expenses, which is included in cash and short-term investments[96] - The Trustee intends to increase the Contingent Reserve to a total of $2.0 million, which will reduce Net Proceeds available for distribution to unitholders[97][99] - Substantial accumulated excess production costs have decreased Trust income and distributions in recent periods, and there is no assurance of sufficient future royalty income to fund the Contingent Reserve and provide liquidity[100] - Unitholders may not receive material distributions in future periods if royalty income is insufficient to fund the planned increase in the Contingent Reserve[101] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This item is marked as not applicable for the Trust, indicating no specific quantitative or qualitative market risk disclosures are provided - This item is marked as 'Not applicable' for the Trust[103] Item 4. Controls and Procedures. This section confirms the effectiveness of the Trustee's disclosure controls and procedures, while noting reliance on Working Interest Owners for operational data - The Trustee's disclosure controls and procedures were evaluated as effective for the Trustee and its employees as of the end of the reporting period[104][105] - The Trustee relies on information provided by Working Interest Owners for disclosure, including litigation status, operating data, and reserve information, and has not evaluated their internal controls[106][108][109] - No material changes in the Trust's internal control over financial reporting were identified during the last fiscal quarter[109] PART II—OTHER INFORMATION This section covers legal proceedings, risk factors, other information, exhibits, and signatures, providing additional context beyond the financial statements Item 1. Legal Proceedings. The Trust is not a named party in any pending legal proceedings, but Working Interest Owners have indicated potential ordinary course litigation related to Royalty Properties - The Trust is not a named party in any pending legal proceedings[111] - Working Interest Owners have advised that the Trust may be subject to ordinary course litigation concerning Royalty Properties, which could materially impact future royalty income[111] Item 1A. Risk Factors. There were no material changes to the Trust's risk factors during the quarter ended March 31, 2025, as previously discussed in the Annual Report on Form 10-K - No material changes to risk factors occurred during Q1 2025[112] - For a comprehensive discussion of potential risks, refer to the Trust's Annual Report on Form 10-K for the year ended December 31, 2024[112] Item 5. Other information. No officer or employee of the Trustee performing policy-making functions for the Trust adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended March 31, 2025 - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by policy-making personnel during Q1 2025[113] Item 6. Exhibits. This section lists the exhibits filed with the Form 10-Q, including the Mesa Royalty Trust Indenture, Overriding Royalty Conveyance, amendments, and certifications under the Sarbanes-Oxley Act - Key exhibits include the Mesa Royalty Trust Indenture and its amendments, the Overriding Royalty Conveyance, and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[114][116] Signatures The report was duly signed on behalf of Mesa Royalty Trust by The Bank of New York Mellon Trust Company, N.A., as Trustee, through Elaina Rodgers, Vice President & Trust Officer, on May 15, 2025 - The report was signed by Elaina Rodgers, Vice President & Trust Officer of The Bank of New York Mellon Trust Company, N.A., as Trustee, on May 15, 2025[119] - Mesa Royalty Trust has no principal executive officer, principal financial officer, or board of directors[119]