MESA ROYALTY TRUST/TX Annual Report - How They Did This Year

I’ve put together this guide to help you understand how Mesa Royalty Trust performed this year. Think of this as a cheat sheet to help you decide if this investment still fits your portfolio.

1. What does this company do?

Mesa Royalty Trust isn't a typical company. It has no employees, CEO, or board of directors. Think of it as a pipeline for cash. It was created in 1979 to collect a share of the profits from oil and gas wells in New Mexico, Colorado, and Kansas.

The Trust is a passive collector. It relies on third-party operators, mainly Hilcorp Energy Company, to manage the wells. When they sell the oil and gas, they pay the Trust a slice of the profit. The Trust then passes that cash to you. As of December 31, 2025, there were 1,868,375 units outstanding.

2. How the money works

The Trust is a "wasting asset." Every barrel of oil or gas pulled from the ground is one less available for the future. Unless new wells are added—which is rare—income will naturally drop as the fields run dry. Because you receive a share of the net profits, your payments depend heavily on energy prices and how efficiently the wells run. If the operator’s costs exceed their sales in a given month, the Trust receives nothing, and that debt carries over to future months.

3. Performance Update: 2025 vs. 2024

Results for 2025 were mixed. While the payout per unit rose to $0.2328 (up from $0.2109 in 2024), this was mostly due to the Trustee managing cash reserves differently, not a jump in production.

• The "Excess Cost" Hurdle: A major issue this year was "excess production costs." When it costs more to run the wells than the oil and gas earns, the Trust gets nothing. By the end of 2025, these unpaid costs grew to $938,739 (up from $793,838 in 2024). Future production must pay off this debt before you see another dime from those wells.
• The Colorado "Zero": Colorado properties remain in a deficit. Meanwhile, production in the San Juan Basin dropped about 6% as the wells naturally depleted.

4. The "Future Value" Reality Check

The Trust estimates the value of the oil and gas left in the ground. As of late 2025, the estimated future cash flow rose to $11 million, up from $8.9 million in 2024. This increase reflects higher year-end energy price estimates. However, this is just an engineer's estimate, not a guarantee.

5. Financial health and risks

• No Control: You have no say in how these wells are run. You are at the mercy of the operators. If they decide to close a well to save money, that income stream is gone forever.
• High Costs: The Trust spent $669,000 on audit and tax fees in 2025. While operators reimburse most of this, administrative costs remain a constant drain.
• Termination: The Trust will shut down if annual income drops below $250,000 for two years in a row. With 2025 distributions near $435,000, the Trust is getting closer to this limit.

6. Tax & Legal Note

You are treated as if you own the oil wells yourself. The Trust pays no federal income tax; you report your share of income and expenses on Schedule K-1. You may owe the 3.8% Net Investment Income Tax on your earnings. Also, because this is a depleting asset, part of your payout may be a "return of capital." This lowers your cost basis, which affects your taxes when you sell or when the Trust ends.

Final Thought for Investors: Mesa Royalty Trust is a declining asset that functions as a direct pass-through for oil and gas profits. Because the Trust is nearing its termination threshold and is currently burdened by rising "excess production costs," it is best viewed as a speculative income play rather than a long-term growth investment. Before buying, consider whether the current yield justifies the risk of the Trust potentially winding down operations in the coming years.