MESA ROYALTY TRUST/TX (MTR) stock intrinsic value fair value estimate & owner earnings analysis

Mesa Royalty Trust is a passive Texas trust that holds a net overriding royalty (about 11.4% of 90% of net proceeds) on natural gas, natural gas liquids and oil properties in New Mexico, Colorado and Kansas. It has no employees, no debt, no capital spending and no stock compensation. The trust receives a share of what Hilcorp (San Juan Basin, New Mexico) and, formerly, Scout (Hugoton, Kansas) earn after they deduct operating and capital costs, pays a small administrative bill, and passes the rest to the 1,863,590 unitholders. Because the trust cannot buy anything new, every dollar it earns comes from a depleting set of wells. What the income really depends on. Today essentially all of the income comes from the San Juan Basin in New Mexico. The Hugoton royalty has paid nothing since 2020 because Scout's costs exceed its revenue, and the accumulated deficit there (about $0.9 million at year-end 2025, about $1.2 million by mid-2026) must be repaid before Hugoton can pay again, so we credit it with nothing. The royalty is revenue minus fixed-style costs. In 2025 the New Mexico properties' share of gross sales was about $1.68 million (484 million cubic feet of gas at $2.04, 34,400 barrels of liquids at $18.13), against about $1.07 million of operating and capital costs, leaving about $0.60 million of royalty income. Costs have stayed near $1.0 to 1.1 million a year since 2021 while volumes fell about 3% a year, so a modest change in realized prices moves the royalty by a large percentage in either direction. Earnings level. Distributable income per unit was $0.65 (2016), $1.58, $1.15, $0.88, $0.30, $0.41, $1.98, $1.53, $0.25 (2024) and $0.27 (2025). The ten-year middle value is about $0.76, but we do not use it as the earnings level: the earlier years include Hugoton royalties of $0.76 million (2018), $0.48 million (2019) and $0.25 million (2020), a different operator on the main New Mexico property until Hilcorp bought it in 2017, and in 2022 and 2023 realized gas prices of $6.73 and $5.73 that have since reversed to $1.69 (2024) and $2.04 (2025). 2021 is also distorted by a roughly $1.1 million one-time true-up of historical costs charged by the operator. The business as it stands is described by 2024 and 2025, about $0.26 a unit, and the first half of 2026 confirms rather than lifts it: royalty income was $207 thousand versus $332 thousand a year earlier, and distributable income was $0.07 a unit for six months versus $0.13, with Hilcorp reporting lower gas and liquids pricing, lower volumes and higher operating costs. Trailing actual change in income per unit in 2025 was about +10% as distributed (about -4% before the cash the trustee set aside); we start the base case below that, at about -19% for 2026, because of those first-half 2026 results. The trust also holds cash of about $2.07 million, of which $1.95 million (about $1.05 a unit) is the contingent reserve; the trustee intends to build it to $2.0 million. That reserve earns interest at roughly the prime rate less 1.5% and is returned to unitholders when the trust winds up. It is counted once, as cash, not again as income. The trust owes nothing, so each case below owes $0 and its value equals the business plus the cash. Termination. The trust must terminate and sell its royalty if royalty income is under $250,000 in each of two successive years (or unitholders vote to end it). With costs fixed and volumes falling, every case except the strongest ends this way within roughly a decade, which is why the value of the royalty is short-lived and the cash reserve is a large part of every case. Base case, about $1.50 a unit. Realized prices stay at the 2025 and first-half 2026 level with no recovery assumed, gross sales decline about 4% a year with the wells (the observed rate), and costs stay at about $1.07 million, as they have for four years. Royalty income falls from about $0.52 million in 2026 to under $0.25 million around 2031, the trust terminates around 2032, and the royalty is sold for little. The royalty stream is worth about $0.49 a unit after the trust's expenses, forced-sale proceeds add a few cents, and the cash reserve, net of wind-up costs of about $0.2 million, is worth about $0.97. Owes: $0. We credit no growth, no price recovery and no cost reduction; none is contracted or evidenced. Bear case, about $0.85 a unit. Realized prices stay at the first-half 2026 level for 2026 (royalty about $0.40 million), then a downturn on the scale of the 2020 collapse hits: gas about 25% and liquids about 35% below 2025 realized prices for two years, which takes gross sales to about $1.1 million, roughly the cost base, and royalty income to about $0.05 million a year (this is the same kind of squeeze the trust already went through in 2020, when income fell from $0.88 to $0.30 a unit even with Hugoton still paying, and in 2024). The trust falls below the $250,000 test for two years, ends around 2028, and the trustee spends about $0.3 million winding up. The royalty stream is worth slightly less than nothing (administrative costs exceed income); the cash reserve less wind-up costs is worth about $0.91. Owes: $0. The structure survives this outcome because the trust has no debt and the reserve is cash, but the royalty itself is largely worthless. Bull case, about $6.80 a unit. Hilcorp realizes the prices the independent engineers used at year-end 2025 ($2.97 per thousand cubic feet of gas, $30.16 per barrel of liquids, $56.18 oil) on the current volumes, declining about 3.5% a year, with costs drifting down about 2% a year as they did from 2023 to 2025, and the royalty runs about 20 years, consistent with the engineer's proved developed producing reserves of 5.9 billion cubic feet. We also include one repeat of the 2022 to 2023 price episode that the trust itself experienced, adding about $2 million of royalty income in each of two years. Royalty stream about $5.8 a unit plus cash of about $1.0; owes $0. The reserve report. Miller and Lents estimated future royalty income of $24.6 million ($11.0 million discounted at the engineers' standard 10%, about $5.91 a unit) at year-end 2025, up from $8.9 million a year earlier after a large upward revision. We do not rely on it because it is built on operator-supplied costs of about $11.5 million over the life of the wells, roughly half the pace of the $1.0 to 1.1 million the trust has actually been charged each year, and on benchmark-based prices well above the $2.04 gas and $18.13 liquids actually realized in 2025. We could not reconcile that gap from the filings. Hilcorp completed fewer well projects in 2025 (seven major recompletions versus 16 in 2024) and a rising reserve estimate has not yet shown up in royalty income. What would make this wrong. Upside: Hilcorp's costs falling as its reserve plan assumes, or realized prices converging to the benchmark-based prices in the reserve report. Downside: costs charged to the trust rising again (they were $1.35 million in 2022), Hilcorp's recompletion spending stopping, or the royalty falling below $250,000 for two years sooner than we model. Changes since our previous analysis. Royalty income in the first half of 2026 fell about 38% from a year earlier, Hugoton's accumulated deficit grew, and the cash reserve is now measured net of distributions payable at $1.95 million (about $1.05 a unit) rather than the $1.11 a unit previously cited. We now give no credit to the engineer's cost forecasts or to price recovery. The previous estimates were made on a different basis and are not comparable. Price judgement. We are sure of the cash (about $0.95 a unit net of winding up, held with the trustee and earning about 5%), reasonably sure of the 2026 income level, and not sure of anything beyond three years. The worst plausible outcome is that costs charged by the operator exceed revenue for several years, income falls below the termination test and the royalty is sold for little; the structure survives because there is no debt and the reserve is cash, and unitholders would receive back roughly the cash less wind-up costs. If we are wrong about price, base-case income could be several times higher in a good gas year, as in 2022 and 2023; if we are wrong about costs or decline, the royalty is worth nothing and only the cash remains. The price assumes a six-to-eight-year holding period, during which the trust pays about 4 to 6 cents a unit of reserve interest plus the royalty distributions. At about $0.80 a unit the cash alone is worth more than the price, the base case implies roughly a 20% annual return from income and cash, and the bear case implies roughly the price back, so the margin-of-safety price is about $0.80 a unit.