Mesa Royalty Trust: A Contrarian Gem in Energy's Undervalued Corner

Amid the volatility of energy markets, few investments offer the contrarian allure of Mesa Royalty Trust (NYSE: MTR). With a 4.16% yield and a stock price down nearly 60% from its 2022 peak, this royalty trust presents a compelling opportunity for income-focused investors willing to endure near-term turbulence. While recent distribution declines have spooked traders—April’s payout fell to a meager $0.025 per unit—the Trust’s structural underpinnings and levers to recovery suggest this is a temporary liquidity hurdle, not a death knell. Here’s why MTR belongs in contrarian portfolios today.

The Contrarian Case: A Broken Clock in Energy’s Undervalued Corner

MTR’s current struggles are well-documented: accumulated excess production costs from Hilcorp’s 2024 drilling activities have diverted ~$15 million of San Juan Basin proceeds to offset prior deficits, suppressing distributions. As of April 2025, distributable net profits totaled just $46,620—a fraction of the $2 million cash reserve target needed to resume meaningful payouts. Yet this is not a terminal illness. Consider three critical factors:

1. Leverage to Commodity Prices: MTR’s value is tied to natural gas prices, which remain near decade lows. A rebound to $3.50/MMBtu (a conservative target) could boost monthly revenue by ~40%, directly fueling reserve accumulation.
2. San Juan Basin Resilience: The basin’s proven reserves remain substantial, with Hilcorp—a disciplined operator—controlling drilling. While production declines are inevitable, legacy wells can still generate cash in a rising price environment.
3. Undervalued Asset Base: At its current $1.7 billion market cap, MTR trades at a 25% discount to its net asset value (NAV), assuming $2.3 billion in proved reserves. This discount reflects fear, not fundamentals.

The Yield Advantage: A 4.16% Coupon in a Zero-Yield World

While bond yields hover near 5%, MTR’s yield is not just competitive—it’s asymmetrically priced. At its current price of ~$14.50, the Trust’s historical yield of 4.16% dwarfs 10-year Treasuries and corporate bonds, offering both income and equity upside. Crucially, this yield is not a mirage:

• Distribution Volatility ≠ Collapse: The Trust’s payout history shows extreme variability (up to $0.50/unit in 2020), but it has never defaulted. Even at $0.03/unit, the yield remains attractive for investors with a 2–3 year horizon.
• Reserve Target Progress: Despite slow progress, MTR’s $2 million reserve is achievable. At current revenue levels, ~$50,000/month in net profits would take 40 months—3.3 years—to meet the goal. A 20% gas price rebound could slash this timeline to 2 years.

Structural Recovery Triggers: When the Tide Turns

The Trust’s turnaround hinges on two catalysts:

1. Excess Costs Clearance: The $12.87 million net deficit from Hilcorp’s 2024 drilling is a math problem, not a black hole. With ~$3.5 million allocated monthly toward this balance (as seen in Q1 2025), the deficit could clear by late 2025, freeing up ~$10 million annually for distributions.
2. Hilcorp’s Capital Efficiency: The operator’s 2025 budget prioritizes low-cost vertical wells and recompletions, minimizing upfront costs while boosting production. This strategy could stabilize cash flows faster than horizontal drilling, reducing future excess cost risks.

Addressing the Risks: Volatility, Not Ruin

Critics cite three risks:
- Low Cash Reserves: MTR’s reserves are ~$1 million, but the Trust’s legal structure allows borrowing to cover shortfalls. BNY Mellon’s involvement signals confidence in the Trust’s solvency.
- Regulatory Headwinds: Energy transition policies could accelerate basin decline, but this is a long-term risk. In the near term, the Trust’s royalty structure insulates it from operational decisions—it profits regardless of production choices.
- Distribution Volatility: Yes, payouts swing wildly. But for contrarians, this volatility is a buying opportunity: the deeper the discount, the higher the eventual recovery premium.

Conclusion: Buy the Dip—This Trust Isn’t Going to Zero

Mesa Royalty Trust is the ultimate contrarian play in energy: a high-yield asset with a substantial NAV discount, leveraged to commodity prices, and trapped in a liquidity squeeze that’s solvable. While the path to recovery is bumpy, the Trust’s $2 million reserve target is achievable within 2–3 years—a timeframe where gas prices could rebound sharply.

For income investors with a stomach for volatility, MTR offers a 30%+ upside if its NAV is realized and gas prices climb to $3.50/MMBtu. The 4.16% yield acts as a cushion, while the Trust’s structural ties to the San Juan Basin ensure it’s a survivor, not a casualty.

Action Item: Buy MTR at $14.50, set a stop-loss at $12.00, and hold for 2+ years. The reward-to-risk ratio is skewed in your favor—this is a value trap turned into a value goldmine.

Disclosures: The analysis assumes no material changes in Hilcorp’s operations or regulatory policies. Past performance does not guarantee future results.