**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE QUARTERLY PERIOD ENDED JUNE 30, 2007**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE TRANSITION PERIOD FROM                 TO                 **

**CommissionFile Number: 1-08432**

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**MESA OFFSHORE TRUST**

(Exact name of Registrantas Specified in its Charter)

| **Texas**                                 |   | **76-6004065**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction             |   | (I.R.S. Employer     |
| of Incorporation  or Organization)        |   | Identification  No.) |
| **JPMorgan Chase Bank, N.A., Trustee**    |   | ** **           |
| **Institutional  Trust Services**         |   | ** **           |
| **919  Congress Avenue**                  |   | ** **           |
| **Austin,  Texas**                        |   | **78701**            |
| (Address of Principal  Executive Offices) |   | (Zip Code)           |

 

**1-800-852-1422**

(Registrant’s TelephoneNumber, Including Area Code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

| Large accelerated filer o | Accelerated filer  o | Non-accelerated  filer x |
|--------------------------------|----------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No x

Asof August 14, 2007—71,980,216 Units of Beneficial Interest in MesaOffshore Trust.

 

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**PART I—FINANCIALINFORMATION**

**Item1.**                           *Financial Statements.*

**MESAOFFSHORE TRUSTSTATEMENTS OF DISTRIBUTABLE INCOME(Unaudited)**

| ** **                          | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **    2007    ** | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Royalty income                      |       |                                                     | $          | —                                        |       |   | $ | 73,780 |   | $ | — |   | $ | 114,545 |   |
| Interest income                     |       |                                                     | —     |                                          |       | 5,008 |   | 5,080 |   | 10,196 |   |
| General and  administrative expense |       |                                                     | —     |                                          |       | (78,788 | ) | (5,080 | ) | (124,741 | ) |
| Distributable  income               |       |                                                     | $          | —                                        |       |   | $ | — |   | $ | — |   | $ | — |   |
| Distributable  income per unit      |       |                                                     | $          | —                                        |       |   | $ | — |   | $ | — |   | $ | — |   |

 

**STATEMENTSOF ASSETS, LIABILITIES AND TRUST CORPUS**

| ** **                                                                         | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                                                             |       |                    |       |                        |       |
| Cash and short-term  investments                                                   |       | $                       | 3,619      |                        | $          | 797,074 |   |
| Interest  receivable                                                               |       | —                  |       | 2,970                       |       |
| Net overriding  royalty interest in oil and gas properties                         |       | 380,905,000             |       | 380,905,000                 |       |
| Accumulated  amortization                                                          |       | (380,902,063            | )          | (380,902,063                | )          |
| Total assets                                                                       |       | $                       | 6,556      |                        | $          | 802,981 |   |
| LIABILITIES AND TRUST  CORPUS                                                      |       |                    |       |                        |       |
| Reserve for Trust  expenses                                                        |       | $                       | 3,619      |                        | $          | 800,044 |   |
| Trust expenses  payable                                                            |       | 172,373                 |       | —                      |       |
| Distributions payable                                                              |       | —                  |       | —                      |       |
| Trust corpus  (71,980,216 units of beneficial interest authorized and outstanding) |       | (169,436                | )          | 2,937                       |       |
| Total liabilities  and trust corpus                                                |       | $                       | 6,556      |                        | $          | 802,981 |   |

 

**MESA OFFSHORE TRUSTSTATEMENTS OF CHANGES IN TRUST CORPUS(Unaudited)**

| ** **                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Trust corpus,  beginning of period               |       | $                                               | 2,937      |                                          | $          | 3,025 |   | $ | 2,937 |   | $ | 3,048 |   |
| Distributable  income                            |       | —                                          |       | —                                        |       | — |   | — |   |
| Trust expenses  payable                          |       | (172,373                                        | )          | —                                        |       | (172,373 | ) | — |   |
| Distributions to  unitholders                    |       | —                                          |       | —                                        |       | — |   | — |   |
| Amortization of  net overriding royalty interest |       | —                                          |       | (59                                           | )          | — |   | (82 | ) |
| Trust corpus, end  of period                     |       | $                                               | (169,436   | )                                             | $          | 2,966 |   | $ | (169,436 | ) | $ | 2,966 |   |

 

(The accompanying notes are an integral part of these financial statements.)

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**MESA OFFSHORE TRUSTNOTES TO FINANCIAL STATEMENTS(Unaudited)**

**Note 1—TrustOrganization**

The Mesa Offshore Trust (the “Trust”) was createdeffective December 1, 1982. On that date, Mesa Petroleum Co., predecessorto Mesa Limited Partnership, which was the predecessor to MESA Inc.,transferred to the Trust a 99.99% interest in the Mesa Offshore RoyaltyPartnership (the “Partnership”). The Partnership was created to receive andhold a net overriding royalty interest (the “Royalty”) in ten producing and nonproducingoil and gas properties located in federal waters offshore Louisiana and Texas(the “Royalty Properties”). Mesa Inc. created the Royalty out of itsworking interest in the Royalty Properties and transferred it to thePartnership. Until August 7, 1997, MESA Inc. owned and operated itsassets through Mesa Operating Co. (“Mesa”), the operator and the managinggeneral partner of the Royalty Properties. On August 7, 1997,MESA Inc. merged with and into Pioneer Natural Resources Company (“Pioneer”),formerly a wholly owned subsidiary of MESA, Inc., and Parker &Parsley Petroleum Company merged with and into Pioneer Natural ResourcesUSA, Inc. (successor to Mesa) a wholly owned subsidiary of Pioneer (“PNR”)(collectively, the mergers are referred to herein as the “Merger”). Subsequentto the Merger, Pioneer owns and operates its assets through PNR and is also themanaging general partner of the Partnership. As hereinafter used in thisreport, the term PNR generally refers to the operator of the Royalty Properties,unless otherwise indicated.

JPMorgan Chase Bank, N.A.is the Trustee (the “Trustee”) of the Trust. JPMorgan Chase & Co. andThe Bank of New York Company (“BNY”) announced in April 2006 an agreementpursuant to which BNY would acquire a portion of JPMorgan Chase’s corporatetrust business in exchange for BNY’s consumer small business and middle marketbanking business. This transaction did not include any transfer by JPMorganChase Bank, N.A. of its obligations as Trustee of this Trust.

**Note 2—Status of theTrust, Legal Proceedings, and Timing of Liquidation**

*Status of the Trust*

The Trust Indenture provides that the Trust willterminate if the total amount of cash per year received by the Trust fallsbelow certain levels for each of three successive years. **As a result of continued declines in production onRoyalty Properties nearing the end of their estimated productive lives, Royaltyincome received by the Trust in 2002, 2003 and 2004 fell below the TerminationThreshold prescribed by the Trust Indenture**. The Trustee has previously taken steps to beginthe process of liquidating the Trust. See “—Timing of Liquidation”below in this Note. The Trustee, which has no authority or discretionarycontrol over the timing of expenditures, production or income on the RoyaltyProperties, has no discretion regarding the occurrence of the TerminationThreshold or its consequences.

The Trust Indentureprovides the Trustee a two-year period during which it must sell all of theTrust properties. The Trust Indenture provides that such properties must besold for cash and not for any other consideration. The Trustee expects that thesale process will be open to any persons desiring to participate, but, as iscustomary, access to information and participation may be limited to personswho execute 

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confidentialityagreements regarding information provided by the working interest owners. TheTrustee may also require bidders to identify themselves clearly and torepresent or evidence sufficient financing in order to participate, as theTrustee expects payment will be required promptly after the close of biddingwithout any financing conditions. Accordingly, the auction may not be a“public” auction in the sense that it may not be open to anyone who does notsatisfy these requirements. The Trustee is currently reviewing a potentialonline bidding process for participants in order to provide current publicinformation on bidding to the marketplace. The Trustee will also determine aduration of bidding that it deems in the best interest of the Unitholders.

*Legal Proceedings*

On April 11, 2005, MOSH Holding, L.P. (“MHLP”)filed an Original Petition in the District Court of Travis County, Texas, 250thJudicial District, against Pioneer Natural Resources Company; Pioneer NaturalResources USA, Inc. (referred to below in this Note collectively withPioneer Natural Resources Company, as “Pioneer”); Woodside Energy(USA), Inc. (“Woodside”); and JPMorgan, as Trustee of the Mesa Offshore Trust(Case No. GN501113) (the “Lawsuit”). The Lawsuit is currently before the334th Judicial District of Harris Country, Texas (the “Court”). MHLP’sOriginal Petition alleges Pioneer and Woodside are liable for various actions,including (1) a wrongful farmout by Pioneer to Woodside of the Brazos A-39Lease, (2) a wrongful delay by Pioneer in producing the Brazos A-39Lease and the Midway #5 well drill thereon, (3) fraudulent accountingpractices by Pioneer, (4) breach of fiduciary duty by Pioneer,(5) aiding and abetting breach of fiduciary duty by Woodside,(6) misapplication of Trust property by Pioneer, (7) conspiracy tomisapply fiduciary property by Woodside and Pioneer, (8) common law fraudby Pioneer, (9) gross negligence by Pioneer, and (10) breach of theconveyance agreement by Pioneer. As described below, MHLP later added claimsagainst the Trustee for (1) an accounting, and (2) breach offiduciary duty. The remedies MHLP seeks include (a) reconstruing the TrustIndenture to determine that the Trust is not terminated because there has orshould have been production that would have generated revenues to extend thelife of the Trust, (b) requiring the Trustee to pursue certain claims, orto allow MHLP to pursue such claims, (c) setting aside any farmouts byPioneer in which there have been conveyances to an alleged affiliate ofPioneer, (d) the removal of JPMorgan as Trustee, (e) the return orforfeiture of compensation to JPMorgan, (f) monetary damages againstPioneer, Woodside and JPMorgan, and (g) unspecified exemplary damagesagainst all defendants.

MHLP’s Original Petition did not contain any claimsagainst the Trustee, except to enjoin the Trustee from terminating the Trustduring the pendency of the Lawsuit. In April 2005, the Trustee voluntarilyentered into an agreement with MHLP whereby the Trustee would not terminate theTrust without first giving MHLP at least sixty days written notice. Thisagreement allowed MHLP time to obtain documents and discovery from Pioneer andWoodside, and allowed the Trustee time to investigate the claims asserted byMHLP against Pioneer and Woodside to determine if they had any merit and, mostimportantly, whether they would benefit the Trust. During the six month periodbetween April and October 2005, the Trustee conducted an independentinvestigation including: numerous meetings and discussions with the parties;reviewing the relevant documents with the Trustee’s counsel; employingindependent reservoir engineers to evaluate the reserves in which the Trust hasan interest; engaging independent joint venture auditors to examine theaccounting records of the operator, Pioneer, relating to revenues and expensesallocated to the Partnership’s interests; and obtaining from both MHLP andPioneer their respective legal analyses of the challenged farmout.

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Throughout 2005, the parties also anticipated that theMidway #5 well on the Brazos A-39 Lease that is the primary subject ofthe Lawsuit would go into production. Given the vast discrepancy between thereserves claimed by the MHLP and those projected by Pioneer for the Midway #5well, actual production results would significantly impact the Trustee’sassessment of whether the Trust was better off with the cost-free overridecreated by the Pioneer/Woodside farmout, or the prior cost-burdened net profitsinterest that MHLP seeks to restore through the Lawsuit. Unfortunately,Hurricanes Katrina and Rita struck the Gulf of Mexico in August 2005 andSeptember 2005, respectively, and delayed the commencement of productionuntil 2006.

Faced with these post-hurricane delays, the Trusteeurged all the parties to consent to a bifurcated trial of the farmout issue onan expedited basis. The Trustee proposed to MHLP that if the Court determinedthat the farmout was not valid and that restoring the net profit interest wouldbenefit the Trust, then the Trust would reimburse MHLP’s reasonable attorneys’fees, up to $100,000, and the Trustee would allow MHLP’s counsel to representthe Trust in prosecuting the damages portion of the case. Conversely, if MHLPwere to lose on the expedited determination of the farmout issue, and in theabsence of more evidence to support any ancillary claims, then MHLP woulddismiss the other claims and would not be reimbursed, and the Trustee wouldmove forward to terminate the Trust.

While the Trustee, Pioneer, and Woodside all agreed toan expedited trial of the farmout issues, MHLP balked. Contrary to theassertions of MHLP and the Intervenor Plaintiffs identified below, the Trusteenever agreed that the claims asserted by MHLP against Pioneer and Woodside “hadmerit”—the Trustee simply stated that the farmout issue might meritadjudication at that time to determine (1) if MHLP was legally correct,and (2) if setting aside the farmout would benefit the Trust.

When MHLP refused to agree to an expedited andbifurcated trial as proposed by the Trustee, the Trustee informed MHLP that theTrustee’s investigation of MHLP’s allegations beyond the farmout issues failedto convince the Trustee that pursuing those claims and incurring the relatedlegal fees and expenses would benefit the Trust. Moreover, the Trustee informedMHLP that the Trustee’s independent joint venture auditors and reservoirengineers had not found any evidence to date to support MHLP’s damageallegations.

It was at this point, in November 2005, in themidst of the Trustee’s negotiations with MHLP to obtain an agreed adjudicationof MHLP’s claims, that MHLP alleged for the first time that the Trustee had aconflict of interest because of JPMorgan’s long-standing lending relationshipwith Pioneer. Although it is clear under the Trust Indenture, the Texas TrustAct, and relevant case law that JPMorgan is not precluded, by holding theposition of Trustee, from pursuing commercial banking activities not involvingTrust funds, MHLP amended its petition and asserted claims against the Trusteeon November 28, 2005.

Although MHLP’s claims against the Trustee weremeritless, to avoid any further assertion that the Trustee could notimpartially evaluate MHLP’s claims, on November 30, 2005, JPMorganannounced its intention to resign as Trustee, effective January 31, 2006.On December 13, 2005, the lawsuit was transferred to the334th Judicial District Court of Harris County, Texas. At a hearing onJanuary 27, 2006 in the Harris County Court, the Court denied MHLP’smotion for a temporary injunction to remove JPMorgan as Trustee and appoint aprincipal of MHLP, Timothy Roberson, as a temporary Trustee. At the Court’ssuggestion, JPMorgan agreed to continue as Trustee, until such time as asubstitute trustee was found that fulfilled the qualifications of Trusteestated in the Trust Indenture. Since that hearing, neither 

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MHLP nor Pioneer haveidentified a willing qualified successor Trustee that is not also a lenderunder one of Pioneer’s credit facilities (which status MHLP contends is analleged conflict of interest).

In 2006, after the Court denied MHLP’s attempt toremove JPMorgan as Trustee, the parties pursued formal discovery in theLawsuit. During this period, the Trustee continued to evaluate the merits ofthe alleged claims against Pioneer and Woodside. A central allegation by MHLPand the Intervenors is that Pioneer and Woodside delayed the commencement ofproduction from the well drilled pursuant to the Pioneer-Woodside Farmout—theMidway #5 well on the Brazos A-39 Lease. Woodside and Pioneer witnesseshave given sworn testimony in depositions about the commercial and technicalreasons for the delays in bringing the well on line. The well commencedproduction in April 2006. After this time, the Trustee instructed itsindependent petroleum reserve engineers to evaluate how the production resultsand projected production from the well might affect the value of the Trust’sinterests. The Trustee’s independent engineers determined that the initial dataregarding projected production from the well did not warrant a material changein prior assessments of the value of the Trust’s assets.

Pioneer subsequently reported to the Trustee thatproduction from the well was suspended in July 2006 due to mercurycontamination identified at downstream facilities where the production from thewell is commingled with production from other wells. An updated evaluation fromthe Trustee’s independent petroleum reserve engineers estimated that revenuesfrom future production from the well likely would not exceed the costs ofdrilling and completing the well. Accordingly, if the Partnership’s interest inthe underlying lease had remained, or was, a cost-burdened net profitsinterest, instead of the cost-free overriding royalty interest the Partnershipheld as a result of the Pioneer-Woodside Farmout, the Partnership most likelywould not have received any payments from this production, and the Trustaccordingly would not have received any associated distributions. Further, theproduction data did not support reserves of the size asserted by MHLP and theIntervenors. The well resumed production in February 2007. The well wasshut in again on April 18, 2007 due to an increase in hydrogen sulfide contentcoincidental with an increase in water production. PNR is in the process ofdeveloping an hydrogen sulfide contingency plan as required by the MMS and willinstall the necessary alarm and safety systems. The well is expected to returnto production during the third or fourth quarter of 2007 pending MMS approvalof the hydrogen sulfide contingency plan. The last rate on production was 2.4—3MMCFD with 4,600 psi flowing tubing pressure.

On December 8, 2006, Dagger-Spine HedgehogCorporation (“Dagger-Spine”) filed a petition to intervene in the Lawsuit as aPlaintiff, alleging claims virtually identical to MHLP. Another group ofunitholders, led by Keith A. Wiegand (together with Dagger-Spine, the“Intervenors”), also filed on March 9, 2007 a petition to intervene asplaintiffs in the Lawsuit, incorporating and adopting the same claims assertedby MHLP.

On January 26, 2007, the Trustee reached aconditional settlement of the claims asserted by MHLP and the Intervenorsagainst Pioneer and Woodside. The conditional settlement was set forth in theMutual Release and Settlement Agreement dated as of January 26, 2007 (the“Conditional Settlement Agreement”). The Trustee filed a motion for approval ofthe Conditional Settlement Agreement with the Court on January 30, 2007.The Trustee believed that the Conditional Settlement Agreement was in the bestinterest of the unitholders. However, on June 19, 2007, the Court issuedan order denying the Trustee’s motion to approve the conditional settlement, sothe case is currently set to be tried.

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Since the Court’s June 19, 2007 order, Pioneer,Woodside, and the Trustee each filed separate motions for summary judgment onseveral of the claims and issues in the Lawsuit. Arguments on those motions areset for dates in August and September 2007. The Court has also issuedan order moving the current trial setting from October 8, 2007 toDecember 3, 2007. The Trustee denies that any of Plaintiffs’ claimsagainst the Trustee have any merit, and the Trustee will continue to vigorouslydefend against such claims as permitted under the terms of the Trust Indenture.

The Trustee will make thefull detail of the underlying data of the December 31, 2006 reserve reportavailable for use in connection with the sale of the Partnership’s RoyaltyProperties as part of the Trust termination. For more information regarding theestimated remaining life of each of the Royalty Properties, the estimatedfuture net revenues of the Royalty Properties and information relating tofarm-outs of interests on the Royalty Properties based on information providedby PNR to DeGoyler & McNaughton (D&M), see pages 23 and 24 ofthe Form 10-K for the year ended December 31, 2006 and Note 6in the Notes to Financial Statements included elsewhere in the Form 10-K.Any final distribution to unitholders will be an amount net of funds requiredto satisfy all Trust liabilities.

*Timing ofLiquidation*

The Trust Indenture provides that the Trust willterminate if the total amount of cash per year received by the Trust fallsbelow certain levels for each of three successive years. As a result ofcontinued declines in production on Royalty Properties nearing the end of theirestimated productive lives, Royalty income received by the Trust in 2002, 2003and 2004 fell below the Termination Threshold prescribed by the TrustIndenture.

Due to the pendinglitigation, the Trustee cannot predict the timing of the sale of all or aportion of the Trust properties as part of the Trust Termination.

**Note 3—Liquidityfor Trust Expenses**

As of June 30, 2007,the Trust had $3,619 in cash and short-term investments reserved for Trustexpenses and $172,373 in unpaid Trust expenses. Based on current general andadministrative expenditures being incurred in connection with the litigation andthe absence of Royalty income, the Trustee will be required to borrow money inaccordance with the Trust Indenture to fund future Trust expenses. The Trusteeis currently reviewing alternatives for loans to the Trust permitted under theTrust Indenture, including loans on a secured basis. In the event any loans aremade to the Trust, the Trust Indenture will prohibit the Trustee from makingany distributions to unitholders until those loans are repaid in full.

**Note 4—Net OverridingRoyalty Interest**

The instruments conveying the Royalty to thePartnership provide that PNR will calculate and pay to the Partnership eachmonth an amount equal to 90% of aggregate net proceeds for the preceding month.Generally, net proceeds means the excess of the amounts received by PNR fromsales of its share of oil and gas from the Royalty Properties (gross proceeds)over the operating and capital costs incurred. Costs exceeding gross proceedsfor any month are recovered by PNR, with interest thereon at the prime rate of 

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the Bank of America plusone-half percent, out of future gross proceeds prior to making further Royaltypayments to the Partnership.

Amortization of theRoyalty, which is calculated on the basis of current Royalty income in relationto estimated future Royalty income, is charged directly to trust corpus sincesuch amounts do not affect distributable income.

**Note 5—Basis ofPresentation**

The accompanying unaudited financial information hasbeen prepared by the Trustee in accordance with the instructions toForm 10-Q. JPMorgan Chase Bank, N.A. was formerly known as The ChaseManhattan Bank and is the successor by mergers to the original name of theTrustee, Texas Commerce Bank National Association. The Trustee believes suchinformation includes all the disclosures necessary to make the informationpresented not misleading. The information furnished reflects all adjustmentswhich are, in the opinion of the Trustee, necessary for a fair presentation ofthe results for the interim periods presented. The financial information shouldbe read in conjunction with the financial statements and notes thereto includedin the Trust’s 2006 Annual Report on Form 10-K.

The financialstatements of the Trust are prepared on the following basis:

(a)    Royaltyincome recorded for a month is the Trust’s interest in the amount computed andpaid by the working interest owner to the Partnership for such month ratherthan either the value of a portion of the oil and gas produced by the workinginterest owner for such month or the amount subsequently determined to be 90%of the net proceeds for such month;

(b)   Interestincome, interest receivable and distributions payable to unitholders includeinterest to be earned on short-term investments from the financial statementdate through the next date of distribution; and

(c)    Trustgeneral and administrative expenses, net of reimbursements, are recorded in themonth they accrue. Trust expenses payable at June 30, 2007 are reported as areduction in Trust Corpus.

This basis for reporting Royalty income is consideredto be the most meaningful because distributions to the unitholders for a monthare based on net cash receipts for such month. However, it will differ from thebasis used for financial statements prepared in accordance with accountingprinciples generally accepted in the United States because, under suchaccounting principles, Royalty income for a month would be based on netproceeds from production for such month without regard to when calculated orreceived and interest income for a month would be calculated only through theend of such month.

The instruments conveying the Royalty provide that theworking interest owner will calculate and pay the Partnership each month anamount equal to 90% of the net proceeds for the preceding month. Generally, netproceeds means the excess of the amounts received by the working interest ownerfrom sales of oil and gas from the Royalty Properties plus other cash receiptsover operating and capital costs incurred. For the three and six months endedJune 30, 2007 no royalty income was received by the Trust, accordingly no Trustdistribution was made to the unitholders.

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Generally, net proceeds means the excess of theamounts received by the working interest owner from sales of oil and gas fromthe Royalty Properties plus other cash receipts over operating and capitalcosts incurred. As of June 30, 2007, there is a deficit balance due PNR ofapproximately $1.4 million, which will be deducted from any future grossproceeds on the Royalty properties, which will reduce future Royalty income.Currently, PNR estimates that the abandonment accrual for amounts expended butnot recouped and for projected future abandonment expenses for properties inwhich the Trust has an interest is $1.4 million, net to the Trust, whichis included in the deficit balance above. These costs will be deducted from anyfuture gross proceeds on the Royalty properties, which will reduce futureRoyalty income.

No Royalty income will be distributed to unitholdersuntil the Trustee recoups Trust expenses paid from the reserve that the Trusteeestablished for anticipated future expenses and any loans secured by theTrustee to pay Trust expenses are repaid in full. As of June 30, 2007,$2.2 million will be withheld by the Trustee from future Royalty incomebefore Trust distributions to the unitholders will resume. During the threemonths ended June 30, 2007 and 2006, the Trust had no distributableincome. Interest income and the reserve for Trust expenses were used to pay $374,727and $796,427 of the Trust’s general and administrative expenses of $547,100 and$973,880 for the three months and six months ended June 30, 2007,respectively. As of June 30, 2007, the Trust has unpaid expenses of$172,373.

Belowis a summary of general and administrative expenses and the adjustments made tothe reserve for Trust expenses:

| ** **                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| General and administrative costs incurred during the  period |       | $                                               | 547,100    |                                          | $          | 312,260 |   | $ | 973,880 |   | $ | 668,873 |   |
| (Deductions from)  additions to reserve for Trust expenses   |       | (374,727                                        | )          | (233,472                                      | )          | (796,427 | ) | (544,132 | ) |
| Unpaid Trust  expenses                                            |       | (172,373                                        | )          | —                                        |       | (172,373 | ) | — |   |
| General and  administrative costs as reported                |       | $                                               | —     |                                          | $          | 78,788 |   | $ | 5,080 |   | $ | 124,741 |   |

 

General and administrativeexpenses of the Trust for the second quarter of 2007 increased 75% to $547,100as compared to $312,260 for the same period in 2006. General and administrativeexpenses for the first half of 2007 increased 46% to $973,880 as compared to$668,873 for the same period in 2006. The increase in general andadministrative expenses in 2006 is primarily due to an increase in legal feesas a result of pending litigation discussed in “Legal Proceedings”.

**Note 6—Distributionsto Unitholders**

Under the terms of theTrust Indenture, the Trustee must distribute to the unitholders all cashreceipts, after paying liabilities and providing for cash reserves asdetermined necessary by the Trustee. The amounts distributed are determined ona monthly basis and are payable to unitholders of record as of the lastbusiness day of each month. However, cash distributions are made quarterly inJanuary, April, July and October, and include interest earned from themonthly record dates to the dates of distribution.

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**Note 7—FederalIncome Taxes**

The Trustee reports on the basis that the Trust is agrantor trust. Based on its previous audit policy, the Internal Revenue Service(the “IRS”) is expected to concur with such action. No IRS ruling has beenreceived or requested with respect to the Trust, however, and no court case hasbeen decided involving identical facts and circumstances. It is possible,therefore, that the IRS would assert upon audit that the Trust is taxable as acorporation and that a court might agree with such assertion.

As a grantor trust, theTrust will incur no federal income tax liability. In addition, it will incurlittle or no federal income tax liability if it is held to be a non-grantortrust. If the Trust were held to be taxable as a corporation, it would have topay tax on its net taxable income at the corporate rate.

**Item 2.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.*

The following review ofthe Trust’s financial condition and results of operations should be read inconjunction with the financial statements and notes thereto.

**Note RegardingForward-Looking Statements**

This Form 10-Qincludes “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. All statements other than statements ofhistorical facts included in this Form 10-Q, including withoutlimitation the statements under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” are forward-looking statements.Although Pioneer has advised the Trust that it believes that the expectationsreflected in such forward-looking statements are reasonable, no assurance canbe given that such expectations will prove to have been correct. Importantfactors that could cause actual results to differ materially from expectations(“Cautionary Statements”) are disclosed in this Form 10-Q,including, without limitation, in conjunction with the forward-lookingstatements included in this Form 10-Q and in the Trust’sForm 10-K for the year ended 2006, including under Item 1A.“Risk Factors”. All subsequent written and oral forward-looking statementsattributable to the Trust or persons acting on its behalf are expresslyqualified in their entirety by the Cautionary Statements.

**Financial Review**

The amount of cash distributed by the Trust isdependent on, among other things, the sales prices and quantities of gas, crudeoil, condensate and natural gas liquids produced from the Royalty Propertiesand the quantities sold. Substantial uncertainties exist with regard to futuregas and oil prices, which are subject to fluctuations due to the regionalsupply and demand for natural gas and oil, production levels and otheractivities of the Organization of the Petroleum Exporting Countries (“OPEC”)and other oil and gas producers, weather, storage levels, industrial growth,conservation measures, competition and other variables.

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Belowis a summary of Royalty income received on the Trust properties for the threeand six months ended June 30, 2007 and 2006:

| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gross proceeds @  90%                |       | $                                               | 23,883     |                                          | $          | 88,041 |   | $ | 23,883 |   | $ | 164,566 |   |
| Operating  expenditures @ 90%        |       | (4,778                                          | )          | (14,253                                       | )          | (11,273 | ) | (41,976 | ) |
| Capital  expenditures @ 90%          |       | —                                          |       | —                                        |       | — |   | (8,033 | ) |
| Net proceeds  (deficit)              |       | 19,105                                          |       | 73,788                                        |       | $ | 12,610 |   | 114,557 |   |
| Increase  (decrease) in deficit      |       | (19,105                                         | )          | —                                        |       | (12,610 | ) | — |   |
| Net proceeds  after deficit recovery |       | $                                               | —     |                                          | $          | 73,788 |   | $ | — |   | $ | 114,557 |   |
| Royalty Income (99.99%)              |       | $                                               | —     |                                          | $          | 73,780 |   | $ | — |   | $ | 114,545 |   |

 

Belowis a summary of distributable income for the three and six months endedJune 30, 2007 and 2006:

| ** **                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Royalty Income                              |       | $                                               | —     |                                          | $          | 73,780 |   | $ | — |   | $ | 114,545 |   |
| Interest income                             |       | —                                          |       | 5,008                                         |       | 5,080 |   | 10,196 |   |
| General and  administrative expenses        |       | —                                          |       | (78,788                                       | )          | (5,080 | ) | (124,741 | ) |
| Distributable  income                       |       | $                                               | —     |                                          | $          | — |   | $ | — |   | $ | — |   |
| Distributable  income per unit              |       | $                                               | —     |                                          | $          | — |   | $ | — |   | $ | — |   |
| Accummulated deficit (as  of end of period) |       | $                                               | 1,405,299  |                                          | $          | — |   | $ | 1,405,299 |   | $ | — |   |

 

During the second quarters of 2007 and 2006, the Trusthad no distributable income. Royalty income and the reserve for Trust expenseswere used to pay $374,727 of the Trust’s second quarter 2007 general andadministrative expenses of $547,100. The Trust has $172,373 of unpaid expensesas of June 30, 2007.

Belowis a summary of general and administrative expenses and the adjustments made tothe reserve for Trust expenses:

| ** **                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| General and  administrative costs incurred during the period |       | $                                               | 547,100    |                                          | $          | 312,260 |   | $ | 973,880 |   | $ | 668,873 |   |
| (Deductions from)  additions to reserve for Trust expenses   |       | (374,727                                        | )          | (233,472                                      | )          | (796,427 | ) | (544,132 | ) |
| Unpaid Trust  expenses                                            |       | (172,373                                        | )          | —                                        |       | (172,373 | ) | — |   |
| General and  administrative costs as  reported                    |       | $                                               | —     |                                          | $          | 78,788 |   | $ | 5,080 |   | $ | 124,741 |   |

 

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General and administrativeexpenses of the Trust for the second quarter of 2007 increased 75% to $547,100as compared to $312,260 for the same period in 2006. General and administrativeexpenses for the first half of 2007 increased 46% to $973,880 as compared to$668,873 for the same period in 2006. The increase in general andadministrative expenses in 2007 is primarily due to an increase in legal feesas a result of pending litigation discussed in “Legal Proceedings”.

**Operational Review**

PNR has advised the Trust that during the secondquarter of 2007 its offshore gas production was marketed under short-termcontracts at spot market prices primarily to TOTAL S.A. and that it expects tocontinue to market its production under short-term contracts for theforeseeable future. Spot market prices for natural gas in the second quarter of2007 were generally higher than spot market prices in the second quarter of2006.

The amount of cash distributed by the Trust isdependent on, among other things, the sales prices and quantities of gas, crudeoil and condensate produced from the Royalty Properties and the quantitiessold. Substantial uncertainties exist with regard to future gas and oil prices,which are subject to fluctuations due to the regional supply and demand fornatural gas and oil, production levels and other activities of the Organizationof the Petroleum Exporting Countries (“OPEC”) and other oil and gas producers,weather, storage levels, industrial growth, conservation measures, competitionand other variables.

Below is an operationalreview of the remaining producing Trust properties:

***Brazos A-7and A-39***

| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gross proceeds @  90%         |       | $                                               | 23,883     |                                          | $          | 32,189 |   | $ | 23,883 |   | $ | 77,426 |   |
| Operating  expenditures @ 90% |       | (6,580                                          | )          | (12,208                                       | )          | (11,030 | ) | (34,833 | ) |
| Capital expenditures  @ 90%   |       | —                                          |       | —                                        |       | — |   | — |   |
| Net proceeds (deficit)        |       | $                                               | 17,303     |                                          | $          | 19,981 |   | $ | 12,853 |   | $ | 42,593 |   |

 

As of June 30, 2007, these two blocks had onewell capable of producing, the Brazos A-39 # 5 which was shut-in duringthe second quarter of 2007 due to an increase in hydrogen sulfide contentcoincidental with an increase in water production. The Brazos A-7No. B-1 well, operated by Newfield, was no longer producing as ofDecember 31, 2006. PNR entered into farmout agreements for thePartnership’s interest in both of these blocks so that two explorationprospects could be drilled and in which the Trust will retain an overridingroyalty interest. The first prospect on Brazos A-7 was drilled during2003 and was determined to be a dry hole. As such, the well was plugged andabandoned.

The second exploration prospect, the Brazos A-39#5, was drilled on Brazos A-39, which PNR announced as a discovery. Aproduction test was completed in 2005. PNR, the operator on this property, hasinformed the Trustee that the lower horizon of the prospect was determined tobe non-commercial, while the middle horizon in the Big Hum 4 sand produced at10,000 Mcf of gas per day during a seventeen hour flow test. This wellcame on line April 20, 2006. However, this well has been shut in from timeto time since then as the operator has encountered and addressed hydrogensulfide issues. The well has also 

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produced a carbon dioxidecontent that exceeds pipeline specifications. This higher content requires theoperator to mix production at the platform with production from other fields inorder to transport the product. Production is being routed to the A-52Cplatform owned by Coldren Resources LP. That platform is being operated byArena, which is also serving as the contract operator for the Midway property.The well was shut in July 21, 2006 by Williams Pipeline due to reporteddetection of mercury in the gas stream. Following the installation of vesselswith mercury-absorbing media and negotiation of the required agreements withthe owner and operator of the Brazos A-52C host platform, the well wasreturned to production on February 13, 2007. The well was shut in onApril 18, 2007 due to an increase in hydrogen sulfide content coincidentalwith an increase in water production. PNR is in the process of developing ahydrogen sulfide contingency plan as required by the MMS and will install thenecessary alarm and safety systems. The well is expected to return toproduction during the third or fourth quarter of 2007 pending MMS approval ofthe hydrogen sulfide contingency plan and installation of the required safetyequipment. The last rate on production was 2.4—3 MMCFD with 4,600 psi flowingtubing  pressure.

Under the terms of a Farmout Agreement between PNR andWoodside Energy (USA) Inc., PNR farmed out to Woodside the undivided one-halfinterest previously burdened by the Partnership’s net profits interest, butexpressly providing that the farmed out interest would not be subject to thePartnership’s net profits interest. PNR reserved a 10% overriding royaltyinterest, proportionately reduced to the interest conveyed, which interest,upon Woodside’s recoupment of specified costs and expenses, would increase to12.5%, proportionately reduced to the interest conveyed. The Partnership’s netprofits interest burdens the overriding royalty interest reserved by PNR. PNRhas informed the Trustee that it believes this process is consistent with theterms of the original conveyance and with the handling of other farmouttransactions involving lands burdened by the Partnership’s net profitsinterest.

PNR continues to own the undivided one-half interestnot burdened by the Partnership’s net profits interest and will participate inand operate the well as owner of that undivided one-half interest (subject toan agreement with Woodside to grant Woodside such interest in PNR’s remainingundivided one-half interest to equalize those parties participation in thewell).

PNR has noted to theTrustee that the Farmout Agreement enabled the drilling costs of theseprospects to be carried on the Partnership’s interest in part by Woodside. PNRfurther noted that the Partnership’s net profits interest would not haveentitled the Trust (through the Partnership) to payment until drilling costsand applicable interest were recovered, whereas the overriding royalty interestretained under the Farmout Agreement entitles the Trust (through thePartnership) to payments prior to the recoupment of expenses incurred byWoodside and PNR. As noted above, the first prospect on Brazos A-7 wasdetermined to be a dry hole. Under the Farmout Agreement and relatedagreements, those drilling and abandonment costs have been born entirely by PNRand Woodside and are not subject to recoupment from any proceeds otherwisepayable to the Partnership or the Trust. Similarly, the Partnership’s currentinterest in the “Midway” prospect on Brazos A-39 will be entitled topayment prior to PNR’s and Woodside’s recovery of expenses for drilling,completion, sub-sea tie backs and other costs.

PNRhas also entered into a farmout agreement with Hydro Gulf of Mexico, L.L.C.relating to the Nimitz Prospect underlying portions of Brazos Area Blocks A-24(E/2 SE/4), A-25 (W/2 SW/4) and A-39 (NE/4 NE/4)(the "Prospect Lands").Under this agreement, PNR reserved, and will be entitled to receive, anoverriding royalty interest in the farmed out properties equal to 2.5% in8/8ths of the earned depth and 

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Prospect Lands and any production from the earneddepth and Prospect Lands. Accordingly, the Trust's indirect net interest inthis farmout would be approximately 2.25%. This interest would become effectivewhenever Hydro earns an assignment of its operating rights as provided in theagreement. Any wells drilled will be drilled free of any cost and generally anyliability to PNR or the Trust's indirect interest in this property. Hydropreviously informed PNR that it expected to commence the drilling of anexploratory test well on or before February 1, 2007 to test the Chris ISands, which are found at depths between 17,500 and 18,300 feet. PNR hasinformed the Trustee that under the terms of the farmout, Pioneer is notentitled to receive Hydro's internal findings or their future drilling plans. Basedon subsequent inquiries by the Trustee, PNR has informed the Trustee that Hydrohas informed PNR that it reached total depth in the well during the secondquarter but has not provided further information to PNR other than Hydro isexamining their options.

***West Delta 61 andOther***

| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gross proceeds @  90%         |       | $                                               | —     |                                          | $          | 55,852 |   | $ | — |   | $ | 87,140 |   |
| Operating  expenditures @ 90% |       | 1,802                                           |       | (2,045                                        | )          | (243 | ) | (7,143 | ) |
| Capital  expenditures @ 90%   |       | —                                          |       | —                                        |       | — |   | (8,033 | ) |
| Net proceeds (deficit)        |       | $                                               | 1,802      |                                          | $          | 53,807 |   | $ | (243 | ) | $ | 71,964 |   |

 

Hurricane Katrina**struckthe Gulf of Mexico in August 2005. The operator of the West Deltaproperties informed PNR that the West Delta properties have been shut in sinceAugust 27, 2005 due to damage to the platform, the pipeline and the salesterminal. The operator has notified PNR that they expect production at WestDelta to resume during the third quarter of 2007. The proceeds for the sixmonths ended June 30, 2006 consist of revenue adjustments related to priorperiods received by the Trust during the first six months of 2006, and as suchdo not relate to production at the West Delta properties during 2006.

The PNR-operated wellsceased production in 2002, and the wells were plugged and abandoned by year-endwith the facilities being completely abandoned during 2003. The only remainingwells on this block are in West Delta 61. PNR farmed out a portion of WestDelta 61 to Stone Energy retaining a 12.5% (11.25% net to the Trust through thePartnership) overriding royalty interest.

***Capital Expenditures***

PNR does not anticipateany significant capital expenditures on the Royalty Properties in the future.Due to the limited financial capacity of the Trust, PNR has advised that itintends to farm out the Trust’s interest in the blocks it believes may beproduced economically, retaining an overriding royalty interest for the Trust.

***Abandonment Expenditures***

During the first ninemonths of 2006, PNR exhausted the $348,066 cash reserve established as ofDecember 31, 2005. In the third quarter of 2006, PNR revised theirestimate of abandonment expenses 

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incurred, but not recoupedfrom the Partnership and expenses yet to be incurred for properties, in whichthe Partnership has an interest to approximately $1.4 million. This revisionwas caused by increased work necessary because of damages caused by HurricaneKatrina, and increased day rates for labor due to the high demand for laborfollowing Hurricanes Katrina and Rita. As of June 30, 2007, PNR had spentapproximately $1,016,193 of the $1.4 million estimate, while approximately $383,807of PNR’s original estimate for total repairs remains to be spent. As thereserve for future abandonment cost was fully utilized during 2006, the total$1.4 million of the Partnership’s interest in estimated repairs will bededucted from any future gross proceeds on the Royalty Properties, which willreduce future Royalty income. No Royalty income will be distributed tounitholders in the future until PNR recoups the Partnership’s portion ofabandonment expenses from gross proceeds.

***Production and Price Review***

Production volumes for natural gas decreased to 3,453Mcf in the second quarter of 2007 as compared with 12,428 Mcf in the secondquarter of 2006 due to decrease in recognized production at both Brazos A-7,A-39 and West Delta 61 properties. The average sales price received for naturalgas in the second quarter of 2007 was $6.67 per Mcf as compared with $6.95 perMcf in the second quarter of 2006. Crude oil, condensate and natural gasliquids production volumes decreased to 16 barrels in the second quarter of2007 as compared to 49 barrels in the second quarter of 2006 due to decrease inrecognized production at both Brazos A-7, A-39 and West Delta 61 properties.The average sales price in the second quarter of 2007 for crude oil, condensateand natural gas liquids was $52.89 per barrel as compared with $33.20 perbarrel in the second quarter of 2006.

Production volumes fornatural gas decreased to 3,453 Mcf for the six months ended June 30, 2007as compared with 16,914 Mcf for the six months ended June 30, 2006 due to decreasein recognized production at both Brazos A-7, A-39 and West Delta 61 properties.The average sales price received for natural gas for the six months endedJune 30, 2007 was $6.67 per Mcf as compared with $8.56 per Mcf for the sixmonths ended June 30, 2006. Crude oil, condensate and natural gas liquidsproduction volumes decreased to 16 barrels for the six months endedJune 30, 2007 as compared to 338 barrels for the six months endedJune 30, 2006 due to decrease in recognized production at both Brazos A-7,A-39 and West Delta 61 properties. The average sales price for the six monthsended June 30, 2007 for crude oil, condensate and natural gas liquids was $52.89per barrel as compared with $58.31 per barrel for the six months endedJune 30, 2006.

***Termination of the Trust***

The Trust Indenture provides that the Trust willterminate if the total amount of cash per year received by the Trust fallsbelow certain levels for each of three successive years. **As a result of continued declines in production onRoyalty Properties nearing the end of their estimated productive lives, Royaltyincome received by the Trust in 2002, 2003 and 2004 fell below the TerminationThreshold prescribed by the Trust Indenture**. During 2005, theTrustee has previously taken steps to begin the process of liquidating theTrust. See “—Timing of Liquidation” above in Note 2. The Trustee, whichhas no authority or discretionary control over the timing of expenditures,production or income on the Royalty Properties, has no discretion regarding theoccurrence of the Termination Threshold or its consequences.

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The Trust Indentureprovides the Trustee a two-year period during which it must sell all of theTrust properties. The Trust Indenture provides that such properties must besold for cash and not for any other consideration. The Trustee expects that thesale process will be open to any persons desiring to participate, but, as iscustomary, access to information and participation may be limited to personswho execute confidentiality agreements regarding information provided by theworking interest owners. The Trustee may also require bidders to identifythemselves clearly and to represent or evidence sufficient financing in orderto participate, as the Trustee expects payment will be required promptly afterthe close of bidding without any financing conditions. Accordingly, the auctionmay not be a “public” auction in the sense that it may not be open to anyonewho does not satisfy these requirements. The Trustee is currently reviewing apotential online bidding process for participants in order to provide currentpublic information on bidding to the marketplace. The Trustee will alsodetermine a duration of bidding that it deems in the best interest of theUnitholders.

**Assets andLiabilities in the Process of Liquidation**

As aresult of the contractual termination of the Trust effective January 1,2005, the Trust is in the process of liquidation. The below table presents theassets of the Trust at their estimated fair value:

| ** **                                                 | ** ** | **June 30** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **2007**         | ** ** |
| ASSETS                                                     |       |             |       |
| Cash and short  term investments                           |       | $                | 3,619      |   |
| Interest  receivable                                       |       | —           |       |
| Net overriding  royalty interest in oil and gas properties |       | 1,334,097        |       |
| Total assets                                               |       | $                | 1,337,716  |   |
| LIABILITIES                                                |       |             |       |
| Trust expenses  payable                                    |       | 172,373          |       |
| Reserve for Trust  expenses                                |       | $                | 3,619      |   |
| Total liabilities                                          |       | 175,992          |       |
| Net assets in process of  liquidation                      |       | $1,161,724       |       |

 

Thenet overriding royalty interest in oil and gas properties at June 30, 2007reflect the Trustee’s estimate of value, (in the absence of third-partyappraisals or evaluations) based on the Trust’s share of future net revenuesfrom the net overriding royalty interest in the properties as of June 30,2007. This estimate is based on the Trustee’s current assessment of the impactof selling existing assets based on current market conditions, and includes thefollowing assumptions:

·       The Trust’s estimated share of proved oil andgas reserve volumes at June 30, 2007, which were derived from theDecember 31, 2006 reserve report prepared by DeGolyer and MacNaughton(D&M) and updated for first six months of 2007 production. The workinginterest owner has not prepared a reserve report as of June 30, 2007, andtherefore any revisions in oil and gas reserves during the first six months of2007 have not been considered in the estimate of fair value of the netoverriding royalty interest in oil and gas properties. The estimated fair valuealso does not include any value for probable or possible oil and gas reserves.

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·       Forward strip commodity prices on June 30,2007 and then escalated 2% thereafter.

·       Includes approximately $1.4million of future abandonment costs.

·       Discount rate of 10%.

***LegalProceedings***

On April 11, 2005, MOSH Holding, L.P. (“MHLP”)filed an Original Petition in the District Court of Travis County, Texas, 250thJudicial District, against Pioneer Natural Resources Company; Pioneer NaturalResources USA, Inc. (referred to below in this Note collectively withPioneer Natural Resources Company, as “Pioneer”); Woodside Energy(USA), Inc. (“Woodside”); and JPMorgan, as Trustee of the Mesa OffshoreTrust (Case No. GN501113) (the “Lawsuit”). The Lawsuit is currently beforethe 334th Judicial District of Harris Country, Texas (the “Court”). MHLP’sOriginal Petition alleges Pioneer and Woodside are liable for various actions,including (1) a wrongful farmout by Pioneer to Woodside of the Brazos A-39Lease, (2) a wrongful delay by Pioneer in producing the Brazos A-39Lease and the Midway #5 well drill thereon, (3) fraudulent accountingpractices by Pioneer, (4) breach of fiduciary duty by Pioneer,(5) aiding and abetting breach of fiduciary duty by Woodside,(6) misapplication of Trust property by Pioneer, (7) conspiracy tomisapply fiduciary property by Woodside and Pioneer, (8) common law fraudby Pioneer, (9) gross negligence by Pioneer, and (10) breach of theconveyance agreement by Pioneer. As described below, MHLP later added claimsagainst the Trustee for (1) an accounting, and (2) breach offiduciary duty. The remedies MHLP seeks include (a) reconstruing the TrustIndenture to determine that the Trust is not terminated because there has orshould have been production that would have generated revenues to extend thelife of the Trust, (b) requiring the Trustee to pursue certain claims, orto allow MHLP to pursue such claims, (c) setting aside any farmouts byPioneer in which there have been conveyances to an alleged affiliate ofPioneer, (d) the removal of JPMorgan as Trustee, (e) the return orforfeiture of compensation to JPMorgan, (f) monetary damages againstPioneer, Woodside and JPMorgan, and (g) unspecified exemplary damagesagainst all defendants.

MHLP’s Original Petition did not contain any claimsagainst the Trustee, except to enjoin the Trustee from terminating the Trustduring the pendency of the Lawsuit. In April 2005, the Trustee voluntarilyentered into an agreement with MHLP whereby the Trustee would not terminate theTrust without first giving MHLP at least sixty days written notice. Thisagreement allowed MHLP time to obtain documents and discovery from Pioneer andWoodside, and allowed the Trustee time to investigate the claims asserted byMHLP against Pioneer and Woodside to determine if they had any merit and, mostimportantly, whether they would benefit the Trust. During the six month periodbetween April and October 2005, the Trustee conducted an independentinvestigation including: numerous meetings and discussions with the parties;reviewing the relevant documents with the Trustee’s counsel; employingindependent reservoir engineers to evaluate the reserves in which the Trust hasan interest; engaging independent joint venture auditors to examine theaccounting records of the operator, Pioneer, relating to revenues and expensesallocated to the Partnership’s interests; and obtaining from both MHLP andPioneer their respective legal analyses of the challenged farmout.

Throughout 2005, the parties also anticipated that theMidway #5 well on the Brazos A-39 Lease that is the primary subject ofthe Lawsuit would go into production. Given the vast discrepancy between thereserves claimed by the MHLP and those projected by Pioneer for the Midway #5well, actual production 

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results wouldsignificantly impact the Trustee’s assessment of whether the Trust was betteroff with the cost-free override created by the Pioneer/Woodside farmout, or theprior cost-burdened net profits interest that MHLP seeks to restore through theLawsuit. Unfortunately, Hurricanes Katrina and Rita struck the Gulf of Mexicoin August 2005 and September 2005, respectively, and delayed thecommencement of production until 2006.

Faced with these post-hurricane delays, the Trusteeurged all the parties to consent to a bifurcated trial of the farmout issue onan expedited basis. The Trustee proposed to MHLP that if the Court determinedthat the farmout was not valid and that restoring the net profit interest wouldbenefit the Trust, then the Trust would reimburse MHLP’s reasonable attorneys’fees, up to $100,000, and the Trustee would allow MHLP’s counsel to representthe Trust in prosecuting the damages portion of the case. Conversely, if MHLPwere to lose on the expedited determination of the farmout issue, and in theabsence of more evidence to support any ancillary claims, then MHLP woulddismiss the other claims and would not be reimbursed, and the Trustee wouldmove forward to terminate the Trust.

While the Trustee, Pioneer, and Woodside all agreed toan expedited trial of the farmout issues, MHLP balked. Contrary to theassertions of MHLP and the Intervenor Plaintiffs identified below, the Trusteenever agreed that the claims asserted by MHLP against Pioneer and Woodside “hadmerit”—the Trustee simply stated that the farmout issue might meritadjudication at that time to determine (1) if MHLP was legally correct,and (2) if setting aside the farmout would benefit the Trust.

When MHLP refused to agree to an expedited andbifurcated trial as proposed by the Trustee, the Trustee informed MHLP that theTrustee’s investigation of MHLP’s allegations beyond the farmout issues failedto convince the Trustee that pursuing those claims and incurring the relatedlegal fees and expenses would benefit the Trust. Moreover, the Trustee informedMHLP that the Trustee’s independent joint venture auditors and reservoirengineers had not found any evidence to date to support MHLP’s damageallegations.

It was at this point, in November 2005, in themidst of the Trustee’s negotiations with MHLP to obtain an agreed adjudicationof MHLP’s claims, that MHLP alleged for the first time that the Trustee had aconflict of interest because of JPMorgan’s long-standing lending relationshipwith Pioneer. Although it is clear under the Trust Indenture, the Texas TrustAct, and relevant case law that JPMorgan is not precluded, by holding theposition of Trustee, from pursuing commercial banking activities not involvingTrust funds, MHLP amended its petition and asserted claims against the Trusteeon November 28, 2005.

Although MHLP’s claims against the Trustee weremeritless, to avoid any further assertion that the Trustee could notimpartially evaluate MHLP’s claims, on November 30, 2005, JPMorganannounced its intention to resign as Trustee, effective January 31, 2006.On December 13, 2005, the lawsuit was transferred to the 334th Judicial District Courtof Harris County, Texas. At a hearing on January 27, 2006 in the HarrisCounty Court, the Court denied MHLP’s motion for a temporary injunction toremove JPMorgan as Trustee and appoint a principal of MHLP, Timothy Roberson,as a temporary Trustee. At the Court’s suggestion, JPMorgan agreed to continueas Trustee, until such time as a substitute trustee was found that fulfilledthe qualifications of Trustee stated in the Trust Indenture. Since thathearing, neither MHLP nor Pioneer have identified a willing qualified successorTrustee that is not also a lender under one of Pioneer’s credit facilities(which status MHLP contends is an alleged conflict of interest).

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In 2006, after the Court denied MHLP’s attempt toremove JPMorgan as Trustee, the parties pursued formal discovery in theLawsuit. During this period, the Trustee continued to evaluate the merits ofthe alleged claims against Pioneer and Woodside. A central allegation by MHLPand the Intervenors is that Pioneer and Woodside delayed the commencement ofproduction from the well drilled pursuant to the Pioneer-Woodside Farmout—theMidway #5 well on the Brazos A-39 Lease. Woodside and Pioneer witnesseshave given sworn testimony in depositions about the commercial and technicalreasons for the delays in bringing the well on line. The well commencedproduction in April 2006. After this time, the Trustee instructed itsindependent petroleum reserve engineers to evaluate how the production resultsand projected production from the well might affect the value of the Trust’sinterests. The Trustee’s independent engineers determined that the initial dataregarding projected production from the well did not warrant a material changein prior assessments of the value of the Trust’s assets.

Pioneer subsequently reported to the Trustee thatproduction from the well was suspended in July 2006 due to mercurycontamination identified at downstream facilities where the production from thewell is commingled with production from other wells. An updated evaluation fromthe Trustee’s independent petroleum reserve engineers estimated that revenuesfrom future production from the well likely would not exceed the costs ofdrilling and completing the well. Accordingly, if the Partnership’s interest inthe underlying lease had remained, or was, a cost-burdened net profitsinterest, instead of the cost-free overriding royalty interest the Partnershipheld as a result of the Pioneer-Woodside Farmout, the Partnership most likelywould not have received any payments from this production, and the Trustaccordingly would not have received any associated distributions. Further, theproduction data did not support reserves of the size asserted by MHLP and theIntervenors. The well resumed production in February 2007. The well wasshut in again on April 18, 2007 due to an increase in hydrogen sulfide contentcoincidental with an increase in water production. PNR is in the process ofdeveloping an hydrogen sulfide contingency plan as required by the MMS and willinstall the necessary alarm and safety systems. The well is expected to returnto production during the third or fourth quarter of 2007 pending MMS approvalof the hydrogen sulfide contingency plan. The last rate on production was 2.4—3MMCFD with 4,600 psi flowing tubing  pressure.

On December 8, 2006, Dagger-Spine HedgehogCorporation (“Dagger-Spine”) filed a petition to intervene in the Lawsuit as aPlaintiff, alleging claims virtually identical to MHLP. Another group ofunitholders, led by Keith A. Wiegand (together with Dagger-Spine, the“Intervenors”), also filed on March 9, 2007 a petition to intervene asplaintiffs in the Lawsuit, incorporating and adopting the same claims assertedby MHLP.

On January 26, 2007, the Trustee reached aconditional settlement of the claims asserted by MHLP and the Intervenors againstPioneer and Woodside. The conditional settlement was set forth in the MutualRelease and Settlement Agreement dated as of January 26, 2007 (the“Conditional Settlement Agreement”). The Trustee filed a motion for approval ofthe Conditional Settlement Agreement with the Court on January 30, 2007.The Trustee believed that the Conditional Settlement Agreement was in the bestinterest of the unitholders. However, on June 19, 2007, the Court issuedan order denying the Trustee’s motion to approve the conditional settlement, sothe case is currently set to be tried.

Since the Court’s June 19, 2007 Order, Pioneer,Woodside, and the Trustee each filed separate motions for summary judgment onseveral of the claims and issues in the Lawsuit. Arguments on those motions areset for dates in August and September 2007. The Court has also issuedan order moving the 

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current trial setting fromOctober 8, 2007 to December 3, 2007. The Trustee denies that any ofPlaintiffs’ claims against the Trustee have any merit, and the Trustee willcontinue to vigorously defend against such claims as permitted under the termsof the Trust Indenture.

The Trustee will make thefull detail of the underlying data of the December 31, 2006 reserve reportavailable for use in connection with the sale of the Partnership’s RoyaltyProperties as part of the Trust termination. For more information regarding theestimated remaining life of each of the Royalty Properties, the estimatedfuture net revenues of the Royalty Properties and information relating tofarm-outs of interests on the Royalty Properties based on information providedby PNR to DeGoyler & McNaughton (D&M), see pages 23 and 24 ofthe Form 10-K for the year ended December 31, 2006 and Note 6in the Notes to Financial Statements included elsewhere in the Form 10-K.Any final distribution to unitholders will be an amount net of funds requiredto satisfy all Trust liabilities.

**Liquidity for TrustExpenses**

As of June 30, 2007,the Trust had $3,619 in cash and short-term investments reserved for Trustexpenses and $172,373 in unpaid Trust expenses. Based on current general andadministrative expenditures being incurred in connection with the litigationand the absence of Royalty income, the Trustee will be required to borrow moneyin accordance with the Trust Indenture to fund future Trust expenses. TheTrustee is currently reviewing alternatives for loans to the Trust permittedunder the Trust Indenture, including loans on a secured basis. In the event anyloans are made to the Trust, the Trust Indenture will prohibit the Trustee frommaking any distributions to unitholders until those loans are repaid in full.

***Item 3.******                        Quantitativeand Qualitative Disclosures About Market Risk.***

The Trust does not utilizemarket risk sensitive instruments. However, see the discussion of marketing byPNR above.

***Item 4.******                       ***Controls andProcedures.

*Evaluationof Disclosure Controls and Procedures.**  *The Trustee maintains disclosurecontrols and procedures designed to ensure that information required to bedisclosed by the Trust in the reports that it files or submits under theExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules andregulations. Disclosure controls and procedures include controls and proceduresdesigned to ensure that information required to be disclosed by the Trust isaccumulated and communicated by Pioneer, as the managing general partner of thePartnership, and the working interest owners to JPMorgan Chase Bank, N.A.,as Trustee of the Trust, and its employees who participate in the preparationof the Trust’s periodic reports as appropriate to allow timely decisionsregarding required disclosure.

As of the end of the period covered by this report, theTrustee carried out an evaluation of the Trust’s disclosure controls andprocedures. Mike Ulrich, as Trust Officer of the Trustee, has concluded thatthe controls and procedures are effective.

Due to the contractual arrangements of (i) theTrust Indenture, (ii) the Partnership Agreement and (iii) the rightsof the Partnership under the Conveyance regarding information furnished by theworking 

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interest owners, theTrustee relies on: (A) information provided by the working interestowners, including (i) the status of litigation, (ii) historicaloperating data, plans for future operating and capital expenditures, reserveinformation, as well as (iii) information relating to projectedproduction; (B) information provided by the managing general partner of thePartnership that is collected by the managing general partner from the workinginterest owners; and (C) conclusions regarding reserves by reserveengineers or other experts in good faith. See Item 1A. Risk Factors “—Noneof the Trust nor its unitholders control the operation or development ofthe Royalty Properties and have little influence over operation or development”and “—The Trustee relies upon the working interest owners and managinggeneral partner for information regarding the Royalty Properties” in theTrust’s 10-K for the year ended 2006 for a description of certain risksrelating to these arrangements and reliance.

*Changesin Internal Control over Financial Reporting.**  *In connection with the evaluationby the Trustee of changes in internal control over financial reporting of theTrust that occurred during the Trust’s last fiscal quarter, no change in theTrust’s internal control over financial reporting was identified that hasmaterially affected, or is reasonably likely to materially affect, the Trust’sinternal control over financial reporting. The Trustee notes for purposes ofclarification that it has no authority over, has not evaluated and makes nostatement concerning, the internal control over financial reporting of theworking interest owners or the managing general partner of the Partnership.

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**PART II—OTHERINFORMATION**

**Item 6.**                        *Exhibits.*

(Asteriskindicates exhibit previously filed with the Securities and Exchange Commissionand incorporated herein by reference. JPMorgan Chase Bank, N.A. was formerlyknown as The Chase Manhattan Bank and is successor by mergers to the originalname of the Trustee, Texas Commerce Bank National Association).

|                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                 | ** ** | **SEC File or  Registration  Number** | ** ** | **Exhibit  Number** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------|
|   4(a) | *          | Mesa Offshore  Trust Indenture between Mesa Petroleum Co. and Texas Commerce Bank  National Association, as Trustee, dated December 15, 1982                                                                                                                                                                |       | 2-79673                               |       | 10(gg)              |
|   4(b) | *          | Overriding  Royalty Conveyance between Mesa Petroleum Co. and Mesa Offshore Royalty  Partnership, dated December 15, 1982                                                                                                                                                                                        |       | 2-79673                               |       | 10(hh)              |
|   4(c) | *          | Partnership Agreement  between Mesa Offshore Management Co. and Texas Commerce Bank National  Association, as Trustee, dated December 15, 1982                                                                                                                                                              |       | 2-79673                               |       | 10(ii)              |
|   4(d) | *          | Amendment to  Partnership Agreement between Mesa Offshore Management Co., Texas Commerce  Bank National Association, as Trustee, and Mesa Operating Limited  Partnership, dated December 27, 1985 (Exhibit 4(d) to  Form 10-K for year ended December 31, 1992 of Mesa Offshore  Trust) |       | 1-08432                               |       | 4(d)                |
|   4(e) |       | Amendment to  Partnership Agreement between Texas Commerce Bank National Association, as  Trustee and Mesa Operating dated as of January 5, 1994  (Exhibit 4(e) to Form 10-K for year ended  December 31, 1993 of Mesa Offshore Trust)                                                  |       | 1-08432                               |       | 4(e)                |
| 31               |       | Certification  furnished pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                             |       |                                  |       |                |
| 32               |       | Certification  furnished pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                             |       |                                  |       |                |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|              | MESA OFFSHORE TRUST |
|--------------|---------------------|
|         | By:                 | /s/  JPMORGAN CHASE BANK, N.A., Trustee |
|         | By:                 |  |
| *** *** | *** ***        | ***Mike Ulrich*** |
| *** *** | *** ***        | ***Vice President & Trust  Officer*** |
| *** *** | *** ***        | ***The Bank of New York Trust  Company, N.A.,*** |
| *** *** | *** ***        | ***as attorney-in-fact for the  Trustee*** |

 

Date: August 14, 2007

The Registrant, Mesa Offshore Trust, has no principalexecutive officer, principal financial officer, board of directors or personsperforming similar functions. Accordingly, no additional signatures areavailable and none have been provided.

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