**SECURITIES 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 MARCH 31, 2007**

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

**FORTHE TRANSITION PERIOD FROM                      TO**

**Commissionfile number 1-8432**

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**MESA OFFSHORE TRUST**

(Exact name of Registrantas Specified in its Charter)

| **Texas**                                                                                                 |   | **76-6004065**      |
|-----------------------------------------------------------------------------------------------------------|--------|---------------------|
| (State of Incorporation                                                                                   |   | (I.R.S. Employer    |
| 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** / 1-512-479-2562

(Registrant’s TelephoneNumber, Including Area Code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange 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 Act). Yes o   No x

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

Asof May 15, 2007—71,980,216 Units of Beneficial Interest were outstandingin Mesa Offshore Trust.

 

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        *Financial Statements.*

**MESA OFFSHORE TRUSTSTATEMENTS OF DISTRIBUTABLE INCOME(Unaudited)**

| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Royalty income                 |       | $                                                | —     |   | $ | 40,765 |   |
| Interest income                |       | 5,080                                            |       | 5,188 |   |
| General and administrative     |       | (5,080                                           | )          | (45,953 | ) |
| Distributable income           |       | $                                                | —     |   | $ | — |   |
| Distributable  income per unit |       | $                                                | —     |   | $ | — |   |

 

**STATEMENTOF ASSETS, LIABILITIES AND TRUST CORPUS**

| ** **                                                                         | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| ASSETS                                                                             |       |                     |       |                        |       |
| Cash and  short-term investments                                                   |       | $                        | 378,345    |                        | $          | 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                                                                       |       | $                        | 381,282    |                        | $          | 802,981 |   |
| LIABILITIES AND  TRUST CORPUS                                                      |       |                     |       |                        |       |
| Reserve for Trust  expenses                                                        |       | $                        | 378,345    |                        | $          | 800,044 |   |
| Trust corpus  (71,980,216 units of beneficial interest authorized and outstanding) |       | 2,937                    |       | 2,937                       |       |
| Total liabilities  and trust corpus                                                |       | $                        | 381,282    |                        | $          | 802,981 |   |

 

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

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

| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **   2007   **     | ** ** | **   2006   ** | ** ** |
| Trust corpus,  beginning of period              |       |                                             | $          | 2,937 |   |   |   | $ | 3,048 |   |   |
| Distributable income                            |       |                                             | —     |   |   |   | — |   |   |
| Distributions to unitholders                    |       |                                             | —     |   |   |   | — |   |   |
| Amortization of net overriding royalty interest |       |                                             | —     |   |   |   | (23 | ) |   |
| Trust corpus, end of  period                    |       |                                             | $          | 2,937 |   |   |   | $ | 3,025 |   |   |

 

(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 andnonproducing oil and gas properties located in federal waters offshoreLouisiana and Texas (the “Royalty Properties”). Mesa Inc. created theRoyalty out of its working interest in the Royalty Properties and transferredit to the Partnership. Until August 7, 1997, MESA Inc. owned andoperated its assets through Mesa Operating Co. (“Mesa”), the operator and themanaging general 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 Resources USA, Inc.(successor to Mesa) a wholly owned subsidiary of Pioneer (“PNR”) (collectively,the mergers are referred to herein as the “Merger”). Subsequent to the Merger,Pioneer owns and operates its assets through PNR and is also the managinggeneral partner of the Partnership. As hereinafter used in this report, theterm PNR generally refers to the operator of the Royalty Properties, unlessotherwise 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” belowin this Note. The Trustee, which has no authority or discretionary control overthe timing of expenditures, production or income on the Royalty Properties, hasno discretion regarding the occurrence of the Termination Threshold or itsconsequences.

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 

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may alsorequire bidders to identify themselves clearly and to represent or evidencesufficient financing in order to participate, as the Trustee expects paymentwill be required promptly after the close of bidding without any financingconditions. Accordingly, the auction may not be a “public” auction in the sensethat it may not be open to anyone who does not satisfy these requirements. TheTrustee is currently reviewing a potential online bidding process forparticipants in order to provide current public information on bidding to themarketplace. The Trustee will also determine a duration of bidding that itdeems 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 the 334th Judicial District of HarrisCountry, Texas (the “Court”). MHLP’s Original Petition alleges Pioneer andWoodside are liable for various actions, including (1) a wrongful farmoutby Pioneer to Woodside of the Brazos A-39 Lease, (2) a wrongfuldelay by Pioneer in producing the Brazos A-39 Lease and the Midway #5well drill thereon, (3) fraudulent accounting practices by Pioneer, (4) breachof fiduciary duty by Pioneer, (5) aiding and abetting breach of fiduciaryduty by Woodside, (6) misapplication of Trust property by Pioneer, (7) conspiracyto misapply fiduciary property by Woodside and Pioneer, (8) common lawfraud by Pioneer, (9) gross negligence by Pioneer, and (10) breach ofthe conveyance agreement by Pioneer. As described below, MHLP later addedclaims against 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,Hurricane Katrina struck the Gulf of Mexico in August 2005 and delayed thecommencement of production until 2006.

Faced with this post-Katrina situation, 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 of either their merit or that pursuing those claims andincurring the related legal fees and expenses would benefit the Trust.Moreover, the Trustee informed MHLP that the Trustee’s independent jointventure auditors and reservoir engineers had not found any evidence to date tosupport any of MHLP’s allegations.

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 Court ofHarris 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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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 as plaintiffs in theLawsuit, incorporating and adopting the same claims asserted by 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 is set forth in theMutual Release and Settlement Agreement dated as of January 26, 2007 (the “ConditionalSettlement Agreement”). The Trustee filed a motion for approval of theConditional Settlement Agreement with the Court on January 30, 2007.

The Conditional Settlement Agreement is the product ofextensive investigations and negotiations by the Trustee. In 2006, after theCourt denied MHLP’s attempt to remove JPMorgan as Trustee, the parties pursuedformal discovery in the Lawsuit. During this period, the Trustee continued toevaluate the merits of the alleged claims against Pioneer and Woodside. Acentral allegation by MHLP and the Intervenors is that Pioneer and Woodsidedelayed the commencement of production from the well drilled pursuant to thePioneer-Woodside Farmout—the Midway #5 well on the Brazos A-39 Lease.Woodside and Pioneer witnesses have given sworn testimony in depositions aboutthe commercial and technical reasons for the delays in bringing the well online. The well commenced production in April 2006. After this time, theTrustee instructed its independent petroleum reserve engineers to evaluate howthe production results and projected production from the well might affect thevalue of the Trust’s interests. The Trustee’s independent engineers determinedthat the initial data regarding projected production from the well did not warranta material change in 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 of drillingand completing the well. Accordingly, if the Partnership’s interest in theunderlying lease had remained, or was, a cost-burdened net profits interest,instead of the cost-free overriding royalty interest the Partnership held as aresult of the Pioneer-Woodside Farmout, the Partnership would not havereceived, or would not receive, any payments from this production, and theTrust accordingly would not have received any associated distributions.Further, the production data did not support reserves of the size asserted byMHLP and the Intervenors. The well resumed production in February 2007.The well was shut in on April 18, 2007 due to an increase in H2S contentcoincidental with an increase in water production. PNR is in the process ofdeveloping an H2S contingency plan as required by the MMS and will install thenecessary alarm and safety systems. The well is expected to return toproduction during the second quarter of 2007 pending MMS approval of the H2Scontingency plan. The last rate on production was 2.4—3 MMCFD psi flowingtubing  pressure.

Under the ConditionalSettlement Agreement, Pioneer has agreed to assign to the Trust an interestconfirming its right to a 4.5% cost-free overriding royalty interest in theBrazos A-39 Lease until payout of the Midway #5 well, and to assign tothe Trust an interest in the Brazos A-39 Lease, to be effective from andafter payout if payout occurs, equal to a 45% net profits interest. Pioneerwould also agree to pay for and satisfy approximately $1.4 million of plugging,abandonment, and decommissioning costs relating to several of the assignedRoyalty Properties that Pioneer has informed the Trustee would otherwise be 

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allocatedto the Partnership’s Royalty. Finally, Pioneer and the Trustee have agreed thatPioneer shall arrange for the sale of all assets of the Partnership as providedfor under the Trust Indenture on, or as soon as practical after, July 1,2007, or on an earlier date as set forth in the proposed settlement. TheConditional Settlement Agreement, if approved by the Court, would settle allclaims in the Lawsuit that the Trust or the Partnership has or might haveagainst Pioneer and Woodside and any claims that Pioneer and Woodside mighthave against the Trust or the Partnership.

Based on the informationavailable to the Trustee and its analysis outlined above, the Trustee believesthat the benefits received under the Conditional Settlement Agreement outweighthe potential benefits that may be achieved by the Trust litigating any of theasserted claims against Pioneer and Woodside, which would require the Trust toincur and assume the risk of further significant litigation costs. As a result,the Trustee believes the Conditional Settlement Agreement is in the bestinterest of the unitholders of the Trust. The Trustee has executed theConditional Settlement Agreement and is recommending to the Court that theagreement be approved.

The Conditional SettlementAgreement is subject to certain conditions, including approval by the Court.The Court has currently scheduled a hearing on the approval for May 21,2007. MHLP and the Intervenors are not signatories or parties to the settlementand they, or other unitholders of the Trust, may comment or object to thesettlement. The settlement is not final until approved by the Court. If theCourt approves the proposed settlement, it will enter an order that approvesthe settlement and dismisses the Lawsuit with prejudice as to all claims thatmay be brought on behalf of the Trust, either by the Trustee or by unitholdersseeking to assert claims on behalf of themselves or the Trust, against Pioneerand Woodside based on the facts asserted in the Lawsuit.

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.The final distribution to unitholders will be an amount net of funds requiredto satisfy all Trust liabilities.

*Timing of Liquidation*

The Trust Indentureprovides that the Trust will terminate if the total amount of cash per yearreceived by the Trust falls below certain levels for each of three successiveyears. As a result of continued declines in production on Royalty Propertiesnearing the end of their estimated productive lives, Royalty income received bythe Trust in 2002, 2003 and 2004 fell below the Termination Thresholdprescribed by the Trust Indenture. Under the proposed Conditional SettlementAgreement, Pioneer and the Trustee have agreed that Pioneer shall arrange forthe sale of all assets of the Partnership as provided for under the TrustIndenture on, or as soon as practical after, July 1, 2007, or on anearlier date as set forth in the proposed settlement. The Trustee filed amotion for approval of the Conditional Settlement Agreement with the court on January 30,2007. See “Legal Proceedings” above in this note for further discussion of theConditional Settlement Agreement.

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.

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**Note 3—Liquidity for Trust Expenses**

As of March 31, 2007,the Trust had $378,345 in cash and short-term investments reserved for Trustexpenses. Based on current general and administrative expenditures being incurredin connection with the litigation, in the absence of Royalty income the Trusteeexpects that it will be required to borrow money in accordance with the TrustIndenture to fund future Trust expenses. The Trustee is currently reviewingalternatives for loans to the Trust permitted under the Trust Indenture,including loans on a secured basis. In the event any loans are made to theTrust, the Trust Indenture will prohibit the Trustee from making anydistributions to unitholders until those loans are repaid in full.

**Note 4—Net Overriding Royalty 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 ofthe Bank of America plus one-half percent, out of future gross proceeds priorto making further Royalty payments 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 of Presentation**

The accompanying unaudited financial information hasbeen prepared by the Trustee in accordance with the instructions to Form 10-Q.JPMorgan Chase Bank, N.A. was formerly known as The Chase Manhattan Bank and isthe successor by mergers to the original name of the Trustee, Texas CommerceBank National Association. The Trustee believes such information includes allthe disclosures necessary to make the information presented not misleading. Theinformation furnished reflects all adjustments which are, in the opinion of theTrustee, necessary for a fair presentation of the results for the interimperiods presented. The financial information should be read in conjunction withthe financial statements and notes thereto included in the Trust’s 2006 AnnualReport 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.

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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 months ended March 31,2007, no royalty income was received by the Trust; accordingly, no Trustdistribution to the unit holders was made.

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 March 31, 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. PNRhas not withheld any funds for future abandonment costs at March 31, 2007.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. See Note 2 “—Status of the Trust, Legal Proceedings, andTiming of Liquidation” for the terms of the contracted settlement agreementthat, if approved would substantially eliminate the deficit balance.

No Royalty income will be distributed to unitholdersuntil the Trustee recoups Trust expenses being paid from the reserve that theTrustee has established for anticipated future expenses. As of March 31,2007, $1.6 million will be withheld by the Trustee from future Royaltyincome before Trust distributions to the unitholders will resume. During thethree months ended March 31, 2007 and 2006, the Trust had no distributableincome. Interest income and the reserve for Trust expenses were used to pay theTrust’s general and administrative expenses for the three months ended March 31,2007 of $426,780.

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

| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| General and  administrative costs incurred during the  period |       | $                                                | 426,780    |   | $ | 356,613 |   |
| (Deductions from) additions  to reserve for Trust expenses    |       | (421,700                                         | )          | (310,660 | ) |
| General and administrative costs as reported                  |       | $                                                | 5,080      |   | $ | 45,953 |   |

 

**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. 

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Theamounts distributed are determined on a monthly basis and are payable tounitholders of record as of the last business day of each month. However, cashdistributions are made quarterly in January, April, July and October, andinclude interest earned from the monthly record dates to the dates ofdistribution.

**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.

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**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 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. All statements other thanstatements of historical facts included in this Form 10-Q, includingwithout limitation the statements under “Management’s Discussion and Analysisof Financial Condition and Results of Operations” are forward-lookingstatements. Although Pioneer has advised the Trust that it believes that theexpectations reflected in such forward-looking statements are reasonable,no assurance can be given that such expectations will prove to have beencorrect. Important factors that could cause actual results to differ materiallyfrom 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’s Form 10-Kfor the year ended 2006, including under Item 1A. “Risk Factors”. Allsubsequent written and oral forward-looking statements attributable tothe Trust or persons acting on its behalf are expressly qualified in theirentirety 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.

Belowis a summary of Royalty income received on the Trust properties for the threemonths ended March 31, 2007 and 2006:

| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Gross proceeds @  90%                |       | $                                                | —     |   | $ | 76,525 |   |
| Operating  expenditures @ 90%        |       | (6,495                                           | )          | (27,723 | ) |
| Capital  expenditures @ 90%          |       | —                                           |       | (8,033 | ) |
| Net proceeds  (deficit)              |       | (6,495                                           | )          | 40,769 |   |
| Increase  (decrease) in deficit      |       | 6,495                                            |       | — |   |
| Net proceeds  after deficit recovery |       | —                                           |       | 40,769 |   |
| Royalty Income (99.99%)              |       | $                                                | —     |   | $ | 40,765 |   |

 

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Belowis a summary of distributable income for the three months ended March 31,2007 and 2006:

| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Royalty income                             |       | $                                                | —     |   | $ | 40,765 |   |
| Interest income                            |       | 5,080                                            |       | 5,188 |   |
| General and  administrative expenses       |       | (5,080                                           | )          | (45,953 | ) |
| Distributable  income                      |       | $                                                | —     |   | $ | — |   |
| Distributable  income per unit             |       | $                                                | —     |   | $ | — |   |
| Accumulated deficit (as  of end of period) |       | $                                                | 1,424,405  |   | $ | — |   |

 

During the first quarters of 2007 and 2006, the Trusthad no distributable income. Interest income and the reserve for trust expenseswere used to pay the Trust’s first quarter of 2007 general and administrativeexpenses of $426,780.

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

| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| General and administrative costs incurred during the period |       | $                                                | 426,780    |   | $ | 356,613 |   |
| (Deductions from) additions to reserve for Trust expenses   |       | (421,700                                         | )          | (310,660 | ) |
| General  and administrative costs as reported               |       | $                                                | 5,080      |   | $ | 45,953 |   |

 

Generaland administrative expenses of the Trust for the first quarter of 2007increased 20% to $426,780 as compared to $356,613 for the same period in 2006. Theincrease in general and administrative expenses in 2007 is primarily due to anincrease in legal fees as a result of pending litigation and expendituresrelated to the anticipated sale of Trust properties pursuant to the Trust’stermination.

**Operational Review**

PNR has advised the Trust that during the firstquarter 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 first quarter of 2007were generally lower than spot market prices in the first quarter of 2006.

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.

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Below is an operationalreview of the remaining producing Trust properties:

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

| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Gross proceeds @  90%         |       | $                                                | —     |   | $ | 45,237 |   |
| Operating  expenditures @ 90% |       | (4,450                                           | )          | (22,625 | ) |
| Capital  expenditures @ 90%   |       | —                                           |       | — |   |
| Net proceeds (deficit)        |       | $                                                | (4,450     | ) | $ | 22,612 |   |

 

As of March 31, 2007, these two blocks had onewell capable of producing, the Brazos A-39 # 5 which was shut-in duringthe first quarter of 2007 due to the detection of mercury. The Brazos A-7No. B-1 well, operated by Newfield, was no longer producing as of December 31,2006. PNR entered into farmout agreements for the Partnership’s interest inboth of these blocks so that two exploration prospects could be drilled and inwhich the Trust will retain an overriding royalty interest. The first prospecton Brazos A-7 was drilled during 2003 and was determined to be a dryhole. As such, the well was plugged and abandoned.

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 produced a carbon dioxide content thatexceeds pipeline specifications. This higher content requires the operator tomix production at the platform with production from other fields in order totransport the product. Production is being routed to the A-52C platformowned by Coldren Resources LP. That platform is being operated by Arena, whichis also serving as the contract operator for the Midway property. The well wasshut in July 21, 2006 by Williams Pipeline due to reported detection ofmercury in the gas stream. Following the installation of vessels with mercuryabsorbing media and negotiation of the required agreements with the owner andoperator of the Brazos A-52C host platform, the well was returned toproduction on February 13, 2007. The well was shut in on April 18,2007 due to an increase in hydrogen sulfide content coincidental with anincrease in water production. PNR is in the process of developing an hydrogensulfide contingency plan as required by the MMS and will install the necessaryalarm and safety systems. The well is expected to return to production duringthe second quarter of 2007 pending MMS approval of the hydrogen sulfidecontingency plan. The last rate on production was 2.4—3 MMCFD 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 

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interest burdens theoverriding royalty interest reserved by PNR. PNR has informed the Trustee thatit believes this process is consistent with the terms of the originalconveyance and with the handling of other farmout transactions involving landsburdened by the Partnership’s net profits interest.

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.

***West Delta 61 andOther***

| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Gross proceeds @  90%         |       | $                                                | —     |   | $ | 31,288 |   |
| Operating  expenditures @ 90% |       | (2,045                                           | )          | (5,098 | ) |
| Capital  expenditures @ 90%   |       | —                                           |       | (8,033 | ) |
| Net proceeds (deficit)        |       | $                                                | (2,045     | ) | $ | 18,157 |   |

 

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 since August 27,2005 due to damage to the platform, the pipeline and the sales terminal. Theoperator has notified PNR that they expect production at West Delta to resumeduring the second quarter of 2007. The proceeds for the quarter ended March 31,2006 consist of revenue adjustments related to prior periods received by theTrust during the first quarter of 2006, and as such do not relate to productionat the West Delta properties during the quarter.

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.

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***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***

Thetable below provides a rollforward of the abandonment and removal costs cashreserve that PNR has withheld from the Trust:

| Balance,  December 31, 2006               |   | $      | — |   |
|------------------------------------------------|--------|--------|--------|--------|
| Abandonment  (costs incurred) credits received |   | — |   |
| Balance, March 31,  2007                  |   | $      | — |   |

 

During the first ninemonths of 2006, PNR exhausted the $348,066 cash reserve established as of December 31,2005. In the third quarter of 2006, PNR revised their estimate of abandonmentexpenses incurred, but not recouped from the Partnership and expenses yet to beincurred for properties, in which the Partnership has an interest toapproximately $1.4 million. This revision was caused by increased work;necessary because of damages caused by Hurricane Katrina, and increased dayrates for labor due to the high demand for labor following Hurricanes Katrinaand Rita. As of March 31, 2007, PNR had spent approximately $867,000 ofthe $1.4 million estimate, while approximately $533,000 of PNR’s originalestimate for total repairs remains to be spent. As the reserve for futureabandonment cost was fully utilized during 2006, the total $1.4 million of thePartnership’s interest in estimated repairs will be deducted from any futuregross proceeds on the Royalty Properties, which will reduce future Royaltyincome. No Royalty income will be distributed to unitholders in the futureuntil PNR recoups the Partnership’s portion of abandonment expenses from grossproceeds.

***Production and Price Review***

Production volumes fornatural gas decreased to 0 Mcf in the first quarter of 2007 as compared with4,487 Mcf in the first of quarter 2006 primarily due to decreased production atWest Delta 61 due to damages related to Hurricane Katrina and due to theshut-in of Brazos A-39. The average sales price received for natural gas in thefirst quarter of 2007 was $0 per Mcf as compared with $13.03 per Mcf in thefirst quarter of 2006. Crude oil, condensate and natural gas liquids productionvolumes decreased to 0 barrels in the first quarter of 2007 as compared to 290barrels in the first quarter of 2006. The average sales price in the firstquarter of 2007 for crude oil, condensate and natural gas liquids was $0 perbarrel as compared to $62.56 per barrel in the first quarter of 2006.

***Terminationof 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**

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**the TrustIndenture**. During 2005, the Trustee has previously takensteps to begin the process of liquidating the Trust. See “—Timing ofLiquidation” above in Note 2. The Trustee, which has no authority ordiscretionary control over the timing of expenditures, production or income onthe Royalty Properties, has no discretion regarding the occurrence of theTermination Threshold 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 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:

| ** **                                                 | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                 | ** ** | **2007**           | ** ** |
| ASSETS                                                     |       |               |       |
| Cash and short  term investments                           |       | $                  | 378,345    |   |
| Interest  receivable                                       |       | —             |       |
| Net overriding  royalty interest in oil and gas properties |       | 1,487,179          |       |
| Total assets                                               |       | $                  | 1,865,524  |   |
| LIABILITIES                                                |       |               |       |
| Reserve for Trust  expenses                                |       | $                  | 378,345    |   |
| Total liabilities                                          |       | 378,345            |       |
| Net assets in process of  liquidation                      |       | $                  | 1,487,179  |   |

 

The net overridingroyalty interest in oil and gas properties at March 31, 2007 reflect theTrustee’s estimate of value, (in the absence of third-party appraisals orevaluations) based on the Trust’s share of future net revenues from the netoverriding royalty interest in the properties as of March 31, 2007. Thisestimate is based on the Trustee’s current assessment of the impact of sellingexisting assets based on current market conditions, and includes the followingassumptions:

·       TheTrust’s estimated share of proved oil and gas reserve volumes at March 31,2007, which were derived from the December 31, 2006 reserve reportprepared by DeGolyer and MacNaughton (D&M) and updated for first quarter of2007 production. The working interest owner has not prepared a reserve reportas of March 31, 2007, and therefore any revisions in oil and gas reserves 

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during the first quarter 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.

·       Forwardstrip commodity prices on March 31, 2007 and then escalated 2% thereafter.

·       Includesapproximately $1.4 million of future abandonment costs.

·       Discount rate of 10%.

***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 (“PNR”); PioneerNatural Resources USA, Inc. (together with PNR, “Pioneer”); WoodsideEnergy (USA), Inc. (“Woodside”); and JPMorgan Chase Bank, N.A., as Trusteeof the Mesa Offshore Trust (Case No. GN501113) (the “Lawsuit”). TheLawsuit is currently before the 334th Judicial District of Harris Country,Texas (the “Court”). MHLP’s Original Petition alleges Pioneer and Woodside areliable for various actions, including (1) a wrongful farmout by Pioneer toWoodside of the Brazos A-39 Lease, (2) a wrongful delay by Pioneerin producing the Brazos A 39 Lease and the Midway #5 well drill thereon,(3) fraudulent accounting practices by Pioneer, (4) breach offiduciary duty by Pioneer, (5) aiding and abetting breach of fiduciary dutyby Woodside, (6) misapplication of Trust property by Pioneer,(7) conspiracy to misapply fiduciary property by Woodside and Pioneer,(8) common law fraud by Pioneer, (9) gross negligence by Pioneer, and(10) breach of the conveyance agreement by Pioneer. As described below,MHLP later added claims against the Trustee for (1) an accounting, and(2) breach of fiduciary duty. The remedies MHLP seeks include(a) reconstruing the Trust Indenture to determine that the Trust is notterminated because there has or should have been production that would havegenerated revenues to extend the life of the Trust, (b) requiring theTrustee to pursue certain claims, or to allow MHLP to pursue such claims,(c) setting aside any farmouts by Pioneer in which there have beenconveyances to an alleged affiliate of Pioneer, (d) the removal ofJPMorgan as Trustee, (e) the return or forfeiture of compensation toJPMorgan, (f) monetary damages against Pioneer, Woodside and JPMorgan, and(g) unspecified exemplary damages against all defendants.

MHLP’s Original Petitiondid not contain any claims against the Trustee, except to enjoin the Trusteefrom terminating the Trust during the pendency of the Lawsuit. InApril 2005, the Trustee voluntarily entered into an agreement with MHLP wherebythe Trustee would not terminate the Trust without first giving MHLP at leastsixty days written notice. This agreement allowed MHLP time to obtain documentsand discovery from Pioneer and Woodside, and allowed the Trustee time toinvestigate the claims asserted by MHLP against Pioneer and Woodside todetermine if they had any merit and, most importantly, whether they wouldbenefit the Trust. During the six month period between April andOctober 2005, the Trustee conducted an independent investigationincluding: numerous meetings and discussions with the parties; reviewing therelevant documents with the Trustee’s counsel; employing independent reservoirengineers to evaluate the reserves in which the Trust has an interest; engagingindependent joint venture auditors to examine the accounting records of theoperator, Pioneer, relating to revenues and expenses allocated to thePartnership’s interests; and obtaining from both MHLP and Pioneer theirrespective 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,Hurricane Katrina struck the Gulf of Mexico in August 2005 and delayed thecommencement of production until 2006.

Faced with this post-Katrina situation, 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 of either their merit or that pursuing those claims andincurring the related legal fees and expenses would benefit the Trust.Moreover, the Trustee informed MHLP that the Trustee’s independent jointventure auditors and reservoir engineers had not found any evidence to date tosupport any of MHLP’s allegations.

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 JudicialDistrict Court of Harris County, Texas. At a hearing on January 27, 2006in the Harris County Court, the Court denied MHLP’s motion for a temporaryinjunction to remove JPMorgan as Trustee and appoint a principal of MHLP,Timothy Roberson, as a temporary Trustee. At the Court’s suggestion, JPMorganagreed to continue as Trustee, until such time as a substitute trustee wasfound that fulfilled the qualifications of Trustee stated in the TrustIndenture. 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).

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 as plaintiffs in theLawsuit, incorporating and adopting the same claims asserted by 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 is set forth in theMutual Release and Settlement Agreement dated as of January 26, 2007 (the “ConditionalSettlement Agreement”). The Trustee filed a motion for approval of theConditional Settlement Agreement with the Court on January 30, 2007.

The Conditional Settlement Agreement is the product ofextensive investigations and negotiations by the Trustee. In 2006, after theCourt denied MHLP’s attempt to remove JPMorgan as Trustee, the parties pursuedformal discovery in the Lawsuit. During this period, the Trustee continued toevaluate the merits of the alleged claims against Pioneer and Woodside. Acentral allegation by MHLP and the Intervenors is that Pioneer and Woodsidedelayed the commencement of production from the well drilled pursuant to thePioneer-Woodside Farmout—the Midway #5 well on the Brazos A-39 Lease.Woodside and Pioneer witnesses have given sworn testimony in depositions aboutthe commercial and technical reasons for the delays in bringing the well online. The well commenced production in April 2006. After this time, theTrustee instructed its independent petroleum reserve engineers to evaluate howthe production results and projected production from the well might affect thevalue of the Trust’s interests. The Trustee’s independent engineers determinedthat the initial data regarding projected production from the well did notwarrant a material change in prior assessments of the value of the Trust’sassets.

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 would nothave received, or would not receive, any payments from this production, and theTrust accordingly would not have received any associated distributions.Further, the production data did not support reserves of the size asserted byMHLP and the Intervenors. The well resumed production in February 2007.

Under the Conditional Settlement Agreement, Pioneerhas agreed to assign to the Trust an interest confirming its right to a 4.5%cost-free overriding royalty interest in the Brazos A-39 Lease untilpayout of the Midway #5 well, and to assign to the Trust an interest in theBrazos A-39 Lease, to be effective from and after payout if payoutoccurs, equal to a 45% net profits interest. Pioneer would also agree to payfor and satisfy approximately $1.4 million of plugging, abandonment, anddecommissioning costs relating to several of the assigned Royalty Propertiesthat Pioneer has informed the Trustee would otherwise be 

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allocated to thePartnership’s Royalty. Finally, Pioneer and the Trustee have agreed thatPioneer shall arrange for the sale of all assets of the Partnership as providedfor under the Trust Indenture on, or as soon as practical after, July 1,2007, or on an earlier date as set forth in the proposed settlement. TheConditional Settlement Agreement, if approved by the Court, would settle allclaims in the Lawsuit that the Trust or the Partnership has or might haveagainst Pioneer and Woodside and any claims that Pioneer and Woodside mighthave against the Trust or the Partnership.

Based on the information available to the Trustee andits analysis outlined above, the Trustee believes that the benefits receivedunder the Conditional Settlement Agreement outweigh the potential benefits thatmay be achieved by the Trust litigating any of the asserted claims againstPioneer and Woodside, which would require the Trust to incur and assume therisk of further significant litigation costs. As a result, the Trustee believesthe Conditional Settlement Agreement is in the best interest of the unitholdersof the Trust. The Trustee has executed the Conditional Settlement Agreement andis recommending to the Court that the agreement be approved.

The Conditional Settlement Agreement is subject tocertain conditions, including approval by the Court. The Court has currentlyscheduled a hearing on the approval for May 21, 2007. MHLP and theIntervenors are not signatories or parties to the settlement and they, or otherunitholders of the Trust, may comment or object to the settlement. Thesettlement is not final until approved by the Court. If the Court approves theproposed settlement, it will enter an order that approves the settlement anddismisses the Lawsuit with prejudice as to all claims that may be brought onbehalf of the Trust, either by the Trustee or by unitholders seeking to assertclaims on behalf of themselves or the Trust, against Pioneer and Woodside basedon the facts asserted in the Lawsuit.

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 D&M, see pages 23 and 24 of the Form 10-K for theyear ended December 31, 2006 and Note 6 in the Notes to Financial Statementsincluded elsewhere in the Form 10-K. The final distribution to unitholderswill be an amount net of funds required to satisfy all Trust liabilities.

**Liquidity for TrustExpenses**

As of March 31, 2007,the Trust had $378,345 in cash and short-term investments reserved for Trustexpenses. Based on current general and administrative expenditures beingincurred in connection with the litigation, in the absence of Royalty incomethe Trustee expects that it will be required to borrow money in accordance withthe Trust Indenture to fund future Trust expenses. The Trustee is currentlyreviewing alternatives for loans to the Trust permitted under the TrustIndenture, including loans on a secured basis. In the event any loans are madeto the Trust, the Trust Indenture will prohibit the Trustee from making anydistributions to unitholders until those loans are repaid in full.

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**Item 3.**                        *Quantitative and Qualitative Disclosures About Market Risk*.

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

**Item 4.**                        *Controls and Procedures*.

*Evaluationof Disclosure Controls and Procedures.*   TheTrustee maintains disclosure controls and procedures designed to ensure thatinformation required to be disclosed by the Trust in the reports that it filesor submits under the Exchange Act of 1934, as amended, is recorded, processed,summarized and reported 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,the Trustee 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 interest owners, the Trustee relies on: (A) information providedby the working interest owners, 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 ofthe Partnership that is collected by the managing general partner from theworking interest 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 of theRoyalty Properties and have little influence over operation or development” and“—The Trustee relies upon the working interest owners and managing generalpartner for information regarding the Royalty Properties” in the Trust’s 10-Kfor the year ended 2006 for a description of certain risks relating to thesearrangements and reliance.

*Changesin Internal Control over Financial Reporting.  *Inconnection with the evaluation by the Trustee of changes in internal controlover financial reporting of the Trust that occurred during the Trust’s lastfiscal quarter, no change in the Trust’s internal control over financial reportingwas identified that has materially affected, or is reasonably likely tomaterially affect, the Trust’s internal control over financial reporting. TheTrustee notes for purposes of clarification that it has no authority over, hasnot evaluated and makes no statement concerning, the internal control overfinancial reporting of the working interest owners or the managing generalpartner of the Partnership.

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**PART II**

**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) |                                            |       | 1-8432              |       |   |   | 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)                                        |                                            |       | 1-8432              |       |   |   | 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,thereunto duly authorized.

|                                |         | MESA OFFSHORE TRUST |
|--------------------------------|--------------|---------------------|
|                           |         | By:                 | /s/ JPMORGAN CHASE BANK, N.A., as Trustee |
|                           |         | By:                 | /s/ MIKE ULRICH |
| * *                       | *** *** | *** ***        | ***Mike  Ulrich*** |
| * *                       | *** *** | *** ***        | ***Vice  President*** |
| Date: May  15,  2007 | * *     | * *            | The Bank of New York  Trust Company, N.A., as attorney-in-fact for the Trustee |

 

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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