**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 ACT OF1934

**FORTHE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**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**(State of Incorporation  or Organization)                                                                                                 | ** ** | **76-6004065**(I.R.S. Employer  Identification No.) |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| **JPMorgan Chase Bank, N.A., Trustee  Institutional Trust Services  221 West Sixth Street  Austin, Texas**(Address of Principal Executive Offices) | ** ** | **78701**(Zip Code)                                 |

 

| **1-800-852-1422**                                         |
|------------------------------------------------------------|
| (Registrant’s  Telephone Number, 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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (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 November 14, 2006—71,980,216 Units of Beneficial Interest in MesaOffshore Trust.

** **

 

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**PART I—FINANCIALINFORMATION**

**Item1.****                        *Financial Statements.***

**MESAOFFSHORE TRUST**

**STATEMENTSOF DISTRIBUTABLE INCOME**

**(Unaudited)**

| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Royalty income                      |       | $                                                    | 31,097     |                                                | $          | 288,534 |   | $ | 145,642 |   | $ | 967,403 |   |
| Interest income                     |       | 7,808                                                |       | 1,838                                               |       | 18,017 |   | 3,785 |   |
| General and  administrative expense |       | (38,905                                              | )          | (290,372                                            | )          | (163,659 | ) | (971,188 | ) |
| Distributable income                |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| Distributable income per unit       |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | — |   |

 

**STATEMENTSOF ASSETS, LIABILITIES AND TRUST CORPUS**

| ** **                                                                         | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                                                             |       |                         |       |                        |       |
| Cash and short-term  investments                                                   |       | $                            | 1,075,213  |                        | $          | 1,846,798 |   |
| Interest receivable                                                                |       | 4,876                        |       | 1,582                       |       |
| Net overriding royalty  interest in oil and gas properties                         |       | 380,905,000                  |       | 380,905,000                 |       |
| Accumulated amortization                                                           |       | (380,902,063                 | )          | (380,901,952                | )          |
| Total assets                                                                       |       | $                            | 1,083,026  |                        | $          | 1,851,428 |   |
| LIABILITIES AND TRUST CORPUS                                                       |       |                         |       |                        |       |
| Reserve for Trust  expenses                                                        |       | $                            | 1,080,089  |                        | $          | 1,848,380 |   |
| Distributions payable                                                              |       | —                       |       | —                      |       |
| Trust corpus (71,980,216  units of beneficial interest authorized and outstanding) |       | 2,937                        |       | 3,048                       |       |
| Total liabilities and trust corpus                                                 |       | $                            | 1,083,026  |                        | $          | 1,851,428 |   |

 

**MESA OFFSHORE TRUST**

**STATEMENTS OF CHANGES IN TRUST CORPUS**

**(Unaudited)**

| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **   2006   **         | ** ** | **   2005   **        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Trust corpus, beginning of period               |       |                                                 | $          | 2,966                                               |       |   |   | $ | 5,224 |   |   | $ | 3,048 |   | $ | 11,127 |   |
| Distributable income                            |       |                                                 | —     |                                                |       |   | — |   |   | — |   | — |   |
| Distributions to unitholders                    |       |                                                 | —     |                                                |       |   | — |   |   | — |   | — |   |
| Amortization of net overriding royalty interest |       |                                                 | (29        | )                                                   |       |   | (539 | ) |   | (111 | ) | (6,442 | ) |
| Trust corpus, end of period                     |       |                                                 | $          | 2,937                                               |       |   |   | $ | 4,685 |   |   | $ | 2,937 |   | $ | 4,685 |   |

 

(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. and TheBank of New York Company (“BNY”) announced in April 2006 an agreement pursuantto which BNY would acquire a portion of JPMorgan Chase’s corporate trustbusiness 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 ofthe Trust, Legal Proceedings, and Timing of Liquidation**

*Hurricane OperationsUpdate*

Hurricane Katrina**struckthe Gulf of Mexico in August 2005. PNR has notified the Trust of itscurrent assessments regarding damages from Hurricanes Katrina and Rita toproduction facilities for properties in which the Trust has an interest. Theoperator of the West Delta properties has informed PNR that the West Deltaproperties have been shut in since August 27, 2005 due to damage to theplatform, the pipeline and the sales terminal. The operator has notified PNR thatthey expect production at West Delta to resume as early as the second quarterof 2007.

*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 (the “TerminationThreshold”). **As a result of continueddeclines in production on Royalty Properties nearing the end of their estimatedproductive lives, Royalty income received by the Trust in 2002, 2003 and 2004fell below**

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**theTermination Threshold prescribed by the Trust Indenture.**TheTrustee has taken steps to begin the process of liquidating the Trust. See “—Timingof Liquidation” below in this Note. 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. See “—Timing of Liquidation” for further update.

*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.; Woodside Energy (USA), Inc.(Woodside); andJPMorgan Chase Bank, N.A., as Trustee of the Mesa Offshore Trust (Case No. GN501113).On November 28, 2005, Plaintiff amended its petition. In the amendedpetition, MHLP asserts claims against Pioneer and Woodside for mattersincluding (1) a wrongful farmout of Brazos A-39 by Pioneer , (2) awrongful delay by Pioneer in producing Brazos A-39, (3) fraudulentaccounting practices by Pioneer, (4) breach of fiduciary duty by Pioneer, (5) aidingand abetting breach of fiduciary duty by Woodside, (6) misapplication ofTrust property by Pioneer, (7) conspiracy to misapply fiduciary propertyby Woodside and Pioneer, (8) common law fraud by Pioneer, (9) grossnegligence by Pioneer, and (10) breach of the conveyance agreement byPioneer. MHLP asserts claims for damages against the Trustee for (1) anaccounting; and (2) breach of fiduciary duty. The plaintiff remedies beingsought include (a) reconstruing the Trust Indenture to determine that theTrust is not terminated because there has or should have been production whichwould have generated revenues to extend the life of the Trust, (b) requiringthe Trustee to pursue certain claims, or to allow plaintiff to pursue suchclaims, (c) setting aside any farmouts by Pioneer in which there have beenconveyances to an affiliate of Pioneer in violation of the Trust’s Conveyanceand as a self-dealing transaction, and (d) removing JPMorgan Chase Bank,N.A. as Trustee, (e) seeking return or forfeiture of compensation toJPMorgan Chase Bank, N.A., (f) recovering monetary damages againstPioneer, Woodside and JPMorgan Chase Bank, N.A., and (g) pursuingexemplary damages against all defendants.

On November 30, 2005, JPMorgan Chase Bank, N.A.announced its intention to resign as Trustee of the Mesa Offshore Trusteeeffective January 31, 2006. Since that announcement, MHLP and others havesought a qualified institution willing to serve as successor Trustee. However,neither MHLP nor Pioneer have identified a willing qualified successor Trusteethat is not also a lender under one of Pioneer’s credit facilities (whichstatus MHLP contends is an alleged conflict of interest).

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On January 27, 2006, a hearing was held in the334th Judicial District Court of Harris County,Texas, regarding MHLP’s Verified Application for Emergency Appointment of aTemporary Trustee in Case No. 2006-01984, MOSH Holding, L.P. v.Pioneer Natural Resources Company; Pioneer Natural Resources USA, Inc; WoodsideEnergy (USA), Inc.; and JPMorgan Chase Bank, N.A., as Trustee of the MesaOffshore Trust. This case follows the transfer of prior claims filed by theplaintiff in Case No. GN501113. At this hearing, the court declined toapprove MHLP’s motion to appoint Timothy J. Roberson, a principal and affiliateof MHLP, as temporary Trustee and declined to appoint any other person astemporary or successor Trustee.

In light of this development, and the absence of anidentified successor Trustee, JPMorgan Chase Bank, N.A. withdrew itsresignation as Trustee. The Trustee continues to desire the appointment of aqualified successor Trustee.

To date, the Trustee has allowed MHLP to proceed onthe issue of whether the farmout by Pioneer was a valid farmout. While Pioneerhas provided a reasoned analysis of why it believes the farmout was in factvalid under the terms of the conveyance, only a court, and not the Trustee, canmake a final adjudication. Further, while MHLP’s claims on the farmout issuemay merit adjudication, based on facts known to the Trustee at this time, theTrustee is unable to determine, even if MHLP prevailed on its uncertainliability claims, whether the Trust would realize any economic benefit. Basedon information received to date, the Trustee has not concluded that it would bein the best interest of the unitholders to fund the MHLP claims directly withTrust funds. However, as noted above, the Trustee has not opposed MHLP’spursuit of its claims on behalf of the unitholders at their own expense, whichreasonable expenses would be subject to repayment of the claims provedsuccessful and a benefit were conferred upon all unitholders of the Trust. Inconnection with both the anticipated sale of Trust properties pursuant to theTrust’s termination and the pending litigation, the Trustee has (1) engagedan independent reserve engineer to review the estimated reserves and (2) hadan independent joint venture auditor review certain historical expenditures andrevenue receipts on Trust properties. The Trustee believes expenditures forthese reviews were prudent and in the interest of the unitholders.

The Trustee will make thefull detail of the underlying data of the December 31, 2005 reserve reportavailable for use in connection with the sale of the Trust properties as partof the Trust termination. For more information regarding the estimatedremaining life of each of the Royalty Properties, the estimated future netrevenues of the Royalty Properties and information relating to farmout of interestson the Royalty Properties based on information provided by DeGolyer &MacNaughton (D&M), see pages 22 and 23 of the Trust’s Annual Report onForm 10-K for the year ended December 31, 2005 and Note 6 inthe Notes to Financial Statements included elsewhere in the Trust’s Form 10-Kfor the year ended December 31, 2005. The sale of the assets of the Trustestate may include the related abandonment liabilities that have not beenpreviously withheld. The final distribution to unitholders will be an amountnet of funds required to satisfy all Trust liabilities.

*Timing ofLiquidation*

In connection with this litigation, the Trustee hasagreed that it will give MHLP at least 60 days notice prior to the sale of anyTrust properties in connection with the termination of the Trust. As of thedate of this filing, based on the information currently provided by Pioneer andthe preliminary state of the proceeding, the Trustee has not made anydefinitive conclusions as to the validity of the claims asserted by 

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MHLP. However, the reviewof reserves by the independent reserve engineer has not shown the existences ofsignificant reserves not previously included in the reserve report prepared byPNR in quantities originally alleged in the plaintiff’s petition. The Trustee hasperformed additional joint venture audits of the Trust properties by anindependent auditor. This is a process that the Trust had already begun in itsinquiry in the ordinary course as part of the termination of the Trust, and theTrustee will continue to review MHLP’s claims.

As previously mentioned, the Trustee engaged anindependent joint venture auditor in October 2004 to review the Trustproperties as part of the termination of the Trust. The joint venture auditorreviewed the periods from 2003 through 2004. The Trustee believed thisengagement of an outside expert on these matters to be a prudent step toidentify any potential benefits to the Trust, as well as any limitations onpotential benefits, due to differing interpretations of accounting matters thatcommonly occur in the oil and gas production industry. The review of theindependent joint venture auditor was completed in December 2005, and itwas the joint venture auditor’s opinion that the charges and credits and revenueto the Trust were in accordance with the applicable agreements, except forcertain items noted in the report. The report notes exceptions, which may ormay not turn out to be meritorious, as to amounts due to the Trust of $204,219.PNR, Stone Energy (Stone) and Newfield Exploration Company (Newfield) respondedto these exceptions on April 20, 2006. PNR, Stone and Newfield havegranted and denied exceptions on all of the areas pointed in the Joint VentureAudit findings. The Trust is in the process of reviewing the exceptions deniedbefore accepting or rejecting PNR, Stone and Newfield’s answers.

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—Basis ofPresentation**

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 AnnualReport on Form 10-K for the year ended December 31, 2005.

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;

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(c)    Trustgeneral and administrative expenses, net of reimbursements, are recorded in themonth they accrue;

(d)   Amortizationof the net overriding royalty interest, which is calculated on the basis ofcurrent royalty income in relation to estimated future royalty income, ischarged directly to trust corpus since such amount does not affectdistributable income; and

(e)    Distributionspayable are determined on a monthly basis and are payable to unitholders ofrecord as of the last business day of each month or such other day as theTrustee determines is required to comply with legal or stock exchangerequirements. However, cash distributions are made quarterly in January, April,July and October, and include interest earned from the monthly recorddates to the date of distribution.

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 of America because, undersuch accounting 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 nine months ended September 30,2006, Royalty income was applied solely to cover a portion of general andadministrative expenses; accordingly, no Trust distribution to the unit holderswas 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 September 30, 2006 there is a deficit balance due PNR of$848,519, which will be deducted from any future gross proceeds on the Royaltyproperties, which deduction will reduce future Royalty income. The unexpendedamount withheld by PNR for future abandonment costs at September 30, 2006was $0. Currently, PNR estimates that the abandonment accrual for amountsexpended but not recouped and for projected future abandonment expenses forproperties in which the Trust has an interest is $1,400,000, net to the Trust.These costs will be deducted from any future gross proceeds on the Royaltyproperties, which deduction will reduce future Royalty income. No Royaltyincome will be distributed to unitholders until the Trustee recoups Trustexpenses being paid from the reserve that the Trustee has established foranticipated future expenses. As of September 30, 2006, $919,911 will bewithheld by the Trustee from future Royalty income before Trust distributionsto the unitholders will resume.

During the three and nine months ended September 30, 2006and 2005, the Trust had no distributable income. Royalty and interest incomeand the reserve for Trust expenses were used to pay the Trust’s general andadministrative expenses for the three and nine months ended September 30,2006 of $262,381 and $931,254, respectively.

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

| ** **                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| General and administrative costs incurred during the  period |       | $                                                    | 262,381    |                                                | $          | 188,644 |   | $ | 931,254 |   | $ | 604,600 |   |
| Deductions from  (additions to) reserve for Trust expenses   |       | (223,476                                             | )          | 101,728                                             |       | (767,595 | ) | 366,588 |   |
| General and  administrative costs as reported                |       | $                                                    | 38,905     |                                                | $          | 290,372 |   | $ | 163,659 |   | $ | 971,188 |   |

 

**Note 4—Assets andLiabilities in 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. The reserve for Trustexpenses represents the amount the Trustee has withheld from distributableincome as of September 30, 2006. The Trustee will continue to reserve fundsto recoup its previously established reserves to pay Trust expenses, which willprimarily consist of expenses incurred by the Trustee to liquidate the Trust’sassets. Any funds remaining after all expenses have been paid will bedistributed to the Unitholders.

| ** **                                                       | ** ** | **September 30,  2006** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|
| ASSETS                                                           |       |                         |       |   |   |
| Cash and short  term investments                                 |       |                         | $          | 1,075,213 |   |   |
| Interest  receivable                                             |       |                         | 4,876      |   |   |
| Net overriding  royalty interest in oil and gas properties(1)(2) |       |                         | 2,460,785  |   |   |
| Total assets                                                     |       |                         | $          | 3,540,874 |   |   |
| LIABILITIES                                                      |       |                         |       |   |   |
| Reserve for Trust  expenses                                      |       |                         | $          | 1,080,089 |   |   |
| Total liabilities                                                |       |                         | 1,080,089  |   |   |
| Net assets in process of  liquidation                            |       |                         | $          | 2,460,785 |   |   |

 

The net overridingroyalty interest in oil and gas properties at September 30, 2006 reflectthe Trustee’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 September 30, 2006.This estimate is based on the Trustee’s current assessment of the impact ofselling existing assets based on current market conditions, and includes thefollowing assumptions:

·       The Trust’s estimated shareof oil and gas reserve volumes at September 30, 2006, which were derivedfrom the December 31, 2005 reserve report prepared by DeGoyler &MacNaughton, and updated for year to date 2006 production (1). A reserve reportas of September 30, 2006 has not been prepared, and therefore anyrevisions in oil and gas reserves during the nine months ended 

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September 30, 2006have not been considered in the estimate of fair value of the net overridingroyalty interest in oil and gas properties.

·       Forward strip commodityprices on September 30, 2006 for the life of the reserves.

·       Discount rate of 10%.

The actual net proceeds from the sales of oil and gasproperties may vary substantially from these estimates in value due to changesin current and estimated future oil and gas prices, subsequent production,estimates of actual abandonment costs and other factors which may be applied bythe buyers.

For all other assetspresented in the above table, the Trustee believes that historical costapproximates fair market value due to the short-term nature of such assets. TheTrustee will continue to reserve funds to recoup its previously establishedreserves to pay Trust expenses, which will primarily consist of expensesincurred by the Trustee to liquidate the Trust’s assets. Any funds remainingafter all expenses have been paid will be distributed to the Unitholders.

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(1)          As a result of thelitigation described above, the Trust has been unable to obtain necessaryinformation from the working interest owner regarding such owner’s own currentestimate of the fair value of the proved reserves on the Midway Prospect. TheTrustee engaged D&M, an independent reserve engineer, to review all oil andgas reserves pertaining to the Royalty, including the Midway Prospect reservesand the Trust’s interest in these reserves as of December 31, 2005.

(2)          The sale of the assetscurrently owned by the Partnership will include the related rights toabandonment cost, if any, previously withheld by the working interest owner. Asof September 30, 2006, the working interest owner had no funds withheld tocover the Trust’s share of estimated future abandonment and removal costs. Tothe extent the abandonment is completed for an amount less than funds withheldby the working interest owner, those funds would be distributed to the Trust. TheDecember 31, 2005 reserve report assumed that amounts previously withheldby the working interest owner were sufficient to cover future abandonment andremoval costs, and accordingly, those costs were not reflected as a reductionof future net revenue. During the third quarter of 2006, the working interestowner notified the Trust that it currently anticipates amounts expended andprojected future abandonment expenses for properties in which the Trust has aninterest to be $1,400,000, net to the Trust. These amounts have not beenwithheld from the Trust and will reduce the Trust’s future net revenue to theextent withheld or incurred by the working interest owner and thus reduce theamount reflected in “Net overriding royalty interest in oil and gas properties”.Given the timing of receiving this information from the working interest owner,the Trustee has not been able to assess the reasonableness of upward change inthe estimated abandonment and removal costs. The Trustee intends to assess thereasonableness to the abandonment reserve during the fourth quarter and alsowill engage D&M to perform a reserve study as of December 31, 2006.

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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” and Note 4 to thefinancial statements of the Trust regarding the estimated fair value of assetsof the Trust, are forward-looking statements. Although Pioneer hasadvised the Trust that it believes that the expectations reflected in suchforward-looking statements are reasonable, no assurance can be given thatsuch expectations will prove to have been correct. Important factors that couldcause actual results to differ materially from expectations (“CautionaryStatements”) are disclosed in this Form 10-Q, including, withoutlimitation, in conjunction with the forward-looking statements includedin this Form 10-Q and in the Trust’s Form 10-K for theyear ended December 31, 2005, including under Part I, Item 1A. “RiskFactors”. 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.

Belowis a summary of Royalty income received on the Trust properties for the threeand nine months ended September 30, 2006 and 2005:

| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Gross proceeds @  90%                 |       | $                                                    | 65,057     |                                                | $          | 250,349 |   | $ | 229,623 |   | $ | 1,058,280 |   |
| Operating  expenditures @ 90%         |       | (72,479                                              | )          | (34,400                                             | )          | (114,456 | ) | (92,045 | ) |
| Change in  abandonment estimate @ 90% |       | (810,082                                             | )          | —                                              |       | (810,082 | ) | — |   |
| Capital  expenditures @ 90%           |       | —                                               |       | 60,306                                              |       | (8,032 | ) | 60,306 |   |
| Net proceeds  (deficit)               |       | $                                                    | (817,504   | )                                                   | $          | 276,255 |   | $ | (702,947 | ) | $ | 1,026,541 |   |
| Increase  (decrease) in deficit       |       | 848,604                                              |       | 12,308                                              |       | 848,604 |   | (59,041 | ) |
| Net proceeds                          |       | $                                                    | 31,100     |                                                | $          | 288,563 |   | $ | 145,657 |   | $ | 967,500 |   |
| Royalty Income (99.99%)               |       | $                                                    | 31,097     |                                                | $          | 288,534 |   | $ | 145,642 |   | $ | 967,403 |   |

 

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Belowis a summary of distributable income for the three and nine months ended September 30,2006 and 2005:

| ** **                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Royalty Income                                           |       | $                                                    | 31,097     |                                                | $          | 288,534 |   | $ | 145,642 |   | $ | 967,403 |   |
| Interest income                                          |       | 7,808                                                |       | 1,838                                               |       | 18,017 |   | 3,785 |   |
| General and  administrative expenses                     |       | (38,905                                              | )          | (290,372                                            | )          | (163,659 | ) | (971,188 | ) |
| Distributable  income                                    |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| Distributable  income per unit                           |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| Accummulated deficit due  PNR (as of end of period) |       | $                                                    | 848,519    |                                                | $          | (12,307 | ) | $ | 848,519 |   | $ | (12,307 | ) |

 

During the third quarters of 2006 and 2005, the Trusthad no distributable income. Royalty income and the reserve for Trust expenseswere used to pay the Trust’s third quarter 2006 general and administrativeexpenses of $262,381.

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

| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| General and  administrative costs incurred during the period    |       | $                                                    | 262,381    |                                                | $          | 188,644 |   | $ | 931,254 |   | $ | 604,600 |   |
| Deductions from  (additions to) reserve for Trust expenses |       | (223,476                                             | )          | 101,728                                             |       | (767,595 | ) | 366,588 |   |
| General and  administrative costs as reported              |       | $                                                    | 38,905     |                                                | $          | 290,372 |   | $ | 163,659 |   | $ | 971,188 |   |

 

General and administrativeexpenses of the Trust for the third quarter of 2006 increased 39% to $262,381 ascompared to $188,644 for the same period in 2005. General and administrativeexpenses for the first nine months of 2006 increased 54% to $931,254 ascompared to $604,600 for the same period in 2005. 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”.

**Operational Review**

PNR has advised the Trust that during the thirdquarter of 2006 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 third quarter of2006 were generally lower than spot market prices in the third quarter of 2005.

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Belowis an operational review of the remaining producing Trust properties:

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

| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Gross proceeds @  90%                |       | $                                                    | 65,057     |                                                | $          | 31,227 |   | $ | 142,483 |   | $ | 126,051 |   |
| Operating  expenditures @ 90%        |       | (72,479                                              | )          | (26,640                                             | )          | (107,313 | ) | (70,865 | ) |
| Change in abandonment estimate @ 90% |       | (810,082                                             | )          | —                                              |       | (810,082 | ) | — |   |
| Capital  expenditures @ 90%          |       | —                                               |       | 6,750                                               |       | — |   | 6,750 |   |
| Net proceeds (deficit)               |       | $                                                    | (817,504   | )                                                   | $          | 11,337 |   | $ | (774,912 | ) | $ | 61,936 |   |

 

The Brazos A-7 and A-39 blocks continued to experiencea decrease in natural gas production due to natural production decline. As ofSeptember 30, 2006, these two blocks had one well capable of producing, theBrazos A-39 # 5. The Brazos A-7 No. B-1 well, operated by Newfield, is nolonger producing as of September 30, 2006. PNR entered into farmout agreementsfor the Trust’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. In 2005, PNR performed abandonment procedures at the PNR operatedBrazos A-7 and the A-39 blocks, with minor sitework clearanceremaining. These abandonment procedures have been substantially completedduring 2006.

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 was shutin July 21, 2006 by Williams Pipeline due to reported detection of mercuryin the gas stream. Timing for resolution of this issue remains unclear. Thelast flow rate prior to shut in was 2,800 Mcf a day with 4200 psi flowingtubing pressure, with a gradually declining flowing 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 Trust’s net profits interest, but expresslyproviding that the farmed out interest would not be subject to the Trust’s netprofits interest. PNR reserved a 10% overriding royalty interest,proportionately reduced to the interest conveyed, which interest, upon Woodside’srecoupment of specified costs and expenses, would increase to 12.5%,proportionately reduced to the interest conveyed. The Trust’s net profitsinterest burdens the overriding royalty interest reserved by PNR. PNR hasinformed the Trustee that it believes this process is consistent 

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with the terms of theoriginal conveyance and with the handling of other farmout transactionsinvolving lands burdened by the Trust’s net profits interest.

PNR continues to own the undivided one-half interestnot burdened by the Trust’s net profits interest and will participate in andoperate the well as owner of that undivided one-half interest (subject to anagreement 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 the Trustee that the FarmoutAgreement enabled the drilling costs of these prospects to be carried on theTrust’s interest in part by Woodside. PNR further noted that the Trust’s netprofits interest would not have entitled the Trust to payment until drillingcosts and applicable interest were recovered, whereas the overriding royaltyinterest retained under the Farmout Agreement entitles the Trust to paymentsprior to the recoupment of expenses incurred by Woodside and PNR. As notedabove, the first prospect on Brazos A-7 was determined to be a dry hole.Under the Farmout Agreement and related agreements, those drilling andabandonment costs have been born entirely by PNR and Woodside and are notsubject to recoupment from any proceeds otherwise payable to the Trust.Similarly, the Trust’s current interest in the “Midway” prospect on Brazos A-39will be entitled to payment prior to PNR’s and Woodside’s recovery of expensesfor drilling, completion, sub-sea tie backs and other costs.

The Brazos A-7 and A-39blocks also experienced a significant decrease in operating expenditures.

***West Delta 61 and62***

| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Gross proceeds @  90%                 |       | $                                                    | —     |                                                | $          | 219,122 |   | $ | 87,140 |   | $ | 932,229 |   |
| Operating  expenditures @ 90%         |       | —                                               |       | (7,760                                              | )          | (7,143 | ) | (21,180 | ) |
| Change in  abandonment estimate @ 90% |       | —                                               |       | —                                              |       | — |   | — |   |
| Capital  expenditures @ 90%           |       | —                                               |       | —                                              |       | (8,032 | ) | — |   |
| Net proceeds (deficit)                |       | $                                                    | —     |                                                | $          | 211,362 |   | $ | 71,965 |   | $ | 911,049 |   |

 

Hurricane Katrina**struck the Gulf of Mexico in August 2005.The operator of the West Delta properties has informed PNR that the West Deltaproperties have been shut in since August 27, 2005 due to damage to theplatform, the pipeline and the sales terminal. The operator has notified PNR thatthey expect production at West Delta to resume as early as the second quarterof 2007. The proceeds for the nine months ended September 30, 2006 consistof revenues adjustments related to prior periods received by the Trust in the ninemonths ended September 30, 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 retaining a 12.5% (11.25% net to the Trust) overridingroyalty 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.In the third quarter of 2005, the Trust received from PNR proceeds of $53,550related to the sale of the South Marsh Island 155 platform that was abandonedby PNR and a $6,750 credit for casing related to the PNR Brazos A-39 platform.

***Abandonment Expenditures***

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

| Balance, December  31, 2005  |   | $        | 348,066 |   |
|------------------------------|--------|----------|---------|--------|
| Abandonment cost  incurred   |   | (348,066 | )       |
| Balance, September 30,  2006 |   | $        | —  |   |

 

In the third quarter of 2006,PNR notified the Trust that the cash reserve for abandonment and removal costshad been depleted. Currently, PNR estimates that the abandonment accrual foramounts expended but not recouped and for projected future abandonment expensesfor properties in which the Trust has an interest is $1,400,000, net to the Trust.These costs will be deducted from any future gross proceeds on the Royaltyproperties owned by PNR, which deduction will reduce future Royalty income.

***Production and Price Review***

Production volumes for natural gas decreased to 9,930Mcf in the third quarter of 2006 as compared with 27,490 Mcf in the thirdquarter of 2005. The average sales price received for natural gas in the thirdquarter of 2006 was $6.44 per Mcf as compared with $6.90 per Mcf in the thirdquarter of 2005. Crude oil, condensate and natural gas liquids productionvolumes decreased to 16 barrels in the third quarter of 2006 as compared to1,437 barrels in the third quarter of 2005. The average sales price in thethird quarter of 2006 for crude oil, condensate and natural gas liquids was$66.50 per barrel as compared with $50.69 per barrel in the third quarter of2005.

Production volumes fornatural gas decreased to 26,844 Mcf for the nine months endedSeptember 30, 2006 as compared with 115,038 Mcf for the nine months endedSeptember 30, 2005. The average sales price received for natural gas forthe nine months ended September 30, 2006 was $7.78 per Mcf as comparedwith $6.49 per Mcf for the nine months ended September 30, 2005. Crudeoil, condensate and natural gas liquids production volumes decreased to 354barrels for the nine months ended September 30, 2006 as compared to 6,795barrels for the nine months ended September 30, 2005. The average salesprice for the nine months ended September 30, 2006 for crude oil,condensate and natural gas liquids was $58.63 per barrel as compared with$45.80 per barrel for the nine months ended September 30, 2005.

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***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 (the “TerminationThreshold”). **As a result of continueddeclines in production on Royalty Properties nearing the end of their estimatedproductive lives, Royalty income received by the Trust in 2002, 2003 and 2004fell below the Termination Threshold prescribed by the Trust Indenture**. The Trustee has taken steps to beginthe process of liquidating the Trust. See“—Timing of Liquidation” for further update. The Trustee, which has noauthority or discretionary control over the timing of expenditures, productionor income on the Royalty Properties, has no discretion regarding the occurrenceof the Termination 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. See “—Timing of Liquidation” in Note 2 to the financial statementsincluded in this Form 10-Q for additional information.

*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.; Woodside Energy (USA), Inc.(Woodside); andJPMorgan Chase Bank, N.A., as Trustee of the Mesa Offshore Trust (Case No. GN501113).On November 28, 2005, Plaintiff amended its petition. In the amendedpetition, MHLP asserts claims against Pioneer and Woodside for mattersincluding (1) a wrongful farmout of Brazos A-39 by Pioneer , (2) awrongful delay by Pioneer in producing Brazos A-39, (3) fraudulentaccounting practices by Pioneer, (4) breach of fiduciary duty by Pioneer, (5) aidingand abetting breach of fiduciary duty by Woodside, (6) misapplication ofTrust property by Pioneer, (7) conspiracy to misapply fiduciary propertyby Woodside and Pioneer, (8) common law fraud by Pioneer, (9) grossnegligence by Pioneer, and (10) breach of the conveyance agreement byPioneer. MHLP asserts claims for damages against the Trustee for (1) anaccounting; and (2) breach of fiduciary duty. The plaintiff remedies beingsought include (a) reconstruing the Trust Indenture to determine that theTrust is not terminated because there has or should have been production whichwould have generated revenues to extend the life of the Trust, (b) requiringthe Trustee to pursue certain claims, or to allow plaintiff to pursue suchclaims, (c) setting aside any farmouts by Pioneer in which there have beenconveyances to an affiliate of Pioneer in violation of the Trust’s Conveyanceand as a self-dealing transaction, and (d) removing JPMorgan Chase Bank,N.A. as Trustee, (e) seeking return or forfeiture of 

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compensation to JPMorganChase Bank, N.A., (f) recovering monetary damages against Pioneer,Woodside and JPMorgan Chase Bank, N.A., and (g) pursuing exemplary damagesagainst all defendants.

On November 30, 2005, JPMorgan Chase Bank, N.A.announced its intention to resign as Trustee of the Mesa Offshore Trusteeeffective January 31, 2006. Since that announcement, MHLP and others havesought a qualified institution willing to serve as successor Trustee. However,neither MHLP nor Pioneer have identified a willing qualified successor Trusteethat is not also a lender under one of Pioneer’s credit facilities (whichstatus MHLP contends is an alleged conflict of interest).

On January 27, 2006, a hearing was held in the334th Judicial District Court of Harris County,Texas, regarding MHLP’s Verified Application for Emergency Appointment of aTemporary Trustee in Case No. 2006-01984, MOSH Holding, L.P. v.Pioneer Natural Resources Company; Pioneer Natural Resources USA, Inc; WoodsideEnergy (USA), Inc.; and JPMorgan Chase Bank, N.A., as Trustee of the MesaOffshore Trust. This case follows the transfer of prior claims filed by theplaintiff in Case No. GN501113. At this hearing, the court declinedto approve MHLP’s motion to appoint Timothy J. Roberson, a principal andaffiliate of MHLP, as temporary Trustee and declined to appoint any otherperson as temporary or successor Trustee.

In light of this development, and the absence of anidentified successor Trustee, JPMorgan Chase Bank, N.A. withdrew its resignationas Trustee. The Trustee continues to desire the appointment of a qualifiedsuccessor Trustee.

To date, the Trustee has allowed MHLP to proceed onthe issue of whether the farmout by Pioneer was a valid farmout. While Pioneerhas provided a reasoned analysis of why it believes the farmout was in factvalid under the terms of the conveyance, only a court, and not the Trustee, canmake a final adjudication. Further, while MHLP’s claims on the farmout issuemay merit adjudication, based on facts known to the Trustee at this time, theTrustee is unable to determine, even if MHLP prevailed on its uncertainliability claims, whether the Trust would realize any economic benefit. Basedon information received to date, the Trustee has not concluded that it would bein the best interest of the unitholders to fund the MHLP claims directly withTrust funds. However, as noted above, the Trustee has not opposed MHLP’spursuit of its claims on behalf of the unitholders at their own expense, whichreasonable expenses would be subject to repayment of the claims provedsuccessful and a benefit were conferred upon all unitholders of the Trust. Inconnection with both the anticipated sale of Trust properties pursuant to theTrust’s termination and the pending litigation, the Trustee has (1) engagedan independent reserve engineer to review the estimated reserves and (2) hadan independent joint venture auditor review certain historical expenditures andrevenue receipts on Trust properties. The Trustee believes expenditures forthese reviews were prudent and in the interest of the unitholders.

The Trustee will make thefull detail of the underlying data of the December 31, 2005 reserve reportavailable for use in connection with the sale of the Trust properties as partof the Trust termination. For more information regarding the estimatedremaining life of each of the Royalty Properties, the estimated future netrevenues of the Royalty Properties and information relating to farmout ofinterests on the Royalty Properties based on information provided by DeGoyler& MacNaughton (D&M), see pages 22 and 23 of the Trust’s AnnualReport on Form 10-K for the year ended December 31, 2005 andNote 6 in the Notes to Financial Statements included elsewhere in the Trust’s Form 10-Kfor the year ended December 31, 2005. The sale of the assets of the Trustestate may include the related abandonment 

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liabilitiesthat have not been previously withheld. The final distribution to unitholderswill be an amount net of funds required to satisfy all Trust liabilities.

*Timing ofLiquidation*

In connection with this litigation, the Trustee hasagreed that it will give MHLP at least 60 days notice prior to the sale of anyTrust properties in connection with the termination of the Trust. As of thedate of this filing, based on the information currently provided by Pioneer andthe preliminary state of the proceeding, the Trustee has not made anydefinitive conclusions as to the validity of the claims asserted by MHLP.However, the review of reserves by the independent reserve engineer has notshown the existence of significant reserves not previously included in thereserve report prepared by Pioneer in quantities originally alleged in theplaintiff’s petition. The Trustee has performed additional joint venture auditsof the Trust properties by an independent auditor. This is a process that theTrust had already begun in its inquiry in the ordinary course as part of thetermination of the Trust, and the Trustee will continue to review MHLP’sclaims.

As previously mentioned, the Trustee engaged anindependent joint venture auditor in October 2004 to review the Trustproperties as part of the termination of the Trust. The joint venture auditorreviewed the periods from 2003 through 2004. The Trustee believed thisengagement of an outside expert on these matters to be a prudent step toidentify any potential benefits to the Trust, as well as any limitations onpotential benefits, due to differing interpretations of accounting matters thatcommonly occur in the oil and gas production industry. The review of theindependent joint venture auditor was completed in December 2005, and itwas the joint venture auditor’s opinion that the charges and credits andrevenue to the Trust were in accordance with the applicable agreements, exceptfor certain items noted in the report. The report notes exceptions, which mayor may not turn out to be meritorious, as to amounts due to the Trust of $204,219.PNR, Stone Energy (Stone) and Newfield Exploration Company (Newfield) respondedto these exceptions on April 20, 2006. PNR, Stone and Newfield havegranted and denied exceptions on all of the areas pointed in the Joint VentureAudit findings. The Trust is in the process of reviewing the exceptions deniedbefore accepting or rejecting PNR, Stone and Newfield’s answers.

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.

***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 (the “Exchange Act”), is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed by theTrust in the reports that it files or submits under 

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the Exchange Act isaccumulated and communicated by Pioneer, as the managing general partner of thePartnership, and the working interest owners to JPMorgan Chase Bank, N.A., asTrustee of the Trust, and its employees who participate in the preparation ofthe Trust’s periodic reports as appropriate to allow timely decisions regardingrequired disclosure.

As of the end of the period covered by this report,the Trustee carried out an evaluation of the Trustee’s disclosure controls andprocedures. Mike Ulrich, as Vice President of The Bank of New York TrustCompany, N.A., as attorney-in-fact for JPMorgan Chase Bank, NationalAssociation as Trustee of the Trust, has concluded that the disclosure controlsand procedures were not effective for purposes of this report due toinformation and comments received from the managing general partner of thePartnership immediately prior to the filing deadline that did not permit atimely filing.

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,reserve information, 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 Part I, 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” inthe Trust’s Form 10-K for the year ended December 31, 2005 fora description of certain risks relating to these arrangements and reliance.

*Changes in InternalControl over Financial Reporting.**  *Duringthe three months ended September 30, 2006, there has been no change in the Trustee’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Trustee’s internal control overfinancial reporting relating to the Trust. 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.

**Item 1A.**                *Risk Factors*.

There has not been any material changes from the riskfactors previously disclosed in response to Part I, Item 1A. “RiskFactors” of the Trust’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

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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., Trustee |
|   | By:                 | The Bank of New York  Trust Company, N.A.,  as attorney-in-fact |
|   | By:                 | **** |
|   |                | ***Mike  Ulrich*** |
|   |                | ***Vice  President *** |

 

Date: November 14, 2006

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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