Mesa Offshore Trust 10Q 2008 Q3 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Commission file number 1-8432

MESA OFFSHORE TRUST
(Exact name of Registrant as 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 919 Congress Avenue Austin, Texas (Address of Principal Executive Offices)		78701 (Zip Code)

1-800-852-1422 / 1-512-236-6599
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:


Large accelerated filer o		Accelerated filer o		Non-accelerated filer ý (do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

As of November 14, 2008—71,980,216 Units of Beneficial Interest were outstanding in Mesa Offshore Trust.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MESA OFFSHORE TRUST

STATEMENTS OF DISTRIBUTABLE INCOME

(Unaudited)

		Three Months Ended September 30,				Nine Months Ended September 30,

		2008		2007		2008		2007
Royalty income		$	—	$	—	$	—	$	—
Interest income			—		—		—		5,080
General and administrative expense			—		—		—		(5,080	)

	Distributable income	$	—	$	—	$	—	$	—

	Distributable income per unit	$	—	$	—	$	—	$	—

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

		September 30, 2008			December 31, 2007

		(Unaudited)
ASSETS
Cash and short-term investments		$	69		$	2,969
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	$	3,006		$	5,906

LIABILITIES AND TRUST CORPUS
Reserve for Trust expenses		$	69		$	2,969
Trust expenses payable			120,008			190,955
Interest payable			178,493			31,187
Note payable—JPMorgan			3,317,679			1,673,617
Trust corpus (71,980,216 units of beneficial interest authorized and outstanding)			(3,613,243	)		(1,892,822	)

	Total liabilities and trust corpus	$	3,006		$	5,906

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

MESA OFFSHORE TRUST

STATEMENTS OF CHANGES IN TRUST CORPUS

(Unaudited)

		Three Months Ended September 30,						Nine Months Ended September 30,

		2008			2007			2008			2007
Trust corpus, beginning of period		$	(3,024,374	)	$	(169,436	)	$	(1,892,822	)	$	2,937
	Trust expenses payable		138,129			(1,311,172	)		70,947			(1,483,545	)
	Interest payable		(54,665	)		—			(147,306	)		—
	Note payable—JPMorgan		(672,333	)		—			(1,644,062	)		—

Trust corpus, end of period		$	(3,613,243	)	$	(1,480,608	)	$	(3,613,243	)	$	(1,480,608	)

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

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1—Trust Organization

The Mesa Offshore Trust (the "Trust") was created effective December 1, 1982. On that date, Mesa Petroleum Co., predecessor to Mesa Limited Partnership, which was the predecessor to MESA Inc., transferred to the Trust a 99.99% interest in the Mesa Offshore Royalty Partnership (the "Partnership"). The Partnership was created to receive and hold a net overriding royalty interest (the "Royalty") in ten producing and nonproducing oil and gas properties located in federal waters offshore Louisiana and Texas (the "Royalty Properties"). Mesa Petroleum Co. created the Royalty out of its working interest in the Royalty Properties and transferred it to the Partnership. Until August 7, 1997, MESA Inc. and its predecessors owned and operated their assets through Mesa Operating Co. ("Mesa") and its predecessors, and Mesa and its predecessors were the operator and the managing general partner of the Royalty Properties. On August 7, 1997, MESA Inc. merged with and into Pioneer Natural Resources Company ("PNRC"), formerly a wholly owned subsidiary of MESA Inc., and Parker & Parsley Petroleum Company merged with and into Pioneer Natural Resources USA, Inc. ("PNR") (successor to Mesa), a wholly owned subsidiary of PNRC (collectively, the mergers are referred to herein as the "Merger"). Subsequent to the Merger, PNRC owns and operates its assets through PNR, and PNR is also the managing general partner of the Partnership. PNRC and PNR are referred hereinafter collectively as "Pioneer."

JPMorgan Chase Bank, N.A. ("JPMorgan") is the Trustee (the "Trustee") of the Trust. JPMorgan Chase & Co. and The Bank of New York Company ("BNY") announced in April 2006 an agreement pursuant to which BNY would acquire a portion of JPMorgan Chase & Co.'s corporate trust business in exchange for BNY's consumer small business and middle market banking business. This transaction did not include any transfer by JPMorgan of its obligations as Trustee of this Trust.

Note 2—Status of the Trust, Legal Proceedings, and Timing of Liquidation

Status of the Trust

The Trust Indenture provides that the Trust will liquidate if the total amount of cash per year received by the Trust falls below certain levels for each of three successive years.As a result of insufficient production on Royalty Properties nearing the end of their estimated productive lives, Royalty income received by the Trust in 2002, 2003 and 2004 fell below the Termination Threshold prescribed by the Trust Indenture. The Trustee has previously taken steps to begin the process of liquidating the Trust; however, the legal proceedings described herein directly challenge whether the Termination Threshold has in fact been met and thus have affected the liquidation process. See "—Timing of Liquidation" below in this Note. The Trustee, which has no authority or discretionary control over the timing of expenditures, production or income on the Royalty Properties, has no control over the occurrence of the Termination Threshold or its consequences.

Legal Proceedings

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Status of the Trust, Legal Proceedings, and Timing of Liquidation (Continued)

delay by Pioneer in producing the Brazos A-39 Lease and the Midway #5 well drilled thereon, (3) fraudulent accounting practices by Pioneer, (4) breach of fiduciary duty by Pioneer, (5) aiding and abetting breach of fiduciary duty by Woodside, (6) misapplication of Trust property by Pioneer, (7) conspiracy 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 the Trust is not terminated because there has or should have been production that would have generated revenues to extend the life of the Trust, (b) requiring the Trustee to pursue certain claims, or to allow MHLP to pursue such claims, (c) setting aside any farmouts by Pioneer in which there have been conveyances to an alleged affiliate of Pioneer, (d) the removal of JPMorgan as Trustee, (e) the return or forfeiture of compensation to JPMorgan, (f) monetary damages against Pioneer, Woodside and JPMorgan, and (g) unspecified exemplary damages against all defendants.

MHLP's Original Petition did not contain any claims against the Trustee, except to enjoin the Trustee from terminating the Trust during the pendency of the Lawsuit. In April 2005, the Trustee entered into an agreement with MHLP whereby the Trustee would not terminate the Trust without first giving MHLP at least sixty-days written notice. This agreement allowed MHLP time to obtain documents and discovery from Pioneer and Woodside, and allowed the Trustee time to investigate the claims asserted by MHLP against Pioneer and Woodside to determine if they had any merit and, most importantly, whether they would benefit the Trust. During the six-month period between April and October 2005, the Trustee conducted an independent investigation including: numerous meetings and discussions with the parties; reviewing the relevant documents with the Trustee's counsel; employing independent reservoir engineers to evaluate the reserves in which the Trust has an interest; engaging independent joint venture auditors to examine the accounting records of the operator, Pioneer, relating to revenues and expenses allocated to the Partnership's interests; and obtaining from both MHLP and Pioneer their respective legal analyses of the challenged farmout.

Throughout 2005, the parties also anticipated that the Midway #5 well on the Brazos A-39 Lease that is the primary subject of the Lawsuit would go into production. Given the vast discrepancy between the reserves claimed by the MHLP and those projected by Pioneer for the Midway #5 well, actual production results would significantly impact the Trustee's assessment of whether the Trust was better off with the cost-free override created by the Pioneer/Woodside farmout, or the prior cost-burdened net profits interest that MHLP seeks to restore through the Lawsuit. Unfortunately, Hurricane Katrina struck the Gulf of Mexico in August 2005 and delayed the commencement of production until 2006.

Faced with this post-Katrina situation, the Trustee urged all the parties to consent to a bifurcated trial of the farmout issue on an expedited basis. The Trustee proposed to MHLP that if the Court determined that the farmout was not valid and that restoring the net profit interest would benefit 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 represent the Trust in prosecuting the damages portion of the case. Conversely, if MHLP were to lose on the expedited determination of the farmout issue, in the absence of more evidence to support any ancillary claims, MHLP would dismiss the other claims and would not be reimbursed, and the Trustee would move forward to terminate the Trust.

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Status of the Trust, Legal Proceedings, and Timing of Liquidation (Continued)

Although the Trustee, Pioneer, and Woodside all agreed to an expedited trial of the farmout issues, MHLP balked. Contrary to the assertions of MHLP and the Intervenor Plaintiffs identified below, the Trustee never agreed that the claims asserted by MHLP against Pioneer and Woodside "had merit"—the Trustee simply stated that the farmout issue might merit adjudication 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 and bifurcated trial as proposed by the Trustee, the Trustee informed MHLP that the Trustee's investigation of MHLP's allegations beyond the farmout issues failed to convince the Trustee that pursuing those claims and incurring the related legal fees and expenses would benefit the Trust. Moreover, the Trustee informed MHLP that the Trustee's independent joint venture auditors and reservoir engineers had not found any evidence to date to support any of MHLP's damage allegations.

It was at this point, in November 2005, in the midst of the Trustee's negotiations with MHLP to obtain an agreed adjudication of MHLP's claims, that MHLP alleged for the first time that the Trustee had a conflict of interest because of JPMorgan's long-standing lending relationship with Pioneer. Although it is clear under the Trust Indenture, the Texas Trust Act, and relevant case law that JPMorgan is not precluded, by holding the position of Trustee, from pursuing commercial banking activities not involving Trust funds, MHLP amended its petition and asserted claims against the Trustee on November 28, 2005.

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

On December 8, 2006, Dagger-Spine Hedgehog Corporation ("Dagger-Spine") filed a petition to intervene in the Lawsuit as a Plaintiff, alleging claims virtually identical to MHLP. Another group of unitholders, led by Keith A. Wiegand (together with Dagger-Spine, the "Intervenors"), also filed on March 9, 2007 a petition to intervene as plaintiffs in the Lawsuit, incorporating and adopting the same claims asserted by MHLP. MHLP and the Intervenors are referred to hereinafter as the "Plaintiffs."

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Status of the Trust, Legal Proceedings, and Timing of Liquidation (Continued)

instructed its independent petroleum reserve engineers to evaluate how the production results and projected production from the well might affect the value of the Trust's interest. The Trustee's independent engineers determined that the initial data regarding projected production from the well did not warrant a material change in prior assessments of the value of the Trust's assets.

Pioneer subsequently reported to the Trustee that production from the well was suspended in July 2006 due to mercury contamination identified at downstream facilities where the production from the well is commingled with production from other wells. An updated evaluation from the Trustee's independent petroleum reserve engineers estimated that revenues from future production from the well likely would not exceed the costs of drilling and completing the well. Accordingly, if the Partnership's interest in the underlying lease had remained, or was, a cost-burdened net profits interest, instead of the cost-free overriding royalty interest the Partnership held as a result of the Pioneer-Woodside Farmout, the partnership would not have received, or would not receive, any payments from this production, and the Trust accordingly would not have received any associated distributions. Further, the production data did not support reserves of the size asserted by the Plaintiffs. The well resumed production in February 2007. The well was shut in again on April 18, 2007 due to an increase in hydrogen sulfide content coincidental with an increase in water production. Pioneer implemented a hydrogen sulfide contingency plan, which was required and approved by the Mineral Management Service ("MMS"), including the installation of the necessary alarm and safety systems. The well was shut in October 4, 2008 after discovery of corrosion in the production separator on the host platform. Repair or replacement options for the separator are being evaluated. The last producing rate was 1.4 MM/D with 3200 psi flowing tubing pressure. There can be no assurance regarding longevity of the gas production on the 52C host platform. Blending with this gas is required to meet pipeline gas quality specifications.

On January 26, 2007, the Trustee reached a conditional settlement with Pioneer and Woodside of the claims asserted by the Plaintiffs against Pioneer and Woodside. The conditional settlement was set forth in the Mutual Release and Settlement Agreement dated as of January 26, 2007 (the "Pioneer/Woodside Settlement Agreement"). The Trustee filed a motion for approval of the Pioneer/Woodside Settlement Agreement with the Court on January 30, 2007. The Trustee believed that the Pioneer/Woodside Settlement Agreement was in the best interest of the unitholders, but the Plaintiffs opposed it. On June 19, 2007, the Court issued an order denying the Trustee's motion to approve the Pioneer/Woodside Settlement Agreement.

In June and July 2007, Pioneer and Woodside filed motions with the Court that argued that the claims against them did not have merit as a matter of law. Pioneer's motion included an argument that the Plaintiffs do not have the legal right to sue Pioneer because the claims belonged to the Trust, not the beneficiaries of the Trust. On October 19, 2007, the Trustee offered to assign to the Plaintiffs the Trust's claims against Pioneer and Woodside. Through their counsel, the Plaintiffs and the Trustee also began negotiating a resolution of the claims pending between them, and on October 26, 2007, the Trustee and the Plaintiffs informed the Court of an agreement in principle to settle.

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Status of the Trust, Legal Proceedings, and Timing of Liquidation (Continued)

Motion, on December 21, 2007, Pioneer filed cross-claims against the Trustee seeking declaratory and injunctive relief to prevent certain aspects of the proposed settlement between the Trustee and the Plaintiffs, and alleging that all or part of such proposed settlement constituted a breach of contract and fiduciary duty. On January 14, 2008, the Trustee filed an answer to Pioneer's cross-claims, in which the Trustee denied the cross-claims in their entirety, stated that they were baseless, and set forth numerous affirmative defenses. On January 22, 2008, the Court issued an order denying the Joint Motion. As a result, the conditions precedent to the Plaintiffs' Settlement Agreement could not be satisfied, and the Plaintiffs' Settlement Agreement became null and void. In addition to denying the Joint Motion, the Court also considered and denied in the same order (i) application by the Plaintiffs for the appointment of a temporary trustee and (ii) Pioneer's application for a temporary restraining order. As a result of the Court's denial of the Joint Motion, and the Court's denial of the Plaintiffs' application for the appointment of a temporary trustee, JPMorgan elected not to resign and continues to serve as Trustee. The Trustee continues to desire the appointment of a successor Trustee.

On April 28, 2008, the Court issued a Docket Control Order to govern the schedule of the Lawsuit. In this Docket Control Order, the Court set the trial date for December 8, 2008. On July 3, 2008, the Plaintiffs filed a Third Amended Petition, seeking, among other things, to add claims against the Partnership (though its partners Pioneer and the Trustee) and JPMorgan in an individual capacity. By order dated July 3, 2008, the Court denied Pioneer's pending motions for summary judgment and ruled that the Plaintiffs do have standing to sue Pioneer. Pioneer then filed a petition for writ of mandamus to the Houston Fourteenth Court of Appeals on July 22, 2008, seeking to reverse the trial courts' ruling on standing. On September 25, 2008, the Houston Fourteenth Court of Appeals denied Pioneer's petition for writ of mandamus, and Pioneer filed a petition for writ of mandamus with the Supreme Court of Texas on October 1, 2008. The Supreme Court of Texas has not yet taken any action on the petition.

Pioneer sent the Trustee and the Plaintiffs a proposal dated October 10, 2008, setting forth the terms by which Pioneer would assign its interest in the Brazos A-39 Lease. The Plaintiffs have rejected Pioneer's proposal, but the Trustee is currently evaluating the proposal. On October 24, 2008, the group of unitholders led by Keith A. Wiegand filed a Motion for Non-Suit Without Prejudice, and the Court granted the motion on October 24, 2008. At a hearing before the Court on October 31, 2008, the Plaintiffs agreed to postpone the trial of the Lawsuit, and the trial is now scheduled for April 13, 2009.

The Trustee will make the full detail of the underlying data of the December 31, 2007 reserve report available for use in connection with the sale of the Partnership's Royalty Properties as part of the Trust termination. For more information regarding the estimated remaining life of each of the Royalty Properties, the estimated future net revenues of the Royalty Properties and information relating to farm-outs of interests on the Royalty Properties based on information provided by Pioneer to DeGolyer & McNaughton (D&M), see page 27 of the Form 10-K for the year ended December 31, 2007 and Note 8 in the Notes to Financial Statements included elsewhere in the Form 10-K. The final distribution to unitholders will be an amount net of funds required to satisfy all Trust liabilities.

Timing of Liquidation

The Trust Indenture provides that the Trust will liquidate if the total amount of cash per year received by the Trust falls below certain levels for each of three successive years. As a result of

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2—Status of the Trust, Legal Proceedings, and Timing of Liquidation (Continued)

continued declines in production on Royalty Properties nearing the end of their estimated productive lives, Royalty income received by the Trust in 2002, 2003 and 2004 fell below the Termination Threshold prescribed by the Trust Indenture.

The Trust Indenture provides the Trustee a two-year period during which it must sell all of the assets of the Partnership; however, due to the pending litigation, the Trustee can not predict the timing of the sale of the assets. The Trust Indenture provides that such properties must be sold for cash and not for any other consideration. The Trustee expects that the sale process will be open to any persons desiring to participate, but, as is customary, access to information and participation may be limited to persons who execute confidentiality agreements regarding information provided by the working interest owners. The Trustee may also require bidders to identify themselves clearly and to represent or evidence sufficient financing in order to participate, as the Trustee expects payment will be required promptly after the close of bidding without any financing conditions. Accordingly, the auction may not be a "public" auction in the sense that it may not be open to anyone who does not satisfy these requirements.

Note 3—Going Concern

The accompanying financial statements have been prepared assuming that the Trust will continue as a going concern. The Trust Indenture provides that the Trust will liquidate if the total amount of cash per year received by the Trust falls below certain levels for each of three successive years. As a result of insufficient production on Royalty Properties nearing the end of their estimated productive lives, Royalty income received by the Trust in 2002, 2003 and 2004 fell below the Termination Threshold prescribed by the Trust Indenture. The Trustee has previously taken steps to begin the process of liquidating the Trust; however, the legal proceedings described herein directly challenge whether the Termination Threshold has in fact been met and thus have affected the liquidation process. Once the Trustee has liquidated all of the Partnership's assets and has met all its obligations as described in the Trust Indenture, the Trust will no longer be a viable entity. Due to the pending litigation, the Trustee cannot predict the timing of the sale of all or a portion of the assets of the Partnership as part of the Trust Termination.

During the two years ended December 31, 2007, the Trust incurred general and administrative expenses which exceeded Royalty and interest income and its available cash reserves, due to the absence of royalty income and expenses incurred in connection with the ongoing litigation. As such, the Trustee was required to borrow money in accordance with the Trust Indenture to fund Trust expenses. The Trustee entered into a Demand Promissory Note with JPMorgan on September 28, 2007, which was amended on December 3, 2007, for demand loans that may be advanced from time to time in the principal amount of up to $3.0 million. On August 25, 2008, the Trustee executed an amended and restated Demand Note that among other things increased the aggregate principal amount available for borrowing to $4.0 million. As of September 30, 2008, the Trust had $3,317,679 in outstanding note payable to JPMorgan and $178,493 in accrued and unpaid interest expense, leaving $682,321 available under this facility. Additionally, as of September 30, 2008, the Trust had $120,008 in unpaid Trust expenses. Should the Trust fully utilize the funds available under the Demand Promissory Note, the Trustee will attempt to borrow additional money. However, no assurance can be given that the Trustee will be able to borrow money on terms the Trustee considers reasonable, or at all.

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3—Going Concern (Continued)

On January 22, 2008, the Court in which the Lawsuit is pending issued an order denying the Joint Motion for Approval of Settlement Agreement between the Plaintiffs and JPMorgan, for itself and in its capacity as Trustee of the Trust. According to the terms of the Amended Promissory Note, the note matured on this date as a result of the denial, and all portions of the outstanding principal under this note together with accrued and unpaid interest became due, in full. On August 25, 2008, in connection with the execution of the Second Amended and Restated Promissory Note, the definition of "Maturity Date" was amended to delete the test relating to the failure of the Court to approve the prior Settlement Agreement. As a result, the due date of the Demand Promissory Note was not accelerated as a result of the order described above.

Note 4—Net Overriding Royalty Interest

The instruments conveying the Royalty to the Partnership provide that Pioneer will calculate and pay to the Partnership each month an amount equal to 90% of aggregate net proceeds for the preceding month. Generally, net proceeds means the excess of the amounts received by Pioneer from sales of its share of oil and gas from the Royalty Properties (gross proceeds) over the operating and capital costs incurred. Costs exceeding gross proceeds for any month are recovered by Pioneer, with interest thereon at the prime rate of the Bank of America plus one-half percent, out of future gross proceeds prior to making further Royalty payments to the Partnership.

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

Note 5—Basis of Presentation

The accompanying unaudited financial information has been prepared by the Trustee in accordance with the instructions to Form 10-Q. JPMorgan was formerly known as The Chase Manhattan Bank and is the successor by mergers to the original name of the Trustee, Texas Commerce Bank National Association. The Trustee believes such information includes all the disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments which are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim periods presented. The financial information should be read in conjunction with the financial statements and notes thereto included in the Trust's 2007 Annual Report on Form 10-K.

The financial statements of the Trust are prepared on the following basis:

(a) Royalty income recorded for a month is the Trust's interest in the amount computed and paid by the working interest owner to the Partnership for such month rather than either the value of a portion of the oil and gas produced by the working interest owner for such month or the amount subsequently determined to be 90% of the net proceeds for such month;

(b) Interest income, interest receivable and distributions payable to unitholders include interest to be earned on short-term investments from the financial statement date through the next date of distribution; and

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5—Basis of Presentation (Continued)

(c) Trust general and administrative expenses, net of reimbursements, are recorded in the month they accrue and are recoupable from Royalty income. Trust expenses payable and the note payable are reported as a reduction in Trust Corpus.

While these statements differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America which may require a liquidation basis of accounting, this basis for reporting distributable income is considered to be the most meaningful because distributions to the unitholders for a month are based on net cash receipts for such month. Additionally, it will differ from the basis used for financial statements prepared in accordance with accounting principles generally accepted in the United States because, under such accounting principles, royalty income for a month would be based on net proceeds from production for such month without regard to when calculated or received and interest income for a month would be calculated only through the end of such month.

The instruments conveying the Royalty provide that the working interest owner will calculate and pay the Partnership each month an amount equal to 90% of the net proceeds for the preceding month. Generally, net proceeds means the excess of the amounts received by the working interest owner from sales of oil and gas from the Royalty Properties plus other cash receipts over operating and capital costs incurred. As of September 30, 2008, there is a deficit balance due Pioneer of approximately $230,000 compared with $1.5 million as of September 30, 2007, which will be deducted from any future gross proceeds on the Royalty properties, which will reduce future Royalty income. Currently, Pioneer estimates that the abandonment accrual for amounts expended but not recouped and for projected future abandonment expenses for properties in which the Trust has an interest is approximately $230,000, net to the Trust, which is included in the deficit balance above. These costs will be deducted from any future gross proceeds on the Royalty properties, which will reduce future Royalty income.

No Royalty income will be distributed to unitholders until the Trustee recoups Trust expenses being paid from the reserve that the Trustee has established for anticipated future general and administrative expenses and any loans secured by the Trustee to pay Trust expenses are repaid in full. As of September 30, 2008, $3,616,180 will be recouped by the Trustee from future Royalty income before Trust distributions will resume. During the three and nine months ended September 30, 2008 and 2007, the Trust had no distributable income. The reserve for Trust expenses and advances under the Demand Promissory Note with JPMorgan were used to pay $673,383 of the Trust's general and administrative expenses of $535,254 for the three months ended September 30, 2008 and $146,245 of accrued expenses from the three months ended June 30, 2008. The reserve for Trust expenses and advances under the Demand Promissory Note with JPMorgan were used to pay $1,646,962 of the Trust's general and administrative expenses of $1,576,015 for the nine months ended September 30, 2008 and $190,955 of accrued expenses from 2007. The Trust had unpaid expenses of $120,008 as of September 30, 2008.

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5—Basis of Presentation (Continued)

Below is a summary of general and administrative expenses and the adjustments made to the reserve for Trust expenses:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2008			2007			2008			2007
General and administrative costs incurred during the period	$	535,254		$	1,311,522		$	1,576,015		$	2,285,400
Expenses paid by JPMorgan for prior period		146,245			—			190,955			—
(Deductions from) additions to reserve for Trust expenses		(1,050	)		(350	)		(2,900	)		(796,775	)
Total expenses paid by JPMorgan during current period		(672,333	)		—			(1,644,062	)		—
Unpaid Trust expenses		(8,116	)		(1,311,172	)		(120,008	)		(1,483,545	)

General and administrative costs as reported	$	—		$	—		$	—		$	5,080

Note 6—JPMorgan Demand Promissory Note

On September 28, 2007, the Trust entered into a Demand Promissory Note agreement with JPMorgan in order to cover portions of its operating expenses. The lender approved an uncommitted line of credit to the Trust in a principal amount not to exceed $3.0 million. As part of the agreement, JPMorgan pays the expenses on behalf of the Trust. JPMorgan may decline to fund any request of the Trust for borrowings at anytime, for any reason, including the event that JPMorgan has reason to believe that the Trust will not be able to satisfy its obligation to repay the Demand Loans. Interest on the note is calculated at a rate per annum equal to Prime Rate plus two percent (2%), paid annually. The Demand Promissory Note is secured by a pledge of the Trust Estate, as that term is defined in the Trust Indenture, including without limitation the 99.99% general partnership interest in the Mesa Offshore Royalty Partnership owned by the Trust, pursuant to a Pledge Agreement dated September 29, 2007, as amended by the First Amendment to Pledge Agreement dated as of December 3, 2007, executed by the Trust for the benefit of the Lender. The Trust may borrow amounts under this Note until such time as JPMorgan makes demand for payment in full or December 31, 2008, whichever is earlier.

On December 3, 2007, JPMorgan, individually and as lender, entered into an Amended and Restated Promissory Note with the Trust as borrower, to amend the Demand Promissory Note to provide for, among other provisions, an extension of the stated maturity date of the Loans made pursuant to the Demand Promissory Note and the Amended and Restated Note until the earlier of (1) December 31, 2009, (2) 31 days after the Trust's receipt of any settlement proceeds, recovery or judgment in connection with the Lawsuit, (3) final liquidation of the Trust's assets, or (4) the Settlement Agreement is not approved by the Court. Additionally, the amendment provided that the Trust may continue to obtain loans under the note until the maturity date, as long as the amount borrowed does not exceed $3.0 million and the loan is not in default. The amendment also provided that interest expense shall be due and payable on the maturity date.

MESA OFFSHORE TRUST

NOTES TO FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—JPMorgan Demand Promissory Note (Continued)

On August 25, 2008, the Trustee executed an amended and restated Demand Note that among other things increased the aggregate principal amount available for borrowing to $4.0 million and amended the definition of "Maturity Date" to delete the text relating to the failure of the Court to approve the prior Settlement Agreement.

Interest is payable at a base rate offered by JPMorgan as announced publicly at its principal office as its prime commercial lending rate, plus 2%. The rate effective as of September 30, 2008 was a Prime Rate of 5%, plus 2% for a combined rate of 7%.

As of September 30, 2008, there was outstanding $3,317,679 of principal advanced for payment of Trust expenses together with $183,823 of accrued and unpaid interest expense. At September 30, 2008, the Trust had $682,321 available under this facility. Additionally, as of September 30, 2008, the Trust had $120,008 in unpaid Trust expenses. Should the Trust fully utilize the funds available under the Demand Promissory Note, the Trustee will attempt to borrow additional money. However, no assurance can be given that the Trustee will be able to borrow money on terms the Trustee considers reasonable, or at all.

Note 7—Distributions to Unitholders

Under the terms of the Trust Indenture, the Trustee must distribute to the unitholders all cash receipts, after paying liabilities and providing for cash reserves as determined necessary by the Trustee.

The amounts distributed are determined on a monthly basis and are payable to unitholders of record as of the last business day of each month. However, cash distributions are made quarterly in January, April, July and October, and include interest earned from the monthly record dates to the dates of distribution.

Note 8—Federal Income Taxes

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

As a grantor trust, the Trust will incur no federal income tax liability. In addition, it will incur little or no federal income tax liability if it is held to be a non-grantor trust. If the Trust were held to be taxable as a corporation, it would have to pay tax on its net taxable income at the corporate rate. As the Trust operates in offshore Gulf Coast, federal waters, it has no state tax liability.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following review of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto.

Note Regarding Forward-Looking Statements

This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. Although Pioneer has advised the Trust that it believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are disclosed in this Form 10-Q, including, without limitation, in conjunction with the forward-looking statements included in this Form 10-Q and in the Trust's Form 10-K for the year ended 2007, including under Item 1A. "Risk Factors". All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.

Financial Review

The amount of cash distributed by the Trust is dependent on, among other things, the sales prices and quantities of gas, crude oil, condensate and natural gas liquids produced from the Royalty Properties and the quantities sold. Substantial uncertainties exist with regard to future gas and oil prices, which are subject to fluctuations due to the regional supply and demand for natural gas and oil, production levels and other activities 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.

Below is a summary of Royalty income received on the Trust properties for the three and nine months ended September 30, 2008 and 2007:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2008			2007			2008			2007
Gross oil and gas proceeds @ 90%	$	198,416		$	5,664		$	1,050,465		$	29,547
Operating expenditures @ 90%		(14,509	)		(70,832	)		(16,801	)		(82,105	)
Recoupment of abandonment expenses @ 90%		104,145			—			104,145			—
Other proceeds @ 90%		112,780			—			112,780			—

Net proceeds (deficit)	$	400,832		$	(65,168	)	$	1,250,589		$	(52,558	)
Increase (decrease) in deficit		(400,832	)		65,168			(1,250,589	)		52,558

Net proceeds after deficit recovery	$	—		$	—		$	—		$	—

Royalty Income (99.99%)	$	—		$	—		$	—		$	—

Below is a summary of distributable income for the three and nine months ended September 30, 2008 and 2007:

	Three Months Ended September 30,				Nine Months Ended September 30,

	2008		2007		2008		2007
Royalty Income	$	—	$	—	$	—	$	—
Interest income		—		—		—		5,080
General and administrative expenses		—		—		—		(5,080	)

Distributable income	$	—	$	—	$	—	$	—
Distributable income per unit	$	—	$	—	$	—	$	—
Accumulated deficit (as of end of period)	$	226,538	$	1,470,467	$	226,538	$	1,470,467

During the three and nine months ended September 30, 2008 and 2007, the Trust had no distributable income. The reserve for Trust expenses and advances under the Demand Promissory Note with JPMorgan were used to pay $673,383 of the Trust's general and administrative expenses of $535,254 for the three months ended September 30, 2008 and $146,245 of accrued expenses for the three months ended June 30, 2008. The reserve for Trust expenses and advances under the Demand Promissory Note with JPMorgan were used to pay $1,646,962 of the Trust's general and administrative expenses of $1,576,015 for the nine months ended September 30, 2008 and $190,955 of accrued expenses from 2007. Interest income and the reserve for Trust expenses were used to pay $350 of the Trust's third quarter 2007 general and administrative expenses of $1,311,522 and $801,855 of the Trust's general and administrative expenses of $2,285,400 for the nine months ended September 30, 2007. The Trust had unpaid expenses of $120,008 and $1,483,545 as of September 30, 2008 and 2007, respectively.

On September 28, 2007 the Trust entered into a Demand Promissory Note with JPMorgan which was amended on December 3, 2007, in which loans will be advanced by the lender from time to time not to exceed $3.0 million. On August 25, 2008, the Trustee executed an amended and restated Demand Note that among other things increased the aggregate principal amount available for borrowing to $4.0 million. This Demand Promissory Note will be used to pay any unpaid administrative expenses related to the operation of the Trust. As of September 30, 2008, $3,317,679 has been advanced to the Trust to pay Trust expenses.

Below is a summary of general and administrative expenses and the adjustments made to the reserve for Trust expenses:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2008			2007			2008			2007
General and administrative costs incurred during the period	$	535,254		$	1,311,522		$	1,576,015		$	2,285,400
Expenses paid by JPMorgan for prior period		146,245			—			190,955			—
(Deductions from) additions to reserve for Trust expenses		(1,050	)		(350	)		(2,900	)		(796,775	)
Total expenses paid by JPMorgan during current period		(672,333	)		—			(1,644,062	)		—
Unpaid Trust expenses		(8,116	)		(1,311,172	)		(120,008	)		(1,483,545	)

General and administrative costs as reported	$	—		$	—		$	—		$	5,080

General and administrative expenses of the Trust for the three months ended September 30, 2008 decreased $776,268 or 59% to $535,254 as compared to $1,311,522 for the same period in 2007. The decrease in general and administrative expenses for the three months ended September 30, 2008 is

primarily due to a decrease in legal fees. General and administrative expenses of the Trust for the nine months ended September 30, 2008 decreased $709,385 to $1,576,015 or 31% compared to $2,285,400 for the first nine months of 2007. The decrease in general and administrative expenses for the nine months ended September 30, 2008 is primarily due to a decrease in legal fees as a result of pending litigation and expenditures related to the anticipated sale of Trust properties pursuant to the Trust's termination.

Operational Review

Pioneer has advised the Trust that during the third quarter of 2008 and 2007 its offshore gas production was marketed under short-term contracts at spot market prices primarily to TOTAL S.A. and that it expects to continue to market its production under short-term contracts for the foreseeable future. Spot market prices for natural gas in the third quarter of 2008 were generally higher than spot market prices in the third quarter of 2007.

The amount of cash distributed by the Trust is dependent on, among other things, the sales prices and quantities of gas, crude oil and condensate produced from the Royalty Properties and the quantities sold. Substantial uncertainties exist with regard to future gas and oil prices, which are subject to fluctuations due to the regional supply and demand for natural gas and oil, production levels and other activities 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.

Below is an operational review of the remaining producing Trust properties:

Brazos A-7 and A-39

	Three Months Ended September 30,					Nine Months Ended September 30,

	2008		2007			2008		2007
Gross oil and gas proceeds @ 90%	$	41,147	$	5,664		$	93,342	$	29,547
Operating expenditures @ 90%		515		(46,870	)		272		(57,898	)
Other proceeds @ 90%		—		—			—		—

Net proceeds (deficit)	$	41,662	$	(41,206	)	$	93,614	$	(28,351	)

The Brazos A-7 and A-39 blocks continued to experience a decrease in natural gas production due to natural production decline. As of September 30, 2008, these two blocks had one well capable of producing, the Brazos A-39 #5 which was shut-in during the first quarter of 2007 due to the detection of mercury. The Brazos A-7 No. B-1 well, operated by Newfield, was no longer producing and abandoned in 2007. Pioneer entered into farmout agreements for the Partnership's interest in both of these blocks so that two exploration prospects could be drilled and in which the Trust will retain an overriding royalty interest. The first prospect on Brazos A-7 was drilled during 2003 and was determined to be a dry hole. As such, the well was plugged and abandoned.

The second exploration prospect, the Brazos A-39 #5, was drilled on Brazos A-39, which Pioneer announced as a discovery. A production test was completed in 2005. Pioneer, the operator on this property, has informed the Trustee that the lower horizon of the prospect was determined to be non-commercial, while the middle horizon in the Big Hum 4 sand produced at 10,000 Mcf of gas per day during a seventeen hour flow test. This well came on line April 20, 2006. However, this well has been shut in from time to time since then as the operator has encountered and addressed hydrogen sulfide issues. The well has also produced a carbon dioxide content that exceeds pipeline specifications. This higher content requires the operator to mix production at the platform with production from other fields in order to transport the product. Production is being routed to the A-52C platform owned by

Beryl Oil and Gas. That platform is being operated by Arena, which is also serving as the contract operator for the Midway property. The well was shut in July 21, 2006 by Williams Pipeline due to reported detection of mercury in the gas stream. Following the installation of vessels with mercury absorbing media and negotiation of the required agreements with the owner and operator of the Brazos A-52C host platform, the well was returned to production on February 13, 2007. The well was shut in on April 18, 2007 due to an increase in hydrogen sulfide content coincidental with an increase in water production. Pioneer implemented a hydrogen sulfide contingency plan which was approved by the MMS. The well returned to production in the fourth quarter of 2007 after the installation of the required safety equipment. The well was shut in October 4, 2008 after discovery of corrosion in the production separator on the host platform. Repair or replacement options for the separator are being evaluated. The last producing rate was 1.4 MM/D with 3200 psi flowing tubing pressure. There can be no assurance regarding longevity of the gas production on the 52C host platform. Blending with this gas is required to meet pipeline gas quality specifications.

Under the terms of a Farmout Agreement between Pioneer and Woodside Energy (USA) Inc., Pioneer farmed out to Woodside the undivided one-half interest previously burdened by the Partnership's net profits interest, but expressly providing that the farmed out interest would not be subject to the Partnership's net profits interest. Pioneer reserved a 10% overriding royalty interest, proportionately reduced to the interest conveyed, which interest, upon Woodside's recoupment of specified costs and expenses, would increase to 12.5%, proportionately reduced to the interest conveyed. The Partnership's net profits interest burdens the overriding royalty interest reserved by Pioneer. Pioneer has informed the Trustee that it believes this process is consistent with the terms of the original conveyance and with the handling of other farmout transactions involving lands burdened by the Partnership's net profits interest.

Pioneer continues to own the undivided one-half interest not burdened by the Partnership's net profits interest and will participate in and operate the well as owner of that undivided one-half interest (subject to an agreement with Woodside to grant Woodside such interest in Pioneer's remaining undivided one-half interest to equalize those parties participation in the well).

Pioneer has noted to the Trustee that the Farmout Agreement enabled the drilling costs of these prospects to be carried on the Partnership's interest in part by Woodside. Pioneer further noted that the Partnership's net profits interest would not have entitled the Trust (through the Partnership) to payment until drilling costs and applicable interest were recovered, whereas the overriding royalty interest retained under the Farmout Agreement entitles the Trust (through the Partnership) to payments prior to the recoupment of expenses incurred by Woodside and Pioneer. As noted above, the first prospect on Brazos A-7 was determined to be a dry hole. Under the Farmout Agreement and related agreements, those drilling and abandonment costs have been born entirely by Pioneer and Woodside and are not subject to recoupment from any proceeds otherwise payable to the Partnership or the Trust. Similarly, the Partnership's current interest in the "Midway" prospect on Brazos A-39 will be entitled to payment prior to Pioneer's and Woodside's recovery of expenses for drilling, completion, sub-sea tie backs and other costs.

West Delta 61 and Other

	Three Months Ended September 30,						Nine Months Ended September 30,

	2008			2007			2008			2007
Gross oil and gas proceeds @ 90%	$	157,269		$	—		$	957,123		$	—
Operating expenditures @ 90%		(15,024	)		(23,962	)		(17,073	)		(24,205	)
Recoupment of abandonment expenses @ 90%		104,145			—			104,145			—
Other proceeds @ 90%		112,780			—			112,780			—

Net proceeds (deficit)	$	359,170		$	(23,962	)	$	1,156,975		$	(24,205	)

Hurricane Katrina struck the Gulf of Mexico in August 2005. The operator of the West Delta properties informed Pioneer 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. The operator has notified Pioneer that production at West Delta resumed production at all four wells in October 2007. There are currently three wells producing on this block and their combined rate is 1.0 MMcf/day of gas and 100 barrels of oil per day.

The Pioneer-operated wells ceased production in 2002, and the wells were plugged and abandoned by year-end with the facilities being completely abandoned during 2003. The only remaining wells on this block are in West Delta 61. Pioneer farmed out a portion of West Delta 61 to Stone Energy retaining a 12.5% (11.25% net to the Trust through the Partnership) overriding royalty interest. Those properties were sold to Maritech Resources Inc. effective October 1, 2007. Maritech began accounting for the properties on February 1, 2008.

Capital Expenditures

Pioneer does not anticipate any significant capital expenditures on the Royalty Properties in the future. Due to the limited financial capacity of the Trust, Pioneer has advised that it intends to farm out the Trust's interest in the blocks it believes may be produced economically, retaining an overriding royalty interest for the Trust.

Other Proceeds

During the third quarter of 2008, proceeds for salvage value were received on the Matagorda Island Block 624 of $57,335 and $55,445 for the South Marsh Island 155 Block.

Abandonment Expenditures

In 2006, Pioneer exhausted the $348,066 cash reserve established as of December 31, 2005. In the third quarter of 2006, Pioneer revised their estimate of abandonment expenses incurred, but not recouped from the Partnership and expenses yet to be incurred for properties, in which the Partnership has an interest to approximately $1.4 million. This revision was caused by increased work necessary because of damages caused by Hurricane Katrina, and increased day rates for labor due to the high demand for labor following Hurricanes Katrina and Rita. As of September 30, 2008, Pioneer had spent approximately $1.3 million of the $1.4 million estimate. Currently Pioneer believes all major abandonment charges have been incurred and is lowering their estimate to $1.3 million from $1.4 million. The Trust is recouping excess abandonment expenses previously taken. No Royalty income will be distributed to the Partnership until Pioneer recoups the Partnership's portion of abandonment expenses from gross proceeds. As of September 30, 2008 approximately $230,000, net to the Trust, remains to be recouped.

Production and Price Review

Production volumes for natural gas increased to 5,662 Mcf in the third quarter of 2008 as compared with 745 Mcf in the third quarter of 2007 primarily due to resumed production at all four wells on the West Delta properties. The average sales price received for natural gas in the third quarter of 2008 was $13.85 per Mcf as compared with $7.36 per Mcf in the third quarter of 2007. Crude oil, condensate and natural gas liquids production volumes increased to 1,106 barrels in the third quarter of 2008 as compared to 3 barrels in the third quarter of 2007. The average sales price in the third quarter of 2008 for crude oil, condensate and natural gas liquids was $96.78 per barrel as compared to $61.33 per barrel in the third quarter of 2007.

Production volumes for natural gas increased to 68,492 Mcf for the nine months ended September 30, 2008 as compared with 4,198 Mcf for the nine months ended September 30, 2007. The average sales price received for natural gas in the nine months ended September 30, 2008 increased to $8.47 per Mcf compared with $6.79 per Mcf for the nine months ended September 30, 2007. Crude oil, condensate and natural gas liquids production volumes increased to 4,919 barrels for the nine months ended September 30, 2008 as compared with 19 barrels for the nine months ended September 30, 2007. The average sales price for the nine months ended September 30, 2008 for crude oil, condensate and natural gas liquids was $64.30 per barrel as compared with $53.84 per barrel for the nine months ended September 30, 2007.

Termination of the Trust

The Trust Indenture provides that the Trust will liquidate if the total amount of cash per year received by the Trust falls below certain levels for each of three successive years.As a result of insufficient production on Royalty Properties nearing the end of their estimated productive lives, Royalty income received by the Trust in 2002, 2003 and 2004 fell below the Termination Threshold prescribed by the Trust Indenture. The Trustee has previously taken steps to begin the process of liquidating the Trust; however, due to the pending Lawsuit that directly challenges whether the Termination Threshold has in fact been met, the Trustee cannot predict the timing of the sale of all or a portion of the Royalty making up the assets of the Partnership as part of the Trust liquidation and termination. See "—Timing of Liquidation" above in Note 2. The Trustee, which has no authority or discretionary control over the timing of expenditures, production or income on the Royalty Properties, has no control over the occurrence of the Termination Threshold or its consequences.

The Trust Indenture provides the Trustee a two-year period during which it must sell all of the assets of the Partnership; however, due to the pending litigation, the Trustee cannot predict the timing of the sale of the assets. The Trust Indenture provides that such properties must be sold for cash and not for any other consideration. The Trustee expects that the sale process will be open to any persons desiring to participate, but, as is customary, access to information and participation may be limited to persons who execute confidentiality agreements regarding information provided by the working interest owners. The Trustee may also require bidders to identify themselves clearly and to represent or evidence sufficient financing in order to participate, as the Trustee expects payment will be required promptly after the close of bidding without any financing conditions. Accordingly, the auction may not be a "public" auction in the sense that it may not be open to anyone who does not satisfy these requirements.

Assets and Liabilities in the Process of Liquidation

As a result of the triggering of the Termination Threshold effective January 1, 2005, the Trust is in the process of liquidation. However, due to the pending Lawsuit that directly challenges whether the Termination Threshold has in fact been met, the Trustee cannot predict the timing of the sale of all or

a portion of the Royalty making up the Partnership assets as part of the Trust liquidation and termination. The below table presents the assets of the Trust at their estimated fair value:

		September 30, 2008

ASSETS
Cash and short term investments		$	69
Net overriding royalty interest in oil and gas properties			1,943,237

	Total assets	$	1,943,306

LIABILITIES
Reserve for Trust expenses		$	69
Trust expenses payable			120,008
Interest Payable			178,493
Note payable—JPMorgan			3,317,679

	Total liabilities		3,616,249

Net liabilities in process of liquidation		$	(1,672,943	)

The net overriding royalty interest in oil and gas properties at September 30, 2008 reflect the Trustee's estimate of value (in the absence of third-party appraisals or evaluations) based on the Trust's share of future net revenues from the net overriding royalty interest in the properties as of September 30, 2008. This estimate is based on the Trustee's current assessment of the impact of selling existing assets based on current market conditions, and includes the following assumptions:

•: The Trust's estimated share of proved oil and gas reserve volumes at September 30, 2008, which were derived from the December 31, 2007 reserve report prepared by DeGolyer and MacNaughton (D&M) and updated for nine months of 2008 production. The working interest owner has not prepared a reserve report as of September 30, 2008, and therefore any revisions in oil and gas reserves during the first nine months of 2008 have not been considered in the estimate of fair value of the net overriding royalty interest in oil and gas properties. The estimated fair value also does not include any value for probable or possible oil and gas reserves.
•: Forward strip commodity prices on September 30, 2008. The recent decline in commodity prices has decreased the fair value of the net overriding royalty interest in oil and gas properties.
•: Includes approximately $230,000 of abandonment costs.
•: Discount rate of 10%.

Liquidity and Capital Resources

In accordance with the provisions of the Trust conveyance, generally all revenues received by the Trust, net of Trust administrative expenses and any cash reserves established for the payment of contingent or future obligations of the Trust, are distributed currently to the unitholders. Based on the current general and administrative expenditures being incurred in connection with the litigation and the absence of Royalty income, the Trustee was required to borrow money in accordance with the Trust Indenture to fund Trust expenses. On September 28, 2007, the Trust entered into a Demand Promissory Note agreement with JPMorgan in order to cover portions of its operating expenses. The lender approved an uncommitted line of credit to the Trust in a principal amount not to exceed $3.0 million. As part of that agreement, JPMorgan pays the expenses on behalf of the Trust. JPMorgan may decline to fund any request of the Trust for borrowings at anytime, for any reason, including the event that JPMorgan has reason to believe that the Trust will not be able to satisfy its obligation to repay the

Demand Loans. Interest on the note is calculated at a rate per annum equal to Prime Rate plus two percent (2%), paid annually. The rate effective as of September 30, 2008 was a Prime Rate of 5%, plus 2% for a combined rate of 7%. The Demand Promissory Note is secured by a pledge of the Trust Estate, as that term is defined in the Trust Indenture, including without limitation the 99.99% general partnership interest in the Mesa Offshore Royalty Partnership owned by the Trust, pursuant to a Pledge Agreement dated September 29, 2007, as amended by the First Amendment to Pledge Agreement dated as of December 3, 2007, executed by the Trust for the benefit of the Lender. The Trust may borrow amounts under this Note until such time as JPMorgan makes demand for payment in full or December 31, 2008, whichever is earlier.

On August 25, 2008, the Trustee executed an amended and restated Demand Note that among other things increased the aggregate principal amount available for borrowing to $4.0 million.

As of September 30, 2008, the Trust had $3,317,679 outstanding of principal advanced and $178,493 in accrued and unpaid interest expense, leaving $682,321 available under this facility. Additionally, as of September 30, 2008, the Trust had $120,008 in unpaid trust expenses. Should the Trust fully utilize the funds available under the Demand Promissory Note, the Trustee will attempt to borrow additional money. However, no assurance can be given that the Trustee will be able to borrow money on terms the Trustee considers reasonable, or at all. The Trust Indenture prohibits the Trustee from making any distributions to unitholders until these loans are repaid in full.

The Trust's source of cash is the Royalty income received from the Partnership's share of the net proceeds from the Royalty Properties. Reference is made to Note 8 in the Notes to Financial Statements included in the Form 10-K for the year ended December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Trust does not utilize market risk sensitive instruments. However, see the discussion of marketing by Pioneer above.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or 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 and regulations. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by Pioneer, as the managing general partner of the Partnership, and the working interest owners to JPMorgan, as Trustee of the Trust, and its employees who participate in the preparation of the Trust's periodic reports as appropriate to allow timely decisions regarding 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 and procedures. Mike Ulrich, as Trust Officer of the Trustee, has concluded that the controls and procedures are effective.

Due to the contractual arrangements of (i) the Trust Indenture, (ii) the Partnership Agreement and (iii) the rights of the Partnership under the Conveyance regarding information furnished by the working interest owners, the Trustee relies on: (A) information provided by the working interest owners, including (i) the status of litigation, (ii) historical operating data, plans for future operating and capital expenditures, reserve information, as well as (iii) information relating to projected production; (B) information provided by the managing general partner of the Partnership that is collected by the managing general partner from the working interest owners; and (C) conclusions regarding reserves by reserve engineers or other experts in good faith. See Item 1A. Risk Factors "—None of the Trust nor its unitholders control the operation or development of the Royalty Properties and have little influence over operation or development" and "—The Trustee relies upon the working interest owners and managing general partner for information regarding the Royalty Properties" in the Trust's 10-K for the year ended 2007 for a description of certain risks relating to these arrangements and reliance.

Changes in Internal Control over Financial Reporting. In connection with the evaluation by the Trustee of changes in internal control over financial reporting of the Trust that occurred during the Trust's last fiscal quarter, no change in the Trust's internal control over financial reporting was identified that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, has not evaluated and makes no statement concerning, the internal control over financial reporting of the working interest owners or the managing general partner of the Partnership.

PART II

Item 1. Legal Proceedings

On April 11, 2005, MOSH Holding, L.P. ("MHLP") filed an Original Petition in the District Court of Travis County, Texas, 250th Judicial District, against PNRC; PNR; 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 Harris Country, Texas (the "Court"). MHLP's Original Petition alleges Pioneer and Woodside are liable for various actions, including (1) a wrongful farmout by Pioneer to Woodside of the Brazos A-39 Lease, (2) a wrongful delay by Pioneer in producing the Brazos A-39 Lease and the Midway #5 well drilled thereon, (3) fraudulent accounting practices by Pioneer, (4) breach of fiduciary duty by Pioneer, (5) aiding and abetting breach of fiduciary duty by Woodside, (6) misapplication of Trust property by Pioneer, (7) conspiracy 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 not terminated because there has or should have been production that would have generated revenues to extend the life of the Trust, (b) requiring the Trustee to pursue certain claims, or to allow MHLP to pursue such claims, (c) setting aside any farmouts by Pioneer in which there have been conveyances to an alleged affiliate of Pioneer, (d) the removal of JPMorgan as Trustee, (e) the return or forfeiture of compensation to JPMorgan, (f) monetary damages against Pioneer, Woodside and JPMorgan, and (g) unspecified exemplary damages against all defendants.

absence of more evidence to support any ancillary claims, MHLP would dismiss the other claims and would not be reimbursed, and the Trustee would move forward to terminate the Trust.

In 2006, after the Court denied MHLP's attempt to remove JPMorgan as Trustee, the parties began formal discovery in the Lawsuit. During this period, the Trustee continued to evaluate the merits of the alleged claims against Pioneer and Woodside. A central allegation by the Plaintiffs is that Pioneer and Woodside delayed the commencement of production from the well drilled pursuant to the Pioneer-Woodside Farmout—the Midway #5 well on the Brazos A-39 Lease. Woodside and Pioneer witnesses have given sworn testimony about the commercial and technical reasons for the delays in bringing the well on line. The well commenced production in April 2006. After this time, the Trustee instructed its independent petroleum reserve engineers to evaluate how the production results and projected production from the well might affect the value of the Trust's interest. The Trustee's independent engineers determined that the initial data regarding projected production from the well did not warrant a material change in prior assessments of the value of the Trust's assets.

On December 3, 2007, JPMorgan, for itself and in its capacity as Trustee of the Trust, entered into a Settlement Agreement and Release with the Plaintiffs and additional Trust unitholders (the "Plaintiffs' Settlement Agreement"). Also on December 3, 2007, the Trustee and the Plaintiffs filed a Joint Motion for Approval of Settlement Agreement (the "Joint Motion"). In response to the Joint Motion, on December 21, 2007, Pioneer filed cross-claims against the Trustee seeking declaratory and injunctive relief to prevent certain aspects of the proposed settlement between the Trustee and the Plaintiffs, and alleging that all or part of such proposed settlement constituted a breach of contract and fiduciary duty. On January 14, 2008, the Trustee filed an answer to Pioneer's cross-claims, in which the Trustee denied the cross-claims in their entirety, stated that they were baseless, and set forth numerous affirmative defenses. On January 22, 2008, the Court issued an order denying the Joint Motion. As a result, the conditions precedent to the Plaintiffs' Settlement Agreement could not be satisfied, and the Plaintiffs' Settlement Agreement became null and void. In addition to denying the Joint Motion, the Court also considered and denied in the same order (i) application by the Plaintiffs for the appointment of a temporary trustee and (ii) Pioneer's application for a temporary restraining order. As a result of the Court's denial of the Joint Motion, and the Court's denial of the Plaintiffs' application

for the appointment of a temporary trustee, JPMorgan elected not to resign and continues to serve as Trustee. The Trustee continues to desire the appointment of a successor Trustee.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in "Part I—Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, which summarize the principal risks associated with an investment in units in the Trust. The risks described in our Annual Report on Form 10-K are not the only risks associated with an investment in units in the Trust. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on any investment in units in the Trust.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(Asterisk indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. JPMorgan was formerly known as The Chase Manhattan Bank and is successor by mergers to the original name of the Trustee, Texas Commerce Bank National Association).



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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


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

Date: November 14, 2008

The Registrant, Mesa Offshore Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available and none have been provided.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls and Procedures.

PART II

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Bad

Mesa Offshore Trust (MOSH) Inactive 10-Q2008 Q3 Quarterly report

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