Cross Timbers Royalty Trust - 10-Q Summary (Q2 2016)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2016. Cross Timbers Royalty Trust is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties located in Texas, Oklahoma, and New Mexico. As of July 1, 2016, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Net Profits Income | $1,391,073 | $1,851,313 | $4,097,179 | $4,675,684 |
| Distributable Income | $975,180 | $1,736,628 | $3,156,162 | $4,302,618 |
| Distributable Income Per Unit | $0.162530 | $0.289438 | $0.526027 | $0.717103 |
| Cash and Short-Term Investments | $1,240,138 | $969,700 | $1,240,138 | $969,700 |
| Trust Corpus | $10,192,486 | $10,542,236 | $10,192,486 | $10,542,236 |
| Expense Reserve | $875,000 | $275,000 | $875,000 | $275,000 |
Note: The Trust operates on a modified cash basis of accounting. There is no debt reported in the liabilities section.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 25% in Q2 2016 and 12% year-to-date compared to 2015. This was primarily driven by significantly lower oil and gas prices.
- Price Volatility: Average oil sales prices dropped 35% to $32.19 per barrel in Q2 2016 (from $49.36 in Q2 2015). Average gas prices dropped 28% to $2.83 per Mcf.
- Production Volumes: Oil sales volumes decreased slightly (2%), while gas sales volumes increased significantly (26% in Q2, 61% YTD) due to the timing of cash receipts for prior production.
- Cost Reductions: Development costs decreased 85% in Q2 2016 due to reduced activity on non-operated properties. Production expenses also declined.
- Excess Costs: Cumulative excess costs (costs exceeding revenues on specific conveyances) totaled $2,634,566 as of June 30, 2016. These costs must be recovered from future net proceeds of the specific conveyances before distributions can be made from those properties.
Outlook, Risks, and Management Commentary
- Market Outlook: Management notes that oil and gas prices are expected to remain volatile. While Q2 2016 prices reflected production from Feb-April, NYMEX futures prices for the following twelve months were higher ($48.19 for oil, $3.03 for gas) as of July 18, 2016.
- Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.
- Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients. The Trustee currently believes withholding is not required, but regulatory changes could reduce distributions if withholding becomes mandatory.
- Impairment: No impairment of assets was recognized as of June 30, 2016, as the Trustee does not view temporary price drops as a trigger event for impairment testing.
Key Facts for Investor Verification
- Distribution Sustainability: Verify the impact of $2.6 million in cumulative excess costs on future cash flows, as these must be recovered before full distribution potential is realized from working interest properties.
- Price Sensitivity: Confirm current NYMEX futures pricing trends, as the Trust's income is highly sensitive to oil and gas price fluctuations.
- Production Decline: Monitor the 6-8% annual natural decline rate against any new development activity to assess long-term income stability.
- Tax Withholding Risk: Review state tax legislation updates in Texas, Oklahoma, and New Mexico regarding nonresident withholding on oil and gas proceeds.
- Expense Reserve: Note that the Trustee has increased the expense reserve to $875,000 (targeting $1,000,000), which reduces immediate distributable income.