Cross Timbers Royalty Trust: Q1 2015 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2015. Cross Timbers Royalty Trust is a fixed investment trust holding net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). The trust holds 6,000,000 units of beneficial interest. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net Profits Income | $2,824,371 | $4,386,145 |
| Total Income | $2,824,383 | $4,386,202 |
| Distributable Income | $2,565,990 | $4,203,960 |
| Distributable Income Per Unit | $0.427665 | $0.700660 |
| Administration Expense | $258,393 | $182,242 |
| Cash and Short-Term Investments | $794,293 | $1,278,294 |
| Trust Corpus | $10,867,893 | $10,994,298 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 36% year-over-year. This was driven primarily by a $1.7 million reduction due to lower oil and gas prices, a $0.5 million one-time purchaser refund included in Q1 2014, and a $0.3 million decrease in gas production.
- Price Volatility: Average oil sales price dropped 30% to $62.80 per barrel (from $90.14). Average gas sales price dropped 18% to $5.71 per Mcf (from $6.94).
- Production Volumes: Underlying oil sales volumes increased 6% due to new wells and workovers. Underlying gas sales volumes decreased 15% due to natural decline and timing of cash receipts.
- Costs: Total costs decreased 19%. Development costs fell 32% due to decreased activity. However, production expenses increased 22% due to higher outside-operated costs.
- Excess Costs: Lower oil prices caused costs to exceed revenues on specific working interest properties in Texas and Oklahoma. Cumulative excess costs remaining as of March 31, 2015, totaled $507,722 ($380,791 net to the trust).
Outlook, Risks, and Management Commentary
- Price Outlook: Management notes that oil and gas prices are expected to remain volatile. At April 28, 2015, the average NYMEX futures price for the following 12 months was $60.84 per barrel for oil and $2.79 per MMBtu for gas.
- Development Budget: Unit operators reported revised 2015 budgeted development costs of $4.4 million, a decrease from the previously reported $5.9 million.
- Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients. While the trustee currently believes withholding is not required, regulatory changes could reduce distributions if withholding becomes mandatory.
- Impairment: No impairment of assets was recognized as of March 31, 2015.
Investor Verification Checklist
- Verify the impact of the $380,791 net cumulative excess costs on future distributions from Texas and Oklahoma working interests.
- Monitor the volatility of NYMEX oil and gas futures prices, as the trust's income is highly sensitive to these rates.
- Confirm the status of state tax withholding regulations in Texas, Oklahoma, and New Mexico to assess potential distribution reductions.
- Review the revised 2015 development cost budget ($4.4 million) to ensure it aligns with actual cash outflows.
- Check the timing of cash receipts, as the trust's income reflects production from two to three months prior.