Cross Timbers Royalty Trust: Q2 2015 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2015, for Cross Timbers Royalty Trust, a Texas-based fixed investment trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). As of July 1, 2015, there were 6,000,000 units of beneficial interest outstanding. The Trust is managed by Southwest Bank as Trustee.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Net Profits Income | $1,851,313 | $3,859,488 | $4,675,684 | $8,245,633 |
| Distributable Income | $1,736,628 | $3,766,254 | $4,302,618 | $7,970,214 |
| Distributable Income Per Unit | $0.289438 | $0.627709 | $0.717103 | $1.328369 |
| Administration Expense | $114,696 | $93,299 | $373,089 | $275,541 |
| Cash and Short-Term Investments | $605,673 | $1,278,294 | $605,673 | $1,278,294 |
| Trust Corpus | $10,778,704 | $11,413,277 | $10,778,704 | $11,413,277 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 52% in Q2 2015 and 43% year-to-date compared to 2014. This was primarily driven by a significant drop in oil and gas prices.
- Price Volatility: Average oil sales prices fell 48% to $49.36 per barrel in Q2 2015 (from $94.30 in Q2 2014). Average gas prices fell 53% to $3.92 per Mcf (from $8.33 in Q2 2014).
- Production Volumes: Underlying oil sales volumes increased 17% in Q2 2015 due to new wells and workovers, partially offset by natural decline. Gas sales volumes decreased 7%.
- Excess Costs: Lower prices caused costs to exceed revenues on specific working interest properties. Cumulative excess costs remaining as of June 30, 2015, totaled $1,625,468 ($1,219,101 net to the Trust). These costs are being recovered from future net proceeds of the specific conveyances and did not reduce income from other properties.
- One-Time Items: The prior year (Q1 2014) included a one-time purchaser refund of approximately $519,000 related to coal seam gas wells, which inflated 2014 comparables.
Outlook, Risks, and Management Commentary
- Market Outlook: Management notes that oil and gas prices are expected to remain volatile. As of July 20, 2015, the average NYMEX futures price for the following twelve months was $52.50 per barrel for oil and $3.05 per MMBtu for gas.
- Production Decline: The estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
- Tax 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.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recognized when received, and expenses when paid.
Key Facts for Investor Verification
- Verify the current status of the $1.6 million in cumulative excess costs and the timeline for their recovery from future net proceeds.
- Monitor NYMEX futures prices for oil and gas, as the Trust's income is highly sensitive to commodity price fluctuations.
- Review the production decline rates (6-8% annually) against the impact of new well completions and workovers to assess long-term volume sustainability.
- Confirm the Trustee's stance on state tax withholding regulations in Texas, Oklahoma, and New Mexico, as changes could impact net distributions.
- Note that the Trust has no debt and distributes all net income; liquidity is dependent entirely on cash flows from XTO Energy.