Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the Cross Timbers Royalty Trust for the period ended September 30, 2013. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust is a grantor trust for federal tax purposes, meaning income is taxed directly to unitholders. As of October 1, 2013, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 |
|---|---|---|
| Net Profits Income | $4,227,291 | $10,244,910 |
| Total Income | $4,227,377 | $10,245,113 |
| Distributable Income | $4,164,564 | $9,921,270 |
| Distributable Income Per Unit | $0.694094 | $1.653545 |
| Administration Expense | $62,813 | $323,843 |
| Cash and Short-term Investments | $1,534,641 | $1,534,641 (as of Sep 30) |
| Trust Corpus | $11,997,677 | $11,997,677 (as of Sep 30) |
Note: The Trust has no debt. Liquidity is maintained through cash reserves and short-term investments held by the Trustee.
Material Changes vs. Prior Period
- Quarterly Performance (Q3 2013 vs. Q3 2012): Net profits income increased 27% to $4.23 million. This was driven primarily by higher oil and gas prices ($1.2 million impact) and increased oil production ($0.3 million impact). These gains were partially offset by decreased gas production and increased development costs.
- Year-to-Date Performance (9 Months 2013 vs. 9 Months 2012): Net profits income decreased 12% to $10.24 million. The decline was primarily due to increased development costs ($0.8 million), decreased gas production ($0.6 million), and lower average oil prices for the nine-month period ($0.6 million). These were partially offset by increased oil production volumes and higher gas prices.
- Excess Costs: In Q3 2013, the Trust fully recovered excess costs (where costs exceeded revenues) totaling $42,445 (net to trust $31,834) on Texas working interest properties. There were no remaining excess costs as of September 30, 2013, compared to $171,978 remaining at the end of Q3 2012.
Outlook, Risks, and Management Commentary
- Production Trends: Oil sales volumes increased 7% in Q3 and 4% YTD compared to 2012, while gas sales volumes decreased 5% in Q3 and 7% YTD. The estimated natural production decline rate is 6% to 8% annually.
- Price Volatility: Average oil prices increased 13% in Q3 to $92.63/Bbl but decreased 6% YTD to $85.67/Bbl. Gas prices increased 37% in Q3 to $6.72/Mcf. Management notes that oil and gas prices are expected to remain volatile.
- Development Costs: Development costs increased significantly (27% in Q3, 97% YTD) due to the timing of expenditures and increased activity on non-operated Texas and Oklahoma properties.
- Risks: Key risks include volatility in commodity prices, natural production decline, and potential changes in state tax withholding regulations regarding nonresident recipients of oil and gas proceeds. The Trustee believes no withholding is currently required, but regulations are subject to change.
Investor Verification Checklist
- Verify the impact of the 97% year-over-year increase in development costs on future distributable income.
- Monitor the recovery status of excess costs on Texas working interest properties to ensure no future distribution reductions.
- Review the natural production decline rate (6-8%) against the reported volume increases to assess the sustainability of current production levels.
- Confirm the Trust's exemption status from Texas franchise tax as a "passive entity" given the revenue mix.
- Check for any updates on state tax withholding legislation that could reduce net distributions to unitholders.