Cross Timbers Royalty Trust - 10-Q Summary (Q3 2012)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2012, for the Cross Timbers Royalty Trust. 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, distributing all net income to unitholders. As of October 1, 2012, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | YTD 9M 2012 | YTD 9M 2011 |
|---|---|---|---|---|
| Net Profits Income | $3,320,147 | $5,257,619 | $11,658,423 | $14,177,476 |
| Distributable Income | $3,267,606 | $5,165,922 | $11,340,072 | $13,820,226 |
| Distributable Income Per Unit | $0.544601 | $0.860987 | $1.890012 | $2.303371 |
| Administration Expense | $52,621 | $91,828 | $318,593 | $357,524 |
| Cash and Short-Term Investments | $846,833 | $1,213,231 | As of Sept 30, 2012 | |
| Trust Corpus | $12,759,505 | $13,415,740 | As of Sept 30, 2012 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 37% in Q3 2012 and 18% for the nine-month period compared to 2011.
- Price Volatility: The decline was primarily driven by lower commodity prices. Average gas prices dropped 39% in Q3 (to $4.91/Mcf) and 16% YTD. Average oil prices fell 12% in Q3 (to $81.86/Bbl) but rose 3% YTD.
- Production Volumes: Underlying oil sales volumes decreased 4% in both Q3 and YTD periods due to natural production decline. Gas volumes increased 6% in Q3 but decreased 4% YTD.
- Cost Increases: Development costs surged 400% in Q3 and 159% YTD due to increased activity on non-operated Texas and Oklahoma properties. Production expenses also rose 13% in Q3 and 22% YTD.
- Excess Costs: In August 2012, costs exceeded revenues on Texas working interest properties by $218,168. Partial recovery occurred in September, leaving remaining excess costs of $171,978 at quarter-end.
Outlook, Risks, and Management Commentary
- Market Outlook: Management expects oil and natural gas prices to remain volatile. Future prices are influenced by North American production levels, weather, storage levels, and the U.S. economy.
- 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 of oil and gas proceeds. 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.
Investor Verification Checklist
- Verify the impact of the $171,978 remaining excess costs on future distributions from the Texas working interest conveyance.
- Monitor NYMEX futures prices for oil and gas, as the Trust's income is highly sensitive to these commodity prices.
- Review the 6-8% annual natural production decline rate to assess long-term income sustainability.
- Confirm the status of state tax withholding regulations in Texas, Oklahoma, and New Mexico, as changes could directly reduce net distributions.
- Check for updates on development costs for non-operated properties, which recently spiked significantly.