Cross Timbers Royalty Trust 2011 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust is an express trust created under Texas law, holding net profits interests in oil and gas properties owned by XTO Energy Inc. (a wholly-owned subsidiary of Exxon Mobil Corporation). The trust has no employees; administrative functions are performed by the trustee, U.S. Trust, Bank of America Private Wealth Management. The reporting period covers the fiscal year ended December 31, 2011. The trust holds 6,000,000 units of beneficial interest outstanding, traded on the NYSE under the symbol "CRT."
Key Financial Metrics
- Net Profits Income: $18,381,657 for 2011.
- Distributable Income: $17,956,494 for 2011.
- Distributions per Unit: $2.992749 for 2011.
- Total Assets: $14,629,000 as of December 31, 2011 (primarily cash and net profits interests).
- Trust Corpus: $13,415,740 as of December 31, 2011.
- Production Volumes (Net Profits Interests): 106,396 Bbls of oil and 1,643,619 Mcf of gas.
- Average Sales Prices: $86.82 per Bbl (oil) and $7.37 per Mcf (gas).
- Proved Reserves: 1,111,000 Bbls of oil and 24,619,000 Mcf of gas allocated to the trust.
- Standardized Measure of Discounted Future Net Cash Flows: $114,514,000 (discounted at 10%).
Material Changes vs. Prior Period
- Income Growth: Net profits income increased 7% from $17.14 million in 2010 to $18.38 million in 2011. This was driven primarily by a $2.9 million increase in oil and gas prices, partially offset by a $1.5 million decrease in gas production volumes.
- Production Decline: Underlying oil sales volumes decreased 1% and gas sales volumes decreased 11% compared to 2010, attributed to natural production decline and timing of cash receipts.
- Cost Increases: Total costs deducted from net proceeds increased 3% to $9.46 million, due to higher property taxes, oil production taxes, and development costs ($623,384 in 2011 vs. $539,048 in 2010).
- Reserve Value: Discounted future net cash flows from proved reserves increased 17% from year-end 2010, primarily due to a 23% increase in oil prices and a 15% increase in natural gas prices used in the calculation.
Outlook, Risks, and Management Commentary
- Outlook: Management notes that oil and gas prices are expected to remain volatile. Budgeted development costs for 2012 are approximately $2.4 million, significantly higher than 2011 actuals, reflecting planned maintenance and development activities.
- Depleting Assets: The trust holds interests in depleting assets with an average reserve-to-production index of approximately 12 years. Distributions are partially a return of capital.
- Key Risks:
- Price Volatility: Distributions are highly dependent on oil and natural gas prices, which fluctuate due to global supply, demand, and geopolitical factors.
- Production Decline: Natural decline rates are estimated at 6% to 8% annually without successful development projects.
- Excess Costs: For the 75% net profits interests (working interests), if production costs exceed revenues, the trust receives no income until excess costs plus interest are recovered. There were no excess costs at year-end 2011.
- Regulatory: Potential increases in operating costs due to climate change or greenhouse gas regulations could reduce net proceeds.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, and expenses when paid.
Investor Verification Checklist
- Verify the current market price of oil and natural gas against the 12-month average prices used in reserve valuations ($90.05/Bbl oil, $6.24/Mcf gas).
- Confirm the status of development projects in the San Juan Basin and Texas/Oklahoma working interests to assess production decline mitigation.
- Review the "Excess Costs" provision for the 75% net profits interests to ensure no current deficits are delaying distributions.
- Monitor the creditworthiness of XTO Energy and other operators of the underlying properties, as the trust relies on them for net proceeds calculations.
- Check for any changes in state tax withholding laws in Texas, Oklahoma, or New Mexico that could impact net distributions.