Cross Timbers Royalty Trust 2010 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust is an express trust created under Texas law, holding defined net profits interests in oil and gas properties owned by XTO Energy Inc. (a wholly-owned subsidiary of Exxon Mobil Corporation as of June 2010). The trust has no employees; administrative functions are performed by the trustee, Bank of America, N.A. The reporting period covers the fiscal year ended December 31, 2010. The trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties across Texas, Oklahoma, and New Mexico.
Key Financial Metrics
- Net Profits Income: $17,142,087 for 2010.
- Distributable Income: $16,725,324 for 2010.
- Distributions per Unit: $2.787554 for 2010 (Total distributions: $16,725,324).
- Total Assets: $15,935,049 as of December 31, 2010 (primarily cash and net profits interests).
- Cash and Short-term Investments: $1,413,665 as of December 31, 2010.
- Production Volumes (Net Profits Interests): 99,628 Bbls of oil and 1,836,889 Mcf of gas.
- Average Sales Prices: $71.80 per Bbl (oil) and $7.06 per Mcf (gas).
- Proved Reserves: 1,064,000 Bbls of oil and 24,917,000 Mcf of gas allocated to the trust.
- Debt: The trust has no debt and limited ability to borrow.
Material Changes vs. Prior Period
Net profits income increased 46% from $11.74 million in 2009 to $17.14 million in 2010. This increase was driven primarily by higher oil and gas prices ($6.3 million impact), increased gas production ($0.5 million), and decreased production expenses ($0.4 million). These gains were partially offset by a decrease in oil production volumes ($1.3 million) and higher taxes and transportation costs ($0.6 million). Average oil prices rose 41% and gas prices rose 27% compared to 2009. Unlike 2009, there were no excess costs (where costs exceeded revenues) in 2010.
Outlook, Risks, and Management Commentary
- Outlook: The trust expects continued volatility in oil and gas prices. Budgeted development costs for 2011 are approximately $907,000, higher than the $539,000 actual costs in 2010. The trust's assets are depleting, with an average reserve-to-production index of approximately 12 years.
- Risks: Key risks include fluctuations in commodity prices, operational hazards, and the inability of unitholders to influence property operations. The trust is subject to potential future regulations regarding greenhouse gas emissions which could increase operating costs.
- Unusual Items: The 2008 results included $2.43 million in lawsuit settlements regarding underpaid royalties, which is not expected to recur. The 2010 results did not include such non-recurring items.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, not when produced.
Investor Verification Checklist
- Verify the current market price of oil and natural gas relative to the 12-month average prices used in reserve calculations ($73.20/Bbl oil, $5.42/Mcf gas).
- Confirm the status of development activities on the 75% net profits interest working properties, as higher development costs directly reduce distributable income.
- Monitor the reserve-to-production ratio and natural decline rates (estimated 6-8% annually) to assess the longevity of distributions.
- Review the creditworthiness of XTO Energy and other operators, as the trust relies on them to calculate and remit net proceeds.
- Check for any new state tax withholding legislation that could impact net distributions to unitholders.