Cross Timbers Royalty Trust 2009 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. 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, 2009. 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: $11,742,545 for 2009.
- Distributable Income: $11,316,138 for 2009.
- Distributions per Unit: $1.886023 for 2009.
- Total Assets: $17,256,102 as of December 31, 2009 (primarily cash and net profits interests).
- Cash and Short-term Investments: $1,067,595.
- Production Volumes (Net Profits Interests): 75,838 Bbls of oil and 1,768,478 Mcf of gas.
- Average Sales Prices: $50.82 per Bbl for oil; $5.58 per Mcf for gas.
- Proved Reserves: 856,000 Bbls of oil and 25,678,000 Mcf of gas (Net Profits Interests).
Material Changes vs. Prior Period
Net profits income decreased 62% from $31.3 million in 2008 to $11.7 million in 2009. This decline was primarily driven by:
- Commodity Prices: Average oil prices fell 49% to $50.82/Bbl, and average gas prices fell 52% to $5.58/Mcf compared to 2008.
- One-Time Items: 2008 results included $2.43 million in lawsuit settlement proceeds related to royalty underpayments, which were not present in 2009.
- Costs: Total costs deducted decreased 19% to $9.2 million, largely due to lower production taxes and development costs ($601,502 in 2009 vs. $1.45 million in 2008).
- Excess Costs: Costs exceeded revenues on Texas and Oklahoma working interest properties in early 2009, but these excess costs were fully recovered during the year.
Outlook, Risks, and Management Commentary
- XTO Energy Merger: On December 13, 2009, XTO Energy entered a definitive merger agreement with Exxon Mobil Corporation. The merger is expected to close in Q2 2010 and is not anticipated to materially affect the trust's income or liquidity.
- Development Costs: Budgeted development costs for 2010 are approximately $585,000, with $1.5 million budgeted for 2011.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, not when produced.
- Risks: Key risks include volatility in oil and gas prices, depletion of reserves (average reserve-to-production index of 12 years), and the inability of unitholders to influence operations. The trust faces potential termination if gross revenue falls below $1 million for two consecutive years.
Investor Verification Checklist
- Verify the impact of the pending XTO Energy/ExxonMobil merger on future royalty calculations and operator stability.
- Monitor commodity price trends, as 65% of 2009 income was derived from natural gas sales.
- Review the "Excess Costs" provision for the 75% net profits interests, as costs exceeding revenues in specific states can delay distributions until recovered.
- Confirm the trust's status regarding the Texas "margin tax" and potential state withholding requirements for nonresident unitholders.
- Assess the depletion rate of proved reserves, noting that the trust holds depleting assets with no ability to acquire new properties.