Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties owned by XTO Energy Inc. The trust receives 90% of net proceeds from royalty/overriding royalty interests and 75% from working interests. As of October 1, 2009, there were 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Profits Income | $2,894,511 | $9,163,997 | $8,089,015 | $24,578,205 |
| Distributable Income | $2,765,082 | $9,114,210 | $7,723,566 | $24,260,802 |
| Distributable Income Per Unit | $0.460847 | $1.519035 | $1.287261 | $4.043467 |
| Cash and Short-Term Investments | $1,162,331 | $1,514,797 | $1,162,331 | $1,514,797 |
| Trust Corpus | $16,669,252 | $17,525,221 | $16,669,252 | $17,525,221 |
| Administration Expense | $129,458 | $57,008 | $365,632 | $335,658 |
Note: The filing does not provide specific debt figures as the trust generally does not borrow; it lists "Distribution payable to unitholders" as a liability of $1,162,344.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 68% in Q3 2009 and 67% for the nine-month period compared to 2008.
- Price Volatility: Average oil sales prices dropped 54% (to $56.90/Bbl in Q3) and gas prices dropped 58% (to $5.34/Mcf in Q3) due to global economic conditions and supply/demand shifts.
- Volume Decline: Underlying oil sales volumes decreased 1% (Q3) and 4% (9 months); gas volumes decreased 4% (Q3) and 6% (9 months) due to natural decline and timing of receipts.
- Cost Recovery: In Q3 2009, the trust recovered excess costs (plus interest) totaling $307,030 ($305,272 net to trust) from Texas and Oklahoma working interests that had previously exceeded revenues.
- One-Time Items: The 2008 period included $2.43 million in lawsuit settlements related to royalty underpayments, which inflated 2008 comparables. Excluding this, the decline in 2009 is even more pronounced.
Outlook, Risks, and Management Commentary
- Market Outlook: Management notes that while oil prices have shown signs of improvement (NYMEX futures at $80.02/Bbl as of Oct 15, 2009), prices are expected to remain volatile. Gas prices are pressured by high storage levels and shale gas development.
- Excess Costs: The recovery of excess costs in Q3 2009 was driven by increased oil prices and decreased costs. Future income remains sensitive to commodity prices.
- Liquidity Risk: Cash reserves are held in Bank of America, N.A. certificates of deposit. Only $250,000 is insured by the FDIC; the remainder relies on the creditworthiness of the bank.
- Regulatory Risk: Potential state income tax withholding requirements for nonresident recipients could reduce distributions if regulations change.
- Legal Contingencies: Ongoing lawsuits are not expected to have a material effect on financial position.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current NYMEX oil and gas futures prices against the trust's recent realized prices to gauge future distribution potential.
- Production Volumes: Confirm the rate of natural decline in underlying properties versus new well activity to assess long-term revenue stability.
- Bank Creditworthiness: Review Bank of America, N.A.'s credit ratings, as the trust's cash reserves exceed FDIC insurance limits.
- Excess Cost Status: Monitor if any working interest properties return to a state where costs exceed revenues, which would delay distributions from those specific conveyances.
- State Tax Legislation: Track state-level legislation regarding withholding taxes on nonresident oil and gas proceeds.