CRT

Cross Timbers Royalty Trust 2006 Annual Report (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 (90% and 75%) in oil and gas properties owned by XTO Energy Inc. The trust has no employees; Bank of America, N.A. serves as the trustee. The reporting period covers the fiscal year ended December 31, 2006. The trust's income is derived solely from net proceeds of production from underlying properties in Texas, Oklahoma, and New Mexico, with approximately 68% of 2006 income attributable to natural gas.

Key Financial Metrics

Reserves: As of December 31, 2006, estimated proved reserves for the net profits interests totaled 1,399,000 barrels of oil and 28,128,100 Mcf of gas. The standardized measure of discounted future net cash flows for the net profits interests was $97,388,000.

Liquidity: The trust has no debt and no off-balance sheet arrangements. Cash requirements are limited to monthly distributions and administrative expenses. The trust may borrow funds only if fully repaid prior to further distributions.

Material Changes vs. Prior Period

• Revenue Growth: Net profits income increased 25% from 2005 to 2006, driven primarily by higher average sales prices for oil ($59.05/Bbl in 2006 vs. $49.70/Bbl in 2005) and natural gas ($8.79/Mcf in 2006 vs. $7.76/Mcf in 2005).
• Production Volumes: Total oil sales attributable to the net profits interests decreased slightly to 143,067 barrels in 2006 from 145,698 barrels in 2005. Gas sales increased to 2,329,603 Mcf in 2006 from 1,965,576 Mcf in 2005.
• Reserve Revisions: The standardized measure of discounted future net cash flows decreased by approximately 31% from 2005 ($140.6 million) to 2006 ($97.4 million). This decline was primarily due to revisions in prior estimates related to changes in year-end prices and costs, despite higher realized prices during the year.

Outlook, Risks, and Contingencies

Reversion Agreement: A significant contingency involves a reversion agreement on certain properties underlying the 90% net profits interests. XTO Energy may transfer 25% of its interest to a third party upon payout. XTO estimates payout could occur by the end of 2007, which would reduce monthly distributions by approximately 5%.

Tax Risk: The trust faces uncertainty regarding the new Texas margin tax effective in 2007. While the trustee assumes the trust is exempt as a passive entity, there is no clear authority confirming this. If the trust is deemed subject to the tax, distributions may be withheld to cover liabilities for the entire 2007 year.

Market Risks: Distributions are highly sensitive to fluctuations in oil and natural gas prices. The trust has no control over operations, development, or marketing of the underlying properties. Additionally, the trust holds depleting assets, and future distributions depend on successful maintenance and development by operators.

Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Income is recognized when received, and expenses when paid.

Investor Verification Checklist

• Reversion Payout Timing: Verify the current status of the reversion agreement payout and the potential 5% reduction in distributions expected in 2007.
• Texas Margin Tax Status: Confirm whether the Texas Comptroller has issued rulings clarifying the trust's exemption status as a passive entity.
• Commodity Price Sensitivity: Assess the impact of current oil and gas price trends on future net proceeds, given the trust's lack of hedging capabilities.
• Reserve Estimates: Review the independent engineer's report (Miller and Lents, Ltd.) for updates on proved reserves and the standardized measure of discounted future net cash flows.
• Operator Activity: Monitor development activities in the San Juan Basin and other key regions, as the trust has no influence over drilling decisions.