Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2004, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. As of October 1, 2004, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
| Metric | Q3 2004 | Q3 2003 | YTD 9 Months 2004 | YTD 9 Months 2003 |
|---|---|---|---|---|
| Net Profits Income | $4,017,397 | $3,122,116 | $10,792,393 | $9,539,904 |
| Total Income | $4,018,945 | $3,123,069 | $10,795,482 | $9,543,251 |
| Distributable Income | $3,928,740 | $3,069,612 | $10,530,516 | $9,332,976 |
| Distributable Income Per Unit | $0.654790 | $0.511602 | $1.755086 | $1.555496 |
| Administration Expense | $90,205 | $53,457 | $264,966 | $210,275 |
| Cash and Short-Term Investments | $1,507,837 | $994,389 | As of Sept 30, 2004 | |
| Trust Corpus (Net) | $23,341,683 | $24,665,401 | As of Sept 30, 2004 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 29% in Q3 2004 and 13% for the nine-month period compared to 2003. This growth is primarily attributed to higher oil and gas sales prices.
- Price Increases: Average oil sales prices rose 30% to $36.44 per Bbl in Q3 2004 (from $27.96 in Q3 2003). Average gas sales prices increased 20% to $6.05 per Mcf (from $5.05).
- Production Volumes: Underlying oil sales volumes remained relatively flat in Q3 but declined 4% for the nine-month period due to natural production decline. Gas volumes increased 1% in Q3 but declined 4% for the nine-month period.
- Expense Variance: Administration expenses increased 69% in Q3 and 26% YTD, driven by higher reporting costs due to an increased number of unitholders and timing of expenditures.
- Development Costs: Development costs decreased 10% in Q3 due to reduced drilling activity in Texas but increased 128% YTD due to increased drilling in Oklahoma.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that oil prices have continued to increase due to supply disruption concerns, instability in the Middle East, and hurricanes in the Gulf of Mexico. Gas prices remain volatile, influenced by weather, storage levels, and production declines.
- Operational Update: In August 2004, XTO Energy became the operator of the Penwell Unit (Texas 75% net profits interest) following an acquisition of the previous operator's interest.
- Contingencies: Several states have enacted legislation requiring state income tax withholding from nonresident recipients. While XTO Energy currently believes the Trust is not subject to these requirements, regulations are subject to change. If withholding is required, distributions to unitholders would be reduced.
- Forward-Looking Statements: The filing includes forward-looking statements regarding production, costs, and prices, which are subject to risks detailed in the 2003 Annual Report (Form 10-K).
Key Facts for Investor Verification
- Distribution Schedule: Verify the record and payment dates for the three distributions made in Q3 2004 (July, August, September) totaling $0.654790 per unit.
- Price Sensitivity: Confirm the correlation between NYMEX futures prices and the Trust's realized prices, noting the Trust's oil prices averaged ~$3.00/Bbl lower than NYMEX and gas prices ~$0.60/MMBtu higher.
- Production Decline: Monitor the natural production decline rates for underlying properties, which offset volume gains from price increases.
- Tax Withholding Risk: Review ongoing state legislation regarding nonresident withholding on oil and gas proceeds, as this could materially impact net distributions.
- Amortization: Note that amortization of net profits interests is charged directly to trust corpus, reducing the corpus value over time ($1,323,718 amortized YTD 2004).