CRT

Cross Timbers Royalty Trust - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, for the Cross Timbers Royalty Trust, a Texas grantor trust. The Trust holds net profits interests in oil and gas properties in Texas, Oklahoma, and New Mexico. It consists of 90% royalty trust interests (royalty and overriding royalty interests) and 75% royalty trust interests (working interests). As of August 1, 1999, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.

Key Financial Metrics

Note: The filing does not provide specific debt figures as the Trust operates on a modified cash basis and holds royalty interests rather than corporate debt. Liquidity is represented by cash and short-term investments.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased 27% in Q2 1999 and 32% for the six-month period compared to 1998. This was driven by lower oil and gas sales volumes and lower sales prices.
• Volume Variances: Oil sales volumes dropped 11% (Q2) and 13% (YTD), primarily due to mechanical complications and downtime on Oklahoma working interest properties. Gas volumes dropped 12% (Q2) and 2% (YTD).
• Price Variances: Average oil prices fell 5% (Q2) and 22% (YTD). Average gas prices fell 5% (Q2) and 21% (YTD), influenced by an abnormally warm winter.
• Cost Recovery: The 75% royalty trust interests (working interests) incurred excess costs where costs exceeded revenues. However, recovery of these excess costs began in May 1999. Cumulative excess costs for the Texas 75% interests stood at $757,604 as of June 30, 1999. The Oklahoma 75% interests fully recovered their excess costs in July 1999.

Outlook, Risks, and Management Commentary

• Price Outlook: Management noted that oil prices began climbing in March 1999 following OPEC production cuts. The average posted West Texas Intermediate oil price for May-July 1999 was $16.01, a 37% increase over the comparable 1998 period. Gas prices also strengthened in the spring.
• Production Recovery: Cross Timbers Oil expects production from the mechanically complicated Oklahoma property to recover, though no specific timeline was provided.
• Excess Cost Recovery: With increased oil prices, the recovery rate of excess costs for the Texas 75% interests is expected to increase. These interests must recover $757,604 in cumulative excess costs before contributing to royalty income again.
• Year 2000 Risk: The Trust relies on third parties (Cross Timbers Oil, property operators, purchasers) for Year 2000 compliance. While Cross Timbers Oil does not believe this represents a material risk, failure of third-party systems could materially impact timely distributions.
• Tax Credits: Unitholders may be eligible for a federal income tax credit for producing nonconventional fuels (coal seam gas). The estimated credit for the six months ended June 30, 1999, is $0.085 per unit.

Investor Verification Checklist

• Verify the timeline for production recovery on the Oklahoma working interest properties affected by mechanical complications.
• Monitor the rate of recovery for the $757,604 in cumulative excess costs associated with the Texas 75% royalty trust interests.
• Confirm the impact of rising oil prices (post-March 1999) on Q3 and Q4 1999 royalty income, given the lag between production and income receipt.
• Review the status of Year 2000 compliance for key third-party operators and purchasers to assess distribution timing risks.
• Check final 1999 coal seam gas tax credit data when provided with year-end tax information.