Cross Timbers Royalty Trust - 10-Q Summary (Q1 1997)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1997, for the Cross Timbers Royalty Trust. The Trust holds net overriding royalty interests in oil and gas properties in New Mexico, Oklahoma, and Texas. Financial statements are prepared on a modified cash basis and have been reviewed, but not audited, by Arthur Andersen LLP. As of May 1, 1997, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 1997 | Q1 1996 |
|---|---|---|
| Royalty Income | $3,114,590 | $1,557,678 |
| Total Income | $3,118,940 | $1,559,844 |
| Administration Expense | $49,405 | $35,326 |
| Distributable Income | $3,069,535 | $1,524,518 |
| Distributable Income per Unit | $0.511589 | $0.254087 |
| Cash and Short-term Investments | $1,145,898 | $1,376,687 (Dec 31, 1996) |
| Net Overriding Royalty Interests (Net) | $40,488,291 | $41,337,673 (Dec 31, 1996) |
| Distribution Payable | $1,147,292 | $1,378,611 (Dec 31, 1996) |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased by approximately 100% compared to Q1 1996. This was driven primarily by significantly higher oil and gas prices rather than volume increases.
- Price Increases: Average oil prices rose 41% to $22.62 per barrel, and average gas prices rose 87% to $2.53 per Mcf.
- Volume Trends: Oil sales volumes decreased slightly (1%) and gas sales volumes decreased (2%) due to natural decline and timing of cash receipts, though infill drilling partially offset oil declines.
- Cost Reductions: Total costs deducted in royalty calculations decreased by 7% ($82,433), driven by lower development and production expenses, despite a 12% increase in production and property taxes.
Outlook, Risks, and Unusual Items
- Legal Settlement (Unusual Item): A lawsuit against Coastal Oil and Gas Corporation was settled in May 1997. The Trust expects to receive approximately $460,000 ($0.077 per Unit) in suspended revenues from 1991–1995, payable in the June distribution. An additional $200,000 ($0.033 per Unit) related to 1996–1997 is expected in the September distribution.
- Future Development Impact: As part of the settlement, Cross Timbers Oil agreed to reduce its overriding royalty interest by half on newly drilled wells on the subject properties, which will correspondingly reduce the Trust's net profits interest in those new wells. Management believes this will not significantly impact estimated future net revenues from proved reserves.
- Tax Credit: The Trust receives income from coal seam gas wells qualifying for a Section 29 tax credit. The estimated credit for Q1 1997 is $0.05 per Unit.
- Concentration Risk: As of April 30, 1997, Cross Timbers Oil owned 20.3% of the outstanding Trust Units.
Investor Verification Checklist
- Verify the timing and receipt of the $460,000 and $200,000 settlement proceeds from Coastal Oil and Gas Corporation.
- Monitor the impact of the reduced royalty interest on new wells drilled on the San Juan Basin properties.
- Confirm the sustainability of current oil and gas prices, which drove the 100% revenue increase.
- Review the allocation formula for oil and gas sales volumes, as changes in prices and costs can cause disproportionate fluctuations in volumes allocated to the Trust.
- Check for updates on the Section 29 coal seam gas tax credit calculation for the full year 1997.