Cross Timbers Royalty Trust - 10-Q Summary (Q3 2015)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2015, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). The Trust is structured as a grantor trust, distributing all net income to unitholders. As of October 1, 2015, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | YTD 9M 2015 | YTD 9M 2014 |
|---|---|---|---|---|
| Net Profits Income | $1,894,473 | $4,672,606 | $6,570,157 | $12,918,239 |
| Distributable Income | $1,760,664 | $4,537,620 | $6,063,282 | $12,507,834 |
| Distributable Income Per Unit | $0.293444 | $0.756270 | $1.010547 | $2.084639 |
| Administration Expense | $133,817 | $135,267 | $506,906 | $410,808 |
| Cash and Short-Term Investments | $691,127 | $1,278,294 | $691,127 | $1,278,294 |
| Net Profits Interests (Net Book Value) | $10,676,288 | $10,994,298 | $10,676,288 | $10,994,298 |
| Expense Reserve | $125,000 | $0 | $125,000 | $0 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 59% in Q3 2015 and 49% for the nine-month period compared to 2014. This was primarily driven by a significant drop in oil and gas prices (oil down ~43%, gas down ~42% in Q3) and decreased gas production volumes.
- Production Volumes: Oil sales volumes from underlying properties increased slightly (1% in Q3, 7% YTD) due to new wells and workovers, partially offset by natural decline. Gas sales volumes decreased (14% in Q3, 12% YTD) due to natural decline and timing of cash receipts.
- Excess Costs: Cumulative excess costs (where costs exceeded revenues on specific working interest properties) totaled $1,723,707 ($1,292,780 net to the Trust) as of September 30, 2015. These costs must be recovered from future net proceeds of the specific conveyances before distributions can be made from those properties.
- Liquidity: Cash and short-term investments decreased by approximately $587,000 from year-end 2014 to Q3 2015. The Trust established a $125,000 expense reserve in Q3 2015 to cover estimated administrative expenses.
Outlook, Risks, and Management Commentary
- Price Volatility: Management notes that oil and gas prices remain volatile. The average NYMEX oil price for the following twelve months (as of Oct 21, 2015) was $48.31 per Bbl, and gas was $2.68 per MMBtu.
- Excess Cost Recovery: The Trust continues to recover excess costs from the Texas and Oklahoma working interest properties. Partial recoveries occurred in Q3 2015 due to decreased costs in August, but cumulative excess costs remain significant.
- Tax Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients. While the Trustee currently believes withholding is not required, regulatory changes could reduce future distributions if withholding becomes mandatory.
- Impairment: No impairment of assets was recognized as of September 30, 2015, despite low prices, as the Trustee does not view temporary price drops as a trigger for impairment testing.
Key Facts for Investor Verification
- Verify the current status of cumulative excess costs ($1.72M total) and the timeline for their recovery from future production, as this directly impacts future distributable income.
- Monitor oil and gas price trends relative to the Trust's break-even levels, given the 40-43% price decline in 2015.
- Confirm the production decline rate (estimated 6-8% annually) versus the impact of new wells and workovers on underlying property volumes.
- Review potential state tax withholding regulations in Texas, Oklahoma, and New Mexico that could affect net distributions to unitholders.
- Check the expense reserve balance ($125,000) to ensure it remains sufficient to cover administrative costs if net profits income declines further.