Cross Timbers Royalty Trust - Q1 2006 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2006. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties owned by XTO Energy Inc. The trust distributes net proceeds from these properties to unitholders. As of April 1, 2006, there were 6,000,000 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Net Profits Income | $7,149,251 | $4,462,096 |
| Total Income | $7,164,533 | $4,465,615 |
| Distributable Income | $7,051,752 | $4,340,544 |
| Distributable Income Per Unit | $1.175292 | $0.723424 |
| Administration Expense | $112,781 | $125,071 |
| Cash and Short-Term Investments | $2,398,638 | $2,111,521 |
| Trust Corpus (Net) | $20,778,749 | $21,204,723 |
Note: The filing does not report traditional debt or liquidity ratios as the trust operates on a pass-through basis with no operating debt.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 60% year-over-year, driven by a 30% increase in average oil prices ($54.78/Bbl vs. $42.25/Bbl) and a 33% increase in average gas prices ($9.29/Mcf vs. $6.96/Mcf).
- Volume Changes: Underlying oil sales volumes increased 1%, while gas sales volumes increased 32% (partially due to receipts from prior period gas sales from new wells; excluding these, volumes declined ~9% due to natural decline).
- Cost Increases: Total costs rose 57%. Development costs surged 158% due to increased activity on properties underlying the 75% net profits interests. Taxes and transportation costs increased 78% due to higher revenues.
- Trust Corpus: The trust corpus decreased by $425,974 due to amortization of net profits interests, offset by distributable income and distributions.
Outlook, Risks, and Contingencies
- Reversion Agreement Risk: Certain properties are subject to a reversion agreement where XTO Energy must transfer 25% of its interest to a third party upon "payout." XTO Energy indicated payout may occur within the next year due to higher prices and development, which would reduce monthly distributions by approximately 5%.
- Asset Sale: In January 2006, XTO Energy announced it would consider selling the underlying properties, contingent on structuring a tax-efficient transaction.
- Market Volatility: Management notes that oil and gas prices are expected to remain volatile, influenced by global demand, supply shortages, and geopolitical instability.
- Tax Contingency: While XTO Energy currently believes the trust is not subject to state income tax withholding, regulations could change, potentially reducing distributions.
Investor Verification Checklist
- Verify the timing of the "payout" under the reversion agreement and the specific properties affected to assess the potential 5% distribution reduction.
- Monitor XTO Energy's progress regarding the potential sale of the underlying properties.
- Track NYMEX futures prices versus the trust's realized prices, noting the trust typically averages 10-13% below NYMEX benchmarks.
- 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 net profits interests.