Cross Timbers Royalty Trust - Q1 2014 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2014. Cross Timbers Royalty Trust is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The trust holds 90% net profits interests in royalty/overriding royalty interests and 75% net profits interests in working interests located in Texas, Oklahoma, and New Mexico. As of April 1, 2014, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net Profits Income | $4,386,145 | $2,792,598 |
| Total Income | $4,386,202 | $2,792,659 |
| Distributable Income | $4,203,960 | $2,659,476 |
| Distributable Income Per Unit | $0.700660 | $0.443246 |
| Administration Expense | $182,242 | $133,183 |
| Cash and Short-term Investments | $1,568,332 | $1,143,391 |
| Net Profits Interests (Net Book Value) | $11,595,798 | $11,791,689 |
| Amortization of Net Profits Interests | $(195,891) | $(150,979) |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased by 57% ($1.59 million) compared to Q1 2013.
- Price Increases: Average oil sales price rose 14% to $90.14 per Bbl, and gas sales price rose 20% to $6.94 per Mcf.
- Volume Increases: Oil sales volumes from underlying properties increased 22%, and gas volumes increased 7%.
- One-Time Proceeds: Q1 2014 included a one-time purchaser refund of $519,071 (net to trust: $467,164) related to coal seam gas wells in the San Juan Basin, including $210,242 in interest.
- Cost Variance: Development costs increased 44% due to timing of expenditures and increased activity. Production expenses decreased 8%.
- Excess Costs: Unlike Q1 2013, where excess costs remained, Q1 2014 saw full recovery of excess costs incurred in January 2014 by February 2014.
Outlook, Risks, and Unusual Items
- Trustee Resignation: U.S. Trust, Bank of America Private Wealth Management notified unitholders on January 9, 2014, of its intent to resign. Southwest Bank has been nominated as the successor trustee, with a meeting scheduled for May 23, 2014. The resignation is effective May 30, 2014, subject to conditions.
- Market Risk: Oil and gas prices remain volatile. The filing notes that future prices are subject to market conditions, weather, and economic factors.
- 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 distributions if withholding becomes mandatory.
- Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.
Investor Verification Checklist
- Verify the impact of the one-time $467,164 purchaser refund on the reported Q1 2014 distributable income per unit.
- Confirm the status and timeline of the trustee transition from U.S. Trust to Southwest Bank.
- Monitor future oil and gas price volatility, as revenues are highly sensitive to NYMEX pricing.
- Review the "Excess Costs" mechanism for the Texas working interest to understand potential future distribution reductions if costs exceed revenues.
- Check for any updates on state tax withholding regulations that could affect net distributions to unitholders.