Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties operated by XTO Energy Inc. The trust receives 90% of net proceeds from royalty/overriding royalty interests and 75% from working interests. As of April 1, 2009, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Profits Income | $2,805,299 | $6,885,854 |
| Total Income | $2,805,371 | $6,892,332 |
| Distributable Income | $2,669,790 | $6,766,278 |
| Distributable Income Per Unit | $0.444965 | $1.127713 |
| Administration Expense | $135,581 | $126,054 |
| Cash and Short-Term Investments | $707,868 | $1,514,797 |
| Trust Corpus | $17,070,957 | $17,255,761 |
Production & Pricing (Q1 2009 vs Q1 2008):
- Oil Sales Volume: 56,631 Bbls (2% decrease)
- Gas Sales Volume: 504,727 Mcf (Flat)
- Average Oil Price: $41.50/Bbl (52% decrease from $85.60)
- Average Gas Price: $6.12/Mcf (42% decrease from $10.55)
Material Changes
Distributable income decreased by approximately 61% compared to the prior year quarter. The primary drivers for this decline include:
- Commodity Prices: Significant drops in oil and gas prices due to the U.S. recession, global economic slowdown, and rising crude supplies.
- One-Time Items: Q1 2008 included a lawsuit settlement of $827,446 (net to trust: $744,702) related to underpaid royalties, which is absent in Q1 2009.
- Costs: Production expenses increased 62% due to higher overhead, maintenance, and CO2 injection costs. However, excess costs on Texas and Oklahoma working interests ($440,888 total) were absorbed by those specific conveyances and did not reduce net proceeds from other properties.
Outlook, Risks, and Contingencies
Management Commentary: The Trustee expects excess costs to continue over the near term due to downward pressure on oil prices, resulting in lower monthly distributions. Oil and gas prices are expected to remain volatile.
Risks and Contingencies:
- Cash Reserves: Cash held by the trustee is invested in Bank of America, N.A. certificates of deposit. While backed by the bank's credit, only $250,000 is insured by the FDIC. Unitholders must assess the creditworthiness of the bank independently.
- Tax Withholding: Several states have enacted legislation requiring income tax withholding from nonresident recipients. While XTO Energy currently believes the trust is not subject to these requirements, regulatory changes could reduce distributions.
- Legal Proceedings: Various lawsuits exist regarding underlying properties, but XTO Energy does not believe they will have a material effect on the trust's financial position.
Investor Verification Checklist
- Verify the current credit rating and financial stability of Bank of America, N.A., given the concentration of trust cash reserves.
- Monitor commodity price trends (NYMEX oil and gas futures) as they directly correlate to future distributable income.
- Review updates on state tax withholding legislation that could impact net distributions to nonresident unitholders.
- Track the status of excess costs on Texas and Oklahoma working interests to determine if they will continue to be isolated or impact other conveyances.