Cross Timbers Royalty Trust - Q1 2016 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2016. 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 (a subsidiary of Exxon Mobil Corporation). The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties located in Texas, Oklahoma, and New Mexico. There were 6,000,000 units of beneficial interest outstanding as of April 1, 2016.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net Profits Income | $2,706,106 | $2,824,371 |
| Total Income | $2,706,164 | $2,824,383 |
| Distributable Income | $2,180,982 | $2,565,990 |
| Distributable Income Per Unit | $0.363497 | $0.427665 |
| Administration Expense | $225,182 | $158,393 |
| Cash and Short-Term Investments | $1,311,478 | $969,700 (Dec 31, 2015) |
| Trust Corpus | $10,328,091 | $10,542,236 (Dec 31, 2015) |
| Expense Reserve | $575,000 | $275,000 (Dec 31, 2015) |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 4% year-over-year, primarily driven by a 42% drop in average oil prices ($36.16/Bbl vs. $62.80/Bbl) and a 27% drop in average gas prices ($4.15/Mcf vs. $5.71/Mcf).
- Volume Shifts: Oil sales volumes decreased 2% due to natural decline, while gas sales volumes increased 93% due to the timing of cash receipts related to prior production payments.
- Cost Reductions: Total costs decreased 22%. Production expenses fell 21% and development costs fell 40% due to reduced activity on non-operated properties.
- Excess Costs: Lower oil prices resulted in net excess costs of $508,361 for the quarter. Cumulative excess costs remaining to be recovered from future proceeds totaled $2,534,432 as of March 31, 2016.
- Reserve Increase: The Trustee increased the cash reserve for expenses by $300,000 during the quarter, raising the total reserve to $575,000.
Outlook, Risks, and Management Commentary
- Price Volatility: Management notes that oil and gas prices remain volatile. At April 21, 2016, NYMEX futures prices for the following twelve months were $45.49/Bbl for oil and $2.62/MMBtu for gas.
- Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.
- Excess Cost Recovery: Excess costs incurred in the Texas and Oklahoma working interest conveyances must be recovered from future net proceeds of those specific conveyances before distributions can be made from those sources.
- Tax Contingencies: While the Trustee currently believes state income tax withholding is not required, changes in state regulations could result in reduced distributions if withholding becomes mandatory.
- Impairment: No impairment of assets was recognized as of March 31, 2016, as the Trustee does not view temporary price drops as a trigger event for impairment testing.
Investor Verification Checklist
- Verify the impact of cumulative excess costs ($2.53 million) on future distributable income from Texas and Oklahoma working interests.
- Monitor NYMEX futures prices relative to the Trust's break-even levels, given the 42% drop in oil prices year-over-year.
- Review the timing of gas receipts, as the 93% volume increase was driven by delayed payments from prior periods rather than current production growth.
- Confirm the status of state tax withholding regulations in Texas, Oklahoma, and New Mexico to assess potential distribution reductions.
- Track the expense reserve balance ($575,000) to ensure it remains sufficient to cover Trustee obligations without impacting distributions.