Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2013, for Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust is taxed as a grantor trust, meaning unitholders are taxed directly on their share of income. As of July 1, 2013, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Net Profits Income | $3,225,021 | $6,017,619 |
| Distributable Income | $3,097,230 | $5,756,706 |
| Distributable Income Per Unit | $0.516205 | $0.959451 |
| Administration Expense | $127,847 | $261,030 |
| Cash and Short-Term Investments | $1,195,010 (as of June 30, 2013) | |
| Net Profits Interests (Net Book Value) | $12,206,851 (as of June 30, 2013) | |
| Amortization of Net Profits Interests | ($174,899) | ($325,878) |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 19% for the quarter and 28% for the six-month period compared to the same periods in 2012.
- Price Impact: Average oil sales prices dropped 13% to $84.65 per barrel (Q2) and 14% to $81.93 per barrel (YTD). Gas prices dropped 1% to $6.12 per Mcf (Q2) and 13% to $5.94 per Mcf (YTD).
- Volume Changes: Oil sales volumes from underlying properties increased 12% (Q2) and 2% (YTD). Gas sales volumes decreased 16% (Q2) and 9% (YTD).
- Cost Increases: Development costs surged 88% for the quarter and 182% for the six-month period due to timing of expenditures and increased activity on non-operated properties. Production expenses increased 6% (Q2) and 7% (YTD).
- Excess Costs: Lower oil prices and timing of cash expenditures in early 2013 caused costs to exceed revenues on Texas working interest properties. While partially recovered by June, remaining excess costs totaled $41,040 ($30,780 net to the trust) as of June 30, 2013.
Outlook, Risks, and Management Commentary
- Production Decline: The estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
- Market Volatility: Management notes that oil and gas prices are expected to remain volatile. Future income is heavily dependent on commodity prices and production volumes.
- Excess Cost Recovery: Excess costs incurred on specific conveyances must be recovered from future net proceeds of those specific conveyances before income is distributed to the Trust. These costs do not reduce proceeds from other conveyances.
- 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.
- Impairment: No impairment of the Trust's net profits interests was recognized as of June 30, 2013.
Investor Verification Checklist
- Verify the current NYMEX futures prices for oil and natural gas to assess potential future revenue volatility.
- Confirm the status of "excess costs" recovery on the Texas working interest properties, as this directly impacts near-term distributable income.
- Review the natural production decline rate (6-8%) against any new drilling or workover activity reported by XTO Energy.
- Monitor state tax legislation in Texas, Oklahoma, and New Mexico regarding withholding requirements for nonresident royalty recipients.
- Check the Trust's website for updated tax information forms (1099) and distribution schedules.