Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). The trust holds 6,000,000 units of beneficial interest outstanding as of April 1, 2011. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Profits Income | $4,350,853 | $4,269,080 |
| Total Income | $4,350,947 | $4,269,134 |
| Administration Expense | $126,773 | $170,558 |
| Distributable Income | $4,224,174 | $4,098,576 |
| Distributable Income Per Unit | $0.704029 | $0.683096 |
| Cash and Short-Term Investments | $1,445,207 | $1,413,665 |
| Net Profits Interests (Net) | $14,241,961 | $14,521,347 |
| Trust Corpus | $14,241,961 | $14,521,347 |
Production and Pricing (Underlying Properties):
- Oil Sales Volume: 52,829 Bbls (5% increase vs. prior year).
- Gas Sales Volume: 468,436 Mcf (10% decrease vs. prior year).
- Average Oil Price: $79.31 per Bbl (12% increase vs. prior year).
- Average Gas Price: $6.69 per Mcf (4% decrease vs. prior year).
Material Changes vs. Prior Period
Net profits income increased by 2% ($81,773) compared to the first quarter of 2010. This increase was driven by:
- Positive Factors: Higher oil prices (+$0.3M), increased oil production (+$0.2M), and decreased taxes/transportation costs (-$0.1M).
- Negative Factors: Decreased gas production (-$0.3M), lower gas prices (-$0.1M), and increased development costs (+$0.1M).
Administration expenses decreased 26% primarily due to the timing of expenditures. Development costs surged 174% due to increased activity on Texas and Oklahoma properties underlying the 75% net profits interests.
Outlook, Risks, and Contingencies
Outlook: Management notes that oil and gas prices are expected to remain volatile. The natural production decline rate on underlying properties is approximately 6% to 8% annually. Future distributions depend on commodity prices, production volumes, and costs.
Risks and Contingencies:
- State Tax Withholding: Several states have enacted legislation requiring income tax withholding from nonresident recipients of oil and gas proceeds. While XTO Energy currently advises the trust is not subject to these requirements, regulatory changes could reduce distributions to unitholders.
- Market Risk: No material changes in market risks were reported compared to the 2010 Annual Report.
Investor Verification Checklist
- Verify the impact of the 174% increase in development costs on future net proceeds.
- Monitor state tax legislation regarding withholding requirements for nonresident royalty trust recipients.
- Track the natural production decline rate (6-8% annually) against any new development activity.
- Review the lag time between production and income recognition (oil: ~2 months; gas: ~3 months).
- Confirm the allocation formula for net profits interests, which shifts based on commodity prices and expense levels.