Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2011, for Cross Timbers Royalty Trust, a Texas grantor trust. The trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). As of July 1, 2011, there were 6,000,000 units of beneficial interest outstanding. The trust is managed by Bank of America, N.A., as trustee.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 |
|---|---|---|
| Net Profits Income | $4,569,004 | $8,919,857 |
| Total Income | $4,569,053 | $8,920,000 |
| Administration Expense | $138,923 | $265,696 |
| Distributable Income | $4,430,130 | $8,654,304 |
| Distributable Income Per Unit | $0.738355 | $1.442384 |
| Cash and Short-Term Investments | $1,916,703 (as of June 30, 2011) | |
| Net Profits Interests (Net Book Value) | $13,959,258 (as of June 30, 2011) | |
| Distributions Payable | $1,916,712 (as of June 30, 2011) |
Note: The trust has no debt. Liquidity is maintained through cash reserves and short-term investments.
Material Changes vs. Prior Period
- Quarterly Comparison (Q2 2011 vs. Q2 2010): Net profits income decreased 1% to $4.57 million. This decline was driven by lower natural gas prices (-$0.6 million) and decreased sales volumes (-$0.4 million), partially offset by higher oil prices (+$0.8 million) and reduced production expenses (+$0.1 million). Distributable income per unit decreased slightly to $0.738355 from $0.747234.
- Semi-Annual Comparison (6 Months 2011 vs. 6 Months 2010): Net profits income increased 1% to $8.92 million. Higher oil prices (+$1.1 million) and reduced taxes/transportation costs (+$0.1 million) offset lower gas prices (-$0.7 million) and decreased gas volumes (-$0.5 million). Distributable income per unit increased to $1.442384 from $1.430330.
- Production Volumes: Underlying oil sales volumes decreased 6% in Q2 due to natural decline. Gas sales volumes decreased 5% in Q2 and 8% for the six-month period, primarily due to natural decline and timing of cash receipts.
- Prices: Average oil prices increased 25% in Q2 to $93.79/Bbl. Average gas prices decreased 16% in Q2 to $7.04/Mcf.
Outlook, Risks, and Management Commentary
- Price Volatility: Management notes that both oil and gas prices are expected to remain volatile. Oil prices are influenced by global demand, while gas prices are affected by North American production levels, weather, and storage.
- Production Decline: The underlying properties experience a natural production decline rate of approximately 6% to 8% annually. This is partially offset by new wells and workovers.
- Tax Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients of oil and gas proceeds. The trustee currently believes withholding is not required, but regulatory changes could reduce distributions if withholding becomes mandatory.
- Forward-Looking Statements: The filing includes standard disclaimers regarding future plans, predictions, and market conditions, noting that actual results may differ due to risks detailed in the 2010 Annual Report.
Investor Verification Checklist
- Verify the impact of natural production decline (6-8% annually) on future distributable income.
- Monitor NYMEX futures prices for oil and natural gas, as these directly correlate with the trust's revenue lag (2 months for oil, 3 months for gas).
- Review state tax legislation updates regarding withholding requirements for nonresident royalty recipients.
- Confirm the timing of cash receipts versus production dates, as this affects the correlation between current market prices and reported income.
- Check for any changes in development costs for the 75% net profits interest properties, which recently saw a 53% increase in development costs for the six-month period.