Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2010, for Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc., which became a wholly owned subsidiary of Exxon Mobil Corporation on June 25, 2010. The Trust has 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis rather than GAAP.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net Profits Income | $4,599,294 | $2,389,205 | $8,868,374 | $5,194,504 |
| Distributable Income | $4,483,404 | $2,288,694 | $8,581,980 | $4,958,484 |
| Distributable Income Per Unit | $0.747234 | $0.381449 | $1.430330 | $0.826414 |
| Administration Expense | $115,978 | $100,593 | $286,536 | $236,174 |
| Cash and Short-term Investments | $1,321,053 | $1,067,595 | (Balance Sheet Data) | |
| Trust Corpus | $15,378,318 | $16,188,498 |
Liquidity & Debt: The Trust holds no debt. Cash and short-term investments totaled $1,321,053 as of June 30, 2010. Distributions payable to unitholders were $1,321,104.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 93% in Q2 2010 and 71% year-to-date compared to 2009.
- Price Drivers: Average oil sales prices rose 87% (Q2) and 78% (YTD) to $74.83 and $72.83 per barrel, respectively. Gas prices increased 56% (Q2) and 32% (YTD).
- Volume Trends: Oil sales volumes from underlying properties decreased 9% (Q2) and 10% (YTD) due to natural decline. Gas volumes increased slightly (1-2%) due to new wells and workovers.
- Costs: Total costs increased 16% (Q2) and 6% (YTD). Production expenses decreased 15% YTD due to lower overhead on non-operated properties. Development costs decreased 54% YTD.
- Excess Costs: Excess costs from 2009 (where costs exceeded revenues on Texas and Oklahoma working interests) were fully recovered by December 31, 2009. No excess costs impacted Q2 2010 income.
Outlook, Risks, and Commentary
- Merger Impact: The acquisition of XTO Energy by Exxon Mobil is not expected to materially affect the Trust's annual distributable income, financial position, or liquidity.
- Market Volatility: Management notes that oil and gas prices are expected to remain volatile. Recent trust oil prices averaged ~7% lower than NYMEX, while gas prices were ~52% higher than NYMEX.
- Tax Contingency: Several states have enacted legislation requiring income tax withholding from nonresident recipients. XTO Energy currently advises the Trust is not subject to these requirements, but regulations could change, potentially reducing distributions.
- Amortization: Net profits interests are amortized on a unit-of-production basis. Accumulated amortization was $45,722,131 as of June 30, 2010.
Investor Verification Checklist
- Verify the impact of the XTO Energy/Exxon Mobil merger on future operational costs and royalty calculations.
- Monitor state tax legislation regarding withholding requirements for nonresident royalty recipients.
- Track the natural production decline rates of underlying oil properties versus the offsetting effect of higher commodity prices.
- Review the specific allocation formula for net profits interests, as changes in costs or prices can disproportionately affect volumes allocated to the Trust.
- Confirm the Trust's cash reserves are sufficient to cover administration expenses and potential tax contingencies.