Cross Timbers Royalty Trust - 2008 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust is an express trust created under Texas law, holding defined net profits interests (90% and 75%) in oil and gas properties owned by XTO Energy Inc. The trust has no employees; U.S. Trust, Bank of America Private Wealth Management serves as the trustee. The reporting period covers the fiscal year ended December 31, 2008. The trust's income is derived solely from net proceeds of production, which are distributed monthly to unitholders. Approximately 59% of 2008 net profits income and 77% of estimated proved reserves were attributable to natural gas.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Net Profits Income | $31,311,215 | $20,189,267 | $25,767,154 |
| Distributable Income | $30,942,420 | $19,805,724 | $25,448,178 |
| Distributions per Unit | $5.16 | $3.30 | $4.24 |
| Total Assets (Year-End) | $18,771,025 | $20,147,900 | $21,655,260 |
| Outstanding Units | 6,000,000 | 6,000,000 | 6,000,000 |
Reserves: As of December 31, 2008, total proved reserves were 849.3 thousand barrels of oil and 25,558.0 thousand Mcf of gas. The standardized measure of discounted future net cash flows from proved reserves was $64.47 million.
Liquidity: The trust holds cash reserves for distributions and contingencies, invested in federal obligations or bank certificates of deposit. The trust has no debt and no off-balance sheet arrangements.
Material Changes vs. Prior Period
- Revenue Increase: Net profits income increased 55% from 2007 to 2008, driven primarily by higher average sales prices for oil ($99.68/Bbl in 2008 vs. $59.70 in 2007) and natural gas ($11.70/Mcf in 2008 vs. $8.01 in 2007).
- Production Decline: Despite higher prices, production volumes declined. Total oil sales attributable to net profits interests dropped to 129,041 Bbls in 2008 from 143,067 Bbls in 2006. Gas sales dropped to 1,825,147 Mcf in 2008 from 2,329,603 Mcf in 2006.
- Reserve Revisions: Significant downward revisions to estimated reserves occurred in 2008 due to changes in year-end prices and costs, reducing the standardized measure of discounted future net cash flows by $64.6 million compared to the prior year's estimate.
- Excess Costs: Costs exceeded revenues on properties underlying the Texas working interest in January and February 2009, and on Oklahoma working interest properties in February 2009, creating carryforward deficits that will reduce future net proceeds until recovered.
Outlook, Risks, and Management Commentary
Outlook: The trust's future distributions are highly dependent on oil and natural gas prices and production volumes. The trust is a passive entity with no control over operations or development. XTO Energy may abandon properties if they are no longer commercially economic, which would terminate the related net profits interest.
Risks:
- Price Volatility: Fluctuations in commodity prices directly impact net proceeds and unit value.
- Depleting Assets: The underlying properties are depleting; without successful development projects, production will decline.
- Operational Control: Unitholders have no influence over operations. XTO Energy or other operators may abandon wells or transfer interests without unitholder consent.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Net profits income is recognized when received, not when produced.
- Termination: The trust will terminate if gross proceeds fall below $1 million for two consecutive years or if 80% of unitholders vote to sell the interests.
Unusual Items: A reversion agreement payout occurred in July 2007, reducing distributions by approximately 5%. The trust is not liable for production costs, but excess costs on 75% interests are carried forward, potentially delaying future income.
Investor Verification Checklist
- Verify current oil and natural gas prices and their impact on the trust's net proceeds calculation.
- Review the status of excess production costs carryforwards for Texas and Oklahoma working interests.
- Confirm the latest proved reserve estimates and the impact of price changes on the standardized measure of discounted future net cash flows.
- Monitor XTO Energy's development activities and any potential abandonment of underlying properties.
- Check for any changes in the trust's termination triggers (gross proceeds below $1 million for two consecutive years).