Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. The Trust is managed by Bank of America, N.A., as Trustee. As of October 1, 2007, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Net Profits Income | $5,029,646 | $14,951,668 |
| Total Income | $5,040,734 | $14,982,568 |
| Distributable Income | $4,982,640 | $14,608,050 |
| Distributable Income Per Unit | $0.830440 | $2.434675 |
| Administration Expense | $58,094 | $374,518 |
| Cash and Short-Term Investments | $1,491,141 | (Balance Sheet Item) |
| Net Profits Interests (Net) | $18,729,137 | (Balance Sheet Item) |
Note: The Trust operates on a modified cash basis. There is no debt reported in the liabilities section; the primary liability is distributions payable to unitholders ($1,494,618 as of Sep 30, 2007).
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 19% for both the quarter and the nine-month period compared to 2006. This was driven by decreased oil and gas sales volumes and higher development costs, partially offset by higher gas prices in the quarter.
- Production Volumes:
- Oil: Sales volumes from underlying properties decreased 18% (quarter) and 9% (nine months) due to natural decline and the timing of cash receipts.
- Gas: Sales volumes from underlying properties decreased 20% (quarter) and 12% (nine months).
- Cost Increases: Development costs surged 284% for the quarter and 209% for the nine-month period due to increased activity on properties underlying the 75% net profits interests.
- Reversion Agreement Impact: Effective with the July 2007 distribution, a reversion agreement payout occurred, reducing distributions by approximately 5%.
Outlook, Risks, and Management Commentary
- Commodity Prices: Oil prices are expected to remain volatile, with recent NYMEX futures averaging $82.16 per Bbl. Gas prices are also expected to be volatile, influenced by weather and economic conditions.
- Tax Contingencies: The Trust is exempt from the Texas margin tax as a "passive entity," but business entity unitholders may be required to include their share of revenues in their own margin tax computations. State income tax withholding requirements for nonresidents remain a potential risk if regulations change.
- Production Decline: The Trust faces natural production decline, which is a primary driver of the volume decreases observed in 2007.
- Forward-Looking Statements: Management cautions that expectations regarding future distributions, production, and costs are subject to significant risks and uncertainties.
Investor Verification Checklist
- Verify the impact of the 5% distribution reduction resulting from the reversion agreement payout effective July 2007.
- Monitor development costs on the 75% net profits interests, which increased significantly and may continue to impact net proceeds.
- Review commodity price trends (Oil and Gas) and their correlation to the Trust's specific pricing differentials versus NYMEX.
- Confirm tax obligations for unitholders, particularly regarding the Texas margin tax and potential state withholding requirements.
- Assess the rate of natural production decline versus any new well activity or workovers that might offset volume losses.