Cross Timbers Royalty Trust 10-K Summary (Year Ended Dec 31, 2005)
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; Bank of America, N.A. serves as the trustee. The reporting period covers the fiscal year ended December 31, 2005. The trust's income is derived solely from net proceeds of production from underlying properties in Texas, Oklahoma, and New Mexico, with approximately 65% of 2005 income attributable to natural gas.
Key Financial Metrics
| Metric | 2005 | 2004 | 2003 |
|---|---|---|---|
| Net Profits Income | $20,607,961 | $15,222,417 | $12,944,047 |
| Distributable Income | $20,267,436 | $14,924,058 | $12,688,746 |
| Distributions per Unit | $3.38 | $2.49 | $2.11 |
| Total Assets (Year-End) | $23,318,733 | $24,284,184 | $25,660,147 |
| Standardized Measure of Discounted Future Net Cash Flows | $140,610,000 | $100,591,000 | $93,855,000 |
Production and Pricing (2005): Total oil sales averaged 741 Bbls/day at $49.70/Bbl. Total gas sales averaged 6,171 Mcf/day at $7.76/Mcf. The trust holds 6,000,000 units of beneficial interest.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 35.4% from 2004 to 2005, driven primarily by significant increases in oil and natural gas prices and higher production volumes from the 75% net profits interests.
- Reserve Revisions: The standardized measure of discounted future net cash flows increased by approximately 40% year-over-year. This was largely due to revisions in price assumptions (year-end oil price of $57.75 vs. $40.25 in 2004) and gas prices ($7.70 vs. $5.14).
- Reversion Agreement Impact: For the first time, proved reserves were adjusted downward to reflect an anticipated payout under a reversion agreement, which transfers 25% of certain underlying royalties to a third party. This reduced estimated reserves by approximately 2% for gas and 6% for oil.
Outlook, Risks, and Management Commentary
Outlook and Guidance: The trust does not provide formal financial guidance. Distributions are highly dependent on commodity prices and production levels. XTO Energy announced in January 2006 that it is considering selling the underlying properties; any sale would be subject to the trust's net profits interests.
Key Risks:
- Commodity Price Volatility: Distributions are directly tied to oil and gas prices, which are subject to global market fluctuations.
- Depleting Assets: The underlying properties are depleting assets. Without significant development by operators, production will decline over time.
- Reversion Payout: Payout on the reversion agreement is expected within one year (as of 2005), which could reduce monthly distributions by approximately 5%.
- Operational Control: The trust and unitholders have no control over the operations or development of the underlying properties, which are managed by XTO Energy and other third-party operators.
Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Net profits income is recognized when received, not accrued.
Investor Verification Checklist
- Verify the current status of XTO Energy's potential sale of underlying properties and its impact on the trust's continuity.
- Monitor the timing of the "payout" event under the reversion agreement, which could reduce distributions by ~5%.
- Review current oil and natural gas prices against the year-end 2005 assumptions ($57.75/Bbl oil, $7.70/Mcf gas) to assess future distribution potential.
- Confirm the trust's cash reserves and liquidity position, as the trust has no debt but relies entirely on monthly net profits income.
- Check for any updates on the density drilling regulations in the San Juan Basin, which affect a significant portion of the trust's gas reserves.