Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2005, 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. As of July 15, 2005, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
| Metric | Q2 2005 | Q2 2004 | YTD 2005 | YTD 2004 |
|---|---|---|---|---|
| Net Profits Income | $4,589,164 | $3,658,858 | $9,051,260 | $6,774,996 |
| Total Income | $4,593,466 | $3,659,971 | $9,059,081 | $6,776,537 |
| Distributable Income | $4,453,848 | $3,555,792 | $8,794,392 | $6,601,776 |
| Distributable Income Per Unit | $0.742308 | $0.592632 | $1.465732 | $1.100296 |
| Cash and Short-Term Investments | $1,558,092 | $1,435,478 | $1,558,092 | $1,435,478 |
| Trust Corpus (Net) | $21,967,298 | $22,847,694 | $21,967,298 | $22,847,694 |
Note: The Trust has no debt. Liabilities consist solely of distributions payable to unitholders ($1,559,718 as of June 30, 2005).
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 25% in Q2 2005 and 34% for the six-month period compared to 2004. This growth is primarily attributed to higher oil and gas sales prices.
- Price Increases: Average oil sales prices rose 42% (to $47.16/Bbl in Q2), and gas prices rose 23% (to $6.78/Mcf in Q2).
- Volume Trends: Oil sales volumes remained relatively flat (0% change in Q2, -1% YTD). Gas sales volumes declined 12% in Q2 and 7% YTD due to natural production decline and timing of cash receipts.
- Expense Variance: Administration expenses increased 34% in Q2 and 51% YTD, driven by the timing of expenditures and fees related to the 2004 audit of internal controls.
- Development Costs: Development costs decreased 49% in Q2 and 29% YTD due to the timing of activity on properties underlying the 75% net profits interests.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that oil prices reached record levels in July 2005 (exceeding $61.00/Bbl). Gas prices are expected to remain volatile, influenced by weather, the U.S. economy, and production levels.
- Forward-Looking Statements: The filing includes standard disclaimers regarding uncertainties in oil and gas prices, production volumes, and development costs.
- Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients. XTO Energy Inc. currently advises the Trust is not subject to these requirements, but regulations could change, potentially reducing distributions to unitholders.
- Controls: The Trustee concluded that disclosure controls and procedures are effective. No material changes in internal control over financial reporting occurred during the period.
Investor Verification Checklist
- Price Sensitivity: Verify the correlation between current NYMEX futures prices and the Trust's realized prices, noting the Trust's oil prices have recently averaged ~$5.30/Bbl lower than NYMEX.
- Production Decline: Monitor the natural decline in gas volumes (-12% in Q2) to assess long-term revenue sustainability absent new development.
- Tax Withholding Risk: Review state legislation updates regarding nonresident withholding on oil and gas proceeds, as this could directly impact net distributions.
- Amortization Impact: Note that the Trust Corpus is reduced by amortization of net profits interests ($880,396 for the six months ended June 30, 2005), which is charged directly to corpus rather than income.