Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2003, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties operated by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. As of May 1, 2003, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Profits Income | $2,662,646 | $1,879,550 |
| Total Income | $2,663,637 | $1,880,476 |
| Distributable Income | $2,595,228 | $1,804,746 |
| Distributable Income Per Unit | $0.432538 | $0.300791 |
| Administration Expense | $68,409 | $75,730 |
| Cash and Short-Term Investments | $1,058,414 | $1,248,735 |
| Trust Corpus (Net) | $26,079,477 | $26,556,533 |
Note: The Trust has no debt. Liabilities consist solely of distributions payable to unitholders ($1,058,826 as of March 31, 2003).
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 42% year-over-year, driven primarily by significantly higher oil and gas prices.
- Price Increases: Average oil sales price rose 56% to $26.89 per barrel. Average gas sales price rose 54% to $3.90 per Mcf.
- Volume Decline: Despite price gains, production volumes declined. Oil sales from underlying properties fell 4% (79,527 Bbls vs. 83,111 Bbls), and gas sales fell 16% (652,435 Mcf vs. 780,720 Mcf) due to natural production decline.
- Cost Variance: Total costs increased 24% to $1.61 million. Taxes and transportation costs rose 120% due to higher product prices and property taxes. Conversely, development costs dropped 82% due to reduced drilling activity and tertiary injectant costs.
- Excess Costs: Unlike Q1 2002, where costs exceeded revenues for one conveyance, there were no excess costs in Q1 2003.
Outlook, Risks, and Commentary
- Market Conditions: Oil prices remain volatile due to the war in Iraq and anticipated resumption of Iraqi exports. OPEC agreed to increase production in February 2003 but tentatively agreed to cut production by 2 million barrels starting June 1, 2003.
- Gas Market: Gas prices have continued to rise in 2003 due to colder weather and low storage levels.
- Forward-Looking Statements: The Trustee and XTO Energy caution that future expectations regarding production, costs, and prices are subject to risks and uncertainties, including market volatility and operational factors.
- Controls: The Trustee concluded that disclosure controls and procedures are effective.
Investor Verification Checklist
- Verify the correlation between NYMEX futures prices and the Trust's actual realized prices (Trust oil prices averaged ~$3.00/Bbl lower than NYMEX).
- Monitor OPEC production decisions and geopolitical stability in the Middle East, which directly impact the Trust's revenue.
- Review the natural production decline rates of the underlying properties to assess long-term volume sustainability.
- Confirm the status of development costs on the 75% net profits interests, as these are subject to production and development expenses.
- Check for any future "excess costs" scenarios where costs might exceed revenues for specific conveyances, requiring recovery from future proceeds.