Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, 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 October 1, 2002, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 |
|---|---|---|
| Net Profits Income | $2,526,363 | $6,222,032 |
| Total Income | $2,527,831 | $6,225,360 |
| Distributable Income | $2,494,434 | $6,022,728 |
| Distributable Income Per Unit | $0.415739 | $1.003788 |
| Administration Expense | $33,397 | $202,632 |
| Cash and Short-Term Investments | $798,382 (as of Sep 30, 2002) | |
| Net Profits Interests (Net Book Value) | $27,295,991 (as of Sep 30, 2002) | |
| Distributions Payable | $798,924 (as of Sep 30, 2002) |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 27% for the quarter and 47% for the nine-month period compared to 2001. This was primarily driven by significantly lower natural gas prices.
- Price Volatility: Average gas sales prices dropped 36% for the quarter (to $3.05/Mcf) and 53% for the nine months (to $2.72/Mcf). Average oil prices decreased 19% for the nine-month period (to $20.84/Bbl) despite a slight 3% increase in the third quarter.
- Production Volumes: Oil sales volumes from underlying properties decreased 9% for the quarter and 2% for the nine months due to natural decline. Gas volumes decreased 3% for the quarter but increased 4% for the nine months.
- Costs: Total costs decreased 26% for the quarter and 27% for the nine months, largely due to lower taxes and reduced development costs. Development costs fell 80% for the quarter.
- Excess Costs: Excess costs incurred in Q1 2002 ($66,867) were fully recovered in Q2 2002. No excess costs were recorded in Q3 2002.
Outlook, Risks, and Commentary
- Market Conditions: Management notes that oil prices have been higher in recent months due to Middle East tensions, while gas prices remain volatile due to hurricane threats in the Gulf of Mexico and lower West Coast demand.
- Tax Credits: The Trust receives income from coal seam gas wells qualifying for Section 29 tax credits. The estimated credit for the nine months ended Sep 30, 2002, is $0.075 per unit. Congress is considering extending these credits beyond their December 31, 2002, expiration.
- Forward-Looking Statements: Future income is subject to risks including commodity price fluctuations, production declines, and changes in tax laws. The Trustee concluded that disclosure controls and procedures are effective.
Investor Verification Checklist
- Verify the impact of the Section 29 tax credit expiration on future unitholder tax liabilities and potential legislative extensions.
- Monitor NYMEX futures prices for oil and gas, as Trust prices typically trade at a discount to these benchmarks.
- Review the recovery of excess costs mechanism for the Texas 75% net profits interests to ensure no future carryforwards impact distributions.
- Confirm the amortization schedule of the net profits interests, which reduces the Trust Corpus directly.
- Assess the production decline rates of the underlying properties versus any new drilling or development activity by XTO Energy.