Cross Timbers Royalty Trust 2013 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust is a Texas express trust created in 1991, holding defined net profits interests (90% in royalty/overriding royalty interests and 75% in working interests) in oil and gas properties located in Texas, Oklahoma, and New Mexico. The underlying properties are owned by XTO Energy Inc., a wholly-owned subsidiary of Exxon Mobil Corporation. The trust has no employees; administrative functions are performed by the trustee, U.S. Trust, Bank of America Private Wealth Management (Bank of America, N.A.). The reporting period covers the fiscal year ended December 31, 2013. As of February 14, 2014, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
- Net Profits Income: $14,290,356 for 2013 (down 6% from 2012).
- Distributable Income: $13,887,594 for 2013.
- Distributions per Unit: $2.314599 for 2013 (down from $2.481598 in 2012).
- Total Assets: $12,935,109 as of December 31, 2013, consisting primarily of cash/short-term investments ($1.14M) and net profits interests ($11.79M).
- Production Volumes (Underlying Properties): 208,347 Bbls of oil and 1,641,215 Mcf of gas.
- Average Sales Prices: $89.79 per Bbl for oil and $6.32 per Mcf for gas.
- Development Costs: $3,481,306 (up 134% from 2012 due to increased activity).
- Proved Reserves: 1,000,000 Bbls of oil and 20,722,000 Mcf of gas allocated to the trust.
Material Changes vs. Prior Period
Net profits income decreased by approximately 6% compared to 2012. This decline was primarily driven by higher development costs ($1.5 million increase) and decreased gas production volumes ($1.3 million impact). These negative factors were partially offset by higher natural gas prices ($0.9 million increase) and increased oil production ($0.8 million increase). Gas sales volumes decreased 12% year-over-year due to natural production decline and timing of cash receipts, while oil sales volumes increased 5%. Total costs deducted from net proceeds rose 17% to $12.7 million, largely attributable to the spike in development costs on non-operated Texas and Oklahoma properties.
Outlook, Risks, and Management Commentary
- Trustee Resignation: On January 9, 2014, the current trustee (U.S. Trust) notified unitholders of its intent to resign, effective May 30, 2014, subject to conditions. Southwest Bank is nominated as the successor trustee.
- Price Volatility: The trust's income is highly sensitive to oil and natural gas prices. Management notes that prices are expected to remain volatile. Future net cash flows are estimated using 12-month average prices.
- Development Costs: Budgeted development costs for 2014 are approximately $2.4 million, with $3.6 million budgeted for 2015. Higher development costs on the 75% net profits interests directly reduce distributable income.
- Depleting Assets: The trust holds interests in depleting assets with an average reserve-to-production index of approximately 12 years. Distributions include a return of capital component.
- Excess Costs: While costs exceeded revenues on the Texas working interest in several months during 2013, all excess costs were fully recovered by the end of the year. No excess costs remained at December 31, 2013.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, and expenses when paid.
Investor Verification Checklist
- Verify the appointment of Southwest Bank as the new trustee and the effective date of the transition.
- Monitor oil and natural gas price trends, as they directly dictate net profits income and distribution levels.
- Review actual development costs for 2014 against the budgeted $2.4 million to assess potential impact on distributions.
- Confirm the status of the Texas working interest excess costs to ensure no new deficits arise that could delay income.
- Assess the impact of the trust's depleting asset nature on long-term distribution sustainability.