Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2012, for Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust is taxed as a grantor trust, meaning unitholders are taxed directly on their share of income. As of July 1, 2012, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Net Profits Income | $3,961,296 | $8,338,276 |
| Distributable Income | $3,823,242 | $8,072,466 |
| Distributable Income Per Unit | $0.637207 | $1.345411 |
| Administration Expense | $138,130 | $265,972 |
| Cash and Short-Term Investments | $1,275,486 (as of June 30, 2012) | |
| Net Profits Interests (Net Book Value) | $12,975,405 (as of June 30, 2012) | |
| Distributions Payable | $1,275,510 (as of June 30, 2012) |
The filing does not provide specific data on debt or liquidity ratios beyond cash balances, as the Trust operates on a modified cash basis and distributes all net income.
Material Changes vs. Prior Period
- Quarter-over-Quarter (Q2 2012 vs. Q2 2011): Net profits income decreased by 13% ($607,708). This decline was driven by lower gas prices ($0.3 million), increased development costs ($0.2 million), and decreased gas production ($0.1 million).
- Six-Month Comparison (YTD 2012 vs. YTD 2011): Net profits income decreased by 7% ($581,581). The decrease resulted from lower oil and gas production volumes ($0.8 million) and increased production expenses ($0.4 million), partially offset by higher oil prices ($0.7 million).
- Production Volumes: Oil sales volumes were relatively flat for the quarter but down 4% for the six-month period due to natural decline. Gas sales volumes decreased 5% for the quarter and 9% for the six-month period.
- Costs: Development costs surged 277% for the quarter and 65% for the six-month period due to timing of expenditures and increased activity on non-operated properties.
Outlook, Risks, and Management Commentary
- Price Volatility: Management notes that oil and gas prices are expected to remain volatile. Average oil prices increased 11% year-to-date, while gas prices decreased 1% year-to-date.
- Production Decline: The estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
- Tax Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients of oil and gas proceeds. While the Trustee currently believes withholding is not required, regulatory changes could reduce distributions if withholding becomes mandatory.
- Forward-Looking Statements: The Trustee assumes no duty to update forward-looking statements regarding future production, costs, or prices.
Investor Verification Checklist
- Verify the impact of the 6-8% annual natural production decline on future distributable income.
- Monitor development costs, which increased significantly (277% QoQ), to assess if this is a temporary timing issue or a sustained increase in capital activity.
- Review state tax withholding regulations in Texas, Oklahoma, and New Mexico to evaluate potential risks to net distributions.
- Confirm the timing lag between production and income receipt (oil: ~2 months; gas: ~3 months) when analyzing current price impacts.
- Check the amortization of net profits interests ($440,335 for six months) to understand the reduction in Trust Corpus.