Cross Timbers Royalty Trust - Q1 2012 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2012. Cross Timbers Royalty Trust is a fixed investment trust holding net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). The trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties located in Texas, Oklahoma, and New Mexico. As of April 1, 2012, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net Profits Income | $4,376,980 | $4,350,853 |
| Total Income | $4,377,066 | $4,350,947 |
| Administration Expense | $127,842 | $126,773 |
| Distributable Income | $4,249,224 | $4,224,174 |
| Distributable Income Per Unit | $0.708204 | $0.704029 |
| Cash and Short-Term Investments | $1,321,870 | $1,213,231 |
| Net Profits Interests (Net Book Value) | $13,188,818 | $13,415,740 |
| Amortization of Net Profits Interests | $(226,922) | $(279,386) |
Material Changes vs. Prior Period
Net profits income increased by 1% ($26,127) compared to the first quarter of 2011. This increase was driven by the following factors:
- Positive Drivers: Higher oil and gas sales prices contributed approximately $1.0 million to income. Decreased development costs contributed approximately $0.1 million.
- Negative Drivers: Decreased oil and gas production volumes reduced income by approximately $0.8 million. Increased production expenses reduced income by approximately $0.2 million.
Production Volumes: Oil sales volumes decreased 7% and gas sales volumes decreased 14% year-over-year, primarily due to natural production decline (estimated at 6% to 8% annually).
Prices: Average oil prices increased 18% to $93.41 per barrel. Average gas prices increased 11% to $7.41 per Mcf.
Costs: Production expenses increased 29% due to higher repairs, maintenance, and power/fuel costs. Development costs decreased 46% due to reduced activity on Texas and Oklahoma properties.
Outlook, Risks, and Contingencies
Outlook: Management notes that oil and gas prices are expected to remain volatile. The trust's income is subject to natural production decline rates of 6% to 8% per year. Future distributions depend on commodity prices, production volumes, and costs deducted by XTO Energy.
Risks and Contingencies:
- State Tax Withholding: 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.
- Market Risk: The trust is exposed to fluctuations in oil and natural gas prices, which directly impact net profits income.
- Depletion: The trust corpus is reduced by amortization of net profits interests on a unit-of-production basis.
Investor Verification Checklist
- Verify the 1% increase in net profits income despite a 7% decline in oil volumes and 14% decline in gas volumes, confirming the offsetting impact of higher commodity prices.
- Review the 29% increase in production expenses to understand the specific drivers (repairs, maintenance, power) and their sustainability.
- Confirm the 46% decrease in development costs and assess if this indicates a long-term reduction in capital activity or a temporary lull.
- Monitor state tax legislation regarding withholding on nonresident oil and gas proceeds, as this could materially impact future distributions.
- Check the amortization rate ($226,922 for the quarter) against the remaining trust corpus to estimate the remaining life of the trust.