Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2011. 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 October 1, 2011, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2011 | Nine Months Ended Sep 30, 2011 |
|---|---|---|
| Net Profits Income | $5,257,619 | $14,177,476 |
| Distributable Income | $5,165,922 | $13,820,226 |
| Distributable Income Per Unit | $0.860987 | $2.303371 |
| Administration Expense | $91,828 | $357,524 |
| Cash and Short-Term Investments | $1,617,927 | (Balance Sheet Item) |
| Net Profits Interests (Net Book Value) | $13,656,982 | (Balance Sheet Item) |
| Distribution Payable | $1,617,960 | (Balance Sheet Item) |
The filing does not provide specific data on debt or liquidity ratios beyond cash balances, as the trust structure generally does not incur debt for operations.
Material Changes vs. Prior Period
- Quarter-over-Quarter (Q3 2011 vs. Q3 2010): Net profits income increased 27% ($1.1 million). This was driven primarily by higher oil and gas prices (+$1.7 million impact), partially offset by decreased gas sales volumes (-$0.6 million impact).
- Year-to-Date (9 Months 2011 vs. 9 Months 2010): Net profits income increased 9% ($1.2 million). Higher oil prices contributed +$2.0 million, while decreased gas sales volumes reduced income by $1.0 million.
- Production Volumes: Oil sales volumes increased 4% for the quarter and 1% for the nine months. Gas sales volumes decreased 15% for the quarter and 10% for the nine months due to natural decline and timing of receipts.
- Prices: Average oil price increased 34% to $92.53/Bbl for the quarter. Average gas price increased 23% to $8.07/Mcf for the quarter.
- Costs: Development costs increased 33% for the nine-month period due to activity in Texas and Oklahoma properties.
Outlook, Risks, and Commentary
- Price Volatility: Management notes that oil and gas prices are expected to remain volatile. At the time of filing (October 13, 2011), NYMEX futures for the following 12 months were $85.59/Bbl for oil and $3.98/MMBtu for gas.
- Production Decline: The underlying properties experience a natural production decline rate of 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 filing includes standard disclaimers regarding future plans, production costs, and market conditions, noting that XTO Energy and the trustee assume no duty to update these statements.
Investor Verification Checklist
- Verify the current NYMEX futures prices for oil and natural gas to assess the impact of price volatility on future distributions.
- Review the specific production decline rates of the underlying properties to understand long-term revenue sustainability.
- Monitor state tax legislation in Texas, Oklahoma, and New Mexico regarding withholding requirements for nonresident royalty recipients.
- Confirm the allocation formula used to determine the trust's share of production volumes, as this changes inversely with product prices.
- Check for updates on development costs in the 75% net profits interest properties, which saw a 33% increase in the first nine months of 2011.