Cross Timbers Royalty Trust - Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties owned by XTO Energy Inc. The trust receives 90% of net proceeds from royalty interests and 75% from working interests. As of April 1, 2010, there were 6,000,000 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Profits Income | $4,269,080 | $2,805,299 |
| Total Income | $4,269,134 | $2,805,371 |
| Distributable Income | $4,098,576 | $2,669,790 |
| Distributable Income Per Unit | $0.683096 | $0.444965 |
| Administration Expense | $170,558 | $135,581 |
| Cash and Short-Term Investments | $1,533,390 | $1,067,595 |
| Net Profits Interests (Net Book Value) | $15,763,725 | $16,188,498 |
| Distributions Declared | $4,098,576 | $2,669,790 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 52% year-over-year, driven primarily by a 71% increase in average oil prices ($70.87/Bbl vs. $41.50/Bbl) and a 13% increase in gas prices ($6.94/Mcf vs. $6.12/Mcf).
- Production Volumes: Oil sales volumes from underlying properties decreased 11% due to natural decline, while gas volumes increased 3% due to new wells and workovers.
- Cost Reductions: Production expenses decreased 29% and development costs dropped 77% compared to Q1 2009.
- Excess Costs: Unlike Q1 2009, where excess costs reduced income, Q1 2010 had no excess costs. Prior excess costs from Texas and Oklahoma working interests were fully recovered in 2009.
- Trust Corpus: The trust corpus decreased by $424,773 due to amortization of net profits interests, offset by distributable income and distributions.
Outlook, Risks, and Management Commentary
- XTO Energy Merger: XTO Energy entered a definitive merger agreement with Exxon Mobil Corporation in December 2009. The merger is expected to close in Q2 2010 and is not anticipated to materially affect the trust's distributable income or liquidity.
- Price Volatility: Management notes that oil and gas prices remain volatile. While prices rose in early 2010, gas prices weakened in February and March due to oversupply concerns.
- Tax Contingency: Several states have enacted legislation requiring income tax withholding from nonresident recipients. XTO Energy currently advises the trust is not subject to these requirements, but regulatory changes could reduce future distributions.
- Forward-Looking Statements: Future distributions depend on production volumes, commodity prices, and costs, all of which are subject to market risks.
Investor Verification Checklist
- Verify the status and expected closing date of the XTO Energy/Exxon Mobil merger.
- Monitor commodity price trends (NYMEX oil and gas futures) given the trust's sensitivity to price fluctuations.
- Review state tax legislation updates regarding withholding requirements for nonresident royalty recipients.
- Confirm the recovery status of any future excess costs on working interest properties.
- Check the amortization schedule of net profits interests to understand the declining trust corpus over time.