Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, for Cross Timbers Royalty Trust, a Texas trust holding net profits interests in oil and gas properties owned by XTO Energy Inc. The trust holds 6,000,000 units of beneficial interest. Financial statements are prepared on a modified cash basis, not GAAP, as permitted for royalty trusts.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Net Profits Income | $5,222,836 | $9,922,022 |
| Total Income | $5,232,876 | $9,941,834 |
| Distributable Income | $5,076,960 | $9,625,410 |
| Distributable Income Per Unit | $0.846160 | $1.604235 |
| Administration Expense | $155,916 | $316,424 |
| Cash and Short-Term Investments | $1,778,101 (as of June 30, 2007) | |
| Net Profits Interests (Net) | $19,024,493 (as of June 30, 2007) |
Material Changes vs. Prior Period
- Quarterly Comparison: Net profits income remained relatively flat ($5.22M vs. $5.22M in Q2 2006). Increased gas sales volumes and lower production expenses were offset by lower gas prices and higher development costs.
- Six-Month Comparison: Net profits income decreased 20% to $9.92M from $12.37M in the prior year period. This decline was driven by lower oil and gas prices, decreased sales volumes, and significantly higher development costs.
- Costs: Development costs surged 389% for the quarter and 179% for the six-month period due to increased activity in Texas and Oklahoma properties. Conversely, production expenses decreased by 12% and 11% respectively.
- Prices: Average oil prices decreased slightly (1% QoQ, 3% YoY), while gas prices dropped 7% QoQ and 15% YoY.
Outlook, Risks, and Unusual Items
- Reversion Agreement Impact: A reversion agreement triggered a payout effective with the July 2007 distribution. XTO Energy will transfer 25% of its interest in certain properties to a third party, reducing future trust distributions by approximately 5%.
- Tax Contingencies: The trust is exempt from the new Texas margin tax as a "passive entity," but business entity unitholders may be required to include trust revenues in their own margin tax computations.
- Market Risk: Oil and gas prices remain volatile. Recent trust oil prices averaged 12% lower than NYMEX, while gas prices were approximately 14% higher than NYMEX.
- Guidance: The filing contains no specific forward-looking financial guidance beyond the noted impact of the reversion agreement and general market volatility.
Investor Verification Checklist
- Verify the 5% reduction in future distributions resulting from the reversion agreement payout effective July 2007.
- Monitor the impact of rising development costs on net proceeds, particularly for the 75% net profits interests.
- Review the allocation of oil and gas sales volumes, as changes in prices and costs can cause disproportionate fluctuations in volumes allocated to the trust.
- Confirm the status of state tax withholding requirements for nonresident recipients, as regulations are subject to change.
- Assess the sustainability of gas sales volumes given the natural production decline noted in the report.