Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties operated by XTO Energy Inc. The trust receives 90% of net proceeds from royalty/overriding royalty interests and 75% from working interests. As of April 1, 2007, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Profits Income | $4,699,186 | $7,149,251 |
| Total Income | $4,708,958 | $7,164,533 |
| Distributable Income | $4,548,450 | $7,051,752 |
| Distributable Income Per Unit | $0.758075 | $1.175292 |
| Administration Expense | $160,508 | $112,781 |
| Cash and Short-Term Investments | $1,604,941 | $1,970,795 |
| Net Profits Interests (Net) | $19,346,823 | $19,679,502 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 34% year-over-year, driven by lower oil and gas sales volumes and prices.
- Volume Reductions: Oil sales volumes from underlying properties fell 6% (65,005 Bbls vs. 68,822 Bbls). Gas sales volumes dropped 24% (608,703 Mcf vs. 797,891 Mcf), though excluding prior-period timing effects, gas volumes actually increased ~10%.
- Price Decreases: Average oil price fell 6% to $51.69/Bbl. Average gas price fell 20% to $7.40/Mcf, largely due to the absence of hurricane-driven price spikes seen in Q1 2006.
- Expense Increases: Administration expenses rose 42% due to additional unitholder tax reporting costs. Development costs increased 80% due to increased activity on working interest properties.
Outlook, Risks, and Contingencies
- Texas Margin Tax: A new 1% margin tax on Texas activities began in 2007. Approximately 30% of the trust's income is from Texas. The trust currently assumes it is exempt as a "passive entity," but if this is denied, distributions could be reduced to cover the tax liability for the full year.
- Reversion Agreement: Payout on certain properties (triggering a transfer of 25% interest to a third party) could occur by the end of 2007. This event is expected to reduce monthly distributions by approximately 5%.
- Market Volatility: Oil and gas prices remain volatile. Recent NYMEX futures prices suggest potential price increases, but trust prices have historically traded at a discount to NYMEX for oil and a premium for gas.
- Production Decline: Natural production decline continues to offset gains from new wells and workovers.
Investor Verification Checklist
- Verify the trust's exemption status regarding the Texas 1% margin tax and potential impact on 2007 distributions.
- Monitor XTO Energy's updates on the timing of the "payout" event under the reversion agreement, which could reduce distributions by 5%.
- Review the correlation between NYMEX futures prices and actual trust realized prices, noting the historical discount/premium differentials.
- Assess the sustainability of production volumes given the natural decline rates versus new development activity.