Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. As of October 1, 2006, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
Revenue and Income (Three Months Ended Sept 30, 2006):
- Net Profits Income: $6,178,866 (up 22% from prior year quarter).
- Total Income: $6,195,414 (includes $16,548 interest income).
- Distributable Income: $6,146,916.
- Distributable Income Per Unit: $1.024486.
Revenue and Income (Nine Months Ended Sept 30, 2006):
- Net Profits Income: $18,544,566 (up 31% from prior year period).
- Total Income: $18,587,255.
- Distributable Income: $18,262,842.
- Distributable Income Per Unit: $3.043807.
Balance Sheet Highlights (Sept 30, 2006):
- Cash and Short-term Investments: $2,209,175.
- Net Profits Interests (Net): $20,035,944.
- Total Assets: $22,257,672.
- Distributions Payable: $2,221,728.
- Trust Corpus: $20,035,944.
Expenses: Administration expenses for the quarter were $48,498. There is no debt reported in the liabilities section.
Material Changes vs. Prior Period
The increase in net profits income is primarily driven by higher commodity prices and increased sales volumes:
- Oil Prices: Average price increased 29% to $65.39 per barrel for the quarter and 26% to $58.71 for the nine-month period.
- Gas Volumes: Underlying gas sales volumes increased 44% for the quarter and 22% for the nine-month period, driven by new wells and timing adjustments.
- Gas Prices: Average price decreased 20% to $7.25 per Mcf for the quarter due to adequate supply inventories, though it increased 11% for the nine-month period.
- Costs: Total costs increased 30% for the quarter and 38% for the nine-month period, largely due to higher production taxes, development costs, and timing of disbursements.
Outlook, Risks, and Unusual Items
Reversion Agreement: Certain properties are subject to a reversion agreement where XTO Energy may transfer 25% of its interest to a third party upon "payout." Payout is estimated to occur by the end of 2007, which would reduce monthly distributions by approximately 5%.
Tax Contingency: A new 1% Texas margin tax is set to begin in 2007. Approximately 30% of the Trust's income is generated in Texas. It is currently unclear if the Trust qualifies for an exemption as a "passive entity."
Unusual Item - Litigation Settlement: XTO Energy received settlement proceeds in September 2006 regarding underpaid royalties on San Juan Basin properties. The Trust estimates its share to be between $1,200,000 and $1,900,000 ($0.20 to $0.32 per unit). This may increase the November distribution payable in December 2006.
Asset Sale: XTO Energy previously considered selling the underlying properties but decided in August 2006 to retain ownership.
Investor Verification Checklist
- Verify the final allocation of the litigation settlement proceeds ($1.2M - $1.9M) and its impact on the December 2006 distribution.
- Monitor the status of the Texas margin tax exemption determination for 2007.
- Track the "payout" date for the reversion agreement to anticipate the ~5% reduction in distributions.
- Review future oil and gas price trends, as the Trust's income is highly sensitive to commodity price fluctuations.
- Confirm XTO Energy's continued decision to retain the underlying properties.