Cross Timbers Royalty Trust - Form 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 1999, for the Cross Timbers Royalty Trust, a Texas grantor trust. The Trust holds net profits interests in oil and gas properties located in Texas, Oklahoma, and New Mexico. It consists of 90% royalty trust interests (royalty and overriding royalty interests) and 75% royalty trust interests (working interests). As of May 1, 1999, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Royalty Income | $1,479,855 | $2,335,418 |
| Total Income | $1,481,883 | $2,339,189 |
| Distributable Income | $1,440,388 | $2,294,969 |
| Distributable Income Per Unit | $0.240065 | $0.382494 |
| Administration Expense | $41,495 | $44,220 |
| Amortization of Net Profits Interests | $453,978 | $680,671 |
| Cash and Short-Term Investments | $376,013 | $528,758 |
| Trust Corpus (End of Period) | $35,570,963 | $37,423,696 |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 37% to $1.48 million, primarily driven by significantly lower commodity prices. Average gas prices fell 33% to $1.73/Mcf, and average oil prices dropped 35% to $10.44/Bbl.
- Volume Fluctuations: Gas sales volumes increased 10% due to timing of cash receipts, while oil sales volumes decreased 16% due to mechanical complications and workover downtime on working interest properties.
- Excess Costs: Costs exceeded revenues for the 75% royalty trust interests by $300,483 in Q1 1999. Cumulative excess costs (including accrued interest) requiring recovery from future proceeds totaled $827,662 ($620,747 net to the trust).
- Amortization: Amortization charges decreased to $453,978 from $680,671, reflecting reduced oil sales volumes allocated to the trust.
Outlook, Risks, and Management Commentary
- Price Outlook: Management noted that oil prices began climbing in March 1999 following OPEC production cuts. Average posted prices for February-April 1999 were $12.00/Bbl, with April reaching $14.66/Bbl.
- Production Risks: Mechanical complications on an Oklahoma working interest property caused a 35% decline in oil volumes for that asset. Recovery timing is currently unpredictable.
- Excess Cost Recovery: The Oklahoma 75% interests were expected to recover excess costs in Q2 1999, but mechanical issues have delayed this. The Texas 75% interests cannot contribute to income until oil prices improve and a carbon dioxide injection project is completed.
- Year 2000 Compliance: The Trust relies on third parties (Cross Timbers Oil, property operators, purchasers) for Year 2000 compliance. While Cross Timbers Oil expects remediation by August 1999, failure of third-party systems could materially impact distributions.
- Tax Credits: The estimated Section 29 coal seam gas tax credit for Q1 1999 is $0.043 per unit, up from $0.036 in Q1 1998.
Investor Verification Checklist
- Verify the timeline for recovery of cumulative excess costs ($827,662 total) for the 75% royalty interests, as these properties currently generate no distributable income.
- Monitor the status of mechanical repairs on the Oklahoma working interest property and the completion of the Texas carbon dioxide injection project.
- Track commodity price trends (WTI crude and natural gas) as they directly dictate royalty income and the ability to recover excess costs.
- Confirm Year 2000 compliance status of key third-party operators and purchasers to ensure uninterrupted royalty payments.
- Review the final 1999 coal seam tax credit calculation, as the current estimate is based on 1998 factors.