Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1996, for the Cross Timbers Royalty Trust. The Trust holds net overriding royalty interests in oil and gas properties in New Mexico, Oklahoma, and Texas. The Trustee is NationsBank of Texas, N.A. There are 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis and have been reviewed, but not audited, by Arthur Andersen LLP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1996 | Six Months Ended June 30, 1996 |
|---|---|---|
| Royalty Income | $1,910,966 | $3,468,644 |
| Total Income | $1,913,670 | $3,473,514 |
| Distributable Income | $1,859,900 | $3,384,418 |
| Distributable Income per Unit | $0.309984 | $0.564071 |
| Administration Expense | $53,770 | $89,096 |
| Cash and Short-term Investments | $699,593 (as of June 30, 1996) | |
| Net Overriding Royalty Interests (Net) | ||
| Distributions Payable | $700,653 (as of June 30, 1996) | |
| Trust Corpus |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 10% for the quarter and 5% for the six-month period compared to 1995.
- Price Drivers: Average oil prices rose 16% in Q2 1996 ($18.46/bbl vs. $15.98/bbl) and 12% for the six-month period. Average gas prices remained flat in Q2 ($1.47/Mcf) but declined slightly for the six-month period ($1.41/Mcf vs. $1.43/Mcf).
- Volume Trends: Oil sales volumes decreased 5% in Q2 due to natural decline and timing, while gas sales volumes increased 6% in Q2 and 4% for the six-month period, driven by higher production in the San Juan Basin.
- Cost Increases: Costs deducted from royalty income increased 6% in Q2 and 13% for the six-month period. This was primarily due to a 40-52% increase in development costs related to infill drilling projects.
Outlook, Risks, and Contingencies
- Legal Settlement: A tentative settlement has been reached in a lawsuit against Hallador Petroleum Company. The Trust expects to receive $675,000, which may be included in distributions for October or November 1996. This amount is not yet recorded in the financial statements.
- Pending Litigation: A second lawsuit regarding suspended revenues (approx. $600,000 net to the Trust) remains unresolved. If unsuccessful, future discounted cash flows could be reduced by this amount.
- Market Outlook: San Juan Basin gas prices increased significantly in July 1996 due to California demand and pipeline constraints. Management expects this to have a positive impact on fourth-quarter 1996 distributions, though sustainability is uncertain.
- Tax Credit: Unit holders may be eligible for a Federal income tax credit for nonconventional fuels (coal seam gas). The estimated credit for the six months ended June 30, 1996, is $0.101 per Unit.
Investor Verification Checklist
- Verify the timing and actual receipt of the $675,000 legal settlement in upcoming distributions.
- Monitor the outcome of the second pending lawsuit regarding suspended revenues of approximately $600,000.
- Assess the sustainability of the July 1996 gas price increases in the San Juan Basin for Q4 1996 projections.
- Review the impact of continued infill drilling development costs on net proceeds and future distributable income.
- Confirm the final calculation of the Section 29 tax credit for 1996 upon receipt of year-end tax information.