Cross Timbers Royalty Trust - Form 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended March 31, 2008. Cross Timbers Royalty Trust is a passive entity holding net profits interests in oil and gas properties owned by XTO Energy Inc. The trust holds 90% net profits interests in royalty/overriding royalty interests and 75% net profits interests in working interests located in Texas, Oklahoma, and New Mexico. As of April 1, 2008, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Profits Income | $6,885,854 | $4,699,186 |
| Total Income | $6,892,332 | $4,708,958 |
| Distributable Income | $6,766,278 | $4,548,450 |
| Distributable Income Per Unit | $1.127713 | $0.758075 |
| Administration Expense | $126,054 | $160,508 |
| Cash and Short-Term Investments | $1,913,378 | $1,757,903 |
| Net Profits Interests (Net Book Value) | $18,093,224 | $18,387,752 |
| Distributions Payable | $1,914,738 | $1,760,148 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 47% year-over-year, driven primarily by significantly higher oil and gas prices and non-recurring lawsuit settlement proceeds.
- Production Volumes: Underlying oil sales volumes decreased 11% and gas sales volumes decreased 17%. This decline is attributed to natural production decline and the "payout" event under a reversion agreement (effective July 2007), which reduced the trust's interest in certain properties by approximately 5%.
- Price Increases: Average oil sales price rose 66% to $85.60 per barrel. Average gas sales price rose 43% to $10.55 per Mcf (including settlement impacts).
- Costs: Total costs decreased slightly (2%) due to a 25% reduction in development costs, offset by an 8% increase in taxes and transportation costs linked to higher revenues.
Outlook, Risks, and Unusual Items
- Lawsuit Settlements (Unusual Items): Q1 2008 included a one-time settlement of $744,702 (net to trust) related to underpaid royalties in the San Juan Basin. An additional settlement of approximately $630,000 (net to trust) is expected in Q2 2008. These non-recurring items significantly boosted income and gas prices for the quarter.
- Reversion Agreement: A payout event in July 2007 permanently reduced distributions by approximately 5% as XTO Energy transferred 25% of its interest in specific properties to a third party.
- Market Risk: Oil and gas prices remain volatile. While prices are currently high due to global demand and supply concerns, future distributions are sensitive to price fluctuations and production declines.
- Tax Contingency: Several states have enacted legislation requiring income tax withholding from non-resident recipients. While XTO Energy currently believes the trust is not subject to these requirements, regulatory changes could reduce future distributions.
- Guidance: The filing contains no specific forward-looking guidance on future production volumes or prices beyond general market commentary.
Investor Verification Checklist
- Verify the sustainability of oil and gas prices given the 66% and 43% year-over-year increases.
- Confirm the timing and total value of the remaining San Juan Basin lawsuit settlement proceeds expected in Q2 2008.
- Monitor the rate of natural production decline in the underlying properties.
- Review state tax legislation updates regarding withholding requirements for royalty trusts.
- Assess the impact of the 5% distribution reduction from the reversion agreement on long-term yield.