Cross Timbers Royalty Trust - 10-Q Summary (Q2 2008)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, 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. The Trust consists of 6,000,000 units of beneficial interest outstanding as of July 1, 2008. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Net Profits Income | $8,528,354 | $5,222,836 | $15,414,208 | $9,922,022 |
| Distributable Income | $8,380,314 | $5,076,960 | $15,146,592 | $9,625,410 |
| Distributable Income Per Unit | $1.396719 | $0.846160 | $2.524432 | $1.604235 |
| Cash and Short-Term Investments | $3,865,946 | $1,757,903 | $3,865,946 | $1,757,903 |
| Trust Corpus | $17,830,889 | $19,024,493 | $17,830,889 | $19,024,493 |
| Administration Expense | $152,596 | $155,916 | $278,650 | $316,424 |
Liquidity: The Trust held approximately $3.87 million in cash and short-term investments as of June 30, 2008. There is no debt reported in the liabilities section; the primary liability is the distribution payable to unitholders ($3,867,918).
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 63% in Q2 2008 and 55% YTD 2008 compared to the prior year periods.
- Price vs. Volume: The increase in income was driven by significantly higher oil and gas prices (Oil +70%, Gas +49% in Q2) and non-recurring lawsuit settlements. This growth occurred despite a decline in production volumes (Oil -12%, Gas -13% in Q2).
- Unusual Items: Q2 2008 included a lawsuit settlement of $1,602,880 (net to trust: $1,442,592) related to underpaid royalties in the San Juan Basin. YTD 2008 settlements totaled $2,187,294 net to the trust.
- Reversion Agreement: A reversion agreement payout occurred in July 2007, reducing future distributions by approximately 5%.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that oil and gas prices remain volatile due to global demand, supply shortages, and geopolitical instability. Recent oil prices averaged ~6% lower than NYMEX, while gas prices were ~40% higher than NYMEX.
- Production Decline: Natural production decline and the reversion agreement payout continue to reduce sales volumes.
- Contingencies: Several states have enacted legislation requiring state income tax withholding from nonresident recipients. While XTO Energy currently advises the Trust is not subject to these requirements, a change in regulations could reduce distributions.
- Forward-Looking Statements: The filing includes standard disclaimers regarding the uncertainty of future oil/gas prices, production levels, and the impact of the reversion agreement.
Key Facts for Investor Verification
- Non-Recurring Income: Verify the sustainability of income given that a significant portion of the Q2 and YTD increase is attributable to one-time lawsuit settlements ($0.36 per unit YTD).
- Volume Decline: Confirm the long-term impact of the 12-15% decline in oil and gas sales volumes due to natural depletion and the 5% reduction from the reversion agreement.
- Price Volatility: Monitor the correlation between Trust prices and NYMEX futures, noting the Trust's recent discount on oil and premium on gas.
- Tax Withholding Risk: Monitor state legislation regarding nonresident withholding on oil and gas proceeds, which could directly reduce net distributions.
- Accounting Basis: Note that financials are on a modified cash basis (revenue recognized when received), which may lag production by 2-3 months.