Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2002, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties managed by XTO Energy Inc. It is a passive entity that distributes net profits income to unitholders. As of August 1, 2002, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q2 2002 | Q2 2001 | YTD 2002 | YTD 2001 |
|---|---|---|---|---|
| Net Profits Income | $1,816,119 | $4,221,331 | $3,695,669 | $8,328,790 |
| Total Income | $1,817,053 | $4,227,567 | $3,697,529 | $8,342,062 |
| Distributable Income | $1,723,548 | $4,178,970 | $3,528,294 | $8,227,872 |
| Distributable Income Per Unit | $0.287258 | $0.696495 | $0.588049 | $1.371312 |
| Cash and Short-Term Investments | $650,817 | $852,349 | $650,817 | $852,349 |
| Trust Corpus | $27,946,913 | $29,872,361 | $27,946,913 | $29,872,361 |
Liquidity and Debt: The Trust holds no debt. Liabilities consist solely of distributions payable to unitholders ($651,186 as of June 30, 2002). Cash reserves are maintained to cover administrative expenses and contingencies.
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 57% in Q2 2002 and 56% year-to-date compared to 2001. This is primarily attributed to significantly lower oil and gas prices.
- Price Volatility: Average oil prices dropped 18% in Q2 and 30% YTD. Average gas prices dropped 62% in Q2 and 61% YTD.
- Production Volumes: Underlying oil sales volumes increased slightly (4% in Q2, 2% YTD), and gas volumes remained flat in Q2 but increased 9% YTD. However, these volume gains were insufficient to offset price declines.
- Administrative Expenses: Expenses increased 92% in Q2 and 48% YTD compared to the prior year, primarily due to the timing of expenditures.
- Excess Costs: In Q1 2002, costs exceeded revenues for the Texas 75% net profits interests by $66,867. These excess costs, plus accrued interest, were fully recovered in Q2 2002.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that oil and gas prices remain volatile due to global economic slowdowns, OPEC production cuts, and weather patterns affecting demand. While prices showed some strengthening in 2002, they are expected to remain volatile.
- Tax Credits: The Trust receives income from coal seam gas wells qualifying for Section 29 tax credits. The estimated credit for the six months ended June 30, 2002, is $0.048 per unit. Legislation regarding the extension of these credits beyond December 31, 2002, is under consideration by Congress.
- Forward-Looking Statements: The filing includes standard disclaimers regarding uncertainties in oil and gas prices, development costs, and industry conditions.
- Auditor Change: The Trust appointed KPMG LLP as its independent auditor for fiscal 2002, replacing Arthur Andersen LLP.
Investor Verification Checklist
- Verify the impact of current NYMEX oil and gas futures prices on future distributable income, given the Trust's high sensitivity to commodity pricing.
- Confirm the status of Section 29 tax credit legislation and its potential expiration or extension beyond 2002.
- Monitor the recovery status of any future "excess costs" on the Texas 75% net profits interests, which can delay distributions.
- Review the natural decline rates of the underlying properties to assess long-term volume sustainability.
- Check for any changes in the overhead fee retained by XTO Energy, which is adjusted annually based on industry indices.