Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1997, for the Cross Timbers Royalty Trust, a Texas grantor trust. The Trust holds net overriding royalty interests in oil and gas properties, with 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 Sep 30, 1997 | Nine Months Ended Sep 30, 1997 |
|---|---|---|
| Royalty Income | $2,158,987 | $8,526,022 |
| Total Income | $2,162,537 | $8,539,087 |
| Distributable Income | $2,118,133 | $8,404,307 |
| Distributable Income per Unit | $0.353022 | $1.400717 |
| Administration Expense | $44,404 | $134,780 |
| Cash and Short-term Investments | $568,419 (Sep 30, 1997) | $1,376,687 (Dec 31, 1996) |
| Net Overriding Royalty Interests | $38,768,008 (Sep 30, 1997) | $41,337,673 (Dec 31, 1996) |
| Distribution Payable | $569,424 | $1,378,611 (Dec 31, 1996) |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 15% for the quarter and 60% for the nine-month period compared to 1996.
- Drivers of Increase: The surge is primarily attributed to higher natural gas prices and the receipt of lawsuit settlement proceeds ($268,000 in Q3; $733,000 for the nine months).
- Volume Trends: Oil sales volumes decreased slightly (2% in Q3, 4% in nine months) due to natural decline. Gas sales volumes increased significantly (22% in Q3, 20% in nine months), largely due to suspended revenues from a legal settlement.
- Price Trends: Average oil prices decreased 7% in Q3 but increased 11% for the nine-month period. Average gas prices increased 14% in Q3 and 46% for the nine-month period.
- Costs: Total costs deducted increased 7% in Q3 (driven by higher taxes) but decreased 3% for the nine-month period (driven by lower development costs).
Outlook, Risks, and Unusual Items
- Legal Proceedings (Unusual Item): A significant lawsuit against Coastal Oil and Gas Corporation was settled in May 1997. The Trust received approximately $465,000 in June and $268,000 in September related to suspended revenues. As part of the settlement, Cross Timbers Oil agreed to reduce its overriding royalty interest by one-half on newly drilled wells, which will correspondingly reduce the Trust's net profits interest in new wells.
- Other Litigation: A separate lawsuit regarding surface contamination on Texas properties was settled for approximately $24,000 net to the Trust.
- Tax Matters: The Trust is a grantor trust. Unit holders may be eligible for a Federal income tax credit for producing nonconventional fuels (coal seam gas). The estimated credit for the nine months ended September 30, 1997, is $0.158 per Unit.
- Management Commentary: Management believes the agreed reductions in royalty interests from the settlement will not significantly affect estimated future net revenues from proved reserves.
Investor Verification Checklist
- Verify the sustainability of the 60% revenue increase, noting the one-time nature of the $733,000 lawsuit settlement proceeds.
- Confirm the impact of the settlement agreement on future cash flows, specifically the 50% reduction in the Trust's interest on newly drilled wells.
- Monitor natural gas price volatility, which drove a 46% price increase for the nine-month period.
- Review the Trust's cash position ($568,419) relative to upcoming distribution obligations.
- Assess the natural production decline in oil volumes (down 4% year-to-date) against the offsetting gas volume increases.