Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1997, for the Cross Timbers Royalty Trust, a Texas grantor 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. As of August 1, 1997, there were 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 | Q2 1997 | Q2 1996 | YTD 1997 | YTD 1996 |
|---|---|---|---|---|
| Royalty Income | $3,252,445 | $1,910,966 | $6,367,035 | $3,468,644 |
| Total Income | $3,257,610 | $1,913,670 | $6,376,550 | $3,473,514 |
| Distributable Income | $3,216,639 | $1,859,900 | $6,286,174 | $3,384,418 |
| Income Per Unit | $0.536106 | $0.309984 | $1.047695 | $0.564071 |
| Administration Expense | $40,971 | $53,770 | $90,376 | $89,096 |
| Cash & Short-term Investments | $1,103,630 (as of June 30, 1997) | |||
| Net Overriding Royalty Interests | $39,507,766 (as of June 30, 1997) | |||
| Distributions Payable | $1,105,515 (as of June 30, 1997) |
Note: The Trust has no debt. Liquidity is derived from royalty receipts and cash reserves.
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 70% in Q2 1997 and 84% year-to-date compared to 1996.
- Price Increases: Average gas prices rose 43% in Q2 (from $1.47 to $2.10 per Mcf) and 61% YTD (from $1.41 to $2.27 per Mcf). Average oil prices increased 3% in Q2 and 20% YTD.
- Volume Trends: Oil sales volumes decreased 8% in Q2 due to natural decline. Gas sales volumes increased 39% in Q2, largely driven by a lawsuit settlement.
- Cost Reductions: Total costs deducted from revenue decreased 10% in Q2 and 8% YTD, primarily due to a 59% drop in development costs (lower drilling activity).
Outlook, Risks, and Unusual Items
- Lawsuit Settlement (Unusual Item): A significant portion of the revenue increase is attributable to a settlement with Coastal Oil and Gas Corporation. The Trust received approximately $465,000 in suspended revenues in Q2 1997. An additional $260,000 was received in July 1997 for 1996-1997 suspended revenues, to be distributed in September 1997.
- Future Impact of Settlement: To facilitate development, Cross Timbers Oil agreed to reduce its overriding royalty interest by half on newly drilled wells, which will correspondingly reduce the Trust's net profit interest in new wells. Management believes this will not significantly impact estimated future net revenues from proved reserves.
- Tax Credits: Unit holders may be eligible for Federal income tax credits for nonconventional fuels (coal seam gas). The estimated credit for the six months ended June 30, 1997, is $0.104 per Unit.
- Other Litigation: A separate lawsuit regarding surface contamination in Texas was settled for approximately $24,000 net to the Trust.
Investor Verification Checklist
- Verify the sustainability of gas price increases, noting the impact of weather-related demand and California market conditions cited in the filing.
- Confirm the timing and amount of the September 1997 distribution related to the July 1997 lawsuit proceeds ($260,000).
- Assess the long-term impact of the reduced royalty interest on new wells drilled in the San Juan Basin as part of the Coastal settlement.
- Review the natural production decline rates for oil volumes, which decreased 8% in Q2 1997.
- Check the calculation of the Section 29 tax credit for nonconventional fuels, as final data is provided at year-end.