Cross Timbers Royalty Trust - 10-Q Summary (Q2 2009)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009. Cross Timbers Royalty Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. The trust is managed by Bank of America, N.A. as Trustee. As of July 1, 2009, there were 6,000,000 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Profits Income | $2,389,205 | $8,528,354 | $5,194,504 | $15,414,208 |
| Distributable Income | $2,288,694 | $8,380,314 | $4,958,484 | $15,146,592 |
| Distributable Income Per Unit | $0.381449 | $1.396719 | $0.826414 | $2.524432 |
| Cash and Short-Term Investments | $832,468 | $1,514,797 | $832,468 | $1,514,797 |
| Trust Corpus | $16,922,528 | $17,255,761 | $16,922,528 | $17,255,761 |
| Administration Expense | $100,593 | $152,596 | $236,174 | $278,650 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 72% in Q2 2009 and 66% year-to-date compared to 2008. This is primarily due to significantly lower oil and gas prices and the absence of lawsuit settlement proceeds that boosted 2008 results.
- Price Volatility: Average oil sales prices dropped 57% to $40.08 per barrel in Q2 2009 (from $94.30 in Q2 2008). Average gas sales prices dropped 54% to $5.37 per Mcf (from $11.67 in Q2 2008).
- Production Volumes: Oil sales volumes from underlying properties decreased 8% in Q2 2009, and gas volumes decreased 14%, attributed to natural decline and timing of cash receipts.
- Excess Costs: Lower prices caused costs to exceed revenues on Texas and Oklahoma working interests in early 2009. Partial recovery occurred in Q2 2009, but remaining excess costs totaled approximately $300,000 (net to trust) at period end.
- Unusual Items (2008): Q2 2008 income included a $1.6 million lawsuit settlement (net $1.44 million to trust) regarding underpaid royalties, which is not present in 2009.
Outlook, Risks, and Management Commentary
- Market Outlook: Management notes that while signs of economic improvement have raised recent oil prices, prices are expected to remain volatile. Gas prices are pressured by oversupply from shale gas and declining demand.
- Liquidity and Cash: Cash reserves are invested in Bank of America, N.A. certificates of deposit. Only $250,000 is insured by the FDIC; the remainder relies on the creditworthiness of the bank.
- Regulatory Risks: New SEC rules regarding oil and gas reporting (effective for fiscal years ending after Dec 31, 2009) are not expected to significantly impact the trust's financial position.
- Tax Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients. While XTO Energy currently believes the trust is not subject to these, a change in regulations could reduce distributions.
- Legal Proceedings: Various lawsuits exist regarding underlying properties, but XTO Energy does not believe their resolution will materially affect the trust's financial position.
Investor Verification Checklist
- Verify the current credit rating and financial stability of Bank of America, N.A., as the majority of trust cash reserves are uninsured.
- Monitor NYMEX futures prices for oil and gas, as the trust's income is highly sensitive to commodity price fluctuations.
- Review the status of excess costs on Texas and Oklahoma working interests to determine if future net proceeds will be further reduced by cost recovery.
- Check for updates on state tax withholding laws in Texas, Oklahoma, and New Mexico that could impact net distributions.
- Confirm the production decline rates of the underlying properties versus the impact of new wells and workovers.