CRT

Cross Timbers Royalty Trust - 2003 Annual Report (10-K) Summary

Business Context and Reporting Period

Cross Timbers Royalty Trust is an express trust created under Texas law, holding defined net profits interests (90% and 75%) in oil and gas properties owned by XTO Energy Inc. The trust has no employees; Bank of America, N.A. serves as the trustee. The reporting period covers the fiscal year ended December 31, 2003. The trust's income is derived solely from net proceeds of oil and gas production, with approximately 73% of 2003 income attributable to natural gas, primarily from the San Juan Basin in New Mexico.

Key Financial Metrics

Production Volumes (Net Profits Interests): Oil sales totaled 130,517 barrels (avg. price $28.04/Bbl) and gas sales totaled 2,337,530 Mcf (avg. price $4.86/Mcf) in 2003.

Liquidity and Debt: The trust has no debt and no off-balance sheet arrangements. Liquidity is maintained through monthly net profits income. The trust had no contractual obligations other than the December 2003 distribution payable in January 2004 ($994,746).

Material Changes vs. Prior Period

• Income Increase: Net profits income increased 43% from 2002 to 2003, driven primarily by higher average sales prices for both oil and gas.
• Price Volatility: Average oil sales price rose from $22.31/Bbl in 2002 to $28.04/Bbl in 2003. Average gas sales price increased from $2.79/Mcf to $4.86/Mcf.
• Production Decline: Despite higher prices, total oil and gas production volumes attributable to the net profits interests declined slightly compared to 2002, consistent with the depletion of mature reserves.
• Reserve Revisions: The standardized measure of discounted future net cash flows increased significantly ($13.9 million) due to upward revisions in price assumptions and lower-than-anticipated production declines in the 90% net profits interests.

Outlook, Risks, and Management Commentary

Outlook: Future distributions are highly dependent on oil and gas prices and production levels. XTO Energy expects operators to pursue increased density drilling in the San Juan Basin (coal seam and Mesaverde formations), though the specific impact on trust income remains unknown.

Risks and Contingencies:

• Price Fluctuations: The trust is exposed to significant market risk from volatile oil and gas prices, which directly impacts distributable income.
• Depletion: The trust's assets are depleting. Distributions include a return of capital component as reserves are exhausted.
• Operational Control: The trust and unitholders have no control over the operation or development of underlying properties, which are operated by third parties (e.g., BP, Burlington, ExxonMobil).
• Regulatory Changes: Potential changes in state tax withholding laws or the expiration of the federal coal seam gas tax credit (which expired for production after 2002) could affect net proceeds.
• Reversion Agreement: Certain properties are subject to a reversion agreement where XTO Energy may transfer 25% of its interest to a third party upon payout. Payout is not projected for approximately 15 years.

Investor Verification Checklist

• Verify current oil and gas spot prices and their correlation to the trust's lagged income recognition (oil: 2 months lag; gas: 3 months lag).
• Confirm the status of the federal coal seam gas tax credit and any potential legislative extensions for future years.
• Review XTO Energy's capital expenditure plans for the San Juan Basin to assess the likelihood of increased density drilling.
• Monitor the "Standardized Measure of Discounted Future Net Cash Flows" for sensitivity to year-end price assumptions.
• Check for any updates on the reversion agreement payout timeline, as this would reduce future distributions.