Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2014. Cross Timbers Royalty Trust is a fixed investment trust holding net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties located in Texas, Oklahoma, and New Mexico. As of July 1, 2014, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 |
|---|---|---|
| Net Profits Income | $3,859,488 | $8,245,633 |
| Total Income | $3,859,553 | $8,245,755 |
| Distributable Income | $3,766,254 | $7,970,214 |
| Distributable Income Per Unit | $0.627709 | $1.328369 |
| Administration Expense | $93,299 | $275,541 |
| Cash and Short-Term Investments | $1,009,028 | $1,009,028 (as of June 30) |
| Trust Corpus | $11,413,277 | $11,413,277 (as of June 30) |
Note: The trust operates on a modified cash basis of accounting. There is no debt reported in the liabilities section; the primary liability is distributions payable to unitholders ($1,009,050 as of June 30, 2014).
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 20% for the quarter and 37% for the six-month period compared to the same periods in 2013.
- Price Drivers: The increase was primarily driven by higher oil and gas prices. Average oil prices rose 11% (quarter) and 12% (six months), while gas prices rose 36% (quarter) and 28% (six months).
- Volume Trends: Oil sales volumes from underlying properties decreased 4% for the quarter due to natural decline but increased 8% for the six-month period due to new wells and workovers. Gas volumes increased 3% (quarter) and 5% (six months).
- Costs: Total costs increased 16% (quarter) and 17% (six months), driven by higher taxes/transportation and increased development costs.
- One-Time Item: The six-month period included a one-time purchaser refund of approximately $519,071 (net to trust: $467,164) related to coal seam gas wells.
Outlook, Risks, and Management Commentary
- Trustee Change: Unitholders voted on June 20, 2014, to appoint Southwest Bank as the successor trustee. The resignation of the current trustee (U.S. Trust, Bank of America) and the appointment of the successor will be effective August 29, 2014.
- Market Risk: Oil and gas prices remain volatile. The filing notes that future prices are subject to market conditions, weather, and economic factors.
- Excess Costs: In June 2014, a missing payment caused costs to exceed revenues by $166 on Oklahoma working interest properties. In January 2014, lower oil prices caused excess costs of $42,061 on Texas working interest properties, which were fully recovered in February 2014. These excess costs did not reduce net proceeds from other conveyances.
- Tax Contingency: The trustee is not currently required to withhold state income taxes on distributions to nonresident unitholders, but state regulations are subject to change, which could reduce future distributions.
- Impairment: No impairment of the net profits interests was recognized as of June 30, 2014.
Investor Verification Checklist
- Verify the impact of the one-time purchaser refund ($467k net) on the six-month distributable income to assess recurring cash flow.
- Monitor the trustee transition to Southwest Bank effective August 29, 2014, for any operational disruptions.
- Review development costs, which increased 32% year-over-year for the six-month period, to understand future cash flow implications.
- Track oil and gas price volatility, as the trust's income is directly correlated to commodity prices with a lag (2 months for oil, 3 months for gas).
- Confirm the status of excess cost recoveries on working interest properties, as these can temporarily reduce distributions.