CRT

Cross Timbers Royalty Trust - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2014. Cross Timbers Royalty Trust is a fixed investment trust holding net profits interests in oil and gas properties located in Texas, Oklahoma, and New Mexico. The trust receives net profits income from XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. As of October 1, 2014, there were 6,000,000 units of beneficial interest outstanding. Southwest Bank serves as the Trustee, having succeeded U.S. Trust effective August 29, 2014.

Key Financial Metrics

Note: The filing does not provide specific debt figures as the trust operates on a modified cash basis and holds royalty interests rather than traditional corporate debt. Liquidity is represented by cash and short-term investments.

Material Changes vs. Prior Period

• Quarter-over-Quarter (Q3 2014 vs. Q3 2013): Net profits income increased by 11% ($445,315). This was driven primarily by increased oil production ($0.3 million) and higher oil prices ($0.1 million). Administration expenses increased by $72,454.
• Year-to-Date (9 Months 2014 vs. 9 Months 2013): Net profits income increased by 26% ($2.67 million). Drivers included higher oil and gas prices ($2.0 million), increased production volumes ($1.1 million), and a one-time purchaser refund ($0.5 million). These gains were partially offset by increased taxes, transportation, and development costs.
• Production Volumes: Oil sales volumes increased 8% for both the quarter and nine-month periods. Gas sales volumes decreased 2% for the quarter but increased 3% for the nine-month period.
• Pricing: Average oil prices increased 3% for the quarter and 9% for the nine-month period. Average gas prices decreased 1% for the quarter but increased 16% for the nine-month period.

Outlook, Risks, and Unusual Items

• Unusual Items: The nine-month period included a one-time purchaser refund of $519,071 ($467,164 net to the trust) related to coal seam gas wells in the San Juan Basin (1997-2006). Additionally, excess costs incurred in January 2014 and June 2014 were fully recovered by February and July 2014, respectively, with no excess costs remaining at period end.
• Market Risk: Oil and gas prices remain volatile. While Q3 2014 oil prices averaged $95.31/Bbl, NYMEX futures for the following twelve months were $79.31/Bbl as of October 22, 2014. Gas prices averaged $6.64/Mcf in Q3, with futures at $3.68/MMBtu.
• Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.
• Tax Contingencies: Several states have legislation regarding income tax withholding on nonresident oil and gas proceeds. The trustee currently believes withholding is not required, but regulatory changes could reduce future distributions.
• Trustee Change: Southwest Bank replaced U.S. Trust as the Trustee effective August 29, 2014.

Investor Verification Checklist

• Verify the impact of the one-time purchaser refund ($467k net) on the nine-month distributable income to assess recurring cash flow.
• Monitor NYMEX futures prices ($79.31/Bbl for oil, $3.68/MMBtu for gas) versus current realized prices to gauge future distribution trends.
• Review the excess cost recovery mechanism; while currently resolved, future price drops could trigger cost exceedances that delay distributions.
• Confirm the production decline rate (6-8%) against new well activity to understand long-term corpus erosion.
• Check for updates on state tax withholding regulations in Texas, Oklahoma, and New Mexico that could affect net distributions.