Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2005, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. The Trust is managed by Bank of America, N.A., as Trustee. As of October 1, 2005, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q3 2005 | Q3 2004 | 9 Months 2005 | 9 Months 2004 |
|---|---|---|---|---|
| Net Profits Income | $5,069,110 | $4,017,397 | $14,120,370 | $10,792,393 |
| Total Income | $5,074,688 | $4,018,945 | $14,133,769 | $10,795,482 |
| Distributable Income | $5,039,088 | $3,928,740 | $13,833,480 | $10,530,516 |
| Distributable Income Per Unit | $0.839848 | $0.654790 | $2.305580 | $1.755086 |
| Administration Expense | $35,600 | $90,205 | $300,289 | $264,966 |
| Cash and Short-Term Investments | $2,070,775 | $1,435,478 | (As of Sept 30, 2005) | |
| Trust Corpus | $21,587,720 | $22,847,694 | (As of Sept 30, 2005) |
Note: The Trust has no debt. Financial statements are prepared on a modified cash basis.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 26% in Q3 2005 and 31% for the nine-month period compared to 2004. This growth was driven primarily by higher oil and gas sales prices.
- Price Increases: Average oil prices rose 39% to $50.57 per Bbl in Q3 2005. Average gas prices rose 50% to $9.05 per Mcf in Q3 2005.
- Volume Declines: Despite price increases, sales volumes declined. Oil volumes from underlying properties decreased 4% in Q3 and 2% for the nine months. Gas volumes decreased 24% in Q3 and 13% for the nine months due to natural production decline and purchaser adjustments.
- Expense Variance: Administration expenses decreased 61% in Q3 2005 due to timing of expenditures, though they increased 13% for the nine-month period due to audit fees related to internal controls.
- Unusual Items: The September 2005 distribution included $668,000 ($0.11 per unit) from a purchaser's recalculation and remittance of royalties for San Juan Basin production prior to February 2002. An associated interest payment of $880,000 ($0.15 per unit) is expected in the October 2005 distribution.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that oil and gas prices remain volatile due to global demand, supply shortages, and geopolitical instability. Prices are expected to remain elevated but subject to fluctuation.
- Hurricane Impact: While the Trust's underlying properties are not located near the Gulf of Mexico and were not significantly affected by the August/September 2005 hurricanes, the resulting supply shortages have driven up industry-wide prices. However, the Trust's production prices are expected to remain lower than Gulf or NYMEX prices due to regional supply/demand differences.
- Cost Outlook: Production expense and development costs are expected to increase throughout the industry due to storm damages and supply shortages.
- Tax Contingency: Several states have enacted legislation requiring income tax withholding from nonresident recipients. XTO Energy Inc. currently advises the Trust is not subject to these requirements, but regulations could change, potentially reducing distributions.
- Forward-Looking Statements: The filing includes standard disclaimers regarding uncertainties in production volumes, costs, and commodity prices.
Investor Verification Checklist
- Price Sensitivity: Verify the correlation between NYMEX futures prices and the Trust's actual realized prices, noting the Trust's historical discount to NYMEX for oil and premium/discount dynamics for gas.
- Volume Decline Rate: Monitor the natural production decline rates of the underlying properties, as volumes are decreasing despite price increases.
- One-Time Adjustments: Confirm the timing and amount of the remaining interest payment ($880,000) related to the San Juan Basin royalty recalculation.
- State Tax Withholding: Review updates on state tax legislation regarding nonresident withholding to assess potential future reductions in distributable income.
- Development Costs: Track development costs for the 75% net profits interests, which saw a 417% increase in Q3 2005, to ensure they do not erode net proceeds disproportionately.