CRT

Cross Timbers Royalty Trust - 2002 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 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, 2002. As of March 3, 2003, there were 6,000,000 units of beneficial interest outstanding, with XTO Energy owning 22.7% (1,360,000 units).

Key Financial Metrics

Production and Pricing (2002):

• Oil Sales: 138,249 Bbls (Net Profits Interest); Average Price: $22.31/Bbl.
• Gas Sales: 2,648,794 Mcf (Net Profits Interest); Average Price: $2.79/Mcf.
• Reserves: Total proved reserves at year-end were 1,715.9 thousand Bbls of oil and 31,091.6 thousand Mcf of gas.

Liquidity and Debt: The Trust has no debt and no contractual obligations other than monthly distributions. It is not liable for production costs. Cash reserves may be established for contingencies.

Material Changes vs. Prior Period

• Revenue Decline: Net profits income decreased by approximately 37% from 2001 to 2002 ($14.4M to $9.0M). This was primarily driven by a significant drop in average realized gas prices ($5.09/Mcf in 2001 vs. $2.79/Mcf in 2002) and lower oil prices ($24.99/Bbl in 2001 vs. $22.31/Bbl in 2002).
• Reserve Revisions: Despite lower production volumes, the standardized measure of discounted future net cash flows increased significantly from $44.0M in 2001 to $80.0M in 2002. This increase was largely due to upward revisions in reserve estimates caused by higher year-end oil prices ($28.00/Bbl in 2002 vs. $16.75/Bbl in 2001) and lower-than-anticipated production declines in gas reserves.
• Accounting Change: The Trust replaced Arthur Andersen LLP with KPMG LLP as its independent auditor effective June 25, 2002.

Outlook, Risks, and Management Commentary

Outlook and Commentary: The Trust's income is highly dependent on commodity prices and production volumes from underlying properties operated by third parties. Approximately 67% of 2002 income was attributable to natural gas. The Trust received a one-time correction payment of $477,000 ($0.08 per unit) in December 2002 related to nonproducing acreage interests.

Risks and Contingencies:

• Price Volatility: Distributions are sensitive to fluctuations in oil and gas prices, which are beyond the Trust's control.
• Depleting Assets: The underlying properties are depleting assets; future distributions depend on maintenance and development projects by operators, which are not guaranteed.
• Coal Seam Tax Credit: The federal tax credit for coal seam gas production expired on December 31, 2002. Unless legislation extends this credit, future production from these wells will not benefit from it.
• Reversion Agreement: Certain royalties are subject to a reversion agreement where 25% of the interest could revert to a third party upon payout. Payout is not projected to occur for more than 20 years based on 2002 production levels.
• Operational Control: The Trust and its unitholders have no control over the operation or development of the underlying properties.

Investor Verification Checklist

• Verify the current status of the coal seam gas tax credit and any legislative extensions beyond 2002.
• Monitor XTO Energy's development plans for the San Juan Basin (Mesaverde formation) and coal seam wells, as these drive future volume.
• Review the impact of the reversion agreement on specific properties if oil and gas prices sustain high levels for an extended period.
• Confirm the Trust's cash reserve levels and any changes in the monthly overhead charge deducted by XTO Energy.
• Track the relationship between year-end commodity prices and the Trust's reported reserve quantities, as price changes significantly alter reserve estimates.