CRT

Cross Timbers Royalty Trust - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, for the Cross Timbers Royalty Trust, a Texas grantor trust. The Trust holds net profits interests in oil and gas properties located in Texas, Oklahoma, and New Mexico. It consists of 90% royalty trust interests (royalty and overriding royalty interests) and 75% royalty trust interests (working interests). As of November 1, 1999, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.

Key Financial Metrics

Note: The Trust has no debt. Liquidity is maintained through cash reserves and royalty receipts. Financial statements are prepared on a modified cash basis.

Material Changes vs. Prior Period

• Quarterly Performance: Distributable income increased slightly by 1% to $1.66 million compared to the prior year quarter. This was driven by a 40% increase in average oil prices ($16.34 vs. $11.69 per Bbl) and a 9% increase in gas prices, which offset a 17% decline in oil production volumes and a 3% decline in gas volumes.
• Nine-Month Performance: Distributable income decreased by 23% to $4.27 million. This decline was primarily due to a 15% drop in oil volumes and a 5% drop in average oil prices for the nine-month period, alongside lower gas prices caused by an abnormally warm winter.
• Costs: Development costs decreased significantly (44% in Q3, 22% for nine months) as a carbon dioxide injection project neared completion. However, "Taxes, transportation and other" costs increased 64% in Q3 due to the reclassification of purchaser deductions previously netted against gas sales prices.
• Excess Costs: The 75% royalty trust interests in Texas continue to have cumulative excess costs of $724,574 (net to trust: $543,431) that must be recovered before these interests contribute to royalty income. The Oklahoma 75% interests recovered their excess costs in October 1999.

Outlook, Risks, and Management Commentary

• Price Outlook: Management notes that oil prices have risen significantly since late 1998, with the average West Texas Intermediate price for August-October 1999 at $19.79 (a 69% increase over 1998). Gas prices for July-September 1999 also showed a 33% increase.
• Recovery of Excess Costs: The Texas 75% interests are expected to recover approximately $136,000 in excess costs in November 1999. If higher oil prices are sustained, the rate of recovery is expected to continue.
• Year 2000 (Y2K) Risk: The Trust relies on third-party computer systems (operators, purchasers, service providers). While Cross Timbers Oil has completed remediation of critical systems, the Trust cannot guarantee all third parties will be compliant. Failure could materially impact timely distributions. Contingency plans are expected to be complete by November 1999.
• Tax Credits: Unitholders may be eligible for a Section 29 federal income tax credit for nonconventional fuels (coal seam gas). The estimated credit is $0.042 per unit for the quarter and $0.127 per unit for the nine months ended September 30, 1999.

Investor Verification Checklist

• Excess Cost Recovery: Verify the timeline for the full recovery of the $543,431 net excess costs on the Texas 75% interests, as these properties currently do not contribute to income.
• Production Volumes: Monitor the impact of mechanical complications on the Oklahoma working interest properties which caused a 19,900 Bbl decline in nine-month oil volumes.
• Commodity Price Sensitivity: Assess the sustainability of the recent 40% increase in oil prices and 33% increase in gas prices, as these are the primary drivers of the Trust's income.
• Y2K Compliance: Confirm the status of third-party operators and purchasers regarding Year 2000 compliance to ensure no disruption to royalty payments.
• Amortization Impact: Note that amortization of net profits interests increased to $760,135 in Q3 1999 due to reduced estimated reserves, directly reducing Trust Corpus.