Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1998, for the Cross Timbers Royalty Trust, a Texas grantor trust. The Trust holds net overriding royalty interests in oil and gas properties in New Mexico, Oklahoma, and Texas. The financial statements are unaudited and prepared on a modified cash basis. As of May 1, 1998, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Royalty Income | $2,335,418 | $3,114,590 |
| Total Income | $2,339,189 | $3,118,940 |
| Administration Expense | $44,220 | $49,405 |
| Distributable Income | $2,294,969 | $3,069,535 |
| Distributable Income per Unit | $0.382494 | $0.511589 |
| Amortization of Royalty Interests | $680,671 | $849,382 |
| Cash and Short-term Investments | $536,526 | $662,486 |
| Net Overriding Royalty Interests (Net) | $37,423,696 | $38,104,367 |
| Trust Corpus (End of Period) | $37,423,696 | $40,488,291 |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 25% to $2.34 million, driven primarily by a 29% drop in average oil prices ($16.15/bbl vs. $22.62/bbl) and a 12% decrease in gas sales volumes.
- Volume Trends: Oil sales volumes from underlying properties declined 1% due to natural production decline. Gas sales volumes declined 12% due to prior period adjustments and timing, though underlying production declined only ~2%.
- Cost Increases: Total costs deducted from revenue increased 5% ($61,876), largely due to a 14% rise in production expenses related to a new carbon dioxide injection project in Texas, partially offset by lower development costs.
- Excess Costs: In April 1998, costs exceeded revenues by $92,914 for the Texas 75% Royalty Trust Interests. These excess costs must be recovered from future proceeds before this segment contributes to income again.
Outlook, Risks, and Management Commentary
- Price Outlook: Management expects the average gas price for Q1 1998 production (received in Q2 1998) to decline to approximately $1.90/Mcf due to reduced demand from a mild winter. Oil prices had begun to increase in late March 1998 after hitting a decade-low of $11.00.
- Tax Credits: The estimated Section 29 coal seam gas tax credit for Q1 1998 is $0.037 per Unit, down from $0.052 per Unit in Q1 1997, due to adjustments in prior period sales volumes.
- Operational Risks: The Trust faces risks related to commodity price volatility and the timing of cash receipts. The Texas 75% interest currently contributes significantly less to distributions (4% of Q1 1998 income vs. 14% in Q1 1997) due to the excess cost carryforward.
- Trustee Change: On May 6, 1998, the Trustee merged into NationsBank, N.A.
Investor Verification Checklist
- Verify the impact of the $92,914 excess costs on the Texas 75% conveyance and the timeline for recovery from future net proceeds.
- Monitor the projected decline in gas prices to $1.90/Mcf for the second quarter of 1998.
- Confirm the final 1998 coal seam tax credit calculation, as the current estimate is subject to year-end adjustments.
- Review the natural production decline rates for oil and gas properties to assess long-term revenue sustainability.
- Check for any further changes in the overhead fee retained by Cross Timbers Oil, which is adjusted annually based on industry indices.