Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended March 31, 2013. Cross Timbers Royalty Trust is a fixed investment trust holding net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The trust distributes all net income to unitholders and is taxed as a grantor trust. As of April 1, 2013, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net Profits Income | $2,792,598 | $4,376,980 |
| Total Income | $2,792,659 | $4,377,066 |
| Distributable Income | $2,659,476 | $4,249,224 |
| Distributable Income Per Unit | $0.443246 | $0.708204 |
| Administration Expense | $133,183 | $127,842 |
| Cash and Short-Term Investments | $784,375 | $1,307,815 |
| Trust Corpus (Net Profits Interests) | $12,381,750 | $12,532,729 |
| Distributions Payable | $784,392 | $1,307,838 |
Material Changes vs. Prior Period
Net profits income decreased by 36% ($1.58 million) compared to the first quarter of 2012. The primary drivers for this decline were:
- Lower Commodity Prices: Average oil prices fell 16% to $78.89 per barrel, and gas prices fell 22% to $5.77 per Mcf. This accounted for approximately $1.2 million of the revenue decrease.
- Increased Costs: Development costs surged 520% to $655,636 due to timing of cash expenditures and increased activity on non-operated properties. Production expenses also rose 7%.
- Production Volumes: Oil sales volumes from underlying properties decreased 7% due to natural decline. Gas volumes remained relatively flat.
- Excess Costs: Costs exceeded revenues on the Texas working interest properties in January and March 2013. Remaining excess costs totaled $93,451 for the quarter, which did not reduce net proceeds from other conveyances.
Outlook, Risks, and Management Commentary
Management Commentary: The Trustee attributes the decline in distributable income primarily to lower oil and gas prices and increased development costs. The trust's income is recorded on a modified cash basis, meaning it reflects proceeds received from XTO Energy, which generally lags production by two months for oil and three months for gas.
Risks and Contingencies:
- Commodity Price Volatility: Oil and gas prices are expected to remain volatile, directly impacting net profits income.
- Production Decline: The estimated natural production decline rate on underlying properties is 6% to 8% annually.
- State Tax Withholding: Several states have enacted legislation requiring withholding from nonresident recipients of oil and gas proceeds. While the Trustee currently believes withholding is not required, regulatory changes could reduce distributions.
- Excess Costs: If costs exceed revenues on specific conveyances, those excess costs must be recovered from future net proceeds of that specific conveyance before income is distributed.
Key Facts for Investor Verification
- Verify the current NYMEX futures prices for oil and natural gas to assess the impact of the reported 16% and 22% price declines on future distributions.
- Confirm the status of the "excess costs" on the Texas working interest properties and the timeline for their recovery from future revenues.
- Review the specific development activities driving the 520% increase in development costs to determine if this is a one-time timing issue or a sustained increase in capital expenditure.
- Monitor state tax legislation in Texas, Oklahoma, and New Mexico regarding withholding requirements for nonresident royalty recipients.