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 September 30, 2010. Cross Timbers Royalty Trust is a Texas trust holding net profits interests in oil and gas properties owned by XTO Energy (a wholly owned subsidiary of Exxon Mobil Corporation as of June 25, 2010). The trust has 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Net Profits Income | $4,142,789 | $2,894,511 | $13,011,163 | $8,089,015 |
| Distributable Income | $4,063,290 | $2,765,082 | $12,645,270 | $7,723,566 |
| Distributable Income Per Unit | $0.677215 | $0.460847 | $2.107545 | $1.287261 |
| Administration Expense | $79,542 | $129,458 | $366,078 | $365,632 |
| Cash and Short-Term Investments | $1,413,026 | $1,067,595 | As of Sept 30, 2010 | |
| Net Profits Interests (Net Book Value) | $14,986,650 | $16,188,498 | As of Sept 30, 2010 | |
| Distributions Payable | $1,413,054 | $1,067,604 | As of Sept 30, 2010 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 43% in Q3 2010 and 61% for the nine-month period compared to 2009.
- Price Drivers: The increase is primarily attributed to higher oil and gas prices. Average oil prices rose 21% in Q3 and 55% for the nine months; gas prices rose 22% in Q3 and 29% for the nine months.
- Volume Trends: Oil sales volumes decreased 11% due to natural production decline. Gas sales volumes increased 9% in Q3 and 4% for the nine months, aided by new wells and workovers.
- Cost Recovery: Excess costs incurred in early 2009 on Texas and Oklahoma working interests were fully recovered in Q3 2009. There were no excess costs outstanding as of September 30, 2010.
- Expense Reduction: Administration expenses decreased 39% in Q3 2010 compared to Q3 2009, primarily due to the timing of expenditures.
Outlook, Risks, and Management Commentary
- Merger Impact: XTO Energy became a subsidiary of Exxon Mobil Corporation on June 25, 2010. Management states this is not expected to have a material effect on the trust's annual distributable income, financial position, or liquidity.
- Price Volatility: Management notes that oil and gas prices are expected to remain volatile. Recent trust oil prices averaged approximately 9% lower than NYMEX, while gas prices were approximately 54% higher than NYMEX.
- Production Decline: The underlying properties experience a natural production decline rate of approximately 6% to 8% per year.
- Tax Contingency: Several states have enacted legislation requiring income tax withholding from nonresident recipients. While XTO Energy currently advises the trust is not subject to these requirements, regulations could change, potentially reducing distributions to unitholders.
- Forward-Looking Statements: The filing includes standard disclaimers regarding risks related to commodity prices, production costs, and development activities.
Investor Verification Checklist
- Verify the current NYMEX futures prices for oil and gas to assess the impact of the stated price volatility on future distributions.
- Confirm the status of state tax withholding legislation in Texas, Oklahoma, and New Mexico to evaluate the risk of reduced distributions.
- Review the specific production decline rates of the underlying properties to understand the long-term trajectory of volumes.
- Monitor the allocation formula for net profits interests, as changes in costs or prices can disproportionately affect volumes allocated to the trust.
- Check for any updates regarding the operational integration of XTO Energy into Exxon Mobil Corporation that might affect cost structures.