Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties managed by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. As of October 1, 2001, there were 6,000,000 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Royalty Income | $3,451,168 | $11,779,958 |
| Total Income | $3,455,647 | $11,797,709 |
| Distributable Income | $3,398,640 | $11,626,512 |
| Distributable Income Per Unit | $0.566440 | $1.937752 |
| Cash and Short-Term Investments | $882,621 (Sep 30, 2001) | N/A |
| Trust Corpus | $29,388,598 (Sep 30, 2001) | N/A |
| Administration Expense | $57,007 | $171,197 |
Debt and Liquidity: The filing does not report any long-term debt. The Trust's primary asset is its net profits interests in oil and gas properties, valued at $29,388,598 net of amortization. Liquidity is maintained through cash reserves and royalty receipts.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 2% in the quarter and 43% for the nine-month period compared to 2000.
- Price Drivers: The increase is primarily driven by higher natural gas prices (up 37% in Q3 and 93% for the nine months). Oil prices declined 14% in Q3 and 2% for the nine months.
- Volume Decline: Sales volumes for both oil and gas decreased due to natural production decline, particularly in coal seam properties. Oil volumes dropped 3% (Q3) and 4% (9M); gas volumes dropped 5% (Q3) and 10% (9M).
- Cost Increases: Total costs rose 32% in Q3 and 23% for the nine months, driven by higher taxes, production expenses, and a 151% increase in development costs due to drilling activity.
Outlook, Risks, and Commentary
- Market Conditions: Management notes that lagging demand caused by a worldwide economic slowdown and the September 11, 2001 terrorist attacks placed downward pressure on oil prices. Gas prices softened in 2001 due to milder weather and reduced electricity demand.
- Production Trends: Natural production decline is expected to continue, particularly in coal seam properties. Gas injection on one Texas property also contributed to volume decreases.
- Tax Credits: Unitholders may be eligible for federal income tax credits (Section 29) for nonconventional fuels. The estimated credit is $0.028 per unit for Q3 2001 and $0.079 per unit for the nine months ended September 30, 2001.
- Excess Costs: All excess costs accumulated in 1999 were fully recovered by May 2000. No excess costs were incurred in the current period.
- XTO Energy Unit Sale: XTO Energy filed to sell 1,360,000 units (22.7% of outstanding units) in June 2001. The Trust receives no proceeds from this sale.
Investor Verification Checklist
- Verify the impact of natural production decline on future royalty income, specifically regarding coal seam properties.
- Monitor oil and gas price volatility, noting the sensitivity of the Trust's income to gas prices versus oil prices.
- Confirm the final 2001 coal seam tax credit calculation when year-end tax information is released.
- Review the Trust's cash reserves against upcoming distribution obligations and potential development cost increases.
- Assess the implications of XTO Energy's potential sale of units on market liquidity and unit price.