Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, for the Cross Timbers Royalty Trust. The Trust holds net overriding royalty interests in oil and gas properties in New Mexico, Oklahoma, and Texas. The Trustee is NationsBank, N.A. There are 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 |
|---|---|---|
| Royalty Income | $1,672,455 | $5,662,228 |
| Total Income | $1,675,051 | $5,671,136 |
| Administration Expense | $37,763 | $131,480 |
| Distributable Income | $1,637,288 | $5,539,656 |
| Distributable Income per Unit | $0.272882 | $0.923276 |
| Cash and Short-term Investments | $481,109 (Sep 30, 1998) | N/A |
| Trust Corpus | $36,435,122 (Sep 30, 1998) | N/A |
| Amortization of Royalty Interests | $486,814 | $1,669,245 |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 23% for the quarter and 34% for the nine-month period compared to 1997. This was driven primarily by a 33% drop in average oil prices (Q3) and a 30% drop (9-month), alongside natural production declines.
- Volume Reduction: Oil sales volumes decreased 10% (Q3) and 6% (9-month). Gas sales volumes decreased 13% (Q3) and 22% (9-month), partially due to the absence of lawsuit settlement proceeds received in 1997.
- Excess Costs: For the 75% Royalty Trust Interests, costs exceeded revenues by $220,943 in Q3 1998. Cumulative excess costs reached $364,343 ($273,257 net to the Trust). These costs must be recovered from future proceeds before these properties contribute to income again.
- Amortization: Amortization charges decreased significantly due to lower sales volumes and prices allocated to the Trust interests.
Outlook, Risks, and Management Commentary
- Excess Cost Recovery: Oklahoma working interest properties resumed contributing to royalty income in October 1998 after recovering excess costs. However, the Trustee cannot predict when Texas working interest properties will resume contributions, as recovery depends on future oil prices and development costs.
- Development Costs: Increased development costs in 1998 are attributed to a carbon dioxide injection project on a Texas property.
- Year 2000 Compliance: The Trust relies on third parties (operators, purchasers, ChaseMellon) for timely distributions. While Cross Timbers Oil has modified its systems, the Trustee cannot guarantee all third parties will be compliant, posing a risk to distribution timing.
- Legal Proceedings: A lawsuit regarding surface pollution on Texas properties was settled. The net cost to the Trust was approximately $18,000.
- Tax Credits: Unit holders may be eligible for Federal income tax credits for nonconventional fuels (coal seam gas). The estimated credit for the nine months ended September 30, 1998, is $0.130 per Unit.
Investor Verification Checklist
- Verify the status of the Texas working interest properties regarding the recovery of cumulative excess costs ($354,276).
- Monitor future oil price trends, as they directly impact the ability to recover excess costs and generate distributable income.
- Confirm Year 2000 compliance status of key third-party operators and service providers to ensure uninterrupted distributions.
- Review the specific allocation of production volumes to the 90% vs. 75% Royalty Trust Interests, as cost structures differ significantly.
- Check for updates on the carbon dioxide injection project costs and their impact on future net proceeds.