Cross Timbers Royalty Trust - 10-Q Summary (Q2 1998)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 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. As of August 1, 1998, there were 6,000,000 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis and have been reviewed, but not audited, by Arthur Andersen LLP.
Key Financial Metrics
| Metric | Q2 1998 | Q2 1997 | YTD 1998 | YTD 1997 |
|---|---|---|---|---|
| Royalty Income | $1,654,355 | $3,252,445 | $3,989,773 | $6,367,035 |
| Total Income | $1,656,896 | $3,257,610 | $3,996,085 | $6,376,550 |
| Distributable Income | $1,607,399 | $3,216,639 | $3,902,368 | $6,286,174 |
| Income Per Unit | $0.267899 | $0.536106 | $0.650393 | $1.047695 |
| Trust Corpus | $36,921,936 | $39,507,766 | $36,921,936 | $39,507,766 |
| Cash & Investments | $518,714 | $662,486 | $518,714 | $662,486 |
| Amortization | $501,760 | $980,525 | $1,182,431 | $1,829,907 |
Liquidity and Debt: The Trust holds no debt. Cash and short-term investments totaled $518,714 at June 30, 1998. Distributions payable to unit holders were $519,505.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 49% in Q2 1998 compared to Q2 1997. This was driven by a 32% drop in average oil prices ($12.91 vs. $18.93/bbl) and a 10% drop in gas prices ($1.88 vs. $2.10/Mcf). The prior year included $465,000 in lawsuit settlement proceeds not present in 1998.
- Volume Reduction: Oil sales volumes declined 7% due to natural production decline. Gas volumes dropped 35%, largely due to the absence of 417,000 Mcf from a 1997 lawsuit settlement and timing differences.
- Cost Increases: Development costs rose 117% in Q2 1998, primarily due to a new carbon dioxide injection project in Texas. However, production expenses and taxes decreased.
- Excess Costs: For the Texas 75% Royalty Trust Interests, costs exceeded revenues by $143,400 in Q2 1998. These excess costs must be recovered from future proceeds before this specific conveyance contributes to income again.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that lower commodity prices and natural production decline are the primary headwinds. The Trustee anticipates that the Texas 75% interests will not contribute to income until excess costs are recovered.
- Legal Proceedings: A lawsuit regarding surface pollution on Texas properties was settled. The net cost to the Trust was approximately $18,000.
- Shareholder Activity: Cross Timbers Oil Company filed a registration statement to sell 1,360,000 units (22.7% of outstanding units) held by the company, contingent on improved market conditions. The Trust receives no proceeds from this sale.
- Tax Credits: Unit holders may be eligible for Federal income tax credits for nonconventional fuels (coal seam gas). The estimated credit for the six months ended June 30, 1998, is $0.085 per unit.
- Accounting Basis: Financials are prepared on a modified cash basis, differing from GAAP. Revenues are recorded when received, and expenses when paid.
Investor Verification Checklist
- Verify the status of the Texas 75% Royalty Trust Interests and the timeline for recovering the $143,400 in excess costs.
- Monitor commodity price trends for oil and gas, as the Trust's income is highly sensitive to price fluctuations.
- Review the progress of the carbon dioxide injection project to assess its long-term impact on production volumes versus development costs.
- Confirm the final 1998 coal seam gas tax credit calculation, as the current figure is an estimate.
- Check for any updates on the potential sale of units by Cross Timbers Oil Company and its impact on the secondary market.