Cross Timbers Royalty Trust - Q1 2017 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2017. Cross Timbers Royalty Trust is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties owned by XTO Energy (a subsidiary of Exxon Mobil Corporation). The Trust holds 90% net profits interests in royalty/overriding royalty interests and 75% net profits interests in working interests located in Texas, Oklahoma, and New Mexico. As of May 1, 2017, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net Profits Income | $1,624,671 | $2,706,106 |
| Total Income | $1,625,658 | $2,706,164 |
| Distributable Income | $1,383,420 | $2,180,982 |
| Distributable Income Per Unit | $0.230570 | $0.363497 |
| Administration Expense | $242,238 | $225,182 |
| Cash and Short-Term Investments | $1,536,437 | $1,544,252 |
| Net Profits Interests (Carrying Value) | $9,786,540 | $9,903,800 |
| Cumulative Excess Costs (Working Interests) | $2,130,858 | $2,403,654 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by 40% ($1.08 million) compared to Q1 2016.
- Production Volumes: Oil sales volumes decreased 9% and gas sales volumes decreased 41% year-over-year, primarily due to natural production decline and timing of cash receipts.
- Pricing Impact: Average oil prices increased 25% to $45.22 per Bbl, partially offsetting volume declines. Average gas prices decreased 4% to $3.99 per Mcf.
- Excess Costs: Continued lower oil prices relative to operating expenses resulted in net excess costs on Texas working interest properties. However, improved oil prices allowed for a partial recovery of excess costs on Oklahoma working interest properties.
- Cost Reductions: Production expenses and development costs both decreased by 22% due to lower activity and reduced secondary recovery costs.
Outlook, Risks, and Management Commentary
- Amortization: The Trust amortizes net profits interests on a unit-of-production basis. Amortization for the quarter was $117,260, charged directly to trust corpus.
- Excess Cost Recovery: If monthly costs exceed revenues for a specific conveyance, the excess must be recovered from future net proceeds of that specific conveyance with accrued interest. Cumulative excess costs remaining as of March 31, 2017, totaled $2,130,858 for underlying working interests.
- Tax Contingencies: Several states have enacted legislation requiring income tax withholding from nonresident recipients. The Trustee currently believes withholding is not required, but regulatory changes could reduce distributions if withholding becomes mandatory.
- Market Risk: The Trust is subject to significant price volatility in crude oil and natural gas markets. There were no material changes in market risks from the previous annual report.
- Impairment: No impairment of assets was recognized as of March 31, 2017, as the Trustee does not view temporary price drops as an indication of impairment.
Investor Verification Checklist
- Verify the impact of cumulative excess costs ($2.13 million) on future distributions from Texas and Oklahoma working interests.
- Monitor production decline rates (estimated 6-8% annually) and their effect on long-term distributable income.
- Review potential changes in state tax withholding regulations that could reduce net distributions to unitholders.
- Confirm the correlation between NYMEX prices and the Trust's realized sales prices, noting the lag in cash receipts (2 months for oil, 3 months for gas).
- Assess the expense reserve status, which remains fully funded at $1,000,000 to cover trustee obligations.