Cross Timbers Royalty Trust - 10-Q Summary (Q2 2006)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. in Texas, Oklahoma, and New Mexico. As of July 1, 2006, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
| Metric | Q2 2006 | Q2 2005 | YTD 2006 | YTD 2005 |
|---|---|---|---|---|
| Net Profits Income | $5,216,449 | $4,589,164 | $12,365,700 | $9,051,260 |
| Distributable Income | $5,064,174 | $4,453,848 | $12,115,926 | $8,794,392 |
| Distributable Income Per Unit | $0.844029 | $0.742308 | $2.019321 | $1.465732 |
| Cash and Short-Term Investments | $1,768,243 | $2,111,521 | (Balance Sheet Data) | |
| Trust Corpus | $20,452,368 | $21,204,723 | ||
| Administration Expense | $163,134 | $139,618 | $275,915 | $264,689 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 14% in Q2 2006 and 37% year-to-date compared to 2005. This growth was driven primarily by higher oil and gas sales prices, partially offset by decreased sales volumes and increased costs.
- Price Increases: Average oil prices rose 19% to $55.95/Bbl in Q2 and 24% to $55.36/Bbl YTD. Average gas prices rose 25% to $8.45/Mcf in Q2 and 30% to $8.95/Mcf YTD.
- Volume Trends: Oil sales volumes from underlying properties decreased slightly (2% in Q2, 1% YTD) due to natural production decline. Gas sales volumes decreased 7% in Q2 but increased 13% YTD due to cash receipts from prior period sales.
- Cost Increases: Total costs increased 28% in Q2 and 42% YTD. Development costs surged 109% YTD due to increased activity on properties underlying the 75% net profits interests.
Outlook, Risks, and Contingencies
- Reversion Agreement Payout: XTO Energy expects "payout" under a reversion agreement to occur in 2006. Upon payout, 25% of the interest in certain properties will transfer to a third party, reducing monthly distributions to the Trust by approximately 5%.
- Tax Contingencies:
- State Withholding: XTO Energy currently believes the Trust is not subject to state income tax withholding, though regulations could change.
- Texas Margin Tax: A new 1% margin tax in Texas is effective 2007. It is currently unclear if the Trust qualifies for the "passive entity" exemption. Approximately 30% of the Trust's income is generated from Texas properties.
- Asset Sale: XTO Energy announced in January 2006 that it is considering selling the underlying properties, subject to structuring a tax-efficient transaction.
- Market Risk: Future distributions remain highly sensitive to volatile oil and gas prices and production volumes.
Investor Verification Checklist
- Verify the timing of the reversion agreement payout and confirm the exact impact on future monthly distributions (estimated 5% reduction).
- Monitor the status of the Texas margin tax exemption for the Trust, given that 30% of income is Texas-sourced.
- Track XTO Energy's potential sale of the underlying properties and any associated tax implications for unitholders.
- Review the production decline rates versus new development activity to assess long-term volume sustainability.
- Confirm the overhead charge retained by XTO Energy ($27,844/month as of June 2006) and its potential for adjustment.