Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, 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 October 1, 2008, there were 6,000,000 units of beneficial interest outstanding. The Trustee is Bank of America, N.A.
Key Financial Metrics
Revenue and Income (Nine Months Ended Sept 30, 2008):
- Net Profits Income: $24,578,205 (vs. $14,951,668 in 2007).
- Total Income: $24,596,460 (includes $18,255 interest income).
- Distributable Income: $24,260,802, or $4.043467 per unit.
- Administration Expense: $335,658 (down 10% from prior year).
Balance Sheet Highlights (Sept 30, 2008):
- Cash and Short-term Investments: $3,322,465 (up from $1,757,903 at year-end 2007).
- Net Profits Interests (Net): $17,525,221.
- Distributions Payable: $3,325,098.
- Trust Corpus: $17,525,221.
Production and Pricing (Nine Months Ended Sept 30, 2008):
- Oil Sales Volume: 172,693 Bbls (down 8% vs. 2007).
- Gas Sales Volume: 1,578,963 Mcf (down 12% vs. 2007).
- Average Oil Price: $100.96 per Bbl (up 81% vs. 2007).
- Average Gas Price: $11.65 per Mcf (up 45% vs. 2007).
Material Changes vs. Prior Period
The Trust experienced significant growth in distributable income, driven primarily by higher commodity prices and non-recurring lawsuit settlements, despite natural production declines.
- Income Growth: Net profits income increased 64% for the nine-month period and 82% for the quarter compared to 2007.
- Price Impact: Oil prices averaged $100.96/Bbl and gas prices $11.65/Mcf, significantly higher than the $55.87/Bbl and $8.03/Mcf in the prior year period.
- Volume Decline: Underlying oil and gas sales volumes decreased by 8% and 12% respectively, attributed to natural production decline.
- Costs: Development costs decreased 28% due to reduced activity on Texas and Oklahoma properties. Production expenses increased 11% due to timing and higher power/fuel costs.
Outlook, Risks, and Unusual Items
Unusual Items (Lawsuit Settlements):
Net profits income for the first nine months of 2008 included $2,430,326 from lawsuit settlements regarding underpaid royalties in the San Juan Basin. This included $1,024,815 in interest and $1,405,511 in additional gas revenue. The net benefit to the Trust was $2,187,294 ($0.36 per unit). Management considers these non-recurring events.
Reversion Agreement:
A reversion agreement triggered a payout in July 2007, resulting in a permanent reduction of approximately 5% in distributions to unitholders effective with the July 2007 payment.
Risks and Contingencies:
- Commodity Price Volatility: Management notes that oil and gas prices are expected to remain volatile due to global economic conditions, supply levels, and geopolitical tensions.
- State Tax Withholding: Several states have enacted legislation requiring withholding from nonresident recipients. While XTO Energy currently believes the Trust is not subject to these requirements, regulatory changes could reduce distributions.
- Production Decline: The Trust is subject to natural production decline as properties mature, with no new drilling or development activities adding to the asset base.
Investor Verification Checklist
- Verify the sustainability of current oil and gas prices versus the historical averages used in the 2008 reporting period.
- Confirm the non-recurring nature of the $2.43 million lawsuit settlement and its impact on year-over-year comparisons.
- Monitor the 5% distribution reduction resulting from the 2007 reversion agreement payout.
- Review potential state tax withholding legislation that could impact net distributions to unitholders.
- Assess the rate of natural production decline in the underlying Texas, Oklahoma, and New Mexico properties.