Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1996, for the Cross Timbers Royalty Trust. The Trust holds net overriding royalty interests in oil and gas properties in New Mexico, Oklahoma, and Texas. It operates as a grantor trust, distributing income to 6,000,000 outstanding units of beneficial interest. Financial statements are prepared on a modified cash basis and have been reviewed, but not audited, by Arthur Andersen LLP.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1996 | Nine Months Ended Sep 30, 1996 |
|---|---|---|
| Royalty Income | $1,873,196 | $5,341,840 |
| Total Income | $1,875,706 | $5,349,220 |
| Administration Expense | $80,507 | $169,603 |
| Distributable Income | $1,795,199 | $5,179,617 |
| Distributable Income per Unit | $0.299200 | $0.863271 |
| Cash and Short-Term Investments | $601,631 (as of Sep 30, 1996) | |
| Net Overriding Royalty Interests (Net) | $42,596,970 (as of Sep 30, 1996) | |
| Distributions Payable | $602,369 (as of Sep 30, 1996) |
Note: The Trust has no debt obligations listed in the liabilities section. Liquidity is maintained through cash reserves and royalty receipts.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 51% in the third quarter of 1996 compared to the same period in 1995 ($1.87M vs. $1.24M). For the nine-month period, income rose 18% ($5.34M vs. $4.53M).
- Price Drivers: Average oil prices rose 20% in Q3 1996 ($18.61/bbl vs. $15.55/bbl). Average gas prices increased 32% in Q3 1996 ($1.51/Mcf vs. $1.14/Mcf), driven by higher San Juan Basin prices.
- Volume Trends: Oil sales volumes decreased slightly (2% in Q3, 1% in 9 months) due to natural decline, partially offset by infill drilling. Gas sales volumes increased 14% in Q3 and 7% for the nine months, primarily due to increased San Juan Basin production.
- Expense Increases: Administration expenses rose significantly in Q3 (58% increase) and the nine-month period (15% increase) due to annual stock exchange listing fees and litigation-related legal and consulting fees.
- Cost Structure: Development costs increased 34% in Q3 and 45% for the nine months due to infill drilling projects on working interest properties.
Outlook, Risks, and Contingencies
- Legal Settlement: A settlement in principle was reached in July 1996 regarding a lawsuit against Hallador Petroleum Company. The Trust expects to receive $675,000. If received in November 1996, these proceeds will be included in the December 1996 distribution (paid January 15, 1997).
- Pending Litigation: The Trust is not a party to a second lawsuit involving suspended revenues of approximately $600,000 (net to Trust). The outcome is uncertain; if plaintiffs are unsuccessful, future net cash flows could be reduced by this amount.
- Tax Credits: The Trust receives royalty income from coal seam gas wells qualifying for the Section 29 Federal income tax credit. The estimated credit for the quarter and nine months ended September 30, 1996, is $0.045 and $0.146 per Unit, respectively.
- Market Risks: Distributions are sensitive to oil and gas prices and production volumes. San Juan Basin gas prices had been low earlier in 1996 due to oversupply but rose in Q3 due to California demand and pipeline constraints.
Key Facts for Investor Verification
- Verify the receipt of the $675,000 legal settlement proceeds and their inclusion in the January 1997 distribution.
- Monitor the outcome of the pending lawsuit regarding the $600,000 in suspended revenues.
- Track future oil and gas price trends, particularly in the San Juan Basin, as they directly impact royalty income.
- Review the impact of ongoing infill drilling projects on production volumes versus development costs.
- Confirm the final 1996 coal seam tax credit calculation when year-end tax information is released.