News Column

CROSS TIMBERS ROYALTY TRUST - 10-Q - Trustee's Discussion and Analysis.

August 6, 2014

The following discussion should be read in conjunction with the trustee's discussion and analysis contained in the trust's 2013 Annual Report on Form 10-K, as well as the condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The trust's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the trust's web site at www.crosstimberstrust.com. Distributable Income Quarter For the quarter ended June 30, 2014, net profits income was $3,859,488 compared to $3,225,021 for second quarter 2013. This 20% increase in net profits income is the result of higher oil and gas prices ($1.1 million), partially offset by increased taxes, transportation and other costs ($0.3 million) and decreased oil production ($0.2 million). See "Net Profits Income" on following page. 11



--------------------------------------------------------------------------------

Table of Contents

After considering interest income of $65 and administration expense of $93,299, distributable income for the quarter ended June 30, 2014 was $3,766,254, or $0.627709 per unit of beneficial interest. Administrative expense for the quarter decreased $34,548 from the prior year quarter. For second quarter 2013, distributable income was $3,097,230, or $0.516205 per unit. Distributions to unitholders for the quarter ended June 30, 2014 were: Distribution per Record Date Payment Date Unit April 30, 2014 May 14, 2014 $ 0.209127 May 30, 2014 June 13, 2014 0.250407 June 30, 2014 July 15, 2014 0.168175 $ 0.627709 Six Months For the six months ended June 30, 2014, net profits income was $8,245,633 compared to $6,017,619 for the same 2013 period. This 37% increase in net profits income is the result of higher oil and gas prices ($1.9 million), increased oil and gas production ($0.9 million) and a one-time purchaser refund ($0.5 million), partially offset by increased taxes, transportation and other costs ($0.8 million) and increased development costs ($0.3 million). See "Net Profits Income" below. After considering interest income of $122 and administration expense of $275,541, distributable income for the six months ended June 30, 2014 was $7,970,214, or $1.328369 per unit of beneficial interest. Administrative expense for the six months ended June 30, 2014 increased $14,511 from the prior year six-month period. For the six months ended June 30, 2013, distributable income was $5,756,706, or $0.959451 per unit.



Net Profits Income

Net profits income is recorded when received by the trust, which is the month following receipt by XTO Energy and generally two months after oil production and three months after gas production. Net profits income is generally affected by three major factors: oil and gas sales volumes, oil and gas sales prices, and costs deducted in the calculation of net profits income. Because properties underlying the 90% net profits interests are royalty and overriding royalty interests, the calculation of net profits income from these interests only includes deductions for production and property taxes, legal costs, and marketing and transportation charges. In addition to these costs, the calculation of net profits income from the 75% net profits interests includes deductions for production expense and development costs since the related underlying properties are working interests. 12



--------------------------------------------------------------------------------

Table of Contents

The following is a summary of the calculation of net profits income received by the trust: Three Months Six Months Ended June 30 (a) Increase Ended June 30 (a) Increase 2014 2013 (Decrease) 2014 2013 (Decrease) Sales Volumes Oil (Bbls) (b) Underlying properties 49,706 51,786 (4 %) 106,247 97,959 8 % Average per day 558 582 (4 %) 587 541 9 % Net profits interests 20,749 21,106 (2 %) 44,437 37,214 19 % Gas (Mcf) (b) Underlying properties 371,333 359,322 3 % 804,244 763,661 5 % Average per day 4,126 3,992 3 % 4,419 4,196 5 % Net profits interests 328,571 313,852 5 % 735,586 663,881 11 % Average Sales Prices Oil (per Bbl) $ 94.30$ 84.65 11 % $ 92.09$ 81.93 12 % Gas (per Mcf) $ 8.33$ 6.12 36 % $ 7.58$ 5.94 28 % Revenues Oil sales $ 4,687,193$ 4,383,424 7 % $ 9,783,856$ 8,026,251 22 % Gas sales 3,093,013 2,199,236 41 % 6,098,027 4,534,111 34 % Total Revenues 7,780,206 6,582,660 18 % 15,881,883 12,560,362 26 % Costs



Taxes, transportation and other (e) 1,109,047 761,669

46 % 2,044,162 1,454,863 41 % Production expense (c) 1,363,679 1,344,215 1 % 2,798,230 2,896,313 (3 %) Development costs 865,724 717,609 21 % 1,809,974 1,373,245 32 % Excess costs (d) (166 ) 52,411 (100 %) (50 ) (41,040 ) (100 %) Total Costs 3,338,284 2,875,904 16 % 6,652,316 5,683,381 17 % Other Proceeds Interest income (e) - - - 210,242 - - Net Proceeds $ 4,441,922$ 3,706,756 20 % $ 9,439,809$ 6,876,981 37 % Net Profits Income $ 3,859,488$ 3,225,021 20 % $ 8,245,633$ 6,017,619 37 %



(a) Because of the interval between time of production and receipt of royalty

income by the trust, (1) oil and gas sales for the quarter ended June 30

generally represent oil production for the period February through April and

gas production for the period January through March and (2) oil and gas sales

for the six-months ended June 30 generally represent oil production for the

period November through April and gas production for the period October

through March.

(b) Oil and gas sales volumes are allocated to the net profits interests based

upon a formula that considers oil and gas prices and the total amount of production expense and development costs. As product prices change, the trust's share of the production volumes is impacted as the quantity of



production to cover expenses in reaching the net profits break-even level

changes inversely with price. As such, the underlying property production

volume changes may not correlate with the trust's net profit share of those

volumes in any given period. Therefore, comparative discussion of oil and gas

sales volumes is based on the underlying properties.

(c) Production expense is primarily from seven working interest properties in the

75% net profits interest. Six of these properties are not operated by XTO

Energy or ExxonMobil. Production expense includes an overhead charge which is

deducted and retained by the operator. As of June 30, 2014, this charge was

$36,845 per month (including monthly overhead charges of $5,264 which XTO

Energy deducts as operator of the Hewitt Unit) and is subject to adjustment

each May based on an oil and gas industry index.

(d) See Note 4 to Condensed Financial Statements.

(e) See Note 5 to Condensed Financial Statements.

13



--------------------------------------------------------------------------------

Table of Contents

The following are explanations of significant variances on the underlying properties from second quarter 2013 to second quarter 2014 and from the first six months of 2013 to the comparable period in 2014:

Sales Volumes

Oil

Oil sales volumes decreased 4% for second quarter 2014 as compared with the same 2013 period primarily because of natural production decline, partially offset by increased production from new wells and workovers. Oil sales volumes increased 8% for the six-month period as compared with the same 2013 period primarily because of the timing of cash receipts and increased production from new wells and workovers, partially offset by natural production decline.



Gas

Gas sales volumes increased 3% for second quarter 2014 and increased 5% for the six-month period as compared with the same 2013 periods primarily because of the timing of cash receipts, partially offset by natural production decline.



The estimated rate of natural production decline on the underlying oil and gas properties is approximately 6% to 8% a year.

Sales Prices

Oil

The average oil price increased 11% to $94.30 per Bbl for the second quarter and 12% to $92.09 per Bbl for the six-month period. Oil prices are expected to remain volatile. The second quarter 2014 oil price is primarily related to production from February through April 2014, when the average NYMEX price was $101.12 per Bbl. The average NYMEX price for May and June 2014 was $103.52 per Bbl. On July 21, 2014, the average NYMEX futures price for the following twelve months was $99.19 per Bbl. Gas Gas prices for the second quarter increased 36% to $8.33 per Mcf and for the six-month period increased 28% to $7.58 per Mcf. Natural gas prices are affected by natural gas liquids prices, the level of North American production, weather, crude oil prices and the U.S. economy, storage levels and import levels of liquefied natural gas. Natural gas prices are expected to remain volatile. The second quarter 2014 gas price is primarily related to production from January through March 2014, when the average NYMEX price was $4.94 per MMBtu. The average NYMEX price for April through June 2014 was $4.67 per MMBtu. On July 21, 2014, the average NYMEX futures price for the following twelve months was $3.90 per MMBtu. 14



--------------------------------------------------------------------------------

Table of Contents

Costs

Taxes, Transportation and Other

Taxes, transportation and other increased 46% for the second quarter primarily because of increased gas production taxes and other deductions related to higher gas revenues. Taxes, transportation and other increased 41% for the six-month period primarily because of increased oil and gas production taxes and other deductions related to higher oil and gas revenues, partially offset by a one-time purchaser refund for coal seam gas deductions.



Production Expense

Production expense decreased 3% for the six-month period primarily because of decreased outside operated costs, partially offset by increased repairs and maintenance, labor and chemical and treating costs.

Development Costs

Development costs increased 21% for the second quarter and 32% for the six-month period primarily because of the timing of expenditures and increased activity and costs related to non-operated Texas and Oklahoma oil properties underlying the 75% net profits interest.



Excess Costs

XTO advised the trustee that a missing payment from a purchaser caused costs to exceed revenues by a total of $166 ($125 net to the trust) on properties underlying the Oklahoma working interest in June 2014. However, these excess costs did not reduce net proceeds from the remaining conveyances. Lower oil prices caused costs to exceed revenues by a total of $42,061 ($31,546 net to the trust) on properties underlying the Texas working interest in January 2014. However, these excess costs did not reduce net proceeds from the remaining conveyances. XTO advised the trustee that higher oil prices and decreased costs led to the full recovery of excess costs, plus accrued interest, of $42,177 ($31,633 net to the trust) in February 2014. Lower oil prices in January 2013 and increased costs related to the timing of cash expenditures in January and March 2013 caused costs to exceed revenues by a total of $148,300 ($111,225 net to the trust) in January and March 2013 on properties underlying the Texas working interest. XTO advised the trustee that increased costs related to the timing of cash expenditures caused costs to exceed revenues by a total of $103,563 ($77,672 net to the trust) in April 2013 on properties underlying the Texas working interest. However, these excess costs did not reduce net proceeds from the remaining conveyances. Decreased costs in February 2013 and May 2013 and increased oil prices in June 2013 led to the partial recovery of excess costs, plus accrued interest, of $54,849 ($41,137 net to the trust) in February 2013 and $155,974 ($116,980 net to the trust) in May and June 2013 on properties underlying the Texas working interest. Remaining excess costs totaled $41,040 ($30,780 net to the trust) for the period ended June 30, 2013. 15



--------------------------------------------------------------------------------

Table of Contents

Other Proceeds

The calculation of net profits income for the quarter ended March 31, 2014 included $519,071 ($467,164 net to the trust), which includes interest of $210,242 ($189,218 net to the trust), related to a one-time purchaser refund for deductions attributable to coal seam gas wells located in the San Juan Basin for the period December 1997 through May 2006.



Trustee Resignation

U.S. Trust, Bank of America Private Wealth Management, a division of Bank of America, N.A., as Trustee of the Cross Timbers Royalty Trust, announced that at the special meeting of trust's unitholders held on June 20, 2014, the unitholders of the trust voted to approve the proposal to appoint Southwest Bank as successor trustee of the trust once the resignation of the current trustee takes effect. The effective date of U.S. Trust's resignation as trustee of the trust and Southwest Bank's appointment as successor trustee will be August 29, 2014. Contingencies Several states have enacted legislation requiring state income tax withholding from nonresident recipients of oil and gas proceeds. After consultation with its tax counsel, the trustee believes that it is not required to withhold on payments made to the unitholders. However, regulations are subject to change by the various states, which could change this conclusion. Should amounts be withheld on payments made to the trust or the unitholders, distributions to the unitholders would be reduced by the required amount, subject to the filing of a claim for refund by the trust or unitholders for such amount.



Forward-Looking Statements

Statements in this report relating to future plans, predictions, events or conditions are forward-looking statements. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements regarding the net profits interests, underlying properties, development activities, development, production and other costs and expenses, oil and gas prices and differentials to NYMEX prices, distributions to unitholders, and industry and market conditions, are forward-looking statements that are subject to risks and uncertainties which are detailed in Part I, Item 1A of the trust's Annual Report on Form 10-K for the year ended December 31, 2013, which is incorporated by this reference as though fully set forth herein. XTO Energy and the trustee assume no duty to update these statements as of any future date. 16



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters