<PAGE>
==========================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10662
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CROSS TIMBERS OIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-2347769
-------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
810 Houston Street, Suite 2000, Fort Worth, Texas 76102
------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(817) 870-2800
--------------------------------------------------
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if change since last
- ------------------------------------------------------------------------------
report)
-------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of May 3, 1999
---------------------------- ------------------------------
Common stock, $.01 par value 44,727,256
==========================================================================
<PAGE>
CROSS TIMBERS OIL COMPANY
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998................................................ 3
Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998..................................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998..................................... 5
Notes to Consolidated Financial Statements................................................ 6
Report of Independent Public Accountants.................................................. 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 19
Item 5. Other Information......................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
Signatures................................................................................ 21
</TABLE>
2
<PAGE>
P A R T I. F I N A N C I A L I N F O R M A T I O N
CROSS TIMBERS OIL COMPANY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except share amounts) MARCH 31,
1999 DECEMBER 31,
(Unaudited) 1998
---------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 9,958 $ 12,333
Accounts receivable, net.................................................... 42,970 50,607
Receivable from royalty trusts.............................................. 2,987 -
Investment in equity securities (Note 2).................................... 28,657 44,386
Deferred income tax benefit................................................. 16,316 24,816
Other current assets........................................................ 3,972 5,436
---------------- ----------------
Total Current Assets.................................................... 104,860 137,578
---------------- ----------------
Property and Equipment, at cost - successful efforts method:
Producing properties........................................................ 1,359,250 1,335,844
Undeveloped properties...................................................... 6,926 6,845
Gas gathering and other..................................................... 28,645 27,829
---------------- ----------------
Total Property and Equipment............................................. 1,394,821 1,370,518
Accumulated depreciation, depletion and amortization........................ (344,851) (319,507)
---------------- ----------------
Net Property and Equipment.............................................. 1,049,970 1,051,011
---------------- ----------------
Other Assets.................................................................. 13,242 13,210
---------------- ----------------
Loans to Officers (Note 3).................................................... 6,325 5,795
---------------- ----------------
Deferred Income Tax Receivable................................................ 2,370 -
---------------- ----------------
TOTAL ASSETS.................................................................. $ 1,176,767 $ 1,207,594
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities.................................... $ 61,379 $ 93,583
Payable to royalty trusts................................................... - 968
Short-term debt ............................................................ 7,962 4,962
Other current liabilities................................................... 2,658 75
---------------- ----------------
Total Current Liabilities................................................ 71,999 99,588
---------------- ----------------
Long-term Debt (Note 4)....................................................... 921,000 921,000
---------------- ----------------
Deferred Income Tax Payable................................................... - 6,892
---------------- ----------------
Other Long-term Liabilities................................................... 9,512 2,663
---------------- ----------------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Series A convertible preferred stock ($.01 par value, 25,000,000
shares authorized, 1,138,729 issued, at liquidation value of $25)....... 28,468 28,468
Common stock ($.01 par value, 100,000,000 shares
authorized, 54,048,227 shares issued)..................................... 541 541
Additional paid-in capital.................................................. 337,662 338,503
Treasury stock (9,320,971 shares)........................................... (118,555) (118,555)
Retained earnings (deficit)................................................. (73,860) (71,506)
---------------- ----------------
Total Stockholders' Equity............................................... 174,256 177,451
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 1,176,767 $ 1,207,594
================ ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUES
Oil and condensate........................................................... $ 15,768 $ 15,062
Gas and natural gas liquids.................................................. 51,964 32,992
Gas gathering, processing and marketing ..................................... 1,792 1,652
Other........................................................................ (17) 262
---------------- ----------------
Total Revenues............................................................... 69,507 49,968
---------------- ----------------
EXPENSES
Production................................................................... 18,491 12,508
Exploration.................................................................. 209 1,368
Taxes, transportation and other.............................................. 7,208 5,104
Depreciation, depletion and amortization..................................... 26,176 15,582
General and administrative................................................... 2,916 2,014
Gas gathering and processing................................................. 2,177 2,132
Trust development costs...................................................... - 267
---------------- ----------------
Total Expenses............................................................... 57,177 38,975
---------------- ----------------
OPERATING INCOME............................................................... 12,330 10,993
---------------- ----------------
OTHER INCOME (EXPENSE)
Gain on investment in equity securities...................................... 806 569
Interest expense, net........................................................ (15,390) (11,167)
---------------- ----------------
Total Other Income (Expense)................................................. (14,584) (10,598)
---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAX................................................ (2,254) 395
---------------- ----------------
INCOME TAX
Current...................................................................... (30) -
Deferred..................................................................... (762) 134
---------------- ----------------
............................................................................
Total Income Tax Expense (Benefit) .......................................... (792) 134
---------------- ----------------
NET INCOME (LOSS).............................................................. (1,462) 261
Preferred Stock Dividends.................................................... 445 445
---------------- ----------------
EARNINGS (LOSS) AVAILABLE TO COMMON STOCK...................................... $ (1,907) $ (184)
================ ================
EARNINGS (LOSS) PER COMMON SHARE (Note 6)
Basic........................................................................ $ (0.04) $ 0.00
================ ================
Diluted...................................................................... $ (0.04) $ 0.00
================ ================
DIVIDENDS DECLARED PER COMMON SHARE............................................ $ 0.01 $ 0.04
================ ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................................... 44,727 39,046
================ ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
CROSS TIMBERS OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
(Note 7)
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES.........................................................
Net income (loss).......................................................... $ (1,462) $ 261
Adjustments to reconcile net income (loss) to net cash.......................
provided by operating activities:........................................
Depreciation, depletion and amortization............................... 26,176 15,582
Exploration............................................................ 209 1,368
Stock incentive compensation........................................... (16) 173
Deferred income tax.................................................... (762) 134
Gain on sale of properties and equity securities....................... (2,820) (652)
Other non-cash items................................................... 796 (62)
Changes in operating assets and liabilities (a)............................ 2,230 (5,320)
--------------- ----------------
CASH PROVIDED BY OPERATING ACTIVITIES...................................... 24,351 11,484
--------------- ----------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment............................... 74 89
Property acquisitions...................................................... (4,244) (45,819)
Exploration and development costs.......................................... (21,463) (9,796)
Gas plant, gathering and other additions................................... (1,330) (1,147)
Loans to officers.......................................................... (530) -
--------------- ----------------
CASH USED BY INVESTING ACTIVITIES.......................................... (27,493) (56,673)
--------------- ----------------
FINANCING ACTIVITIES
Proceeds from short- and long-term debt.................................... 7,000 162,500
Payments on short- and long-term debt...................................... (4,000) (96,500)
Dividends.................................................................. (2,233) (1,895)
Net proceeds (payments) related to stock option exercises.................. - (1,023)
Purchase of treasury stock................................................. - (10,139)
--------------- ----------------
CASH PROVIDED BY FINANCING ACTIVITIES...................................... 767 52,943
--------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (2,375) 7,754
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 12,333 3,816
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 9,958 $ 11,570
=============== ================
(a) CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable.................................................... $ 6,210 $ 6,126
Investment in equity securities - net sales (purchases)................ 18,233 (6,233)
Other current assets................................................... 1,418 (2,122)
Accounts payable, accrued liabilities and payable to royalty trusts.... (24,772) (3,091)
Other long-term liabilities............................................ 1,141 -
--------------- ----------------
DECREASE (INCREASE) IN OPERATING ASSETS AND LIABILITIES.................. $ 2,230 $ (5,320)
=============== ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
CROSS TIMBERS OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Cross Timbers Oil
Company ("the Company"), with the exception of the consolidated balance sheet at
December 31, 1998, have not been audited by independent public accountants. In
the opinion of the Company's management, the accompanying financial statements
reflect all adjustments necessary to present fairly the financial position at
March 31, 1999 and the results of operations and cash flows of the Company for
the three months ended March 31, 1999 and 1998. All such adjustments are of a
normal recurring nature. Certain amounts presented in prior period financial
statements have been reclassified for consistency with current period
presentation. The results for interim periods are not necessarily indicative of
annual results.
Certain disclosures have been condensed or omitted from these financial
statements. Accordingly, these financial statements should be read with the
Company's consolidated financial statements included in the Company's 1998
annual report on Form 10-K.
Comprehensive Income
During the three months ended March 31, 1999 and 1998, there were no
reportable elements of comprehensive income other than net income (loss).
Royalty Trusts
The Company makes monthly net profits payments to Cross Timbers Royalty
Trust and Hugoton Royalty Trust (Note 8) based on revenues and costs related to
properties from which net profits interests were carved. Effective January 1,
1999, the Company changed its method of accounting for the trusts from the
royalty interest method to the working interest method. Under the working
interest method, amounts due the trusts are carved from the Company's revenues,
taxes, production expenses and development costs. The Company no longer records
the trusts' portion of development costs as an expense in the consolidated
statements of operations, and reported oil and gas production and revenues and
production expense are lower than reported under the royalty interest method.
2. INVESTMENT IN EQUITY SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, equity
securities acquired in 1998 have been recorded as trading securities since such
securities were principally held for resale in the near future. Accordingly,
such investment has been recorded as a current asset at market value, unrealized
holding gains and losses have been recognized in the consolidated statements of
operations and cash flows from purchases and sales of equity securities have
been included in cash provided (used) by operating activities in the
consolidated statements of cash flows. Gains (losses) on trading securities and
interest related to the cost of these investments have been classified as other
income (expense).
The following are components of gain (loss) on investment in equity
securities (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------------------------
<S> <C> <C>
Realized gains (losses) on sale of securities:
Gains............................................. $ - $ 62
Losses............................................ (23,042) (14)
----------- -----------
Net gains (losses)................................ (23,042) 48
Changes in unrealized gains and losses................. 25,546 604
Interest expense related to investment in
equity securities................................. (1,698) (83)
----------- -----------
Gain on investment in equity securities................ $ 806 $ 569
=========== ===========
</TABLE>
6
<PAGE>
As of March 31, 1999, the unrealized holding loss on investment in equity
securities was $47.1 million, as compared with an unrealized holding loss of
$37.4 million on May 10, 1999.
3. RELATED PARTY TRANSACTIONS
Pursuant to margin support agreements with each of six officers, the
Company agreed to use the value of its investments in equity securities (Note 2)
to provide margin support for the officers' broker accounts where they hold
Company common stock. The Company has also agreed to pay each officer's margin
debt to the extent unpaid by the officer. In connection with these agreements,
in December 1998 the Company loaned four officers a total of $5,795,000 to
reduce their margin debt. In first quarter 1999, an additional $430,000 was
loaned and approximately $100,000 interest was accrued. The loans are full
recourse and due in five years, with interest equal to the Company's bank debt
rates. Total officer margin debt on their broker accounts at April 30, 1999 was
$11.2 million.
4. LONG-TERM DEBT
As of March 31, 1999, long-term bank debt, subordinated note and other
long-term debt were unchanged from balances at December 31, 1998. The Company
has reduced bank and short-term debt by approximately $162 million since March
31, primarily from proceeds from the sale of Hugoton Royalty Trust units and
non-operated producing properties in the San Juan Basin, net of payments to
Shell for the Cook Inlet Acquisition (Note 8).
The Company is currently amending its Revolving Credit Agreement with
commercial banks ("loan agreement"). Because of the sale of trust units and
producing properties, the Company anticipates that the borrowing base and
commitment will be reduced from $615 million to $505 million, resulting in
unused borrowing capacity of approximately $48 million. Other significant
provisions of the loan agreement are expected to remain unchanged.
5. COMMITMENTS AND CONTINGENCIES
Commodity Commitments
The Company has entered into gas futures contracts and oil swap agreements
that effectively fix prices for the production and periods shown below. Prices
to be realized for hedged production will be less than these NYMEX prices
because of location, quality and other adjustments. As of May 10, 1999, the
NYMEX oil price is approximately $2.50 higher than the West Texas Intermediate
posted price. See "Oil and Gas Production and Prices" under Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Gas Oil
--------------------------------- -------------------------------
Production Month Mcf per Day Price per Mcf Bbls per Day Price per Bbl
--------------------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
1999 April - $ - 7,000 $15.80
May 230,000 1.95 9,355 16.66
June 240,000 2.00 7,333 16.21
July 140,000 2.07 4,839 16.14
August 130,000 2.15 3,871 15.88
September 140,000 2.14 2,667 15.34
October 110,000 2.14 1,613 15.68
November 60,000 2.27 - -
December 60,000 2.43 - -
2000 January 30,000 2.60 - -
February 30,000 2.50 - -
March 20,000 2.40 - -
April to September 10,000 2.30 - -
</TABLE>
7
<PAGE>
The Company has entered into basis swap agreements that effectively fix
the San Juan Basin basis at $0.25 per Mcf for 20,000 Mcf per day for May through
December 1999, and 10,000 Mcf per day from January through December 2000. The
Company has basis swap agreements that effectively fix the Wyoming basis at
$0.27 per Mcf for 10,000 Mcf per day from May through December 1999. The Company
also has basis swap agreements that effectively fix Oklahoma basis at $0.13 per
Mcf for 10,000 Mcf per day for May through December 1999.
The Company's termination of futures contracts related to April 1999 gas
production, net of the effects of basis swap agreements, resulted in a net gain
of $670,000. This gain will be recognized as additional gas revenue of
approximately $0.08 per Mcf in April 1999.
The Company has committed to pay a minimum price of $2.00 per Mcf for gas
sales related to Hugoton Royalty Trust distributions through March 2000, which
effectively represents production through January 2000. Underlying volumes
related to the trust units sold to the public (Note 8) are approximately 38,000
Mcf per day. Therefore, the Company's gas revenues will be reduced to the extent
actual gas prices for these underlying volumes is less than $2.00.
Litigation
On April 3, 1998, a class action lawsuit, styled Booth, et al. v. Cross
Timbers Oil Company, was filed against the Company in the District Court of
Dewey County, Oklahoma. The action was filed on behalf of all persons who, at
any time since June 1991, have been paid royalties on gas produced from any gas
well within the State of Oklahoma under which the Company has assumed the
obligation to pay royalties. The plaintiffs allege that the Company has reduced
royalty payments by post-production deductions and has entered into contracts
with subsidiaries that were not arms-length transactions, which actions reduced
the royalties paid to the plaintiffs and those similarly situated, and that such
actions are a breach of the leases under which the royalties are paid. The
plaintiffs are seeking an accounting and payment of the monies allegedly owed to
them. The Company filed motions to dismiss the action due to lack of proper
venue, which motions were denied. This decision denying the motions was
appealed, but the appeal was denied. A hearing on the class certification issue
has not been scheduled. Management believes it has strong defenses against this
claim and intends to vigorously defend the action. Management's estimate of the
potential liability from this claim has been accrued in the Company's financial
statements.
On October 17, 1997, an action, styled United States of America ex rel.
Grynberg v. Cross Timbers Oil Company, et al., was filed in the U. S. District
Court for the Western District of Oklahoma against the Company and certain of
its subsidiaries by Jack J. Grynberg on behalf of the United States under the
qui tam provisions of the False Claims Act. The Company was not made aware of
the claim until the U.S. Department of Justice contacted the Company in August
1998. The plaintiff alleges that the Company underpaid royalties on gas produced
from federal leases and lands owned by Native Americans by at least 20% during
the past 10 years as a result of mismeasuring the volume of gas and incorrectly
analyzing its heating content. According to the U.S. Department of Justice, the
plaintiff has made similar allegations in actions filed against over 300 other
companies. The plaintiff seeks to recover the amount of royalties not paid,
together with treble damages, a civil penalty of $5,000 to $10,000 for each
violation and attorney fees and expenses. After its review, the Department of
Justice decided in April 1999 not to intervene and asked the court to unseal the
case. Although the court unsealed the case in May 1999, the Company has not been
served with this complaint. The Company believes that the allegations of this
lawsuit are without merit and intends to vigorously defend the action.
The Company is involved in various other lawsuits and certain governmental
proceedings arising in the ordinary course of business. Company management and
legal counsel do not believe that the ultimate resolution of these claims,
including the lawsuits described above, will have a material effect on the
Company's financial position, liquidity or operations.
8
<PAGE>
6. COMMON SHARES OUTSTANDING AND EARNINGS PER COMMON SHARE
The following reconciles earnings (numerator) and shares (denominator) used
in the computation of basic and diluted earnings per share (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------------
Earnings Earnings
Earnings Shares (a) per Share Earnings Shares per Share
---------- --------- ----------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income...................... $ (1,462) $ 261
Preferred stock dividends....... (445) (445)
---------- -------
Earnings (loss) available to
common stock - basic...... (1,907) 44,727 $(0 .04) (184) 39,046 $ 0.00
======= ========
Diluted:
Effect of dilutive securities:
Stock options................ - 6 - 703
Preferred stock (a).......... - - - -
Warrants..................... - - - 60
---------- -------- ------ ------
Earnings (loss) available to
common stock - diluted.... $ (1,907) 44,733 $ (0.04) (b) $ (184) 39,809 $ 0.00 (b)
========== ======== ======= ====== ====== ========
</TABLE>
(a) Based on common shares outstanding at May 1, 1999, potential conversion of
Series A convertible preferred stock becomes dilutive to earnings per share
when annual earnings available to common stock exceeds approximately $32.4
million and when quarterly earnings available to common stock exceeds
approximately $8.1 million.
(b) Because of the antidilutive effect of dilutive securities on loss per
common share, diluted loss available to common stock is the same as basic.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following are total interest and income tax payments (receipts) during
each of the periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------- ---------
<S> <C> <C>
Interest................................ $ 9,224 $ 4,476
Income tax.............................. (278) 64
</TABLE>
The accompanying consolidated statements of cash flows exclude the
following non-cash equity transactions during the three-month periods ended
March 31, 1999 and 1998:
- Vesting of 81,000 performance shares in 1998
- Receipt of 8,294 shares (valued at $162,000) of common stock for the
option price of exercised stock options in 1998
- Transfer of $841,000 from additional paid-in capital to accrued
liabilities in 1999 related to the decrease in the Company's common
stock price for shares issued to Shell for the Cook Inlet Acquisition
(Note 8)
9
<PAGE>
8. ACQUISITIONS AND DISPOSITIONS
On April 24, 1998, the Company acquired producing properties in the East
Texas Basin from EEX Corporation ("EEX Acquisition") for $265 million. After
purchase price adjustments primarily resulting from net revenues from the
January 1, 1998 effective date through April 24,1998, the properties were
purchased for an estimated purchase price of $245 million. In connection with
the acquisition, the Company sold a production payment to EEX Corporation for
$30 million. The cost of the EEX Acquisition (net of the production payment
sold) of $215 million was funded by bank borrowings which were partially repaid
by proceeds from the sale of common stock.
On September 30, 1998, the Company acquired oil-producing properties in the
Middle Ground Shoal Field of Alaska's Cook Inlet ("Cook Inlet Acquisition") from
various Shell Oil Company affiliates ("Shell"). The acquired interests include a
100% working interest in two State of Alaska leases, two offshore production
platforms and a 50% interest in certain operated production pipelines and
onshore processing facilities. The Company acquired the properties in exchange
for 1,921,850 shares of the Company's common stock, subject to a $20 per share
price guarantee. The Company also executed a non-interest bearing promissory
note to Shell for $6 million. Payments under this note of $3 million, $2 million
and $1 million are due when the average NYMEX crude oil price for 60 consecutive
days equals or exceeds $18.50, $19.50 and $20.50, respectively. The total
estimated purchase price of the Cook Inlet Acquisition is $44.4 million.
On March 1, 1999, the Company and Shell entered into an amended agreement
to postpone Shell's resale of Company common stock to no later than August 16,
1999. Prior to that date, the Company will have the options of purchasing the
common stock from Shell, registering the shares for resale by Shell, or
exchanging the shares with another Company security to be resold by Shell. In
the interim, the Company has paid $15 million to Shell and $5 million into
escrow. The Company also has entered into gas sales and transportation contracts
that provide Shell with an estimated value of $7.5 million. If Shell's proceeds
from the sale of Company securities exceeds the remaining amount due Shell under
the $20 common stock price guarantee, the difference will be refunded to the
Company; otherwise, the difference will be paid to Shell. As of May 10, 1999,
the remaining amount due Shell under the common stock price guarantee is
approximately $11 million, or $5.75 per common share held by Shell, after
considering funds in escrow. Amounts due Shell in excess of the common stock
value at March 31, 1999 and December 31, 1998 are recorded in accounts payable
and accrued liabilities in the accompanying consolidated balance sheets.
On November 20, 1998, the Company acquired primarily gas-producing
properties in northwest Oklahoma and the San Juan Basin of New Mexico for $33.4
million from Seagull Energy Corp. After purchase price adjustments primarily
resulting from net revenues from the October 1, 1998 effective date through
November 20, 1998, the properties were purchased for an estimated price of $29.2
million. Additional purchase price revisions may result from post-closing
adjustments. The Company funded the acquisition with existing lines of credit.
In December 1998, the Company formed the Hugoton Royalty Trust by conveying
80% net profits interests in properties located in the Hugoton area of Kansas
and Oklahoma, the Anadarko Basin of Oklahoma and the Green River Basin of
Wyoming. These net profits interests represent approximately 30% of the
Company's existing reserve base and were conveyed to the Trust in exchange for
40,000,000 units of beneficial interest. On April 8, 1999, the Company sold
15,000,000, or 37.5%, of the Trust units, in an initial public offering at a
price of $9.50 per unit, less underwriters' discount and expenses. Pursuant to
the underwriters' overallotment option, the Company sold an additional 2,004,000
units at $9.50 per unit less discount on May 7, 1999. Total net proceeds of
approximately $149 million from the sale were used to reduce bank debt.
Estimated gain on the sale of Trust units is approximately $40 million before
income tax.
Acquisitions have been recorded using the purchase method of accounting.
The following presents unaudited pro forma results of operations for the three
months ended March 31, 1999 and 1998 and the year ended December 31, 1998, as if
these acquisitions and the sale of Hugoton Royalty Trust units had been
consummated immediately prior to January 1, 1999 and 1998. These pro forma
results are not necessarily indicative of future results.
10
<PAGE>
<TABLE>
<CAPTION>
Pro Forma (Unaudited)
------------------------------------------------------------
Three Months Ended Year Ended
(in thousands, except per share data) March 31, December 31,
-----------------------------------
1999 1998 1998
-------------- --------------- --------------
<S> <C> <C> <C>
Revenues......................................... $ 62,879 $ 68,701 $ 265,981
============== =============== ==============
Net income (loss)................................ $ (950) $ 4,336 $ (63,586)
=============== =============== ==============
Earnings (loss) available to common stock........ $ (1,395) $ 3,891 $ (65,365)
============== =============== ==============
Earnings (loss) per common share
Basic...................................... $ (0.03) $ 0.08 $ (1.39)
=============== =============== ==============
Diluted.................................... $ (0.03) $ 0.08 $ (1.39)
=============== =============== ==============
Weighted average shares outstanding.............. 44,727 48,172 46,994
============== =============== ==============
</TABLE>
On May 4, 1999, the Company sold non-operated producing properties in the
San Juan Basin of New Mexico to Vastar Resources, Inc. for $29.5 million. The
sale is effective March 1, 1999 and is subject to typical post-closing
adjustments. Proceeds were used to reduce bank debt.
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Cross Timbers Oil Company:
We have reviewed the accompanying consolidated balance sheet of Cross Timbers
Oil Company (a Delaware Corporation) as of March 31, 1999 and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1999 and 1998. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cross Timbers Oil Company as of
December 31, 1998 included in the Company's 1998 annual report on Form 10-K, and
in our report dated March 12, 1999, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1998 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1998 annual report on Form 10-K from which it has been derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 10, 1999
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
management's discussion and analysis contained in the Company's 1998 annual
report on Form 10-K, as well as with the consolidated financial statements and
notes thereto included in this quarterly report on Form 10-Q.
OIL AND GAS PRODUCTION AND PRICES
- ---------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
Increase
1999 1998 (Decrease)
------------ ---------- ------------
<S> <C> <C> <C>
TOTAL PRODUCTION
Oil (Bbls)....................................... 1,397,505 1,076,292 30%
Gas (Mcf)........................................ 25,968,633 15,900,715 63%
Natural gas liquids (Bbls)....................... 218,847 209,876 4%
Mcfe............................................. 35,666,745 23,617,723 51%
AVERAGE DAILY PRODUCTION
Oil (Bbls)....................................... 15,528 11,959 30%
Gas (Mcf)........................................ 288,540 176,675 63%
Natural gas liquids (Bbls)....................... 2,432 2,332 4%
Mcfe............................................. 396,297 262,419 51%
AVERAGE SALES PRICE
Oil per Bbl...................................... $ 11.28 $ 13.99 (19%)
Gas per Mcf...................................... $ 1.94 $ 1.96 (1%)
Natural gas liquids per Bbl...................... $ 6.74 $ 8.47 (20%)
</TABLE>
-------------------------------------------------------
Bbl - Barrel
Mcf - Thousand cubic feet
Mcfe - Thousand cubic feet of natural gas equivalent (computed on an
energy equivalent basis of one Bbl equals six Mcf)
Total oil production increased primarily because of the Cook Inlet
Acquisition and development activity in 1998, partially offset by natural
decline. Increased gas production is primarily attributable to 1998 producing
property acquisitions and development activity, partially offset by natural
decline. Approximately 9,000 Mcf per day of first quarter gas production is
related to a prior period revenue adjustment.
The average posted price for West Texas Intermediate ("WTI"), a benchmark
crude, was $10.39 per barrel for first quarter 1999, compared to $13.73 for
first quarter 1998. The Company's average oil price is generally higher than the
WTI posted price because of quality and location differentials. The WTI price
was slightly above $15.00 at the beginning of 1998, then continued to slide
throughout the year until dropping to $8.00 in December 1998, the lowest level
since 1978. Following the announcement in March 1999 of further agreed
production cuts by OPEC and other oil producers, the WTI posted price has risen
above $16.00 in April, the highest level since December 1997.
Gas prices during the first quarter of 1999 and 1998 have been relatively
weak because of abnormally mild winters in the central and eastern U.S. Cooler
spring weather and lower industry production levels have helped to strengthen
prices in April 1999. The Company uses price-hedging arrangements to reduce
price-risk on a portion of its gas production; see Note 5 to Consolidated
Financial Statements. The Company's average gas price for first quarter 1999
includes $0.25 per Mcf related to gas hedging profits.
13
<PAGE>
RESULTS OF OPERATIONS
- ----------------------
The loss available to common stock was $1.9 million for first quarter
1999, compared to $200,000 for first quarter 1998. This decline in earnings was
the result of lower oil prices and increased expenses from the 1998
acquisitions, which were largely offset by acquisition-related production
increases.
Total revenues for the 1999 quarter were $69.5 million, a 39% increase
from first quarter 1998 revenues of $50 million. Oil revenue increased $700,000
(5%) because of the 30% increase in production, largely offset by the 19%
decrease in average prices. Gas and natural gas liquids revenues increased $19
million (58%) because of the 63% increase in gas production. Gas gathering,
processing and marketing revenues increased $100,000 (8%) primarily because of
increased gas marketing margins.
Expenses for first quarter 1999 totaled $57.2 million, a 47% increase
compared to total expenses of $39 million for the first quarter of 1998.
Production expense increased $6 million (48%), taxes, transportation and other
increased $2.1 million (41%) and depreciation, depletion and amortization
increased $10.6 million (68%) primarily because of the 1998 acquisitions.
Exploration costs for first quarter 1999 decreased $1.2 million (85%) due to a
reduction in exploratory activities. General and administrative expense
increased $900,000 (45%) because of increased salaries and expenses due to
Company growth through acquisitions and development activity.
Gain on investment in equity securities increased $200,000 (42%) because
of the increase in market value of securities during the quarter, partially
offset by related interest expense. Other interest expense increased $4.2
million (38%) because of an increase of approximately 47% in the weighted
average borrowings used to partially fund property acquisitions and treasury
stock purchases. This increase was partially offset by a decrease in the
weighted average interest rate from 8% in first quarter 1998 to 7.4% in first
quarter 1999.
COMPARATIVE EXPENSES PER MCF EQUIVALENT PRODUCTION
The following are expenses on an Mcf equivalent (Mcfe) produced basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
Increase
1999 1998 (Decrease)
-------- ------ ----------
<S> <C> <C> <C>
Production......................... $0.52 $0.53 (2%)
Taxes, transportation and other.... 0.20 0.22 (9%)
Depreciation, depletion and
amortization (DD&A) (a).......... 0.71 0.63 13%
General and administrative (G&A)... 0.08 0.09 (4%)
Interest........................... 0.43 0.47 (9%)
</TABLE>
___________________________
(a) Includes only DD&A directly related to oil and gas production.
The following are explanations of significant variances of expenses on an Mcfe
basis:
DD&A- Increased DD&A per Mcfe is primarily related to increased 1998
producing property acquisition costs and lower proved oil reserve estimates,
related to lower prices, as of December 31, 1998.
Interest- Decreased interest expense per Mcfe is because a portion of the
1998 acquisitions were funded by sales and issuance of common stock. Also, the
weighted average interest rate declined from 8% to 7.4%. These decreases were
partially offset by increased debt to fund treasury stock purchases in 1998.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
CASH FLOW AND WORKING CAPITAL
Cash provided by operating activities was $24.3 million for the first
quarter of 1999 compared to $11.5 million for the first quarter of 1998.
Operating cash flow (defined as cash provided by operating activities before
changes in operating assets and liabilities) increased 32% from $16.8 million
for the first quarter of 1998 to $22.1 million for the same 1999 period
primarily because of increased production from 1998 acquisitions and development
activity, partially offset by the decline in oil prices.
During the quarter ended March 31, 1999, proceeds from bank borrowings of
$7 million and operating activities of $24.3 million were used to fund net
property acquisitions, development costs and other capital additions of $27.5
million, debt payments of $4 million and dividends of $2.2 million. The
resulting decrease in cash and cash equivalents for the period was $2.4 million.
Other significant changes in current assets during the first three months
of 1999 were a $15.7 million decrease in investment in equity securities and an
$8.5 million decrease in current deferred income tax resulting from security
sales in the first quarter that were partially offset by increased security
prices. Accounts receivable decreased $7.6 million because of lower gas prices
and timing of settlement of gas marketing receivables. The $3 million receivable
from royalty trusts at March 31, 1999 primarily reflects the Company's March net
profits payment to Hugoton Royalty Trust which was 100% owned by the Company
until the sale of trust units in April.
Total current liabilities decreased $27.6 million during first quarter
1999 primarily because of a $32.2 million decrease in accounts payable and
accrued liabilities primarily related to timing of payments. This decrease was
partially offset by a $3 million increase in short-term borrowings, as well as a
$2.6 million increase in other current liabilities related to deferred revenues
on gas contracts and interest swap terminations.
ACQUISITIONS AND DEVELOPMENT
Exploration and development costs incurred by the Company for the first
three months of 1999 were $18.8 million; cash expenditures for exploration and
development for this period totaled $21.5 million. This compares with cash
expenditures for exploration and development of $9.8 million and development
costs incurred of $12.8 million during the first quarter of 1998. The Company
initially budgeted $60 million for 1999 exploration and development
expenditures. Actual exploration and development expenditures may vary
significantly due to many factors, particularly changes in commodity prices.
With recent increased oil prices, the Company currently anticipates its 1999
exploration and development expenditures will be $70 to $90 million. Such
expenditures are expected to be funded by cash flow from operations.
During first quarter 1999, the Company drilled one gas well and completed
nine 1998 drill wells. A total of 27 recompletions and workovers were also
performed in the first quarter. Because of weak oil prices, first quarter
development was concentrated on gas projects in East Texas.
DISPOSITIONS
In December 1998, the Company formed the Hugoton Royalty Trust by conveying
80% net profits interests in properties located in the Hugoton area of Kansas
and Oklahoma, the Anadarko Basin of Oklahoma and the Green River Basin of
Wyoming. These net profits interests represent approximately 30% of the
Company's existing reserve base and were conveyed to the Trust in exchange for
40,000,000 units of beneficial interest. On April 8, 1999, the Company sold
15,000,000, or 37.5%, of the Trust units, in an initial public offering at a
price of $9.50 per unit, less underwriters' discount and expenses. Pursuant to
the underwriters' overallotment option, the Company sold an additional 2,004,000
units at $9.50 per unit less discount on May 7, 1999. Total net proceeds of
approximately $149 million from the sale were used to reduce bank debt.
Estimated gain on the sale of Trust units is approximately $40 million before
income tax.
15
<PAGE>
On May 4, 1999, the Company sold non-operated producing properties in the
San Juan Basin of New Mexico to Vastar Resources, Inc. for $29.5 million. The
sale is effective March 1, 1999 and is subject to typical post-closing
adjustments. Proceeds were used to reduce bank debt.
DEBT AND EQUITY
As of March 31, 1999, long-term bank debt, subordinated note and other
long-term debt were unchanged from balances at December 31, 1998. The Company
has reduced bank and short-term debt by approximately $162 million since March
31, primarily from proceeds from the sale of Hugoton Royalty Trust units and
non-operated producing properties in the San Juan Basin, net of payments to
Shell for the Cook Inlet Acquisition.
The Company is currently amending its Revolving Credit Agreement with
commercial banks ("loan agreement"). Because of the sale of trust units and
producing properties, the Company anticipates that the borrowing base and
commitment will be reduced from $615 million to $505 million, resulting in
unused borrowing capacity of approximately $48 million. Other significant
provisions of the loan agreement are expected to remain unchanged.
Stockholders' equity at March 31, 1999 decreased $3.2 million from
year-end because of the net loss for the quarter of $1.9 million, dividends
declared of $447,000, and a decrease in additional paid-in capital of $841,000
related to the decrease in the Company's common stock price for shares issued to
Shell for the Cook Inlet Acquisition.
COMMON STOCK DIVIDENDS
In February 1999, the Board of Directors of the Company declared a first
quarter common stock dividend of $0.01 per share, or a total of $447,000, paid
in April 1999. The quarterly dividend was reduced from $0.04 per common share
paid in 1998 because of the Company's current focus on debt reduction.
YEAR 2000
- ---------
"Year 2000," or the ability of computer systems to process dates with
years beyond 1999, affects almost all companies and organizations. Computer
systems that are not Year 2000 compliant by January 1, 2000 may cause material
adverse effects to companies and organizations that rely upon those systems.
Continuity of the Company's operations in January 2000 will not only depend upon
Year 2000 compliance of the Company's computer systems and computer-controlled
equipment, but also compliance of computer systems and computer-controlled
equipment of third parties. These third parties include oil and natural gas
purchasers and significant service providers such as electric utility companies
and natural gas plant, pipeline and gathering system operators.
The Company is in the process of reviewing its computer systems and
computer-controlled field equipment and making the necessary modifications for
Year 2000 compliance. The Company has completed modifications and testing of its
primary accounting and land computer programs. The remaining computer systems
have been inventoried and assessed. Remediation and testing of significant
remaining systems are expected to be complete by August 1999.
Some of the Company's critical field equipment, such as natural gas
compressors, are partially controlled or regulated by embedded computer chips.
Based on a preliminary review of all operating areas, no significant compliance
exceptions have been identified. As of April 1999, the types of field equipment
in all operated areas have been inventoried. The Company plans to complete
remediation and testing of identified exceptions for significant
computer-controlled field equipment by August 1999.
Based on its review, remediation efforts and the results of testing to
date, the Company does not believe that timely modification of its computer
systems and computer-controlled equipment for Year 2000 compliance represents a
material risk to the Company. The Company estimates that total costs related to
Year 2000 compliance efforts will be less than $500,000 of which approximately
$50,000 has been incurred and expensed through March 1999.
16
<PAGE>
The Company has identified significant third parties whose Year 2000
compliance could affect the Company and is in the process of formally inquiring
about their Year 2000 status. The Company has received responses to
approximately 36% of its inquiries. Approximately 99% of respondents have
indicated that they will be Year 2000 compliant by January 1, 2000. Despite its
efforts to assure that such third parties are Year 2000 compliant, the Company
cannot provide assurance that all significant third parties will achieve
compliance in a timely manner. A third party's failure to achieve Year 2000
compliance could have a material adverse effect on the Company's operations and
cash flow. The potential effect of Year 2000 non-compliance by third parties is
currently unknown.
The Company is currently identifying appropriate contingency plans in the
event of potential problems resulting from failure of the Company's or
significant third party computer systems on January 1, 2000. The Company has not
completed any contingency plans to date. Specific contingency plans will be
developed in response to the results of testing scheduled to be complete by
August 1999, as well as the assessed probability and risk of system or equipment
failure. These contingency plans may include installing backup computer systems
or equipment, temporarily replacing systems or equipment with manual processes,
and identifying alternative suppliers, service companies and purchasers. The
Company expects these plans to be complete by October 1999.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain information included in this quarterly report and other materials
filed by the Company with the Commission contain forward-looking statements
relating to the Company's operations and the oil and gas industry. Such
forward-looking statements are based on management's current projections and
estimates and are identified by words such as "expects," "intends," "plans,"
"projects," "anticipates," "believes," "estimates" and similar words. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
results may differ materially from what is expressed or forecasted in such
forward-looking statements.
Among the factors that could cause actual results to differ materially
are:
- crude oil and natural gas price fluctuations
- the Company's ability to acquire oil and gas properties that meet
its objectives and to identify prospects for drilling
- potential delays or failure to achieve expected production from
existing and future exploration and development projects
- potential disruption of operations because of failure to achieve
timely Year 2000 compliance by the Company or other entities with
which it has material relationships, and
- potential liability resulting from pending or future litigation.
In addition, these forward-looking statements may be affected by general
domestic and international economic and political conditions.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following market risk disclosures should be read in conjunction with
the quantitative and qualitative disclosures about market risk contained in the
Company's 1998 annual report on Form 10-K, as well as with the consolidated
financial statements and notes thereto included in this quarterly report on Form
10-Q.
Hypothetical changes in interest rates and prices chosen for the following
estimated sensitivity effects are considered to be reasonably possible near-term
changes generally based on consideration of past fluctuations for each risk
category. It is not possible to accurately predict future changes in interest
rates, product prices and investment market values. Accordingly, these
hypothetical changes may not necessarily be an indicator of probable future
fluctuations.
INTEREST RATE RISK
The Company is exposed to interest rate risk on short-term and long-term
debt carrying variable interest rates. At March 31, 1999, the Company's variable
rate debt had a carrying value of $623 million, which approximated its fair
value, and the Company's fixed rate debt had a carrying value of $306 million
and an approximate fair value of $278 million. Assuming a 100-basis point change
in interest rates, the fair value of the Company's fixed rate debt would change
by approximately $16.4 million at March 31, 1999.
COMMODITY PRICE RISK
The Company hedges a portion of the market risks associated with its crude
oil and natural gas sales. As of March 31, 1999, outstanding gas futures
contracts had a fair value loss of $1.9 million and outstanding gas basis swap
agreements had a fair value gain of $200,000. During March, the Company entered
into crude oil swap agreements, which had a fair value loss of $700,000 at March
31, 1999. The aggregate effect of a hypothetical 10% change in oil and gas
prices and basis would result in a change of up to $9 million in the fair value
of these financial instruments at March 31, 1999. See Note 5 to Consolidated
Financial Statements.
INVESTMENT IN EQUITY SECURITIES
The Company is subject to price risk on its unhedged portfolio of publicly
traded investments in equity securities. The fair value of these securities at
March 31, 1999 was $28.7 million. At that time, a 25% appreciation or
depreciation in equity prices would increase or decrease portfolio fair value
and pre-tax earnings by approximately $7.2 million. See Note 2 to Consolidated
Financial Statements.
18
<PAGE>
P A R T I I. O T H E R I N F O R M A T I ON
ITEM 1. LEGAL PROCEEDINGS
On October 17, 1997, an action, styled United States of America ex rel.
Grynberg v. Cross Timbers Oil Company, et al., was filed in the U. S. District
Court for the Western District of Oklahoma against the Company and certain of
its subsidiaries by Jack J. Grynberg on behalf of the United States under the
qui tam provisions of the False Claims Act. The Company was not made aware of
the claim until the U.S. Department of Justice contacted the Company in August
1998. The plaintiff alleges that the Company underpaid royalties on gas produced
from federal leases and lands owned by Native Americans by at least 20% during
the past 10 years as a result of mismeasuring the volume of gas and incorrectly
analyzing its heating content. According to the U.S. Department of Justice, the
plaintiff has made similar allegations in actions filed against over 300 other
companies. The plaintiff seeks to recover the amount of royalties not paid,
together with treble damages, a civil penalty of $5,000 to $10,000 for each
violation and attorney fees and expenses. After its review, the Department of
Justice decided in April 1999 not to intervene and asked the court to unseal the
case. Although the court unsealed the case in May 1999, the Company has not been
served with this complaint. The Company believes that the allegations of this
lawsuit are without merit and intends to vigorously defend the action.
ITEMS 2. THROUGH 4.
Not applicable.
ITEM 5. OTHER INFORMATION
On May 4, 1999, the Company sold non-operated producing properties in the
San Juan Basin of New Mexico to Vastar Resources, Inc. for $29.5 million. The
sale is effective March 1, 1999 and is subject to typical post-closing
adjustments. Proceeds were used to reduce bank debt. The Company's internal
engineers estimate proved developed reserves attributable to the sale to be 32.2
billion cubic feet of gas and 1.1 million Bbls of natural gas liquids. Current
net daily production averages 8,000 Mcf of gas and 250 Bbls of natural gas
liquids.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number
and Description Page
--------------- ----
11 Computation of per share earnings
(included in Note 6 to Consolidated Financial Statements)
15 Letter re unaudited interim financial information
15.1 Awareness letter of Arthur Andersen LLP 22
19
<PAGE>
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 1998 and through May 14, 1999:
On February 16, 1999, the Company filed a report on Form 8-K/A
(Amendment No. 2 to Form 8-K dated April 24, 1998) to file
amended financial statements for the acquisition of certain
producing oil and gas properties and undeveloped acreage in
the East Texas Basin from EEX Corporation.
On April 23, 1999, the Company filed a report on Form 8-K
regarding its April 8, 1999 sale of 15,000,000 units of the
Hugoton Royalty Trust which was formed in December 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROSS TIMBERS OIL COMPANY
Date: May 14, 1999 By BENNIE G. KNIFFEN
------------------------------
Bennie G. Kniffen
Senior Vice President and Controller
(Principal Accounting Officer and
Duly Authorized Officer)
21
<PAGE>
EXHIBIT 15.1
Cross Timbers Oil Company:
We are aware that Cross Timbers Oil Company has incorporated by reference
in its Registration Statements on Form S-8 (Nos. 33-64274, 33-65238, 33-81766,
333-35229 and 333-36569) and on Form S-3 (No. 333-46909) of Cross Timbers Oil
Company and Form S-3 (No. 333-56983) of Cross Timbers Oil Company and Cross
Timbers Royalty Trust its Form 10-Q for the quarter ended March 31, 1999, which
includes our report dated May 10, 1999, covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the Securities Act of
1933, that report is not considered a part of the registration statement
prepared or certified by our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 14, 1999
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,958
<SECURITIES> 28,657
<RECEIVABLES> 45,957
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104,860
<PP&E> 1,394,821
<DEPRECIATION> 344,851
<TOTAL-ASSETS> 1,176,767
<CURRENT-LIABILITIES> 71,999
<BONDS> 921,000
0
28,468
<COMMON> 541
<OTHER-SE> 145,247
<TOTAL-LIABILITY-AND-EQUITY> 1,176,767
<SALES> 69,507
<TOTAL-REVENUES> 70,313
<CGS> 0
<TOTAL-COSTS> 57,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,390
<INCOME-PRETAX> (2,254)
<INCOME-TAX> (792)
<INCOME-CONTINUING> (1,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,907)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
