s ABOUT THE REPORT
The people of Cross Timbers Oil Company live and work in the vast
expanse of America. From the icy waters of Alaska’s Cook Inlet to
the piney woods of East Texas, our folks are part and parcel of the
daily routines of life in these communities. We drive the country
roads. We watch local football.
We do business at the corner stores.
Yet, with the hectic pace of life, we rarely have a minute to pause
and look around at our world. In so doing, the seemingly ordinary
might reveal itself as something extraordinary.
Our goal was to take that “pause” for you in photographs. We
hoped to capture those little slices of life which reveal the underly-
ing essence of our neighborhoods. What we expose is a compelling
collection of diverse landscapes, interesting cultures and colorful
characters who live and work alongside us.
s ON THE COVER
Atop White Rock Mountain in the Ozark National Forest, an adventurer
surveys the rolling terrain of Arkansas.
At the close of 1999, we reflect on the year’s many challenges, relish
the substance of our accomplishments and stand ready to enter
another world of opportunity – the gas-rich Arkoma Basin.
Like the bold explorer with a vision, we have staked our claim to
more than 600,000 acres. With excitement, anticipation and sea-
soned confidence, we prepare for the intensity of work and fresh
s COMPANY PROFILE
Cross Timbers Oil Company, established in 1986, is engaged in the
acquisition and development of quality, long-lived producing oil
and gas properties and exploration for oil and gas. Since going
public in 1993, proved oil and gas reserves have grown at an annual
compound rate of 38% to more than two trillion cubic feet of gas
equivalent. Cross Timbers operates more than 85% of its properties,
which are concentrated in Texas, Arkansas, Oklahoma, Kansas, New
Mexico, Wyoming, and Alaska. The Company completed its initial
public offering in May 1993 and is listed on the New York Stock
Exchange under the symbol “XTO.” It also created the Cross
Timbers Royalty Trust (“CRT” traded on the NYSE) and the
Hugoton Royalty Trust (“HGT” traded on the NYSE) which went
public in 1992 and 1999, respectively.
Cr oss Tim b er s O il C om pan y
1999 1998 1997
In thousands except production, per share and per unit data
Total revenues $ 341,295 $ 249,486 $ 198,272
Income (loss) before income tax and minority interest $ 70,605(a) $ (105,570)(b) $ 39,201
Earnings (loss) available to common stock $ 44,964(a) $ (71,498)(b) $ 23,905
Per common share (c)
Basic $ 0.96 $ (1.65) $ 0.60
Diluted $ 0.95 $ (1.65) $ 0.59
Operating cash flow (d) $ 132,683 $ 78,480 $ 89,979
Operating cash flow per share (c) $ 2.83 $ 1.81 $ 2.26
Total assets $ 1,477,081 $ 1,207,005(e) $ 788,455
Senior $ 684,100 $ 615,000 $ 239,000
Subordinated notes and other $ 307,000 $ 305,411(e) $ 300,000
Total stockholders’ equity $ 277,817 $ 201,474(e) $ 170,243
Common shares outstanding at year-end (c) 48,890 44,727 39,450
Oil (Bbls) 14,006 12,598 10,905
Gas (Mcf) 288,000 229,717 135,855
Natural gas liquids (Bbls) 3,631 3,347 220
Mcfe 393,826 325,390 202,609
Oil (per Bbl) $ 16.94 $ 12.21 $ 18.90
Gas (per Mcf) $ 2.13 $ 2.07 $ 2.20
Natural gas liquids (per Bbl) $ 11.80 $ 00007.62 $ 9.66
Oil (Bbls) 61,603 54,510 47,854
Gas (Mcf) 1,545,623 1,209,224 815,775
Natural gas liquids (Bbls) 17,902 17,174 13,810
Mcfe 2,022,653 1,639,331 1,185,759
(a) Includes effect of a $40.6 million pre-tax gain on sale of Hugoton Royalty Trust units.
(b) Includes effect of a $93.7 million pre-tax net loss on investment in equity securities and a $2 million pre-tax, non-cash impairment charge.
(c) Adjusted for the three-for-two stock splits effected on March 19, 1997 and February 25, 1998.
(d) Cash provided by operating activities before changes in operating assets and liabilities and exploration expense.
(e) As restated. See Note 16 to Consolidated Financial Statements.
Operating Cash Flow Daily Production Proved Reserves
Glossary (in millions) (in MMcfe) (in Bcfe)
$350 400 2,500
Bbls Barrels (of oil or NGLs)
Bcf Billion cubic feet (of gas)
Bcfe Billion cubic feet equivalent
BOE Barrels of oil equivalent
BOPD Barrels of oil per day $250
E&P Exploration & production
Mcf Thousand cubic feet (of gas) 1,500
Mcfe Thousand cubic feet equivalent
MMcf Million cubic feet (of gas)
MMcfe Million cubic feet equivalent $60 1,000
NGLs Natural gas liquids
Tcf Trillion cubic feet (of gas) $100
Tcfe Trillion cubic feet equivalent
One barrel of oil is the energy equivalent 50
of six Mcf of natural gas.
0 0 0
Cr oss Tim b er s O il C om pan y
TO OUR SHAREHOLDERS
“The pendulum swings...” and it swung decisively to share and have debt of $.40 to $.45 per Mcfe by year-end
the upside in 1999, for both the industry and Cross 2000. Obviously, the amount of cash flow is dependent on
Timbers. Despite three mild winters in a row, both oil and commodity prices, but we expect to internally generate
gas prices approached new highs in the first quarter of between $320 million and $340 million, including asset
2000. During this time, Cross Timbers progressed notably, sales. About $100 million to $120 million will be used to
positioning itself among the top U.S. independents. Our fund the development program, while $111 million was
achievements during 1999 were impressive: used on March 31 to purchase the minority interest in
Arkoma Basin properties held by Lehman Brothers
Proved oil and gas reserves at year-end 1999 were Holdings, Inc. The remaining $100 million to $130
2.02 Tcfe, up 23% from the 1.64 Tcfe at year-end million will be used to reduce existing debt and to
1998. This translates to 41 Mcfe per share.
repurchase our common stock.
Record production, attributable to our successful
development drilling and property acquisitions, ACQUISITIONS
jumped 21% to 144 Bcfe. Much of our production growth in recent years has been
fueled by the steady accumulation of high-quality properties,
Acquisition of nearly 500 Bcfe in the highly
regarded Arkoma Basin established a new core and 1999 was no exception. In two transactions, we
operations area for the Company. acquired 455 Bcfe of proved reserves, net of sales, in the
highly promising Arkoma Basin of Arkansas and Oklahoma,
Cash flow from operations reached an annualized
as well as a gas gathering and marketing company, compres-
rate of $203 million, or $4.15 per share, during the
fourth quarter. sion and gathering assets and undeveloped acreage. The
Arkoma properties are 99% gas, creating a new core area
Unit cash margin averaged a strong $1.03 per Mcfe
for Cross Timbers and adding about 120 MMcf in daily
during 1999 and an impressive $1.42 per Mcfe in
the fourth quarter, both multiples of our five-year
average drill bit replacement cost of $.40. The Arkoma Basin is generating considerable excite-
ment among our experienced staff of engineers and
Debt per Mcfe was reduced to $.49 from $.56
geologists. Early studies of the multiple sandstone plays and
producing horizons indicate this area will yield a multi-year
The Company added 852 Bcfe (before reserve sales)
project inventory and may well exceed our usual 50%
at a cost of $.70 per Mcfe.
improvement on reserves acquired. We have already identi-
fied 180 well locations and 200 workover opportunities,
With a 15% production growth for 2000 already
which include 50 compression projects, 70 pumping units
“built-in” through our Arkoma Basin acquisitions, our pri-
and 80 recompletions.
mary focus shifts to efficiently developing the vast potential
The Arkoma acquisitions, valued at $466 million, were
of the quality properties we’ve acquired over the past two
achieved with Lehman as a financial partner. Cross Timbers
years. Our acquisitions in East Texas, the San Juan Basin
purchased Lehman’s interest in the first acquisition in
and the Arkoma Basin have nearly tripled production and
September 1999 and the second interest on March 31
reserves as well as related development opportunities.
of this year.
Our stated goals for 2000 are to generate $4.00 per
share in cash flow, have proved reserves of 40 Mcfe per
Cr oss Tim b er s O il C om pan y
PROPERTY SALES tion at a cost of only $.28 per Mcfe. These results are
directly attributable to our well-established formula for
In 1999, Cross Timbers conducted a comprehensive
success: purchase quality, established reserves with the right
review of its producing property portfolio. As a result, we
characteristics for further development, perform detailed
sold $258 million of producing properties in several trans-
studies and apply the latest engineering, geologic and
actions. Proceeds from these sales were used for debt reduc-
geophysical technology to increase production, reserves and
tion and to partially fund the acquisition of gas-producing
properties in the Arkoma Basin.
Hugoton Royalty Trust. In May, Cross Timbers com- Our 1999 activities focused on our East Texas and San
Juan properties. In both of these areas, field studies indi-
pleted the Hugoton Royalty Trust offering. By selling an
cate that reserve additions could exceed 100% of acquired
interest in properties that our development efforts have
reserves in the next couple of years.
already increased in value, we were able to “monetize” our
Since acquisition of our East Texas properties in 1998,
success and to fund acquisition opportunities with even
we have drilled 41 wells and completed 153 workovers in
greater upside potential. To form the trust, we conveyed an
the area. As a result, in the past 18 months we have
80% net profits interest in our properties in the Hugoton
increased reserves by 88% and daily production by 38%.
area of Oklahoma and Kansas, the Anadarko Basin in
Our remaining exploitation inventory consists of 150
Oklahoma and the Green River Basin in Wyoming. We
development wells and 300 recompletions.
sold 17,004,000 of 40,000,000 total units in a public offer-
Development emphasized the Travis Peak and Cotton
ing at $9.50 per unit. This sale generated net proceeds of
Valley formations underlying the Willow Springs and
$149 million. Importantly, we still effectively own 66% of
Freestone fields. Additionally, in the Freestone Field we are
the original property base subsequent to the offering.
Other Property Sales. Other property sales during involved in an active Bossier Sandstone development play.
In both fields we have utilized innovative completion and
1999 generated $109 million in proceeds. These sales
low-cost fracture techniques that allow recompletion of pay
occurred in multiple transactions and focused primarily on
intervals beneath existing producing intervals – a signifi-
non-operated producing properties in Texas, New Mexico,
cant technical achievement. By using these new techniques,
Oklahoma and Wyoming. Through this process, we were
completing all producing horizons and commingling
able to reduce the Company’s well count by 30%, while
production, we are adding still more upside to these high-
reducing the reserves by only 7%. The large number of
wells sold increased our efficiency, while the relatively small
In the San Juan Basin, we have drilled 31 wells and
proportion of reserves sold is testimony to the quality and
completed 220 workovers since acquisition. As a result, we
concentration of our remaining reserves.
have increased daily operated production by 46% and
On March 31, 2000, Cross Timbers sold properties
reserves by 62% and still have 200 well locations and 250
located primarily in southeast New Mexico and West Texas
workovers remaining in our development inventory.
for $68.3 million. Daily production from the combined
In 1999, we increased daily operated production in the
sales totals 13.1 MMcf and 560 barrels of oil. The proceeds
San Juan Basin by 27% – topping the 15% increase in
were used to partially fund the purchase of Lehman’s
1998 – by drilling 18 wells and successfully developing
minority interest in the Arkoma properties.
deeper Dakota, Burro Canyon, Paradox and Morrison forma-
DEVELOPMENT tions. We completed 130 workovers and revamped field
compression by installing 74 wellhead compressors. We
We executed the most aggressive development pro-
will continue to install wellhead compression to further
gram in our history in 1999. Cross Timbers delivered on
reduce line pressure. In 2000, we plan to drill 42 wells and
516 projects, including drilling 116 wells (101 gas, 15 oil),
complete 100 workovers in the San Juan Basin.
completing 400 workovers and replacing 237% of produc-
Cr oss Tim b er s O il C om pan y
FINANCIAL RESULTS OUTLOOK
For 1999, the Company reported earnings to common The historical link between oil and gas prices and E&P
shareholders of $45 million, or $.96 per share, compared equity price performance was shattered this past year.
with a loss of $71.5 million or $1.65 per share in 1998. While operations of a majority of independent producers
Earnings for 1999 included a $26.8 million after-tax gain are once again prospering, E&P share prices are just now
from the sale of the Hugoton Royalty Trust units, a $4.2 beginning to recover.
million after-tax gain on the sale of properties, and an Despite the market’s current tendency to discount
$800,000 after-tax loss on investment in equity securities. industry improvements, we are committed to achieving a
The 1998 loss includes a $61.9 million after-tax loss related stock price that better recognizes our underlying value.
to the Company’s investment in equity securities, as well as More than 80% of our reserves and daily production are
an after-tax impairment write-off of producing properties of related to natural gas. With the 12-month natural gas
$1.3 million. Excluding gains and losses from investments price strip around $3.00 per Mcf even as we near the end of
and from sales of trust units and other property, earnings another mild winter, North American natural gas funda-
for 1999 were $14.8 million or $.32 per share. Excluding mentals appear bullish for 2000 and beyond. As a result,
losses from investments and impairment write-off, the we should generate at least $80 million to $100 million in
Company would have reported a loss of $8.3 million or cash flow above the capital requirements of our develop-
$.19 per share in 1998. ment program. This will position us to meet our debt per
Total revenues for 1999 were $341.3 million, a 37% Mcfe goals and to continue to do what we do best – buy
increase from revenues of $249.5 million for 1998. Cash high-quality oil and gas properties and improve them by
flow from operations before changes in operating assets and more than 50%.
liabilities and exploration expense for the year was $132.7 We can’t predict or control the “swing of the
million, or $2.83 per share, compared to $78.5 million or pendulum.” We can, however, concentrate on the funda-
$1.81 per share for 1998. mentals of being a low-cost finder and producer of energy,
especially gas. We also can emphasize shareholder value,
SHARE REPURCHASE PROGRAM and with our strategic steps this year, expect that solid
In February of 2000, the Board of Directors authorized value will be recognized in the marketplace.
the repurchase of up to 2.5 million shares of the Company’s We hope you share the excitement of our bright
common stock, or about 5% of the 48.9 million shares out- prospects for 2000 and beyond. As always, we appreciate
standing at year-end. The shares will be bought from time your continued support.
to time in open-market or negotiated transactions.
The Board’s action recognized the extraordinary value
represented by the current price of Cross Timbers stock,
which is trading at a substantial discount from our historic
multiples of four to seven times cash flow and well below Bob R. Simpson
our underlying value. The buy-back plan continues Chairman and Chief Executive Officer
management’s long-standing strategy of opportunistically
repurchasing its common stock to create additional value
Steffen E. Palko
Vice Chairman and President
March 31, 2000
At the turn of the 1800s, the rich natural resources of
the Alaskan frontier brought Russian fur traders across
the Bering Strait. With their families and their religion,
these bold pioneers carved a life out of the wild Kenai
Peninsula. They hunted the woods and fished the cold
This Russian Orthodox Church, a gentle reminder of a past culture, waters. They trapped and traded
anchors the center of old Kenai. pelts. They dreamed of fortunes.
Two centuries later, pioneers still
make the journey to this northern frontier. They come
with their families and culture. Only now, the “hunt”
is for the natural resources lying deep below the surface –
great reservoirs of hydrocarbons.
Cr oss Tim b er s O il C om pan y
Since the Company’s founding in 1986 and initial Our efforts in 1999 yielded another successful chapter
public offering in 1993, the domestic energy industry has in the story of Cross Timbers’ focused and disciplined
experienced – alternately enduring and enjoying – wide strategy.
swings in commodity prices. Through it all, Cross
Timbers has pressed forward to emerge as a leader in the
exploration and production sector. One of the reasons is a The Company has
steadfast commitment to a proven operational strategy: purchased about $1
billion of strategic, gas-
Employ talented professionals, both in the office
and in the field;
since December 1997,
Make quality acquisitions of long-lived reserves; including $466 million in Arkoma Basin properties this
past year. It now has a presence in every premier onshore
Reduce field operating costs while increasing
gas-producing basin in the United States. Cross Timbers’
challenge now is to efficiently develop this extensive
Focus development spending on the most favorably inventory and to achieve or beat the Company’s historic
priced commodity, oil or gas; 50% addition to reserves on acquired properties.
Do the analytical homework, both intensively
The Arkoma Basin, stretching across Arkansas and
Deploy the most current technological advancements eastern Oklahoma, is well known for its shallow decline
for finding, developing and producing more reserves rates, multiple formations and complex geology – attrib-
from existing properties.
utes that long attracted Cross Timbers to the region. Our
bold move into this basin was accomplished in two major
These tenets on which the Company was built have
deals that made Cross Timbers the largest gas producer in
provided a sound foundation for growth. From a team of
the state of Arkansas.
less than a dozen in 1986, personnel has grown to over 600
strong. Operations have expanded from a handful of wells
in West Texas and Oklahoma to more than 7,000 wells in
five core operating areas in the Lower 48, as well as off-
shore Alaska. Proved reserves, starting at zero, have grown
to two Tcfe. In so doing, we have positioned the Company Areas
to profit from the future preeminence of natural gas by
building one of the most impressive domestic reserve bases
of any independent.
From an operational perspective, a simple goal has Hugoton Area
remained resolute throughout these challenging periods: Major County
San Juan Basin
“Work hard to enhance reserves, improve
production and profitability and, consequently, increase
our shareholders’ value.” Permian Basin Basin
On thousands of uninhabited acres rising above the
valleys, an old way of life continues to exist. Shepherds
tend to thousands of sheep that graze the vast government
lands. These men roam the mountains for months at a
time with only their dogs and caravan wagons.
Yet below them lies a wealth
A solitary sheepherder rises to a new day.
of natural gas. This gas feeds a
web of pipelines that stretches to the West Coast,
providing energy for modern life.
Cr oss Tim b er s O il C om pan y
The first acquisition was completed in June 1999, DEVELOPMENT
when the Company purchased the common stock of Spring Cross Timbers spent about $94.4 million for explo-
Holding Company, a private oil and gas firm in Tulsa, ration and development activities in 1999, replacing a
Oklahoma, for cash and Cross Timbers common stock remarkable 237% of its
totaling $85 million. Lehman Brothers Holdings, Inc. production through
contributed $42.5 million in cash for a 50% interest in development at a cost
Spring. In mid-September, Cross Timbers acquired of $.28 per Mcfe. This
Lehman’s interest for $44.3 million, funded through the compares to a five-year
sale of non-strategic properties. average drill bit reserve
The acquisition was 99% gas and gave Cross Timbers replacement of 189%
proved reserves of 264 Bcfe, with proved developed at a cost of $.40 per
reserves accounting for 82% of total proved reserves. Mcfe. This is an enviable achievement that places Cross
Based on first quarter 1999 daily production of 66 MMcfe, Timbers at the forefront of its peers.
the reserve-to-production index was 11 years – fulfilling Improved oil and gas prices have spurred new
the Company’s criteria for acquiring long-lived reserves. enthusiasm in the oil patch, and Cross Timbers was no
The properties included about 1,400 producing wells exception to the upturn in field activity. We executed our
located on 340,000 net acres. The deal also included most aggressive development plan to date, participating in
non-producing assets such as compression equipment, the drilling of 116 wells and completing more than 400
gathering systems and undeveloped acreage. workovers. Our primary focus was on gas projects, with
In September, Cross Timbers again teamed with about 90% of the completed wells targeting natural gas.
Lehman to acquire $231 million worth of Arkoma proper- Oil project development accelerated late in the year as oil
ties from Ocean Energy, Inc. As in the Spring transaction, prices reached levels not seen since 1990.
Lehman granted Cross Timbers Natural gas drilling con-
Summary of Proved Reserves by Area
an opportunity to acquire its centrated in East Texas
SEC Assumptions – December 31, 1999
50% equity interest at a (in thousands) (31 wells), the Arkoma Basin
Proved Reserves Discounted
later date. Natural Gas Present Value before of Arkansas and eastern
Liquids Income Tax of
Engineers estimate proved Area Oklahoma (26 wells), the San
Oil (Bbls) Gas (Mcf) (Bbls) Proved Reserves
Permian Basin 38,738 99,681 – $ 393,602 22.3%
reserves at acquisition of 220 Juan Basin of New Mexico
Arkoma Basin 4 433,083 – 346,064 19.6%
East Texas 2,575 401,617 – 337,434 19.1%
Bcfe with daily production of (19 wells), the Major County
Hugoton (a) 2,819 333,503 – 269,754 15.3%
55 MMcfe from 1,140 wells. area of northwestern
San Juan Basin 1,315 259,031 17,902 257,426 14.6%
Alaska 14,001 – – 126,309 7.1%
Like the Spring acquisition, Oklahoma (13 wells), and the
Other 2,151 18,708 – 35,347 2.0%
these Arkoma properties are Total 61,603 1,545,623 17,902 $1,765,936 100.0% Fontenelle Unit located in
99% gas and have a reserve-to- (a) related underlying properties. in the Hugoton Royalty Trust and the
Includes Cross Timbers’ ownership
Wyoming (7 wells). We
production index of 11 years. placed greatest emphasis on
As a result of these Arkoma Basin acquisitions, Cross our core properties in East Texas and the San Juan Basin
Timbers added an estimated 480 Bcfe (455 net of sales) in with more than 65% of capital deployed to these gas-rich
reserves with daily production of about 120 MMcfe. More regions. In addition, more than two-thirds of our
than 86% of the value of the reserves acquired is operated, workover activities were focused in East Texas and the
and production expense, before severance and property San Juan Basin.
taxes, is just $.22 per Mcfe. The Company now has inter-
ests in more than 2,500 (1,100 operated) Arkoma wells on
435,000 net acres.
Although the West Texas territory was wrought with
dust storms and danger, bold pioneers battled their way
across the land to set down roots for the future. They
worked to build homesteads and towns while the stage-
coaches and railroads followed.
Ila Trout, Postmaster of Tokio, Texas,
For their pioneering efforts, a
has seen decades of letters come and go through the doors of her post office.
legacy of wealth was granted to
their descendants. Though the land of the Permian
Basin is rugged and unforgiving, beneath it lies a
bonanza of oil and gas.
Cr oss Tim b er s O il C om pan y
East Texas Basin
Development of oil reserves again focused on the
The East Texas Basin, one of the nation’s premier gas
University Block 9 Field and the Prentice Northeast Unit,
basins, has a history of production from multiple intervals
both located in the Permian Basin of West Texas. Six wells
ranging from 7,000 to 12,000 feet. Our holdings are con-
were successfully drilled in the University Block 9 Field.
centrated in eight major fields including Willow Springs,
Three of these were horizontal sidetracks that continued
Opelika, Logansport, Freestone, Whelan, Tri-Cities, North
the horizontal program begun in 1998. In the Prentice
Lansing and Bald Prairie.
Northeast Unit we drilled nine wells, several of which
Since assuming operations in May 1998, we have
were delineation wells that set up future drilling prospects.
drilled 41 wells and completed 153 workovers. Daily pro-
Meanwhile, development of the prolific Middle Ground
duction has increased 38% to 110 MMcfe from 80 MMcfe
Shoal Field located in Alaska’s Cook Inlet was initiated in
while reserves, including
1999 with six workovers and the refurbishment of drilling
55 Bcfe produced since
rigs on both platforms in preparation for continued devel-
opment in 2000.
increased 88% to 472
During 1999, Cross Timbers focused its exploration
Bcfe from 251 Bcfe. We
efforts on prospect generation in areas where it already has
still have 150 well loca-
a presence. Successful wildcats were drilled on the Fort
tions and more than 300
Chaffee prospect located in the Arkoma Basin of Arkansas
workovers identified for
and the Cowboy prospect located in McClain County,
future development. During 1999, Cross Timbers spent
Oklahoma. These successful test wells will fuel additional
about $43 million on 31 development wells and 100
drilling in 2000.
workovers with an average rate of return exceeding 60%.
Our 2000 capital budget of $100 million to $120
Most of Cross Timbers’ East Texas production comes
million encompasses acquisition, exploration and develop-
from the Travis Peak Formation, which has multiple
ment plans. Cross Timbers expects to drill or participate
sandstone reservoirs distributed throughout a thickness of
in the drilling of 180 wells and plans to implement more
about 2,000 feet. Because of its prolific production rates,
than 400 workover and recompletion activities. Our
multi-pay complexity and depth, the Travis Peak
development program will again focus on gas, with 70%
Formation has generally been the primary target in the
of capital allocated for these projects. Any acquisitions are
East Texas Basin for the past 25 years. Cross Timbers’
expected to be additive in nature – limited to small
initial development focus also centered on the Travis Peak
purchases in areas where we already have a foothold.
and, while this play has been and will continue to be
The excellent results from the 1999 program reveal
successful, we have identified significant potential in the
the quality of our exploration and development portfolio,
remaining formations. In fact, we drilled 16 wells target-
which is the best in our 14-year history. We can attribute
ing overlooked potential in the Bossier and Cotton Valley
this to strategic acquisitions that place Cross Timbers in
formations in 1999.
major gas basins with multiple producing horizons allow-
Willow Springs Field. This Gregg County field has
ing our extensive technical expertise to be brought to bear
been the proving ground for the vast potential of the entire
in a target-rich environment. The Arkoma Basin acquisi-
basin. As a result of our development efforts, production
tions are the most recent in a string of astute acquisitions
has tripled to 27 MMcf per day (net 22 MMcf). A substan-
that have transformed Cross Timbers into one of the top
tial portion of the increase is due to adding production
U.S. E&P independents. The results of this strategy will
from the Cotton Valley Sandstones to the established Travis
become more apparent during the next 12 months as the
Arkoma acquisitions drive future development with
In 1998, we performed several workovers that proved
additional high-quality projects.
the production potential of the Upper Cotton Valley, an
interval with a thickness of about 1,000 feet containing
numerous sandstones. As a result, in 1999 we set in
The farthest extent of the Red River brought paddleboats
into the woods of eastern Texas in the mid-1800s. With
them came the commerce that built port towns. Folks
harvested raw goods and resources – from timber to cotton
to sugar cane – to send packing back downstream on boats
headed for the bustling
Blessed with a relaxed pace of life, two men of Jefferson
cities of the East Coast.
strum their tune on a fine spring afternoon.
These historic hubs,
with their unique culture, live in quieter times today.
Yet the land around them is still rich with a commodity
that flows east: natural gas.
Cr oss Tim b er s O il C om pan y
motion a program to increase production by adding pay The Company holds more than 17,000 acres (10,000
from the Upper Cotton Valley Sandstones to existing net) with Bossier Sandstone potential and has identified up
producing wells. Previous operators in the area imple- to 100 potential well locations. Furthermore, very few of
mented high-cost stimulation techniques with poor results, the deep Freestone wells have been completed to the
which resulted in underdeveloped Cotton Valley reservoirs. Cotton Valley Sandstones, leaving much of the interval
Cross Timbers unlocked the potential of these “stringers” untapped. And the development of the deepest formation,
by designing a more economic completion process. the Cotton Valley Limestone, has been limited to the
A fracture stimulation using water instead of northern third of the field. Substantial
costly gels to carry proppant was successfully development opportunity for this limestone
implemented with excellent results. This remains throughout the acreage.
new stimulation process resulted in higher We plan to capitalize on these numerous
production rates with cost savings of about reservoir opportunities by drilling wells with
70% – $75,000 versus $250,000. Import- multiple completions. In fact, commingling
antly, this technique can be utilized beyond production from the Cotton Valley
the boundary of the Willow Springs Field, Sandstones, Cotton Valley Limestones and
creating exciting upside potential in Bossier Sandstones, in conjunction with
other areas. utilizing less costly water fracture versus
The 1999 drilling efforts yielded 11 conventional fracturing techniques, has
Willow Springs Field wells with average initial producing already generated phenomenal results. Previous operators
rates of two MMcfe per day and reserves of two Bcfe per completed these three zones separately, attaining daily
well. This development drilling further delineated and rates of 1 to 1.5 MMcfe per zone. In contrast, we com-
extended the field boundaries to the south and west. In bined all zones at initial completion with daily rates
addition, pressure tests indicate very little drainage from exceeding four MMcfe. By completing deeper pay zones
40-acre development wells, creating additional drilling in the beginning and utilizing more cost-efficient develop-
opportunities on tighter spacing. The Company plans to ment techniques, the present value of these Freestone Field
drill 12 wells and to perform 13 workovers and recomple- wells will be significantly increased.
tions in this area in 2000. The development results for 1999 reveal the success of
Freestone Field. Located in Freestone County, Texas, our proven process. As a whole, daily field production
this field produces from the Cotton Valley and Bossier more than doubled since acquisition, increasing from eight
sandstones and the Travis Peak and Pettit formations. MMcfe to around 20 MMcfe at year end. We plan during
However, at the time of acquisition, development was 2000 to drill 15 wells and to complete 12 workovers,
focused in the Travis Peak Formation, with 35 of 40 wells making Freestone one of our most active
completed exclusively in that formation. development areas.
Other Fields. Cross Timbers enjoys additional
During 1999 our focus shifted to new development
targets in the deeper Cotton Valley and Bossier sandstones. upsides in all its East Texas fields. We believe previous
We drilled four wells, completing them in both zones. operators of the Opelika and Tri-Cities fields bypassed
Daily rates averaged more than four MMcfe per well, with reserves in the Cotton Valley Sandstones, while the Travis
reserves of 3.2 Bcfe each, far exceeding expectations. An Peak and Rodessa formations have many numerous multi-
intensive field study reveals there is more to come. zone development prospects. The Whelan, North Lansing,
and Logansport fields also provide opportunities for field
extensions and infill drilling. In total, the Company plans
to drill 40 wells and perform more than 120 workovers in
these areas during 2000.
In the mid-1800s, adventurous cowboys rode hundreds
of miles with thousands of cattle to get to the Kansas
railheads and payday. Over the decades, towns of trade
populated by bold, colorful characters sprang up all
along this famous trail.
Today, the same entrepreneurial
In western Oklahoma, 83-year-old Bob Klemme is on a mission to mark
spirit is alive in the heartland of
the Chisholm Trail – every mile from South Texas to Kansas.
America. Farmers, merchants and
oilmen alike strike out on a daily journey to serve their
passions and earn a dream.
Cr oss Tim b er s O il C om pan y
San Juan Basin The Paradox Formation wells are producing at rates
exceeding three MMcf per day with estimated reserves of
Cross Timbers’ acquire-and-exploit strategy is strongly
3.5 Bcf per well. The Paradox Formation was initially
exemplified in the San Juan Basin properties it purchased
developed on 640-acre spacing; however, field studies and
in late 1997. The existing wells had long produced from
these recent results indicate the need for tighter spacing to
multiple intervals and the region’s complex geology pro-
adequately recover remaining reserves. The Company will
vided a well-established arena for upside potential. Also,
pursue changing the spacing rules to allow for additional
like East Texas, the San Juan Basin is laden with producing
Paradox drilling in 2000.
horizons bypassed by previous operators. Regulatory
Cross Timbers drilled four Dakota wells targeting
changes in recent years, allowing increased development
structural highs identified in our seismic
through reduced spacing and commingling, have Ute Indians
studies. We drilled these wells
multiplied our prospects in this gas-rich region.
through the deeper Burro
An impressive snapshot of our San Juan potential –
Canyon and Morrison sand-
both realized and unrealized – is illustrated by our devel-
stones. Two of the four wells
opment progress. At acquisition, we identified 37 well
encountered prolific produc-
locations and 29 workover projects on our operated proper-
tion from these deeper
ties. We have since drilled 31 wells and completed more
sandstones. Since the
than 200 workovers, with a remaining inventory of 150
majority of the original wells
identified well locations and 250 workover opportunities.
in the field were not drilled
Production on the operated properties has increased 46%
deep enough to test the Burro 700 •
while reserves have increased 62%.
Canyon and Morrison sand- 750 •
In 1999, we drilled 19 wells and completed 130
stones, there is significant 800 •
workovers, employing only $9 million in capital. This
upside potential for additional Burro Canyon
generated an average rate of return exceeding 100%.
Ute Dome Field
development. The other two
Development again focused on lowering producing
wells were economically completed in the
pressures with the installation of 74 wellhead compressors, After processing the
3-D seismic survey over
main Dakota sandstone intervals.
bringing total compressor installations to more than 150. Ute Dome Field, several
subtle fault traps were
Development plans for 2000 include
These installations have resulted in increased daily produc- discovered in the
shooting additional areas of the field with Cretaceous-age Dakota
tion rates averaging more than 100 Mcf per well. Drilling
Formation. Three wells
3-D seismic and drilling eight wells with
focused on the Ute Dome Field in both the Paradox and were drilled in 1999
targeting these traps,
the Dakota, Burro Canyon and Morrison
Dakota formations along with Fruitland Coal development all being successful.
formations as targets.
in the northwestern portion of the basin.
Fruitland Coal. Development activities in the
The 2000 development budget for the San Juan Basin
Fruitland Coal focused on the northwestern portion of the
includes 48 recompletions, 50 wellhead compressor instal-
basin where we drilled eight wells during 1999. Our
lations and 42 development wells. This is about 15% of
successful program increased daily Fruitland Coal gas
our planned development spending for the year.
Ute Dome Field. During 1999, the Company production to more than seven MMcf from about two
MMcf at acquisition. The Fruitland Coal Formation is
successfully utilized reprocessed 3-D seismic in the Ute
only 1,500 feet deep here, and therefore, highly economic
Dome Field to clarify structural mapping and to identify
– costing $190,000 to drill and complete a well with
isolated, undrained fault blocks. Using these studies, we
average reserves of about 1.4 Bcf. This equates to a
drilled three wells to the Paradox Formation and four wells
development cost of just $.14 per Mcfe.
to the Dakota Formation. As a result of this development,
daily production has almost tripled, increasing to 14.5
MMcf from five MMcf at acquisition.
In past times, the mesa landscape was home to only cac-
tus, creatures and a few brave souls. Now communities
dot the countryside and the townsfolk are involved in the
energy business which fuels vibrant growth.
Tucked into the San Juan Basin,
thousands of gas wells quietly coexist In the cold Farmington morning, brothers walk the
with the cities, the wildlife and the dirt road toward their school bus.
environment. All the while, natural gas flows from deep
within the earth, filling the pipelines which supply our
growing demands for energy.
Cr oss Tim b er s O il C om pan y
Two successful wells were drilled in the State Line area Our development program in the Ashland Field has
where producing rates often exceed two MMcf per day. In continued to target the Morrowan-age Cromwell
addition, six wells were drilled in the Fulcher-Kutz area Sandstones and Atokan-age sandstones, using reprocessed
surrounding Farmington, New 2-D seismic lines to pinpoint the
Mexico. Several of these wells were optimum position for new wells. The
successful trend extension tests that set work paid off as the two wells that
up additional drilling opportunities have been completed are testing at
for the future. A reduction in well daily rates exceeding 2.5 MMcf. Also
spacing from 320 acres to 160 acres the Company has a sizable acreage
also is under discussion with regulato- position in the South Pine Hollow
ry agencies, providing further oppor- Field, which only has one well pro-
tunity. We expect to drill 15 wells to the Fruitland Coal ducing from the Cromwell Sandstones. An exploration
Formation during 2000. well is currently being drilled to define the possible limits
of this Cromwell production.
Arkoma Basin In total, the Company plans to drill six wells in the
The Company secured a stronghold in the Arkoma Oklahoma Cromwell/Atoka Trend during 2000. Four will
Basin, by acquiring, net of sales, 455 Bcfe of high-quality be infill development wells to exploit trapped reserves, and
reserves and interests in 2,500 wells. We have long pur- two exploratory wells will test portions of our extensive
sued a significant position in the Arkoma, a multi-pay and acreage position.
Arkansas Fairway Trend. This area is home to the
geologically complex basin stretching from central
Arkansas into eastern Oklahoma. This premier basin is majority of the Company’s Arkoma acreage. Production
well known for its shallow rates of production decline, here is predominantly Aetna Field
multiple productive intervals and heavily faulted, complex controlled by #4
geology. These attributes perfectly match our comprehen- faults that cre- 0•
sive approach to exploitation and development. With this ate pockets of 1,000 •
isolated reserves 2,000 •
sizable acquisition, we now control more than 40% of the
Arkansas Arkoma Basin production, making us the largest trapped in mul-
producer in the state. tiple sandstones 5,000 •
In the last half of the year, we drilled 10 wells that at depths rang- 6,000 •
proved geologic concepts that will drive future develop- ing from 2,500 7,000 •
ment. Thus, we have already identified more than 200 to 7,500 feet in Areci SS Freiburg Dunn quot;Cquot; SD Orr L. Hale SD
prospective workover opportunities and 180 well locations. the Atokan-age
Aetna Field, located in the
In 2000, the budget provides for drilling 45 of these wells and Morrowan-age formations. The heart of the Arkoma
Basin, produces from
and completing 75 workovers. Company is utilizing electrical imaging Atokan-age through
The properties can be separated into three distinct logs to define these sandstone trends while
Each identified fault block
areas with unique geologic and producing characteristics: reprocessing seismic data for better creates separate reser-
voirs that remain
the Oklahoma Cromwell/Atoka Trend, the Arkansas fault-plane definition. undrained until penetrated
by a new well.
Fairway Trend and the Arkansas Overthrust Trend. Three multi-zone development wells
Oklahoma Cromwell/Atoka Trend. This area is were drilled during 1999 with initial daily
located in eastern Oklahoma, with the majority of our production rates averaging 2.5 MMcf and reserves of 1.80
ownership in the Ashland and Northwest Reams fields. It Bcf per well. So far, more than 120 locations have been
was originally developed in the 1970s targeting the identified for development drilling with 24 planned in
Cromwell Sandstones with subsequent drilling focusing on 2000. Moving forward, we expect our joint geologic and
the shallower Atokan-age sandstone. engineering studies to reveal a bounty of untouched fault
blocks, setting up additional development drilling.
The endless flatlands of Kansas provide the source for
the region’s wealth – fertile soils and hydrocarbon-rich
reservoirs. With so much to gain
The spirited farmer works his land in preparation for spring planting.
for the economy and their families,
farmers and pumpers work hand in hand.
Tractors plow across the same lands where thousands
of gas wells produce from the giant Hugoton area.
Cr oss Tim b er s O il C om pan y
This area is ripe for exploration opportunities. During Drilling in Major and Woodward counties focused on
1999, the Company participated in the Fort No. 1-23 further development of the Chester and Osage formations.
well, which tested at daily rates exceeding 2.5 MMcf from A successful trend extension well, the Stanford No. 3-2,
the Orr and Hale sandstones. This well was located on a was completed in Major County with daily production of
portion of Fort Chaffee, an inactive military base, which 20 barrels of oil and 1.1 MMcf. This well led to plans for
has been off-limits to drilling until now. The Company two additional wells during 2000. In the Quinlan area,
and its partners have the rights to develop a 12,300-acre the Company completed highly economic development
federal unit within the Fort’s wells that extended
Gragg Field Gragg Field is in the
boundaries, with Cross Timbers the boundaries of overthrust portion of
the Arkoma Basin,
having a 49.3% interest. the trend. The located in Sebastian
Importantly, the success of this County, Arkansas.
first well extends the southern a large acreage
4,000 • caused sediments in
5,000 • the subsurface to fault.
edge of the Fairway Trend onto position in this area
This resulted in the
thrusted Middle Atoka
the Fort Chaffee acreage. Three and plans to drill
interval as illustrated
additional wells are expected to be 9,000 • Lower Atoka
six wells to further with multiple isolated
drilled in 2000 to further test the develop the Chester
Top Middle Atoka Basham Nichols Turner Borum
possibilities on the acreage block. Formation during 2000.
Fontenelle Unit development in 1999 focused
Arkansas Overthrust Trend. This area is located to primarily on additional 80-acre infill drilling. However,
the south of the Fairway Trend. It is characterized by mul- two successful step-out wells also were completed,
tiple thrust faults that create isolated reservoirs. Structural confirming our trend extension theories and creating
definition is therefore key to successful development in this future upside opportunities. Unit production remains
area. Our ongoing process of interpreting seismic studies above 30 MMcf per day. Plans for 2000 include five wells
and evaluating fault-planes through the use of electrical along with five workovers and recompletions.
imaging logs will provide a more complete stratigraphic As for the Hugoton area, development during 2000
picture to realize the best exploitation opportunities. will focus on further delineation of the Council Grove and
We have already seen early success. Towanda formations. A well to test the deeper Chester
The Company drilled five wells during 1999 with and St. Louis formations also is on the sched-
average daily production of 1.6 MMcf. One of the wells, ule. The Company expects to drill a
the Glen Jones No. 3-20, which is completed in the total of three wells in this area during
Nichols Sandstone, recently tested at daily rates exceeding the year.
four MMcf, showing the high-rate potential for the area.
Alaskan Cook Inlet
The Company holds a substantial acreage position in this
trend and more than 40 well locations have already been In October 1998, Cross
identified. Fourteen wells are scheduled for drilling Timbers acquired two state leas-
during 2000. es in the Cook Inlet, two operated
production platforms and an inter-
Hugoton Royalty Trust Properties est in production pipelines and onshore
Development on the Hugoton Royalty Trust proper- processing facilities. The platforms,
ties during 1999 included completing 68 workovers and located in 70 feet of water, contain
drilling 25 new wells. Thirteen wells were drilled in 29 producing wells in the
Major and Woodward counties of northwest Oklahoma. Middle Ground Shoal Field
Seven wells were drilled in the Fontenelle Unit in the along with 12 water injection wells. Oil production is
Green River Basin of Wyoming, and five wells were com- derived from multiple intervals in the Tyonek Formation
pleted in the Hugoton area of Oklahoma and Kansas.
Cr oss Tim b er s O il C om pan y
between 7,300 and 10,000 feet. Production is currently 1999 program was no different, with each of the three new
3,950 BOPD (3,456 net) with reserves pegged at 14 sidetracks averaging 136 BOPD. These “legs” extend
million barrels of oil. approximately 1,500 feet laterally, cost $350,000 and
Last year, the Company began preparing the field for develop 119,000 BOE. This equates to a development cost
future expansion of secondary recovery operations. of $2.94 per barrel ($.49 per Mcfe).
Historically, secondary recovery operations have been In addition, the Company drilled three vertical
highly successful on the East Flank of the field. During Devonian wells in the eastern portion of the field during
1999, the Company embarked on a study to analyze the 1999. These wells were set-up by the highly successful
potential of a full-scale West Flank waterflood program CE-C6 well, which was completed in 1998 at initial daily
and to evaluate the East Flank for optimization and production rates exceeding 1,000 barrels of oil. The three
potential expansion of the current program. This included vertical Devonian wells drilled during 1999 were
utilizing a 3-D visualization model to better define the completed with average daily production rates of about
complex geology of the field and to clearly identify addi- 160 barrels of oil.
tional drilling opportunities. Since the Devonian Formation is the deepest produc-
As a result of our studies, we plan to expand the West ing formation in this field, any well drilled to this horizon
Flank waterflood during 2000 by drilling two wells and penetrates the shallower Pennsylvanian and Wolfcamp
converting three wells to water injection. In addition, a formations. Consequently, each well has excellent recom-
new well will be drilled on the East Flank in an area that pletion opportunities in these upside zones. The Company
has not been adequately flooded. If successful, more East has focused specifically on recompletions targeting reser-
Flank wells will be required to drain the new-found voirs in the Pennsylvanian Formation, which are then
reserves. Development costs for 1999 are commingled with the reservoirs in the
AU 5 AU 8
estimated at $12 million, which include Devonian Formation. During 1999, six
To p : T
upgrading onshore facilities and refurbish- wells were successfully recompleted to the
ing the drilling rigs on both platforms. Pennsylvanian Formation with produc-
The Company expects to begin develop- tion rates averaging 40 BOPD.
ment activities in April of this year. Development plans for 2000 include
drilling 12 vertical wells and five
Permian Basin horizontal sidetracks and performing six
University Block 9 Field. Located in recompletions in this field.
Prentice Northeast Unit. This unit
Andrews County, Texas, this field received University Block 9 Field
renewed interest during 1999 as oil prices Horizontal sidetracks have been used to also posted exciting development results
extend the life of wells. The University
rebounded. The multi-pay field, which AU No. 8 was producing 27 BOPD prior during 1999. The West Texas unit is
to being sidetracked. After a 1,021-foot
produces from the Devonian, located in Terry and Yoakum counties and
lateral was drilled, the well produced at
Pennsylvanian and Wolfcamp formations, produces from the Glorieta and Clear
332 BOPD and is currently producing
was aggressively developed during the last Fork formations at depths of 6,800 and
half of the year. 7,700 feet, respectively. Drilling in this unit was suspend-
The Company continued the highly successful hori- ed during 1998 due to low oil prices; however, as oil prices
zontal sidetrack program it began in 1997, along with recovered in 1999, we recommenced activity, drilling nine
additional Devonian development in the eastern portion of wells with exceptional results. As a result, we continue to
the field. Through the end of 1998, nine horizontal expand infill development upsides in this mature field.
sidetracks targeting the Devonian Formation had been
completed. Each sidetrack averaged 140 BOPD. The
Cr oss Tim b er s O il C om pan y
Since acquiring the unit in 1994, the Company has Oil prices, at an average of $12.21 per barrel for 1998,
successfully drilled 82 ten-acre infill wells. In the eastern rose to an average of $16.94 for 1999, reflecting OPEC’s
portion of the field, high oil-cuts in efforts to reduce over-production by
the Upper Clear Fork encourage con- its members as well as a general
tinuous expansion of our program. A reduction in U.S. inventories. The
deeper section, the Basal Clear Fork, average gas price for 1999 was $2.13
was encountered in many of the new per Mcf, up 3% from the 1998 aver-
wells and has proven productive. For age of $2.07. The NGLs price per
the northern portion of the unit, infill barrel averaged $11.80, up 55% from
wells have yielded oil-cuts in the the 1998 average sales price of $7.62.
80-100% range, indicating the need for further secondary As of December 31, 1999, estimated
recovery optimization. Thus, additional infill wells will future net cash flows before income tax Proved Reserves
tap more untouched reserves. were $3.27 billion based on realized (in Bcfe)
In 2000, the Company intends to drill 10 ten-acre prices of $24.17 per barrel of oil and 2,500
infill wells. An additional 40 sites have been mapped for $2.20 per Mcf of gas. The present value
future development. before income tax, discounted at 10%,
was $1.77 billion, compared to the year-
RESERVES & PRODUCTION end 1998 level of $909 million. The
Cross Timbers’ aggressive acquisition and development realized prices at year-end 1998 were
program resulted in record operating results and impres- $9.92 per barrel of oil and $2.00 per
sive reserve growth during 1999. The major stimulus Mcf of gas.
came when management took advantage of a unique
opportunity to purchase 480 Bcfe of gas properties, prior
to property sales in the Arkoma Basin, creating a new core
area for the Company. Oil NGL Gas
Estimated proved oil and gas reserves at year-end 1999
Proved Oil & Gas Reserves
were 2.022 Tcfe, up 23% from 1.639 Tcfe at year-end December 31, 1999
1998. This translates to 41 Mcfe for each share of the Natural Gas
Oil Gas Liquids
Company’s common stock. After deducting reserve sales of (Bbls) (Mcf) (Bbls) Mcfe
Proved developed 48,010 1,225,014 13,781 1,595,760
325 Bcfe, the Company replaced 527 Bcfe or 367% of
Proved undeveloped 13,593 320,609 4,121 426,893
1999 production at a cost of $.70 per Mcfe. Through the Total proved 61,603 1,545,623 17,902 2,022,653
Estimated future net cash flows,
drill bit, we replaced 237% of production at a cost of $.28
before income tax $3,269,443
per Mcfe. For the past five years Cross Timbers has Present value before income tax $1,765,936
replaced 470% of its production at a finding cost of just
Changes in Proved Reserves
$.68 per Mcfe. We believe this outstanding record places
the Company among the best in the industry for finding Oil Gas Liquids
(Bbls) (Mcf) (Bbls) Mcfe
cost and production replacement statistics. December 31, 1998 54,510 1,209,224 17,174 1,639,328
During 1999, the Company produced 5.1 million bar- Revisions 10,792 60,011 1,838 135,791
Extensions and discoveries 3,003 166,669 3,357 204,829
rels of oil, 1.3 million barrels of natural gas liquids and Production (5,112) (105,120) (1,325) (143,742)
105.1 Bcf of natural gas. Daily oil and NGLs production Purchases in place 2,790 494,666 20 511,526
Sales in place (4,380) (279,827) (3,162) (325,079)
averaged 17,637 barrels, up 11% over the 15,945 barrels December 31, 1999 61,603 1,545,623 17,902 2,022,653
per day during 1998. Daily gas production averaged Based on SEC assumptions
288.0 MMcf, up 25% from the 229.7 MMcf in 1998. The
1999 exit rate for daily production is 332.7 MMcf of natu-
ral gas and 17,620 barrels of oil and NGLs.