CROSS TIMBERS OIL COMPANY




    1996 Annual Repor t
COMPANY PROFILE
    Cross Timbers Oil Company, established in 1986, is engaged in
the acquisition, exploitation and develo...
FINANCIAL HIGHLIGHTS

                                                                                                    ...
TO OUR SHAREHOLDERS

   During 1996 Cross Timbers again             The Permian Basin properties are           Kansas and ...
Value Creation
1997 CAPITAL BUDGET                                                                                  for up...
OPERATIONS REVIEW

                     1996 represented a year of accelerated                      attractive rates of re...
“INDIANS OF THE GREAT PL AINS”
Astride the horse, the Plains Indians were
   superb hunters and fierce warriors.
They were...
FONTENELLE FIELD
            The acquisitions in the Green River
                                                         ...
“THE TRAIL HOME”
  Cross Timbers Oil Company is headquartered in
        Fort Worth, Texas, whose Stockyards
      at one ...
Mid-Continent                                  cess in these areas, we increased the num-          many as 20 wells to the...
“BUFFALO HUNTER”
In the early 1800s, Comanches in the area now
 known as Lubbock hunted the “Texas Herd.”
Not only did the...
Permian Basin                                            UNIVERSITY BLOCK 9                            from 4,800 to 10,80...
“WEST OF THE L AW”
  In the 1800s, horse thieves and cattle
rustlers ran rampant in the panhandles of
Oklahoma and Texas. ...
Mid-Continent
current net daily production about 950                                                               to the ...
“THE COWBOYS”
At the end of a cattle drive the cowboys celebrated
   in true western fashion by “going to town.”
      The...
Proved Reserves
                 Company participated in the drilling of                                                  ...
“BUTTERFIELD STAGECOACH ROBBERS”
San Antonio, Texas was one of the earliest hubs
   of the stagecoach, an important means ...
Cross Timbers Oil Company

SELECTED FINANCIAL DATA
                                                                       ...
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
xto energy annual reports 1996
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xto energy annual reports 1996

  1. 1. CROSS TIMBERS OIL COMPANY 1996 Annual Repor t
  2. 2. COMPANY PROFILE Cross Timbers Oil Company, established in 1986, is engaged in the acquisition, exploitation and development of quality, long- lived producing oil and gas properties. Since going public in 1993, Cross Timbers has grown value per share at greater than 30% annual compounded growth rates. Cross Timbers operates 81% of its properties, which are concentrated in Texas, Oklahoma, Kansas, Wyoming and New Mexico. 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) which went public in 1992. On the Cover “Homesteaders” In the late 1880s, public land was made available in the Cherokee Strip west of Enid in northwestern Oklahoma. The “Oklahoma Land Rush” attracted settlers and immigrants seeking a new life out West. About the Report The history of the petroleum industry in the United States is interwoven into the history of frontier settlement. Even before the Indian encampments had faded from the landscape of America’s plains, many states had already begun producing oil. The pioneers who settled the land and those who produce its oil and gas resources share certain entrepreneurial characteristics: indepen- dence, optimism and a willingness to take risks. The rich and colorful history of the frontier is part of the culture in areas where Cross Timbers Oil Company is active today. The scenes depicted in this report are the work of actor-artist Buck Taylor, whose paintings reflect the spirit of individualism and self-reliance common to those who settled the West. (See inside back cover.) CONTENTS To Our Shareholders . . . . . . . . 2 Operations Review . . . . . . . . . . 4 Selected Financial Data . . . . . 16 Management’s Discussion and Analysis . . . . . . . . . . . . . . 17 Financial Statements . . . . . . . 23 Corporate Information . . . . . . 38
  3. 3. FINANCIAL HIGHLIGHTS 1996 1995 1994 In thousands except production, per share and per unit data Financial $00161,391 Total revenues $0112,905 $0096,275 $00030,973 $ 0(17,019)(a) Income (loss) before income tax and extraordinary item $0004,778 $00019,790 $ 0(10,538)(a) Earnings (loss) available to common stock $0003,048 $000000.74 $ 000(0.42)(a) Per common share (b) $00000.13 $00068,263 Operating cash flow (c) $0040,439 $0037,816 $00523,070 Total assets $0402,675 $0292,451 Long-term debt $00285,000)(d) Senior $0172,000 $0068,000 $00029,757)(e) Convertible subordinated notes $0066,475 $0074,750 $00142,668)(e) Total stockholders’ equity $0130,700 $0113,333 25,631)(e) Common shares outstanding at year-end (b) 27,577 23,887 Production Daily production 9,584 Oil (Bbls) 9,677 9,497 101,845 Gas (Mcf) 78,408 58,182 26,558 BOE 22,745 19,194 Average price $000021.38 Oil (per Bbl) $00017.09 $00015.38 $000001.97 Gas (per Mcf) $00001.42 $00001.81 Proved Reserves 42,440 Oil (Bbls) 39,988 33,581 540,538 Gas (Mcf) 358,070 177,061 132,530 BOE 99,666 63,091 Abbreviations Bbl barrel Mcf thousand cubic feet BOE barrels of oil equivalent (six Mcf equal one Bbl) (a) Includes effect of a $20.3 million pre-tax, non-cash impairment charge recorded upon adoption of Statement of Financial Accounting Standards No. 121. (b) Adjusted for the three-for-two stock split effected on March 19, 1997. (c) Cash provided by operating activities before changes in working capital. (d) On April 2, 1997, the Company sold $125 million of senior subordinated notes. Net proceeds of $121.1 million were used to reduce senior debt. (e) In January 1997, $29.7 million principal amount of the convertible subordinated notes was converted into 1,928,242 shares of common stock, after the adjustment in (b) above. Total Revenues Proved Reserves Daily BOE Production Operating Cash Flow (in thousands) (in millions of dollars) (in millions of BOE) (in millions of dollars) 30 175 70 140 150 60 120 25 100 125 50 20 100 40 80 15 75 30 60 10 40 50 20 5 25 10 20 0 0 0 0 1993 1994 1995 1996 1993 1994 1995 1996 1993 1994 1995 1996 1993 1994 1995 1996 1
  4. 4. TO OUR SHAREHOLDERS During 1996 Cross Timbers again The Permian Basin properties are Kansas and Texas for $39.5 million from posted record results: located in the Northern Val Verde area. a subsidiary of Burlington Resources Inc. They are primarily operated interests in The transaction is effective April 1, 1997 B Record total revenues – $161.4 the Henderson, Ozona and Davidson and should close in May 1997. million – up 43% from 1995; Ranch fields of Crockett County, Texas. The properties are primarily operated B Record earnings available to Cross Timbers’ internal engineers interests concentrated in northwestern common stock – $19.8 million ($.74 per share); estimate proved reserves attributable to Oklahoma and the panhandle areas of the Val Verde Basin acquisition to be Oklahoma and Texas and in southwestern B Record operating cash flow – $68.3 million – up 69% from 1995; 36 billion cubic feet of natural gas and Kansas. Cross Timbers’ internal engineers 280,000 barrels of oil. estimate proved reserves attributable to B Record natural gas production – 101,845 Mcf per day – up 30% the acquisition to be 36.5 billion cubic from 1995; feet equivalent of natural gas, of which Since we went public in B Record proved reserves – 132.5 more than 97% is gas. 1993 we’ve grown reserves million BOE – up 33% from 1995; Approximately 30% of the purchase per share by 32% annually B Record present value (before income price is attributable to 124 square miles taxes) of reserves – $946 million. and cash flow per share by (79,500 net acres) of undeveloped acreage primarily located in Texas County, 26% while keeping debt Since we went public in 1993 we’ve Oklahoma. More than 71,000 of the grown reserves per share by 32% annually around $2.20 per BOE. undeveloped acres purchased are for and cash flow per share by 26% while deep rights below Cross Timbers’ keeping debt around $2.20 per BOE. This acquisition expands our reserve existing Texas County Hugoton Chase Our goal at that time was to double base in the Val Verde Basin. Our engi- production. value per share by 1998. That goal has neers have already identified 60 locations Additionally, in the area of portfolio been achieved ahead of schedule and for additional development, 32 of which management, the Company has entered replaced by more aggressive goals for we plan to drill during 1997. We believe into definitive agreements to sell non- 1997 (see adjacent graph). there is additional upside through further strategic producing properties aggregat- In May 1996 we announced our plans infill and step-out drilling. ing approximately $15 million. Closings for 1997: The Green River Basin properties on these sales are expected during the B Increase reserves to 5.4 BOE were purchased in two transactions dur- second quarter of 1997. per share – 4.8 at year-end 1996 ing 1996. As a result of these acquisi- (split adjusted); 1996 DEVELOPMENT tions, Cross Timbers now operates the B Increase cash flow to $3.67 The Company drilled 100 wells and Fontenelle Unit with a 97% working per share – $2.57 for 1996 completed 125 workovers during 1996. (split adjusted); interest, and owns interests in the nearby Drilling was balanced between oil and Nitchie Gulch and Pine Canyon fields. B Maintain debt at $2.20 per BOE – gas wells with a success rate of 97%. $2.17 at year-end 1996. Proved reserves attributable to the Development of oil reserves on the acquisitions in the Green River Basin are With our growth in reserves and Prentice Northeast Unit in West Texas estimated to be 118 billion cubic feet of production to date, we are confident that and the Southeast Maljamar Unit in natural gas. Since assuming operations of we will achieve these goals assuming our southeastern New Mexico has been the Fontenelle Unit, Cross Timbers has 1997 prices average $20.00 per barrel of particularly successful with initial pro- drilled 10 wells that are in various stages oil and $2.00 per thousand cubic feet duction rates per well averaging 100 and of completion. Production is up 30% of gas. 40 barrels of oil per day, respectively. from the time of acquisition as a result of Based upon this success, we increased the ACQUISITIONS this development. Twenty wells are number of wells drilled in these units During 1996 Cross Timbers acquired planned for 1997 with as many as 50 during 1996 to 28 wells in the Prentice more than $100 million in producing additional wells to be drilled in the Unit Northeast Unit, up from the original properties, establishing two new core during the next several years. budget for 10 wells, and 11 wells in the areas – the Green River Basin in south- In March 1997 Cross Timbers agreed Southeast Maljamar Unit, up from western Wyoming and the Ozona Area of to acquire producing properties and five wells. the Permian Basin in West Texas. undeveloped acreage in Oklahoma, 2
  5. 5. Value Creation 1997 CAPITAL BUDGET for up to three million common shares (split adjusted). Through year-end, two Cross Timbers has set its 1997 capital 5 million shares had been repurchased at a budget at $120 million. The budget 4.8 cost of about $30 million. This program includes $70 million for the Company’s 4 has since been completed and an addi- ongoing development program and $50 3.6 tional two million share program has million for acquisitions. We’ve already 3 2.7 been authorized. 2.1 made or committed to make 1997 $2.27 $2.26 2 $2.17 $2.11 Through the placement of $125 acquisitions totaling $52 million. These million in Senior Subordinated Notes expenditures are expected to be funded 1 previously discussed, Cross Timbers has through internally generated sources, substantially increased its financial flexi- including cash flow and selective 0 1993 1994 1995* 1996** bility. The note offering also locks in an asset sales. BOE per share attractive interest rate for 10 years and It is likely that additional acquisition Debt per BOE has, in general, less restrictive covenants opportunities will be available during the * Including effect of Tyrone sale/leaseback transaction than bank debt. remainder of 1997. In preparation for ** Pro forma with effect of note conversion these opportunities, the Company has SUMMARY the Tubb Formation and plans to recom- recently sold $125 million of 9.25% Cross Timbers is poised to achieve its plete up to 22 wells and drill up to 20 Senior Subordinated Notes. Proceeds stated goals for 1997. This means that we wells to the Tubb during 1997. Subject were used to repay outstanding indebted- will have enjoyed cash flow growth to drilling success, we have substantial ness under the Company’s senior bank averaging more than 50% annually for additional opportunities in this area. credit facility. We expect more than $100 1996 and 1997. Cross Timbers has acquired more million to be available under the bank As we look toward 1998 and beyond, than 8,700 net acres prospective in the facility to fund future acquisitions. we believe that Cross Timbers has the Cotton Valley Pinnacle Reef play, cur- The Company plans to drill 173 wells quality, long-lived reserve base and the rently the most exciting domestic explo- in 1997, including 114 gas and 59 oil, technical and operating staff to continue ration play. These wells produce at initial and plans 80 workover/recompletion increasing value per share by more than rates up to 50 million cubic feet per day activities. Natural gas development will 25% annually. Continued achievement of with estimated proved reserves up to 80 focus in the Fontenelle Unit in south- this extraordinary growth is only possible billion cubic feet. Eleven reef anomalies western Wyoming, the Ozona Area in through the effort and dedication of our have been identified by 2-D seismic on West Texas, both areas acquired in 1996, employees and the guidance of our direc- Cross Timbers’ acreage and these will be and in Major County, Oklahoma. tors. Our thanks to them and to you, our further refined with the help of 3-D seis- Oil drilling will continue the success- fellow shareholders, for your support. mic. Because we have long-term leases, ful development of the Company’s largest As in past years, we again state our we can lessen our risk by allowing other oil-producing property, the Prentice dedication to achieving exceptional operators to test geologic concepts near Northeast Unit in Terry County of West growth in shareholder value on a per our acreage prior to our drilling. Texas. Development will also be acceler- share basis. We are confident in our ated in the University Block 9 Field, CAPITAL STRUCTURE ability to continue to deliver the results where the Company recently increased its that you have come to expect. During 1996 the Company called for working interest to 100%. the redemption of its 51⁄4% Convertible Approximately 10% to 20% of the Notes. The last were converted into com- budget will be allocated to higher-risk mon stock in January 1997 and in total, Bob R. Simpson projects, including step-out development stockholders’ equity was increased by $57 Chairman and Chief Executive Officer wells and exploratory drilling. The higher- million. We believe the preference of risk activity will initially focus on two these noteholders to receive common areas: the Tubb Formation in Lea County, stock instead of cash reflects an New Mexico and the Cotton Valley optimistic outlook for Cross Timbers’ Steffen E. Palko Pinnacle Reef play in East Texas. The stock price. Vice Chairman and President Company has accumulated more than In May 1996 Cross Timbers 4,500 net acres that are prospective for April 15, 1997 announced a stock repurchase program 3
  6. 6. OPERATIONS REVIEW 1996 represented a year of accelerated attractive rates of return. Additionally, Rocky Mountains activity for Cross Timbers and the energy exploratory projects, reflecting a slightly The Company invested $57 million industry. Rising oil and gas prices and more aggressive management stance, now in natural gas properties in the Green growing global oil demand – projected comprise 10% to 20% of our drilling River Basin of southwestern Wyoming. to be at least 2% annually through the budget. As a result of these acquisitions, the year 2000 – helped fur- Cross Timbers also maintained its Company now operates and owns more Cross Timbers acquired ther revitalize the busi- practice of establishing a short-term than 97% of the Fontenelle Unit – ness and to set a tone action plan and long-range strategy for including 100% of the related gathering more than $100 million for optimism, opportu- every well it operates, a unique commit- and compression facilities – and owns of producing properties nities and prosperity as ment for an independent of its size. Every both operated and non-operated interests during 1996. New core 1997 began. well receives an extensive technical evalu- in the nearby Nitchie Gulch and Pine operating areas were During 1996 Cross ation and is reviewed at least annually, Canyon fields. established in both the Timbers expanded into from the field employee up through The Company’s proved reserves in the two new core operating engineering to the Company president. Green River Basin are estimated to be Green River Basin in areas – the Green River 118 billion cubic feet of natural gas. Net southwestern Wyoming ACQUISITIONS Basin of Wyoming and production from this area averages more and the Ozona Area of the Ozona Area of the Cross Timbers acquired more than than 18.5 million cubic feet of gas per the Permian Basin in Permian Basin in West $100 million of producing properties day, up about 30% as a result of Texas – adding gather- during 1996. New core operating areas aggressive development subsequent to West Texas, and our ing and processing facil- were established in both the Green River acquisition of the properties. existing franchises were ities at the same time. Basin in southwestern expanded in Oklahoma Our traditional phi- Wyoming and the and Texas. losophy for adding value Ozona Area of the MAJOR WYOMING PRODUCING to the Company and our Permian Basin in Fontenelle AREAS Area dedication to quality are unchanged: We West Texas, and our buy producing properties with over- existing franchises looked potential and concentrate our were expanded in COLORADO expertise and technological advancements Oklahoma and Texas. KANSAS to develop projects that produce Hugoton Area Major County Summary of Proved Reserves by Area Elk City NEW OKLAHOMA SEC Assumptions MEXICO (in thousands) Prentice N.E. Oil Gas BOE Present Russell Area (Bbls) (Mcf) BOE Value(a) Percent University Tubb Play Permian Basin 31,274 77,655 44,217 $346,520 36.6% Block 9 Mid-Continent 8,512 165,334 36,068 306,730 32.4% TEXAS Hugoton ,362 161,318 27,248 167,160 17.7% Ozona Area Rocky Mountain 1,673 127,554 22,932 107,269 11.3% Other (b) ,619 8,677 2,065 18,471 2.0% Total 42,440 540,538 132,530 $946,150 100.0% (a) Before income tax (b) Includes 16% ownership of Cross Timbers Royalty Trust Abbreviations: Bbl barrel Mcf thousand cubic feet BOE barrel of oil equivalent (six Mcf equal one Bbl) 4
  7. 7. “INDIANS OF THE GREAT PL AINS” Astride the horse, the Plains Indians were superb hunters and fierce warriors. They were a nomadic people who depended on the huge herds of buffalo that roamed from Texas to Canada. 5
  8. 8. FONTENELLE FIELD The acquisitions in the Green River Frontier Sandstone Depositional Model Basin have proven to be particularly well timed. The prices received for gas Marsh produced in the Rocky Mountain area Tidal Chann el improved substantially since our Lagoon purchase as a result of a significant nar- Upper Shorefa rowing of the differential between Rocky ce Barrier Beach Mountain prices and Henry Hub prices. Lower Comple Shorefa x ce Four major pipeline projects stretching from the Rockies to the Midwest are Well locations for the 1997 drilling program are based on the depositional systems scheduled to come on line in 1997 and shown in this model. 1998, which could further alleviate price differentials. correlate to the most productive wells. barrels of oil. Current net daily produc- Cross Timbers acquired operations of By delineating the geometry of these tion averages 8.1 million cubic feet of gas the Fontenelle Unit in late July and by facies, Cross Timbers will improve and 43 barrels of oil. year-end had increased its ownership drilling results and economic benefits. Approximately two-thirds of the interest to 97%. The field has 88 gross The Company drilled 10 Frontier reserves and value in these properties are (85net) wells that produce from the wells during 1996 with initial flow rates from wells operated by the Company. Frontier Formation on the Moxa Arch. averaging one million cubic feet per day. These properties are distinguished by The field covers about 16,000 acres and is Proposed wells for 1997 were identified their high Btu content (1200 Btu/cubic currently developed on 160-acre spacing. by mapping and identifying the trend of foot), low operating costs (about $0.30 The Frontier Formation is a geolog- the most productive sandstones. Many of per Mcf equivalent) and excellent devel- ically complex, low-permeability sand- the proposed wells are in areas that can opment potential, including infill stone. Because of the low permeability of extend productive areas of the field and drilling, field extension and delineation the Frontier, upside potential exists add significant new drilling opportuni- drilling and the possibility of horizontal through 80- and 40-acre infill drilling. ties in the future. Also, we plan to drilling in the Strawn Formation. Cores and electric logs suggest the restimulate selected wells that were poorly Cross Timbers immediately examined Frontier Formation includes an upper stimulated upon original completion. the operational efficiencies of the fields shoreface and a tidal channel facies which and successfully reduced compression Permian Basin costs in the Henderson Field by 25%. OZONA AREA In December 1996, the Additional gathering and compression Crockett County,Texas Company acquired properties system work is planned here for 1997 to Upton Reagan Irion located in the Ozona Area of further reduce our compression costs, Crockett County Schleicher Central Basin the Permian Basin in Crockett which are currently more than 50% of Platform County, Texas for about $27.5 lease operating costs. DAVIDSON RANCH FIELD million. These properties – 88 Budget plans for 1997 are to drill 32 OZONA FIELD gross (49.1 net) Company- wells, of which 16 are planned for the SONORA FIELD operated wells and 124 gross Henderson (Canyon) Field and 16 are Sutton HENDERSON (26.3 net) wells operated by planned for the Ozona (Canyon/Strawn) FIELD others – have estimated net Field. The proposed wells will be primar- Val Verde reserves of 36 billion cubic ily infill wells with spacing between 40 CTOC Properties feet of gas and 280 thousand and 160 acres. 6
  9. 9. “THE TRAIL HOME” Cross Timbers Oil Company is headquartered in Fort Worth, Texas, whose Stockyards at one time were the largest in the country. Not only were herds of cattle taken to market in “Cowtown,” but large remudas (herds of saddle horses) and mules were sold to the cowboys for their daily chores. 7
  10. 10. Mid-Continent cess in these areas, we increased the num- many as 20 wells to the Tubb Formation ber of wells drilled in these units during during 1997. Subject to drilling success, Cross Timbers continues to make 1996 from those originally budgeted. the Company has substantial additional strategic acquisitions in its core operating Development of gas reserves centered opportunities in this area. areas. The Company expects to close in on the Major County, Oklahoma area The Cotton Valley Pinnacle Reef May 1997 on a $39.5 million acquisition (36 wells), the Green River Basin in wells are highly prolific, producing at of producing properties and undeveloped Wyoming (10 wells) and the Hugoton initial rates up to 50 million cubic feet acreage in southwestern Kansas, north- Field in Kansas (5 wells). Our success in per day with estimated proved reserves western Oklahoma and the panhandle these areas set up additional prospective up to 80 billion cubic feet. Cross Timbers areas of Oklahoma and Texas. Our inter- locations for drilling in 1997. has acquired more than 8,700 net acres nal engineers estimate proved reserves prospective in the Cotton Valley play. attributable to the acquisition to be 36.5 Operated Wells Drilled The acreage includes 3,200 net acres held billion cubic feet of natural gas equiva- by production in Wood County, Texas lent, of which more than 97% is gas. 175 and 5,500 net acres leased in Van Zandt, Current net daily production averages 150 Smith and Henderson counties. 5.5 million cubic feet of gas equivalent 125 Advancements in 3-D seismic tech- from 130 gross (65 net) wells with a 100 nology have allowed for better definition reserve-to-production index of 17.5 years. 75 of the Pinnacle Reef build-up, making About 30% of the purchase price is 50 this an attractive exploration play. Eleven attributable to 124 square miles (79,500 25 reef anomalies have been identified by net acres) of undeveloped acreage located 0 2-D seismic on Cross Timbers’ acreage 1994 1995 1996 1997 primarily in Texas County, Oklahoma. (est.) and these will be further refined with the This acquisition adds deep rights to In February 1997, Cross Timbers set help of 3-D seismic. Because we have our existing Hugoton assets, which are its 1997 development budget at $70 long-term leases, we can lessen our risk among our most important, while million. With this budget, the Company by allowing other operators to test geo- extending our franchise in northwestern plans to drill 173 wells in 1997, includ- logic concepts near our acreage prior to Oklahoma. The undeveloped acreage is ing 114 gas and 59 oil, and plans 80 our drilling. viewed as highly prospective, and 3-D workover/recompletion activities. Natural gas development will be seismic technology, successful for opera- About 10% to 20% of the develop- focused on two newly acquired interests tors in adjoining areas, will be employed ment budget will be allocated to – the Fontenelle Unit in southwestern in its development. higher-risk projects, including step-out Wyoming and the Ozona Area in West DEVELOPMENT development wells and exploratory Texas – and in Major County, Oklahoma. drilling. The higher-risk activity will Oil drilling will continue the success- The Company drilled 100 wells and focus on the Tubb Formation in Lea ful development of the Company’s largest completed 125 workovers during 1996. County, New Mexico and the Cotton oil-producing property, the Prentice Drilling was balanced between oil and Valley Pinnacle Reef play in East Texas. Northeast Unit in Terry County, West gas wells with a success rate of 97%. In New Mexico the Company has Texas. Development will be accelerated Development of oil reserves on the accumulated more than 6,200 gross on the University Block 9 Field, where Prentice Northeast Unit in West Texas (4,500 net) acres that are prospective for the Company recently increased its work- and the Southeast Maljamar Unit in the Tubb Formation. The Company plans ing interest to 100%. southeastern New Mexico has been par- to recomplete up to 22 wells and drill as ticularly successful. Based upon the suc- 8
  11. 11. “BUFFALO HUNTER” In the early 1800s, Comanches in the area now known as Lubbock hunted the “Texas Herd.” Not only did the Plains Indians use the buffalo for food, clothing and shelter, but they depended on the animal for spiritual inspiration as well. 9
  12. 12. Permian Basin UNIVERSITY BLOCK 9 from 4,800 to 10,800 feet. Exploitation Andrews County,Texas potential exists through restimulations, Prentice Northeast Unit recompletions, infill drilling and sec- The Prentice Northeast Unit is Cross ondary recovery operations in the Middle DEPTH (FEET) FORMATION Timbers’ largest oil property, producing Clear Fork and San Andres formations. 2,650 barrels of oil and 580 thousand WOLFCAMP Cross Timbers owns 25 gross 8500 cubic feet of gas per day net to the (23.4 net) operated wells and 139 gross Company from 153 gross (140 net) wells. quot;PENNquot; RESERVOIRS 8900 (43.6 net) wells operated by others. The Unit is located on the prolific Current net daily oil and gas production Northwest Shelf of the Permian Basin is about 990 barrels of oil and 530 thou- and produces from the Glorieta and sand cubic feet of gas. During 1996, the Upper Clear Fork formations at depths Company performed four recompletions ranging from 6,000 to 7,000 feet. The UD 10,400 to the Glorieta and San Andres. The Prentice Field has been separated into DEVONIAN Company and its working interest part- several waterflood units for secondary This schematic illustrates the potential for drilling ners plan to drill five Middle Clear Fork operations, and tertiary recovery potential and recompletions to multiple horizons at University Block 9. and Glorieta wells during 1997. also exists through carbon dioxide increase the drilling program. The infill flooding. A tertiary recovery study and University Block 9 program continued to outperform development plan for this field will be This Andrews County, Texas field, estimates with average daily initial pro- completed this year. discovered in 1953, produces from ducing rates in excess of 100 barrels of Cross Timbers has drilled 40 ten-acre Wolfcamp, Pennsylvanian and Devonian- oil per well. In addition, development of infill wells in the Unit during the past aged carbonates at 8,500, 8,900 and the deeper reservoirs discovered in the two years. A successful 12-well infill 10,400 feet, respectively. The Wolfcamp 1995 program was expanded by more pilot program was initiated in 1995. The and Pennsylvanian reservoirs were than a mile to the east of the current 1996 drilling program, initially designed unitized for secondary recovery operations drilling area. This could significantly for 10 wells, was increased to 28 ten-acre in 1960 and 1970, respectively, but increase the number of available infill wells. operated by different companies under development locations within the Unit. The favorable results of the early inefficient and costly conditions. The Based on this success, the Company wells, coupled with rising crude oil Devonian was produced on a lease-by- expects to drill 26 ten-acre infill wells prices, prompted the Company to lease basis by several different operators, during 1997. In addition, five leaving it underdeveloped and creating a 20-acre infill wells are scheduled PRENTICE NORTHEAST UNIT Terry County,Texas significant opportunity for Cross Timbers. for 1997 to test additional por- Cross Timbers recently completed an tions of the field and the deeper acquisition which gave it a 100% work- reservoirs in select areas of ing interest and operations of the the Unit. Wolfcamp Unit, Penn Unit and 13 of the Russell Field 14 active Devonian wells. As operator of all zones, Cross Timbers can selectively This field, located in Gaines recomplete existing wells and drill new County in West Texas, produces wells with the potential to complete in from the San Andres, Glorieta, any horizon. The Company owns an Middle Clear Fork and Devonian interest in 42 wells that it operates, with formations at depths ranging 10
  13. 13. “WEST OF THE L AW” In the 1800s, horse thieves and cattle rustlers ran rampant in the panhandles of Oklahoma and Texas. The frontier could be a dangerous place, especially in these “badlands” or “no man’s land.” 11
  14. 14. Mid-Continent current net daily production about 950 to the Company-operated Tyrone Plant. barrels of oil and one million cubic feet The Company also completed the Hugoton Area of gas. installation and start-up of a residue Ongoing development of the During 1996, the Company drilled compressor and 11.5 miles of high pres- Hugoton Field, the largest U.S. gas field, and completed two Devonian wells, sure residue pipeline in August 1996. increased our 1996 daily production which produced at initial rates of 200 These installations have enabled the more than five million cubic feet. The barrels of oil per day. During 1997, the Company to operate the Tyrone Plant Company owns an interest in 349 gross Company plans to drill 10 more wells more efficiently and to increase gas prices (327.9 net) wells that it operates and 116 targeting the Devonian, four wells target- through access to three additional inter- gross (25.8 net) wells operated by others. ing Pennsylvanian-aged reservoirs and state pipelines. Current net daily production in the area one infill well in the Wolfcamp Unit. The success in 1996 should continue is 34.4 million cubic feet. This aggressive development plan is through 1997 with a program that Efficiency of Operations expected to double field production dur- includes the drilling of 10 wells primarily (Production Expenses) $/BOE ing 1997. Development potential in Kansas and 11 workovers in Kansas $ 6.00 includes proper wellbore utilization, and Oklahoma. Seven of the proposed $ 5.00 recompletions, infill drilling and wells are Chase infill wells in Kansas, $ 4.00 improvement of waterflood efficiency. two are Council Grove development $ 3.00 wells, and the remaining well is a Chase $ 2.00 Maljamar Area replacement well in Oklahoma. The The Southeast Maljamar Unit is 1997 workover program concentrates on $ 1.00 located in southeastern New Mexico opening additional intervals in the Chase $0 1993 1994 1995 1996 where oil is produced from sandstones in Group. These intervals will increase the Grayburg Formation at depths of producing rates and add reserves to the The drilling of five wells in Kansas 4,300 feet. The field, which has been Hugoton Field. developed more reserves and proved addi- producing since 1943, was unitized for tional horizons to exploit. The Kansas B Major County secondary recovery operations 30 years #6 and #7 penetrated the Council Grove ago. Cross Timbers owns a 100% work- Cross Timbers is one of the largest Formation to develop horizons not now ing interest in the 28-well Unit. producers in the Anadarko Basin fields producing on this lease. The wells are Cross Timbers completed a highly of Ringwood, Northwest Okeene and currently testing and could result in the successful pilot 10-acre infill program in Cheyenne Valley in Major County, drilling of three additional Council 1995, continuing in 1996 by drilling 12 Oklahoma with 426 gross (364.2 net) Grove producers on this lease and pro- wells in the Unit and surrounding leases. operated wells and an interest in 199 mote further development on other The infill wells averaged 40 barrels of oil gross (45.4 net) wells operated by others. operated leases. per day upon completion and area pro- Current net daily production is about Pumping units were installed on 53 duction increased 300 percent to more 32.7 million cubic feet of gas and 930 wells to increase production rates in the than 500 net barrels per day. The barrels of oil from zones ranging from area by 3.4 million cubic feet per day. Company has budgeted an additional five 6,500 to 9,400 feet. Also, our Timberland Gathering sub- wells in 1997 for the Unit along with The Company develops the Major sidiary installed new compression on a four conversions to complete a “pattern County area primarily through mechani- portion of the gathering system to flood” in the heart of the Unit. cal improvements, restimulations, further increase production rates by two recompletions to shallower zones and million cubic feet per day. About 70% of development drilling. During 1996, the our Hugoton gas production is delivered 12
  15. 15. “THE COWBOYS” At the end of a cattle drive the cowboys celebrated in true western fashion by “going to town.” The uniquely independent traits of the traditional cowboy have become part of our national heritage and culture. 13
  16. 16. Proved Reserves Company participated in the drilling of replacement costs in the industry. During (in millions of BOE) 33 gross (25.9 net) wells. It has budgeted 1996 the Company produced 3.5 million 140 132.5 21 wells in Major County for 1997, with barrels of oil and 37.3 billion cubic feet 68% 120 the primary drilling area in the western of gas. 99.7 100 60% portion of the county. The Mississippian Natural gas reserves increased 51% to 80 and Chester formations will be targeted. 541 billion cubic feet from 358 billion 63.1 60 47% A subsidiary of the Company has cubic feet in 1995. Oil reserves grew 6% 49.3 57% 40 32% operated a gathering system and pipeline to 42 million barrels, compared with 40 40% 53% 20 in the Major County area since 1994, million barrels at year-end 1995. Proved 43% 0 collecting gas from 425 wells through developed reserves account for 83% of 1993 1994 1995 1996 300 miles of pipeline. The system has an year-end total proved reserves on a Gas Oil estimated daily capacity of 40 million BOE basis. cubic feet of gas with current throughput As of December 31, 1996, estimated GAS MARKETING of about 30 million cubic feet, 70% of future net cash flows before income tax which is produced from Company-oper- 1996 was a landmark year for Cross were $1.7 billion, based on flat price and ated wells. During 1994 and 1995, the Timbers Energy Services with operating cost assumptions, compared to $713 gathering system was converted from income increasing more than 200% to million in the previous year. The present centralized to field compression through $3.1 million. This performance was the value before income tax, discounted at the installation of four field compression result of a 31% increase in gas sales 10%, was $946 million, up 133% from stations. Field compression has allowed volumes and a 119% improvement in the year-end 1995 level of $406 million. the system to operate more efficiently sales margins per thousand cubic feet. In Values are based on 1996 year-end prices and to expand into previously inacces- 1996, Cross Timbers Energy Services of $24.25 per barrel of oil and $3.02 per sible areas. marketed more than 50 billion cubic feet thousand cubic feet of natural gas. Based of gas. on prices of $20.00 per barrel and $2.00 Proved Oil and Gas Reserves Cross Timbers Energy Services per thousand cubic feet the discounted (a) (in thousands) December 31, 1996 maintains a diverse natural gas supply present value before income tax at year- Oil Gas (Bbls) (Mcf) BOE and customer base serving utilities, end 1996 was $600 million. Proved developed 31,883 466,412 109,618 municipalities and a variety of industrial For the year, Cross Timbers’ daily oil Proved undeveloped 10,557 74,126 22,912 Total proved 42,440 540,538 132,530 and commercial end users. In 1996, it production averaged 9,584 barrels of oil, Estimated future net cash flows, purchased gas from about 50 compared to 9,677 barrels in 1995. Daily before income tax $1,737,024 producers/suppliers and sold to approxi- gas production averaged 101.8 million Present value before income tax, discounted at 10% $946,150 mately 80 customers in 20 states. cubic feet in 1996, up from 78.4 million Changes in Proved Reserves cubic feet in 1995. Increased gas produc- (a) (in thousands) RESERVES & PRODUCTION tion resulted from producing property Oil Gas (Bbls) (Mcf) BOE Cross Timbers’ estimated proved oil acquisitions and from 1995 and 1996 December 31, 1995 39,988 358,070 99,666 and gas reserves at year-end 1996 were development activity. Oil prices increased Revisions 2,361 29,379 7,258 Extensions and discoveries 2,220 37,480 8,467 132.5 million barrels of oil equivalent to an average of $21.38 per barrel from Production (3,508) (37,275) (9,721) Purchases in place 1,552 153,400 27,119 (BOE), up 33% from 99.7 million BOE $17.09 per barrel in 1995. Gas prices for Sales in place (173) (516) (259) December 31, 1996 42,440 540,538 132,530 at the end of 1995. The Company the year climbed to an average of $1.97 (a) Based on SEC assumptions. replaced 438% of its 1996 oil and gas per thousand cubic feet compared with Abbreviations: Bbls barrels production of 9.7 million BOE at a cost $1.42 in 1995. Mcf thousand cubic feet BOE barrels of oil equivalent (six Mcf equal one Bbl) of $3.51 per BOE, one of the lowest 14
  17. 17. “BUTTERFIELD STAGECOACH ROBBERS” San Antonio, Texas was one of the earliest hubs of the stagecoach, an important means of transporting letters, newspapers and valuables. Between 1847 and 1881, more than 50 different lines operated out of this city. Highwaymen were always a threat. 15
  18. 18. Cross Timbers Oil Company SELECTED FINANCIAL DATA 1996 1995 1994 1993 1992 In thousands except production, per share and per unit data CONSOLIDATED STATEMENT OF OPERATIONS AND CASH FLOWS DATA (a) Revenues: $075,013 Oil $060,349 $053,324 $039,747 $031,921 73,402 Gas 40,543 38,389 34,649 31,994 12,032 Gas gathering, processing and marketing 7,091 4,274 3,717 3,943 944 Other 4,922 288 69 (502)(b) $161,391 Total revenues $112,905 $096,275 $078,182 $067,356 $019,790 Earnings (loss) available to common stock $ (10,538)(c) $003,048 $0 (4,012)(d) $004,744 $0000.74 Per common share (e) (f) $ 00(0.42)(c) $0000.13 $00 (0.18)(d) – $00000 – – – Pro forma earnings (loss) (g) $000(251) $003,233 $00000 – – – Per common share/unit (f) (g) $00 (0.01) $0000.17 26,609 Weighted average common shares/units outstanding (f) 25,382 23,886 21,788 18,582 $0000.20 Dividends/distributions declared per common share/unit (f) (h) $0000.20 $0000.20 $0000.20 $0000.10 $068,263 Operating cash flow (i) $040,439 $037,816 $027,925 $027,033 YEAR-END CONSOLIDATED BALANCE SHEET DATA (a) $450,561 Property and equipment, net $364,474 $244,555 $228,551 $149,484 523,070 Total assets 402,675 292,451 258,019 176,831 314,757 Long-term debt 238,475 142,750 111,750 79,000 142,668 Owners’ equity 130,700 113,333 115,168 76,056 OPERATING DATA (a) Average daily production: 9,584 Oil (Bbls) 9,677 9,497 6,968 4,749 101,845 Gas (Mcf) 78,408 58,182 51,260 51,205 26,558 Barrels of oil equivalent (BOE) 22,745 19,194 15,511 13,283 Average sales price: $21.38 Oil (per Bbl) $17.09 $15.38 $15.63 $18.37 $01.97 Gas (per Mcf) $01.42 $01.81 $01.85 $01.71 $04.05 Production costs (per BOE) $04.26 $04.62 $05.16 $04.47 $01.23 Production and property taxes (per BOE) $01.04 $01.23 $01.19 $01.19 Proved reserves: 42,440 Oil (Bbls) 39,988 33,581 21,082 16,666 540,538 Gas (Mcf) 358,070 177,061 169,119 172,199 132,530 BOE 99,666 63,091 49,269 45,366 (a) Significant producing property acquisitions in 1993, 1994, 1995 and 1996 affect the comparability of year-to-year financial and operating data. (b) Includes a $2.4 million loss on sale of Royalty Trust Units in the initial public offering for the Royalty Trust. (c) Includes effect of a $20.3 million pre-tax, non-cash impairment charge recorded upon adoption of Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” (d) Includes effect of a one-time, non-cash accounting charge of $4 million for net deferred income tax liabilities recorded upon the merger of the Company with the former Partnership. (e) Historical net income (loss) per common share is not provided for 1992 since the results of the former Partnership, as a nontaxable entity, are not comparable to the Company. (f) Adjusted for the three-for-two stock split effected on March 19, 1997. (g) As if all former Partnership income was subject to corporate income tax, exclusive of the charge in (d) above. (h) Excludes non-recurring distributions of the former Partnership. (i) Defined as cash provided by operating activities before changes in working capital. 16

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