CRT

Cross Timbers Royalty Trust - 10-Q Summary (Q2 2017)

Business Context and Reporting Period

Cross Timbers Royalty Trust (the "Trust") is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties located in Texas, Oklahoma, and New Mexico. The Trust receives net profits income from XTO Energy Inc. (a wholly owned subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. This report covers the quarterly period ended June 30, 2017. As of August 1, 2017, there were 6,000,000 units of beneficial interest outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance: Net profits income increased 17% to $1.63 million compared to Q2 2016. This increase was driven primarily by a $1.2 million rise in oil and gas prices, partially offset by a $0.4 million decrease in production volumes and increased development costs.
• Year-to-Date Performance: Net profits income decreased 20% to $3.26 million compared to the first six months of 2016. The decline was primarily due to a $1.6 million decrease in production volumes and $0.8 million in net excess costs activity, partially offset by a $1.5 million increase in prices.
• Production Volumes: Oil sales volumes decreased 10% and gas sales volumes decreased 12% for the quarter, attributed to natural production decline (estimated at 6-8% annually) and timing of cash receipts.
• Prices: Average oil prices increased 48% to $47.76 per barrel, and gas prices increased 53% to $4.34 per Mcf for the quarter.
• Excess Costs: Cumulative excess costs for Texas and Oklahoma working interest conveyances totaled $1.94 million as of June 30, 2017. Continued lower oil prices relative to operating expenses resulted in net excess costs on Texas properties, while improved prices allowed for partial recovery on Oklahoma properties.

Outlook, Risks, and Contingencies

• Management Commentary: The Trustee notes that distributable income for interim periods is not necessarily indicative of full-year results. The Trust's income is highly sensitive to oil and gas prices and production volumes.
• Risks: The Trust faces risks related to commodity price volatility, natural production decline, and the potential for state income tax withholding on nonresident recipients of oil and gas proceeds. While the Trustee currently believes withholding is not required, regulatory changes could reduce distributions.
• Contingencies: If monthly costs exceed revenues for any specific conveyance, excess costs must be recovered from future net proceeds of that conveyance with accrued interest. These costs cannot be offset by proceeds from other conveyances.
• Impairment: No impairment of assets was recognized as of June 30, 2017, as the Trustee does not view temporarily low prices as an indication of impairment.

Key Facts for Investor Verification

• Price Sensitivity: Verify current NYMEX oil and gas prices against the Trust's lagged revenue recognition (oil sales reflect production from 2-3 months prior).
• Production Decline: Confirm the estimated 6-8% annual natural production decline rate and its impact on future cash flows.
• Excess Cost Recovery: Monitor the $1.94 million in cumulative excess costs, particularly the $1.85 million associated with Texas working interests, which may delay future distributions if prices soften.
• Tax Withholding: Review state legislation in Texas, Oklahoma, and New Mexico regarding potential income tax withholding on nonresident unitholders.
• Development Costs: Assess the impact of increased development costs (up 148% QoQ) on net proceeds, as these are deducted before the Trust receives income.