Cross Timbers Royalty Trust (CRT) - 2016 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust is an express trust created under Texas law, holding defined net profits interests in oil and gas properties owned by XTO Energy Inc. (a wholly-owned subsidiary of Exxon Mobil Corporation). The Trust has no employees; administrative functions are performed by Southwest Bank, the Trustee. The reporting period covers the fiscal year ended December 31, 2016. The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties across Texas, Oklahoma, and New Mexico.
Key Financial Metrics
- Net Profits Income: $7,541,706 for 2016.
- Distributable Income: $6,364,800 for 2016.
- Distributions per Unit: $1.060800 for 2016 (Total distributions: $6,364,800).
- Total Assets: $11,448,234 as of December 31, 2016 (Cash and short-term investments: $1,544,252).
- Trust Corpus: $9,903,800 (Net profits interests, net of amortization).
- Production Volumes (Net Profits Interests): 66,648 Bbls of oil and 1,895,526 Mcf of gas.
- Average Sales Prices: $38.02 per Bbl (Oil) and $3.55 per Mcf (Gas).
- Development Costs: $998,200 (down 63% from 2015).
- Cumulative Excess Costs: $2,403,654 remaining at year-end (must be recovered from future proceeds).
Material Changes vs. Prior Period
Net profits income decreased 15% from $8,884,319 in 2015 to $7,541,706 in 2016. This decline was primarily driven by:
- Lower Commodity Prices: Average oil prices fell 28% to $38.02/Bbl and gas prices fell 22% to $3.55/Mcf compared to 2015.
- Excess Costs: The impact of excess costs on Texas and Oklahoma working interest properties in 2015 reduced 2016 income by approximately $1.2 million.
- Production Decline: Underlying oil sales volumes decreased 3% due to natural decline.
- Offsetting Factors: The decline was partially mitigated by a 27% increase in gas sales volumes, lower development costs ($1.3 million reduction), and decreased production expenses.
Outlook, Risks, and Management Commentary
Outlook and Guidance: The Trust does not provide formal forward-looking guidance. Future distributions depend entirely on oil and gas prices, production volumes, and costs incurred by operators. Budgeted development costs for 2017 are approximately $1.2 million. The Trustee notes that oil and gas prices are expected to remain volatile.
Risks and Contingencies:
- Depleting Assets: The underlying properties are depleting assets with an average reserve-to-production index of approximately 9 years. Distributions include a return of capital component.
- Excess Costs: Remaining cumulative excess costs of $2.4 million must be recovered from future net proceeds before distributions can resume on those specific conveyances.
- Price Volatility: Distributions are highly sensitive to market prices for oil and natural gas.
- Regulatory Environment: Potential increases in operating costs due to climate change and greenhouse gas regulations could reduce net proceeds.
- Termination Risk: The Trust will terminate if gross revenue falls below $1 million for two successive years.
Investor Verification Checklist
- Verify the current status of the $2.4 million in cumulative excess costs and the timeline for their recovery from future proceeds.
- Monitor the 12-month average oil and gas prices used to calculate reserve estimates and future cash flows.
- Review the quarterly production volumes to assess the rate of natural decline versus any new development activity.
- Confirm the Trust's cash reserve status (fully funded at $1,000,000 as of year-end) and its impact on distributable income.
- Assess the impact of XTO Energy's development budget ($1.2 million for 2017) on future production levels.