Cross Timbers Royalty Trust 2015 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust (CRT) is a Texas express trust created in 1991, holding defined net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust has no employees; Southwest Bank serves as the Trustee. The reporting period covers the fiscal year ended December 31, 2015. 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: $8,884,319 for 2015 (down from $16,449,036 in 2014).
- Distributable Income: $8,128,668 for 2015.
- Distributions per Unit: $1.354778 for 2015 (down from $2.657550 in 2014).
- Total Assets: $11,511,940 as of December 31, 2015.
- Cash and Short-term Investments: $969,700.
- Net Profits Interests (Carrying Value): $10,542,236.
- Proved Reserves: 483,000 barrels of oil and 16,479,000 Mcf of gas allocated to the Trust.
- Standardized Measure of Discounted Future Net Cash Flows: $33,742,000 (down 65% from 2014 due to price declines).
Material Changes vs. Prior Period
The Trust experienced a significant decline in financial performance in 2015 compared to 2014, primarily driven by a collapse in commodity prices.
- Price Declines: Average oil sales price dropped 42% to $52.62 per barrel, and average gas sales price dropped 35% to $4.54 per Mcf.
- Income Reduction: Net profits income decreased 46% year-over-year. Approximately $10.4 million of the decline was attributed to lower oil and gas prices.
- Excess Costs: Costs exceeded revenues on Texas and Oklahoma working interest properties during multiple months in 2015. Cumulative excess costs remaining at year-end totaled $2,026,071 ($1,519,553 net to the Trust), which must be recovered from future proceeds before distributions resume from those specific conveyances.
- Development Costs: Total development costs decreased 20% to $2,697,664 due to reduced activity on non-operated properties.
Outlook, Risks, and Management Commentary
The Trustee notes that the Trust is highly sensitive to oil and gas price volatility. Future distributions depend on production volumes, commodity prices, and the recovery of excess costs on working interest properties.
- Reserve Depletion: The assets are depleting. The average reserve-to-production index is approximately 10 years. A portion of distributions is considered a return of capital.
- Excess Cost Recovery: The Trust will not receive net proceeds from the Texas and Oklahoma working interest conveyances until future production revenues exceed the cumulative excess costs plus accrued interest.
- Regulatory Risks: Potential increases in operating costs due to greenhouse gas emissions regulations could reduce net proceeds.
- Termination Triggers: The Trust will terminate if gross revenue falls below $1 million for two successive years or if 80% of unitholders vote to terminate.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, not when produced.
Investor Verification Checklist
- Verify the current status of cumulative excess costs ($2.0M) on Texas and Oklahoma working interests and the timeline for their recovery.
- Monitor commodity price trends (oil and gas) as they directly dictate the Trust's distributable income.
- Review the Trust's proved reserve estimates, noting the 65% drop in discounted future net cash flows due to price revisions.
- Confirm the Trust's cash reserves ($969,700) are sufficient to cover monthly distributions if net profits income fluctuates.
- Check for any updates on the "excess cost" carryforward mechanism, as it delays income from specific properties.