CRT

Cross Timbers Royalty Trust (CRT) - Q3 2023 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2023. Cross Timbers Royalty Trust is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust has 6,000,000 units of beneficial interest outstanding. It is classified as a non-accelerated filer and a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Decline: Net profits income decreased 30% in Q3 2023 compared to Q3 2022. This was primarily driven by a $2.2 million reduction due to lower oil and gas prices, partially offset by increased production volumes ($0.7 million) and favorable net excess costs activity ($0.2 million).
• Year-to-Date Growth: Net profits income increased 2% for the nine months ended September 30, 2023. This increase was driven by net excess costs activity ($3.1 million), increased gas production ($1.8 million), and decreased development costs ($0.5 million). These gains were partially offset by decreased oil production ($3.3 million) and lower gas prices ($1.1 million).
• Commodity Prices: Average oil prices fell 27% to $74.62/Bbl in Q3 2023 (vs. $101.80 in Q3 2022). Average gas prices fell 53% to $4.23/Mcf in Q3 2023 (vs. $8.93 in Q3 2022).
• Production Volumes: Underlying oil sales volumes increased 29% in Q3 2023 due to timing of cash receipts, though they decreased 31% on a nine-month basis. Gas sales volumes increased 4% in Q3 and 29% YTD.
• Expenses: Administration expenses increased $155,556 for the quarter and $106,551 YTD, primarily due to the timing of payments and professional service terms.

Guidance, Outlook, Risks, and Contingencies

• Guidance: The filing contains no specific forward-looking financial guidance or production targets beyond standard forward-looking statements regarding market risks.
• Excess Costs: As of September 30, 2023, cumulative excess costs remaining to be recovered on the Texas working interest conveyance totaled $2.4 million (including $0.8 million accrued interest). These costs must be recovered from future net proceeds of that specific conveyance.
• Contingencies (Litigation): The Trust is involved in an arbitration regarding the Chieftain royalty class action settlement. The Trustee has objected to XTO Energy's attempt to allocate approximately $40,000 of settlement costs to the Trust as production costs. The final hearing was cancelled, and the matter remains unresolved. If the Trust is determined responsible, it would reduce net profits income.
• Tax Matters: The Trust is exempt from Texas franchise tax as a passive entity. However, unitholders may be subject to state income taxes in Oklahoma and New Mexico on income sourced to those states.
• Impairment: No impairment of net profits interests was recorded in Q3 2023 as no trigger events occurred.

Investor Verification Checklist

• Verify the impact of the ongoing Chieftain settlement arbitration on future net profits income calculations.
• Monitor the recovery status of the $2.4 million in cumulative excess costs associated with the Texas working interest conveyance.
• Review the natural production decline rate (estimated 6-8% annually) against the reported volume increases to assess the sustainability of production levels.
• Confirm the Trustee's continued exemption from Texas franchise tax and any changes in state withholding requirements for nonresident unitholders.
• Assess the sensitivity of distributable income to further fluctuations in oil and gas prices, given the significant price drops observed in Q3 2023.