Cross Timbers Royalty Trust (CRT) - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2019. Cross Timbers Royalty 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. The Trust has 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | YTD 9 Months 2019 | YTD 9 Months 2018 |
|---|---|---|---|---|
| Net Profits Income | $1,272,845 | $2,257,576 | $4,466,126 | $6,868,248 |
| Distributable Income | $1,124,874 | $2,144,706 | $3,927,846 | $6,344,214 |
| Distributable Income Per Unit | $0.187479 | $0.357451 | $0.654641 | $1.057369 |
| Administration Expense | $154,308 | $118,614 | $558,245 | $537,953 |
| Cash and Short-Term Investments | $1,291,121 | $1,600,694 | As of Sept 30, 2019 | |
| Net Profits Interests (Net) | $8,237,771 | $8,526,512 | As of Sept 30, 2019 | |
| Expense Reserve | $1,000,000 | $1,000,000 | As of Sept 30, 2019 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 44% in Q3 2019 and 35% for the nine-month period compared to 2018.
- Production Volumes: Oil sales volumes from underlying properties dropped 30% (Q3) and 18% (YTD) due to natural decline, increased downtime, and timing of cash receipts. Gas volumes decreased 5% (Q3) and 10% (YTD).
- Commodity Prices: Average oil prices fell 11% to $55.64/Bbl (Q3) and 10% to $52.64/Bbl (YTD). Gas prices fell 25% to $3.11/Mcf (Q3) and 11% to $3.89/Mcf (YTD).
- Costs: Production expenses increased 11% (Q3) and 19% (YTD) primarily due to timing of charges and reporting of well work activity. However, taxes, transportation, and other costs decreased significantly due to lower revenues and volumes.
- Excess Costs: Cumulative excess costs remaining to be recovered as of September 30, 2019, totaled $2.2 million (including $0.3 million accrued interest). Partial recovery occurred on Texas working interests, while Oklahoma working interests incurred new excess costs.
Outlook, Risks, and Contingencies
- Production Decline: The estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
- Development Activity: Drilling on wells planned for 2019 has not commenced and may be delayed into 2020.
- Contingency (Chieftain Litigation): A federal court approved a settlement of a royalty class action lawsuit against XTO Energy in March 2018. XTO advised that approximately $40,000 should be allocated to the Trust as additional production costs. The Trustee has objected to this allocation. XTO has agreed to defer accounting entries for this allocation until a pending arbitration regarding a similar claim against the Hugoton Royalty Trust is resolved.
- Tax Matters: The Trust is exempt from Texas franchise tax as a passive entity. Unitholders may be subject to state income taxes in Oklahoma and New Mexico on income sourced from those states.
Investor Verification Checklist
- Verify the impact of the pending arbitration regarding the Chieftain settlement allocation on future net profits income.
- Monitor the timing of drilling activities for 2019/2020 wells, as delays could further impact production volumes.
- Review the excess costs recovery status, particularly for the Oklahoma working interests which incurred new excess costs in Q3 2019.
- Confirm the natural production decline rate (6-8%) against actual volume trends to assess long-term cash flow sustainability.
- Check for any changes in state tax withholding regulations in Texas, Oklahoma, or New Mexico that could affect net distributions.