Cross Timbers Royalty Trust (CRT) - Q2 2022 10-Q Summary
Business Context and Reporting Period
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 subsidiary of Exxon Mobil Corporation) based on production from underlying properties. This report covers the quarterly period ended June 30, 2022. As of August 3, 2022, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Net Profits Income | $3,767,617 | $1,791,664 | $5,719,289 | $3,147,105 |
| Distributable Income | $3,558,996 | $1,669,458 | $5,243,928 | $2,708,808 |
| Distributable Income Per Unit | $0.593166 | $0.278243 | $0.873988 | $0.451468 |
| Administration Expense | $209,529 | $122,235 | $476,303 | $438,389 |
| Cash and Short-Term Investments | $2,632,564 | $1,822,750 | - | - |
| Net Profits Interests (Carrying Value) | $3,096,807 | $3,266,356 | - | - |
Note: The Trust has no debt. Liquidity is maintained through cash reserves and net profits income. The expense reserve is funded at $1,000,000.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 110% in Q2 2022 and 82% YTD compared to 2021. This was driven primarily by higher oil and gas prices and increased production volumes.
- Commodity Prices: Average oil sales price rose 57% to $90.00/Bbl in Q2 2022 (vs. $57.15 in Q2 2021). Average gas sales price rose 34% to $6.81/Mcf (vs. $5.09 in Q2 2021).
- Production Volumes: Gas sales volumes from underlying properties increased 142% in Q2 2022 due to timing of cash receipts. Oil sales volumes decreased 14% in Q2 2022 due to natural decline and timing, though YTD oil volumes increased 88%.
- Costs: Total costs increased 67% in Q2 2022. Significant increases were seen in taxes/transportation (149%) and development costs (due to activity in the Hewitt Unit). Excess costs activity reduced net proceeds by approximately $0.1 million in Q2.
Outlook, Risks, and Contingencies
- Trustee Transition: Simmons Bank is resigning as Trustee. Unitholders approved the appointment of Argent Trust Company as successor trustee at a meeting on May 4, 2022. The effective date depends on satisfying conditions, including unitholder approval for related trusts.
- Chieftain Litigation: A federal court approved a settlement of a royalty class action against XTO Energy. Approximately $40,000 was initially allocated to the Trust as production costs. The Trustee has objected to similar claims in related arbitration. If the Trust is determined responsible for settlement costs, they will be deducted from net profits income, reducing distributions.
- Excess Costs: Cumulative excess costs remaining to be recovered as of June 30, 2022, totaled $2.2 million (underlying) or $1.6 million (net to Trust) for the Texas working interest conveyance. These must be recovered from future net proceeds before distributions can be made from that specific conveyance.
- Market Risk: The Trust is subject to volatility in oil and gas prices and production decline rates (estimated at 6% to 8% annually).
Investor Verification Checklist
- Verify the status of the Trustee transition to Argent Trust Company and any associated fees or delays.
- Monitor the resolution of the Chieftain royalty class action settlement and its potential impact on future net profits income deductions.
- Review the recovery schedule for the $1.6 million in net excess costs associated with the Texas working interest conveyance.
- Assess the sustainability of current oil and gas prices ($90/Bbl oil, $6.81/Mcf gas) against the Trust's natural production decline rate.
- Confirm the impact of state tax withholding regulations on nonresident unitholders, as regulations are subject to change.