CRT

Cross Timbers Royalty Trust (CRT) - Q3 2021 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 in Texas, Oklahoma, and New Mexico. The Trust receives net profits income from XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. This report covers the quarterly period ended September 30, 2021. As of November 1, 2021, there were 6,000,000 units of beneficial interest outstanding.

Key Financial Metrics

Liquidity and Debt: The Trust maintains an expense reserve of $1,000,000 to cover obligations if net profits income is insufficient. There is no traditional debt; however, cumulative excess costs (costs exceeding revenues on specific conveyances) remaining to be recovered as of September 30, 2021, totaled approximately $2.7 million ($2.0 million net to the Trust), including accrued interest.

Material Changes vs. Prior Period

• Revenue Surge: Net profits income increased 196% in Q3 2021 and 36% for the nine-month period compared to 2020. This was primarily driven by significantly higher oil and gas prices (Oil avg price up 112% QoQ; Gas avg price up 132% QoQ).
• Production Volumes: Underlying oil sales volumes increased 9% in Q3 2021 but decreased 12% for the nine-month period due to natural decline and timing of cash receipts. Gas volumes were relatively flat.
• Asset Amortization: The carrying value of net profits interests decreased significantly from $7.5 million (Dec 31, 2020) to $3.3 million (Sep 30, 2021) due to accelerated amortization of working interest net profits interests, driven by lower 2020 oil prices used in reserve calculations.
• Excess Costs: The Trust recovered $138,207 of excess costs in Q3 2021. However, a subsequent event in October 2021 increased excess costs by approximately $3.6 million due to a timing reversal of oil sales.

Outlook, Risks, and Unusual Items

• Trustee Change: On November 4, 2021, the Trustee (Simmons Bank) announced an agreement to resign and nominate Argent Trust Company as the successor trustee, subject to unitholder approval.
• Subsequent Event (Timing Issue): Adjustments in October 2021 related to a reversal of oil sales from the North Cowden Unit increased excess costs on Texas working interest properties by approximately $3.6 million ($2.7 million net to the Trust). XTO Energy expects to receive payment for these sales directly from the operator in the future.
• Litigation Contingency: The Trust is involved in an arbitration regarding the allocation of the Chieftain royalty class action settlement costs. A panel previously ruled that XTO Energy has the right to charge the settlement as a production cost, though the specific amount allocable to the Trust is pending. If charged, this would reduce net profits income.
• Market Risk: The Trust's income is highly sensitive to commodity prices and production volumes. The estimated natural production decline rate is 6% to 8% annually.

Investor Verification Checklist

• Verify the impact of the $3.6 million increase in excess costs (due to the North Cowden Unit timing reversal) on future distributions.
• Monitor the status of the trustee transition from Simmons Bank to Argent Trust Company and any associated fees or indenture amendments.
• Review the outcome of the arbitration regarding the Chieftain settlement allocation to determine potential future reductions in net profits income.
• Confirm the trajectory of oil and gas prices, as the Trust's income is directly correlated to market rates (Oil ~$62.29/Bbl and Gas ~$5.49/Mcf in Q3 2021).
• Assess the remaining cumulative excess costs of $2.7 million and the timeline for their recovery from future net proceeds.