Cross Timbers Royalty Trust - Q1 2018 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2018. 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 90% and 75% net profits interests. As of May 1, 2018, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net Profits Income | $2,277,499 | $1,624,671 |
| Total Income | $2,280,959 | $1,625,658 |
| Distributable Income | $2,030,280 | $1,383,420 |
| Distributable Income Per Unit | $0.338380 | $0.230570 |
| Administration Expense | $250,679 | $242,238 |
| Cash and Short-Term Investments | $1,536,792 | $1,469,830 (Dec 31, 2017) |
| Net Profits Interests (Carrying Value) | $9,120,594 | $9,311,334 (Dec 31, 2017) |
| Expense Reserve | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased by 40% ($652,828) compared to Q1 2017. This increase was primarily driven by higher oil and gas prices, contributing approximately $0.6 million to the increase.
- Price Increases: Average oil sales prices rose 20% to $54.17 per barrel, and gas prices increased 16% to $4.61 per Mcf.
- Volume Trends: Underlying oil sales volumes decreased slightly by 1% due to natural production decline. Gas sales volumes increased by 5%.
- Cost Management: Development costs decreased by 11% due to reduced activity in Texas oil properties. Excess costs recovered during the quarter totaled $150,540 for Texas working interests.
- Trust Corpus: The trust corpus decreased from $9,311,334 to $9,120,594, reflecting amortization of net profits interests ($190,740) offset by distributable income and distributions.
Outlook, Risks, and Contingencies
- Excess Costs: Cumulative excess costs remaining to be recovered as of March 31, 2018, totaled $2,032,848 for Texas working interests and $1,524,636 for Oklahoma working interests. These must be recovered from future net proceeds of the specific conveyances.
- Production Decline: The estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
- Tax Contingencies: Several states have legislation regarding income tax withholding on oil and gas proceeds. The Trustee currently believes withholding is not required, but regulatory changes could reduce distributions if withholding becomes mandatory.
- Market Risk: The Trust is subject to significant price volatility in crude oil and natural gas markets. No material changes in market risks were reported compared to the 2017 Annual Report.
- Impairment: No impairment of net profits interests was recognized during the quarter.
Investor Verification Checklist
- Verify the impact of future oil and gas price fluctuations on net profits income, given the Trust's reliance on commodity prices.
- Monitor the recovery status of cumulative excess costs ($3.56 million total remaining) which reduce future distributable income.
- Review the natural production decline rate (6-8%) to assess long-term revenue sustainability.
- Confirm the Trustee's stance on state tax withholding requirements, as changes could directly impact cash distributions.
- Check the quarterly amortization of net profits interests, which reduces the trust corpus over time.