Cross Timbers Royalty Trust (CRT) - Q1 2023 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 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 holds 6,000,000 units of beneficial interest outstanding as of May 2, 2023. Financial statements are prepared on a modified cash basis rather than GAAP.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net Profits Income | $3,912,704 | $1,951,672 |
| Total Income | $3,927,042 | $1,951,706 |
| Distributable Income | $3,639,198 | $1,684,932 |
| Distributable Income Per Unit | $0.606533 | $0.280822 |
| Administration Expense | $287,844 | $266,774 |
| Cash and Short-Term Investments | $2,070,031 | $1,898,638 (Dec 31, 2022) |
| Net Profits Interests (Carrying Value) | $2,832,930 | $2,961,955 (Dec 31, 2022) |
| Expense Reserve | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
Net profits income increased by approximately 100% compared to Q1 2022. This significant increase was driven by the following factors:
- Excess Costs Recovery: A reduction in excess costs charged to the Trust contributed approximately $2.8 million to the increase.
- Gas Production: Gas sales volumes increased 226% (driven by timing of receipts for New Mexico royalty interests), adding $2.7 million.
- Oil Prices: Average oil prices rose 34% to $80.49 per barrel, contributing $1.6 million.
- Development Costs: Decreased drilling activity in the Hewitt Unit reduced development costs by $0.3 million.
These gains were partially offset by:
- Oil Production Decline: Oil sales volumes decreased 63% due to natural decline and the absence of a specific unit adjustment present in the prior year, reducing income by $4.2 million.
- Gas Prices: Average gas prices fell 21% to $5.43 per Mcf, reducing income by $0.3 million.
- Operating Costs: Increases in taxes, transportation, and production expenses reduced income by $0.9 million combined.
- Chieftain Litigation: The Trust may be required to bear a portion of settlement costs from a royalty class action lawsuit against XTO Energy. If determined responsible, these costs will be deducted from net profits income. The Trustee is currently involved in arbitration regarding the allocation of these costs.
- Excess Costs: As of March 31, 2023, cumulative excess costs remaining to be recovered totaled $2.5 million (underlying) or $1.8 million (net to Trust), including accrued interest. These costs must be recovered from future net proceeds of specific conveyances.
- Tax Withholding: State legislation regarding income tax withholding on payments to nonresidents could reduce distributions if regulations change.
- Verify the status of the Chieftain royalty class action settlement arbitration to assess potential future deductions to net profits income.
- Monitor the excess costs recovery schedule, as future distributions depend on the recovery of the $1.8 million net balance.
- Review the production decline rates (6-8% annually) and the impact of natural depletion on long-term distributable income.
- Confirm the timing of receipts for gas production, as Q1 2023 results were significantly boosted by delayed receipts from 2018-2020 production.
- Check for updates on state tax withholding regulations in Texas, Oklahoma, and New Mexico that could impact net distributions.
Outlook, Risks, and Contingencies
Guidance and Outlook: The filing contains no specific forward-looking guidance on future production or prices. Management notes that actual results may differ materially from expectations due to commodity price volatility and production declines (estimated at 6-8% annually).
Contingencies and Risks: