CRT

Cross Timbers Royalty Trust 2019 10-K Summary

Business Context and Reporting Period

Cross Timbers Royalty Trust (CRT) is an express trust created under Texas law, holding defined net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust has no employees and is administered by Simmons Bank as Trustee. The reporting period covers the fiscal year ended December 31, 2019. The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties across Texas, Oklahoma, and New Mexico.

Key Financial Metrics

Production and Pricing (2019): Average oil sales price was $52.79 per Bbl (down 11% from 2018). Average gas sales price was $3.74 per Mcf (down 15% from 2018). Approximately 56% of net profits income was derived from natural gas.

Material Changes vs. Prior Period

• Revenue Decline: Net profits income decreased by 35% ($3.2 million) compared to 2018. This was primarily driven by lower oil and gas prices ($1.9 million impact), decreased production volumes ($1.9 million impact), and increased production expenses ($0.8 million impact).
• Cost Reductions: Total costs deducted from net proceeds decreased 9% to $7.7 million. This was due to lower taxes, transportation, and development costs, partially offset by higher production expenses.
• Excess Costs: Cumulative excess costs for the Texas working interest conveyance totaled $2.3 million (including accrued interest) as of December 31, 2019. These costs must be recovered from future net proceeds before the Trust receives income from that specific conveyance.
• Reserves: Proved reserves for the net profits interests were 1,105,000 Bbls of oil and 14,587,000 Mcf of gas. The standardized measure of discounted future net cash flows was $47.2 million.

Guidance, Outlook, and Risks

Outlook: The Trustee does not provide specific forward-looking guidance on future distributions due to the volatility of commodity prices. However, unit operators have reported budgeted development costs of approximately $2.1 million for 2020 and 2021. The Trust's income is highly dependent on oil and gas prices and production volumes, which are subject to natural decline rates of approximately 6% to 8% annually.

Risks and Contingencies:

• Commodity Price Volatility: Significant declines in oil or gas prices could materially reduce distributions and proved reserves.
• Excess Costs: If costs exceed revenues on the 75% working interest properties, the Trust receives no income from those properties until excess costs are recovered.
• Legal Contingency: A settlement regarding the Chieftain Royalty Company v. XTO Energy Inc. lawsuit is pending. XTO Energy advised that approximately $40,000 may be allocated to the Trust as additional production costs. The Trustee has objected to this allocation, and the matter is subject to arbitration. If the Trust is held responsible, it would reduce net profits income.
• Depleting Assets: The underlying assets are depleting. If operators do not perform successful development projects, production decline may accelerate, eventually leading to the termination of the Trust if gross revenue falls below $1 million for two successive years.

Investor Verification Checklist

• Commodity Prices: Verify current NYMEX oil and gas prices against the 12-month average prices used in reserve calculations ($52.30/Bbl oil, $2.77/Mcf gas) to assess potential reserve revisions.
• Excess Cost Recovery: Monitor the status of the $2.3 million cumulative excess costs on the Texas working interest conveyance, as this directly blocks income from that segment.
• Legal Arbitration: Track the outcome of the arbitration regarding the Chieftain settlement to determine if the $40,000 cost allocation will be enforced.
• Production Decline: Review quarterly production reports to confirm if the natural decline rate (6-8%) is being offset by development activities.
• Trust Termination Threshold: Monitor annual gross revenue to ensure it remains above the $1 million threshold required to avoid automatic termination.