Cross Timbers Royalty Trust (CRT) - Q2 2024 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 wholly-owned subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. This report covers the quarterly period ended June 30, 2024. As of August 2, 2024, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Net Profits Income | $1,564,871 | $3,163,059 | $3,402,612 | $7,075,763 |
| Total Income | $1,580,044 | $3,180,068 | $3,434,758 | $7,107,110 |
| Distributable Income | $1,345,758 | $3,040,614 | $2,838,972 | $6,679,812 |
| Distributable Income Per Unit | $0.224293 | $0.506769 | $0.473162 | $1.113302 |
| Administration Expense | $234,286 | $139,454 | $595,786 | $427,298 |
| Cash and Short-Term Investments | $1,175,691 | (Balance Sheet Data) | ||
| Net Profits Interests (Net) | $2,550,725 | |||
| Expense Reserve | $1,000,000 | (Fixed) |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 51% in Q2 2024 and 52% YTD 2024 compared to the prior year periods.
- Commodity Prices: The primary driver was a 66% decrease in average natural gas prices (Q2 2024: $4.04/Mcf vs. $11.87/Mcf in Q2 2023). Oil prices increased slightly by 4% in Q2 2024 ($77.24/Bbl vs. $74.03/Bbl).
- Production Volumes: Underlying oil sales volumes increased 3% in Q2 2024. Gas sales volumes increased 27% in Q2 2024 due to out-of-period revenues, though YTD gas volumes decreased 45% due to the absence of receipts for New Mexico properties related to prior years.
- Costs: Development costs increased 290% in Q2 2024 due to the timing of drilling activity costs for the Hewitt Unit. Taxes, transportation, and other costs decreased 33% in Q2 2024.
- Excess Costs: Cumulative excess costs remaining to be recovered as of June 30, 2024, totaled $3.7 million (including $1.0 million in accrued interest), with $2.8 million net to the Trust.
Guidance, Outlook, and Risks
- Outlook: The filing contains no specific forward-looking guidance on future production or prices. The Trustee notes that actual results may differ materially from expectations due to commodity price volatility and production decline rates (estimated at 6-8% annually).
- Contingencies: A settlement agreement was reached on June 18, 2024, regarding the Chieftain royalty class action lawsuit. The allocation of a portion of the settlement to the Trust is expected to be resolved in the third quarter of 2024. If the Trust is determined responsible for costs, they will be deducted from net profits income.
- Tax Matters: The Trust is exempt from Texas franchise tax as a passive entity. However, unitholders may be subject to state income taxes in Oklahoma and New Mexico. The Trustee believes no withholding is currently required on payments to unitholders, though regulations are subject to change.
- Impairment: No trigger event occurred in Q2 2024 requiring an impairment assessment of the net profits interests.
Investor Verification Checklist
- Gas Price Sensitivity: Verify the impact of sustained low natural gas prices on future distributable income, given the 66% price drop in Q2.
- Excess Cost Recovery: Monitor the $3.7 million in cumulative excess costs (including interest) that must be recovered from future net proceeds before full distributions can resume on affected conveyances.
- Chieftain Settlement Impact: Confirm the final allocation amount of the Chieftain settlement costs to the Trust in Q3 2024 filings, as this will reduce net profits income.
- Production Decline: Assess the long-term impact of the 6-8% annual natural production decline rate on the Trust's corpus and future cash flows.
- State Tax Withholding: Review updates on state legislation regarding income tax withholding on oil and gas proceeds for non-resident unitholders.