Cross Timbers Royalty Trust (CRT) - Q1 2024 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2024. 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 wholly owned subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. As of May 2, 2024, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net Profits Income | $1,837,741 | $3,912,704 |
| Total Income (incl. interest) | $1,854,714 | $3,927,042 |
| Distributable Income | $1,493,214 | $3,639,198 |
| Distributable Income Per Unit | $0.248869 | $0.606533 |
| Administration Expense | $361,500 | $287,844 |
| Cash and Short-Term Investments | $1,111,159 | $1,852,320 (Dec 31, 2023) |
| Trust Corpus | $2,620,517 | $2,671,583 (Dec 31, 2023) |
| Expense Reserve | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
Net profits income decreased by 53% year-over-year, driven primarily by the following factors:
- Gas Production: Underlying gas sales volumes dropped 69% (from 811,264 Mcf to 253,799 Mcf), largely due to the absence of receipts for New Mexico royalty interests related to 2018-2020 production and natural decline.
- Commodity Prices: Average gas prices fell 16% to $4.57/Mcf, and oil prices fell 6% to $75.30/Bbl.
- Development Costs: Increased 87% due to the timing of cost receipts for drilling activity on the Hewitt Unit.
- Offsetting Factors: The decline was partially mitigated by a recovery of excess costs ($0.8 million benefit) and decreases in taxes, transportation, and production expenses.
Administration expenses increased by $73,656, attributed to the timing of expense payments and professional service terms.
Outlook, Risks, and Contingencies
Outlook and Commentary: The Trustee notes that the estimated natural production decline on underlying properties is approximately 6% to 8% annually. No impairment of net profits interests was recorded in Q1 2024 as no trigger events occurred. The Trust does not provide specific forward guidance beyond historical trends and market dependencies.
Contingencies and Risks:
- Chieftain Litigation: A federal court approved a settlement of a royalty class action against XTO Energy. Approximately $40,000 was initially allocated to the Trust as additional production costs. The Trustee has objected to similar claims in related arbitration (Hugoton Royalty Trust). The final allocation to the Cross Timbers Trust remains pending resolution of the arbitration.
- Excess Costs: Cumulative excess costs remaining to be recovered as of March 31, 2024, totaled $4.1 million ($3.1 million net to the Trust), including accrued interest. These costs must be recovered from future net proceeds of specific conveyances before distributions can be made from those interests.
- Tax Withholding: State legislation regarding income tax withholding on nonresident oil and gas proceeds could reduce distributions if regulations change.
Investor Verification Checklist
- Verify the impact of the Chieftain litigation settlement on future net profits income and potential legal fee expenses.
- Monitor the recovery of excess costs ($3.1 million net to Trust), which delays distributions from specific working interest conveyances.
- Assess the sustainability of gas production volumes given the 69% year-over-year decline and the absence of specific New Mexico receipts.
- Review the expense reserve status ($1.0 million) to ensure it remains sufficient to cover Trustee obligations if net profits income declines further.
- Confirm the timing of development costs for the Hewitt Unit, as these significantly impacted Q1 2024 results and may recur.