Cross Timbers Royalty Trust: Q1 2021 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2021. 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 1, 2021, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net Profits Income | $1,355,441 | $2,023,519 |
| Total Income | $1,355,504 | $2,027,812 |
| Administration Expense | $316,154 | $218,878 |
| Distributable Income | $1,039,350 | $1,808,934 |
| Distributable Income Per Unit | $0.173225 | $0.301489 |
| Cash and Short-Term Investments | $1,223,790 | $1,372,799 (Dec 31, 2020) |
| Net Profits Interests (Carrying Value) | $7,422,911 | $7,523,065 (Dec 31, 2020) |
| Expense Reserve | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased by 33% ($668,078) compared to Q1 2020. This was driven by a 34% decrease in oil sales volumes and a 20% decrease in average oil prices ($43.89/Bbl vs. $54.72/Bbl).
- Gas Performance: Gas sales volumes increased by 47% and average gas prices rose 22% to $3.86/Mcf, partially offsetting the decline in oil revenue.
- Cost Increases: Taxes, transportation, and other costs increased 110% due to higher property taxes and the absence of oil severance tax incentives. Administration expenses increased by $97,276, primarily due to the timing of payments.
- Excess Costs: Cumulative excess costs remaining to be recovered (including accrued interest) totaled $3.02 million as of March 31, 2021. Oklahoma working interest excess costs increased by $95,110 during the quarter.
Outlook, Risks, and Contingencies
- Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.
- Market Volatility: Management notes that while prices have increased since early 2020 shutdowns, the market remains volatile due to accumulated supplies and the ongoing impact of the COVID-19 pandemic on demand.
- Chieftain Litigation: A federal district court approved a settlement of a royalty class action lawsuit against XTO Energy. Approximately $40,000 was initially proposed to be allocated to the Trust as production costs. The Trustee has objected to this allocation. An arbitration panel regarding a similar trust (Hugoton Royalty Trust) issued an interim award in January 2021 allowing XTO to charge settlement amounts, but the final amount allocable to Cross Timbers remains under review. XTO has agreed to defer accounting entries for this allocation until the arbitration is finalized.
- 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.
Investor Verification Checklist
- Verify the impact of the pending Chieftain litigation arbitration on future net profits income and potential cost allocations.
- Monitor the excess costs balance ($3.02 million total), as future net proceeds from specific conveyances must recover these costs before distributions can be made from those specific interests.
- Assess the sensitivity of distributions to oil price volatility, given the 34% volume decline and 20% price drop in Q1 2021.
- Review the expense reserve status ($1,000,000) to ensure it remains sufficient to cover Trustee obligations if net profits income is insufficient.
- Confirm the amortization schedule of net profits interests, as lower oil prices in 2020 could lead to higher amortization charges in 2021, reducing trust corpus (though not affecting distributions).