Cross Timbers Royalty Trust - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2018, for Cross Timbers Royalty Trust (the "Trust"). The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust is managed by Simmons Bank as Trustee. As of August 1, 2018, there were 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis of accounting.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
|---|---|---|
| Net Profits Income | $2,333,173 | $4,610,672 |
| Total Income | $2,337,888 | $4,618,847 |
| Distributable Income | $2,169,228 | $4,199,508 |
| Distributable Income Per Unit | $0.361538 | $0.699918 |
| Administration Expense | $168,660 | $419,339 |
| Cash and Short-Term Investments | $1,720,152 (as of June 30, 2018) | |
| Net Profits Interests (Net) | ||
| Expense Reserve | $1,000,000 (as of June 30, 2018) | |
| Distributions Payable |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 43% for the quarter and 42% for the six-month period compared to the same periods in 2017.
- Price Drivers: The increase was primarily driven by higher oil prices (up 24% for the quarter to $59.05/Bbl) and higher oil production volumes (up 4% for the quarter).
- Cost Reductions: Development costs decreased significantly, down 42% for the quarter and 29% for the six-month period, due to reduced activity on Texas and Oklahoma properties.
- Excess Costs Recovery: Improved oil prices and lower development costs allowed for the partial recovery of cumulative excess costs on Texas working interest properties. Total remaining excess costs to be recovered as of June 30, 2018, were approximately $1.96 million (including accrued interest).
- Gas Production: Gas sales volumes decreased 4% for the quarter, partially offsetting the gains from oil.
Outlook, Risks, and Contingencies
- Chieftain Settlement Contingency: A class action lawsuit against XTO Energy (Chieftain Royalty Company v. XTO Energy Inc.) was settled for $80 million plus costs. XTO Energy estimates the portion allocated to the Trust could be as much as $40,000. The Trustee has objected to similar claims for another trust and is reviewing the allocation for Cross Timbers. If allocated, these costs would reduce net profits income.
- Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% per year.
- Tax Status: The Trust is a grantor trust for federal tax purposes and expects to remain exempt from Texas franchise tax as a passive entity. Unitholders are responsible for their own tax liabilities.
- Market Risk: The Trust's income is highly sensitive to oil and gas prices and production volumes. There have been no material changes in market risks since the last annual report.
Investor Verification Checklist
- Allocation of Chieftain Settlement: Verify the final allocation of the $80 million settlement to the Trust and the resulting impact on future distributions.
- Excess Costs Recovery: Monitor the recovery of the remaining ~$1.96 million in excess costs on Texas working interests, which will impact future net proceeds.
- Production Volumes: Track the natural decline rate (6-8%) against any new development activity to assess long-term income sustainability.
- Oil Price Sensitivity: Evaluate the Trust's exposure to fluctuations in NYMEX oil prices, given the significant portion of income derived from oil sales.