Cross Timbers Royalty Trust 2018 Annual Report (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, 2018. The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties located in Texas, Oklahoma, and New Mexico.
Key Financial Metrics
- Net Profits Income: $9,133,959 for 2018 (up from $6,621,337 in 2017).
- Total Revenues: $19,043,439 (Oil: $12,589,277; Gas: $6,454,162).
- Total Costs: $8,542,320 (Production expense: $4,353,031; Development costs: $1,227,217).
- Distributable Income: $8,558,526 for the year, or $1.426421 per unit.
- Administration Expense: $595,606.
- Cash and Short-term Investments: $1,600,694 as of December 31, 2018.
- Trust Corpus: $8,526,512 (Net profits interests carrying value).
- Proved Reserves (Net Profits Interests): 1,367,000 Bbls of oil and 17,141,000 Mcf of gas.
- Standardized Measure of Discounted Future Net Cash Flows: $64,333,000 (10% discount rate).
Material Changes vs. Prior Period
Net profits income increased 38% year-over-year, primarily driven by a 31% increase in average oil prices ($59.33/Bbl in 2018 vs. $45.18/Bbl in 2017) and a 6% increase in average gas prices ($4.40/Mcf vs. $4.15/Mcf). While underlying oil sales volumes remained relatively flat and gas volumes decreased by 4% due to natural production decline, the higher commodity prices significantly boosted revenues. Total costs decreased slightly by 1% due to lower production expenses and excess cost recoveries on Texas working interests, partially offset by increased development costs.
Outlook, Risks, and Contingencies
- Outlook: Future distributions depend heavily on volatile oil and gas prices. XTO Energy plans to drill eight vertical wells in the Hewitt Unit in 2019. Budgeted development costs for 2019 are approximately $1.7 million.
- Excess Costs: Cumulative excess costs remaining to be recovered as of December 31, 2018, totaled $1,803,572 (underlying) or $1,352,679 (net to Trust). These costs, primarily from Texas and Oklahoma working interests, must be recovered from future net proceeds before distributions resume from those specific conveyances.
- Legal Contingency: A pending arbitration regarding the "Chieftain" royalty class action settlement ($80 million) may impact the Trust. XTO Energy estimates approximately $40,000 in additional production costs could be allocated to the Trust, but this is deferred pending the arbitration outcome.
- Risks: Key risks include commodity price volatility, natural production decline (estimated 6-8% annually), operational hazards, and the potential for operators to abandon properties if they are no longer economic.
Investor Verification Checklist
- Verify the current status of the "Chieftain" settlement arbitration and its potential impact on future net profits income.
- Monitor the recovery rate of the $1.35 million in excess costs allocated to the Trust, which delays distributions from specific working interest properties.
- Track commodity price trends (WTI crude and Henry Hub natural gas) as they directly correlate with monthly distribution amounts.
- Review the Trust's reserve-to-production ratio (approx. 11 years for underlying properties) to assess the longevity of cash flows.
- Confirm the Trust's exemption status from Texas franchise tax and any potential changes in state tax withholding regulations.