Cross Timbers Royalty Trust 2017 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, 2017. 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: $6,621,337 for 2017.
- Distributable Income: $6,053,790 for 2017.
- Distributions per Unit: $1.008965 for 2017 (Total distributions: $6,053,790).
- Total Assets: $10,782,124 as of December 31, 2017.
- Cash and Short-term Investments: $1,469,830 as of December 31, 2017.
- Net Profits Interests (Carrying Value): $9,311,334 (net of accumulated amortization).
- Administration Expenses: $575,144 for 2017.
- Interest Income: $7,597 for 2017.
- Proved Reserves (Net Profits Interests): 1,300,000 Bbls of oil and 17,088,000 Mcf of gas.
- Standardized Measure of Discounted Future Net Cash Flows: $54,045,000 (10% discount rate).
Material Changes vs. Prior Period
- Income Decline: Net profits income decreased 12% to $6.62 million in 2017 from $7.54 million in 2016. Distributable income per unit decreased to $1.01 from $1.06.
- Production Volumes: Underlying oil sales volumes decreased 5% and gas sales volumes decreased 25% compared to 2016, primarily due to natural production decline and timing of cash receipts.
- Price Increases: Average oil sales price increased 19% to $45.18/Bbl, and average gas sales price increased 17% to $4.15/Mcf, partially offsetting volume declines.
- Cost Increases: Total costs deducted from net proceeds increased 16% to $8.59 million, driven by excess costs on Texas and Oklahoma working interest properties and higher development costs.
- Excess Costs: Cumulative excess costs remaining to be recovered (including accrued interest) totaled $2,159,727 as of year-end 2017, all attributable to Texas working interests. Oklahoma working interest excess costs were fully recovered in 2017.
Outlook, Risks, and Management Commentary
- Development Plans: XTO Energy plans to drill seven vertical wells in the Hewitt Unit (Oklahoma) during 2018. Budgeted development costs for 2018 are approximately $1.9 million.
- Price Volatility: Management notes that oil and gas prices are expected to remain volatile. Future distributions are highly dependent on these prices and production volumes.
- Depleting Assets: The Trust holds interests in depleting assets with an estimated reserve-to-production index of approximately 11 years. Distributions include a return of capital component.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Income is recognized when received, not when produced.
- Risks: Key risks include fluctuations in commodity prices, operational hazards, the inability of the Trust to influence operations, and the potential for excess costs to reduce future distributions. The Trust will terminate if gross revenue falls below $1 million for two successive years.
Investor Verification Checklist
- Verify the current status of cumulative excess costs on Texas working interests ($2.16 million) and their impact on future cash flows.
- Monitor monthly oil and gas price trends, as they directly dictate net profits income and distribution amounts.
- Review the Trust's reserve-to-production ratio (approx. 11 years) to assess the timeline for asset depletion.
- Confirm the Trustee's cash reserve status (currently fully funded at $1,000,000) and any changes to the reserve policy.
- Check for any updates on the planned drilling activities in the Hewitt Unit and their expected impact on production volumes.