CRT

Cross Timbers Royalty Trust - 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2017, for the Cross Timbers Royalty Trust. The Trust holds net profits interests in oil and gas properties located in Texas, Oklahoma, and New Mexico, operated by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust is taxed as a grantor trust, meaning income is passed through to unitholders. As of November 1, 2017, there were 6,000,000 units of beneficial interest outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance: Net profits income increased 11% in Q3 2017 compared to Q3 2016. This was driven by higher oil and gas prices (+$0.4M) and favorable net excess costs activity (+$0.3M), partially offset by decreased production volumes (-$0.2M) and higher production expenses (-$0.2M).
• Year-to-Date Performance: Net profits income decreased 12% for the nine months ended September 30, 2017. The decline was primarily due to decreased oil and gas production volumes (-$1.8M) and net excess costs activity (-$0.5M), despite a significant increase in oil and gas prices (+$1.9M).
• Production Volumes: Oil sales volumes decreased 9% and gas sales volumes decreased 1% in Q3 2017 compared to the prior year quarter, attributed to natural production decline (estimated at 6-8% annually) and timing of cash receipts.
• Costs: Development costs increased 66% in Q3 2017 due to increased activity on Texas and Oklahoma properties. Production expenses increased 26% in Q3 2017 due to higher power, fuel, and maintenance costs.
• Excess Costs: Cumulative excess costs remaining to be recovered as of September 30, 2017, totaled approximately $2.3 million for working interest conveyances and $1.7 million for net profits interest conveyances.

Outlook, Risks, and Contingencies

• Management Commentary: The Trustee notes that distributable income for interim periods is not necessarily indicative of full-year results. The Trustee does not view temporarily low prices as an indication of impairment, though asset recoverability is evaluated based on estimated undiscounted future net cash flows. No impairment was recognized as of September 30, 2017.
• Subsequent Event: On October 19, 2017, Simmons First National Corporation completed its acquisition of First Texas BHC, Inc. (parent of Southwest Bank, the Trustee). The Trustee does not anticipate a material impact on the Trust.
• Risks: The Trust is subject to commodity price volatility and natural production decline. There is a risk that state legislation may require income tax withholding from payments to nonresident unitholders, which could reduce distributions.
• Contingencies: The Trustee maintains a $1,000,000 expense reserve to cover obligations if net profits income is insufficient. The Trust is exempt from Texas franchise tax as a "passive entity," but unitholders may have individual tax obligations.

Key Facts for Investor Verification

• Verify the 11% quarterly increase in net profits income against the 12% year-to-date decrease to understand the impact of seasonal production timing and price fluctuations.
• Monitor the $2.3 million in cumulative excess costs on working interest properties, as these must be recovered from future net proceeds before distributions can be made from those specific conveyances.
• Confirm the 6-8% annual natural production decline rate and its long-term impact on distributable income, given the Trust's reliance on existing reserves.
• Review the administration expense increase of $61,064 for the quarter, attributed to timing of payments and professional service terms.
• Check for any updates on state tax withholding regulations that could affect net distributions to nonresident unitholders.