Cross Timbers Royalty Trust (CRT) - 2023 Annual Report Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust (the "Trust") 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; administrative functions are performed by Argent Trust Company, which succeeded Simmons Bank as Trustee on December 30, 2022. The reporting period covers the fiscal year ended December 31, 2023. The Trust holds 6,000,000 units of beneficial interest, traded on the NYSE under the symbol "CRT."
Key Financial Metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Net Profits Income | $12,300,176 | $12,493,727 |
| Total Income (Net Profits + Interest) | $12,364,073 | $12,509,191 |
| Administration Expense | $816,185 | $765,955 |
| Distributable Income | $11,547,888 | $11,743,236 |
| Distributable Income Per Unit | $1.924648 | $1.957206 |
| Cash and Short-Term Investments (Dec 31) | $1,852,320 | $1,898,638 |
| Trust Corpus (Dec 31) | $2,671,583 | $2,961,955 |
| Expense Reserve | $1,000,000 | $1,000,000 |
Production and Pricing (2023):
- Oil Sales: 71,131 Bbls (Net Profits Interests) at an average price of $77.05/Bbl.
- Gas Sales: 1,452,440 Mcf (Net Profits Interests) at an average price of $6.00/Mcf.
- Revenue Mix: Approximately 57% of net profits income was derived from natural gas.
Material Changes vs. Prior Period
Net profits income decreased by approximately 2% ($193,551) from 2022 to 2023. The primary drivers for this decline included:
- Lower Gas Prices: The average gas price dropped 26% to $6.00/Mcf from $8.08/Mcf in 2022, reducing income by approximately $2.6 million.
- Decreased Oil Production: Underlying oil sales volumes decreased 19% due to natural decline and the absence of a specific unit adjustment present in 2022, reducing income by approximately $2.4 million.
- Increased Costs: Production expenses increased by $1.4 million, and taxes/transportation costs rose by $0.3 million.
- Offsetting Factors: The decline was partially mitigated by a $3.2 million benefit from net excess costs activity (recovery of prior period costs), a $2.1 million increase from higher gas production volumes, and a $1.2 million decrease in development costs.
Outlook, Risks, and Contingencies
Outlook and Guidance: The Trust does not provide formal forward-looking guidance. Future distributions depend on oil and gas prices, production volumes, and costs. Management notes that natural gas prices are expected to remain volatile. Budgeted development costs for 2024 are approximately $0.2 million (net to Trust $0.1 million), significantly lower than 2023 actuals.
Key Risks:
- Commodity Price Volatility: Distributions are highly sensitive to oil and gas prices. A significant decline could materially reduce net proceeds.
- Depleting Assets: The underlying properties are depleting assets with an estimated reserve-to-production index of approximately 10 years. Distributions include a return of capital component.
- Excess Costs: For the 75% net profits interests (working interests), if costs exceed revenues, the Trust receives no income until excess costs plus interest are recovered. As of Dec 31, 2023, cumulative excess costs for the Texas working interest conveyance totaled $3.1 million ($2.3 million net to Trust).
- Regulatory and Climate Change: Potential regulations on greenhouse gas emissions could increase operating costs or restrict production.
Contingencies: The Trust may be subject to a portion of settlement costs from the Chieftain Royalty Company v. XTO Energy Inc. class action lawsuit. The Trustee has objected to similar claims in related arbitration, and the final allocation to the Trust remains pending resolution of the arbitration.
Investor Verification Checklist
- Excess Cost Recovery: Verify the status of the $2.3 million net excess costs on Texas working interests and the timeline for recovery, as this directly impacts future cash flow.
- Commodity Price Sensitivity: Assess the impact of current NYMEX oil and gas prices versus the 12-month average prices used in reserve calculations ($74.88/Bbl oil, $4.40/Mcf gas).
- Reserve Estimates: Review the independent engineer's report (Miller and Lents, Ltd.) regarding the 10-year reserve-to-production index and the allocation of reserves between the 90% and 75% interests.
- Chieftain Litigation: Monitor the status of the arbitration regarding the allocation of the Chieftain settlement costs to the Trust.
- Trust Termination Triggers: Note that the Trust terminates if gross revenue falls below $1 million for two successive years or if 80% of unitholders vote for termination.