Cross Timbers Royalty Trust 2020 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust (CRT) is a Texas express trust created in 1991, 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. The reporting period covers the fiscal year ended December 31, 2020. The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interest properties across Texas, Oklahoma, and New Mexico.
Key Financial Metrics
- Net Profits Income: $5,308,249 for 2020 (down from $5,934,606 in 2019).
- Distributable Income: $4,674,672 for 2020, or $0.779112 per unit.
- Administration Expense: $639,441 for 2020.
- Cash and Short-Term Investments: $1,372,799 as of December 31, 2020.
- Trust Corpus: $7,523,065 as of December 31, 2020.
- Production Volumes (Net Profits Interests): 70,193 Bbls of oil and 1,347,807 Mcf of gas.
- Average Sales Prices: $40.74 per Bbl for oil and $2.56 per Mcf for gas.
- Proved Reserves: 812,000 Bbls of oil and 12,885,000 Mcf of gas allocated to the Trust.
Material Changes vs. Prior Period
Net profits income decreased by approximately 11% compared to 2019. The primary drivers for this decline were:
- Commodity Prices: Average oil prices fell 23% to $40.74/Bbl, and gas prices fell 32% to $2.56/Mcf, largely due to the COVID-19 pandemic and reduced global demand.
- Production Volumes: Underlying gas sales volumes decreased 7% due to natural decline, while oil sales volumes increased 12%.
- Cost Reductions: Total costs deducted from net proceeds decreased by 30% to $5.4 million. This was driven by a significant drop in development costs (down 84% to $120,684) and lower production expenses.
- Excess Costs: Cumulative excess costs for working interest conveyances totaled $2.9 million (including accrued interest), which must be recovered from future net proceeds before distributions can be made from those specific properties.
Outlook, Risks, and Contingencies
Outlook and Guidance: The Trust does not provide formal forward-looking guidance. Management notes that oil and gas prices remain volatile. Budgeted development costs for 2021 are approximately $1.0 million (underlying), significantly lower than 2020 actuals. The Trust's future cash flows are highly dependent on commodity prices and the production decline rate of mature assets.
Risks:
- Depleting Assets: The underlying properties are mature, with an average reserve-to-production index of approximately 10 years. Distributions are partially a return of capital.
- Price Volatility: Distributions are directly tied to oil and gas prices, which are subject to geopolitical factors, supply/demand shifts, and regulatory changes.
- Excess Costs: If costs exceed revenues on working interest properties, distributions from those specific conveyances are suspended until costs are recovered.
- Legal Contingency: A pending arbitration regarding the allocation of the Chieftain royalty class action settlement costs could result in future reductions to net profits income if the Trust is determined to be responsible for a portion of the settlement.
Investor Verification Checklist
- Verify the current status of the Chieftain royalty class action settlement arbitration and potential impact on future net profits income.
- Monitor the balance of cumulative excess costs for Texas and Oklahoma working interest conveyances, as these reduce distributable cash flow until recovered.
- Review the 12-month average oil and gas prices used in reserve calculations, as significant price drops can reduce estimated proved reserves and accelerate amortization.
- Confirm the Trust's cash reserve status ($1.0 million funded) and its ability to cover administrative expenses during periods of low production revenue.
- Assess the impact of the natural production decline rate (estimated 6-8% annually) on long-term distribution sustainability.