Cross Timbers Royalty Trust (CRT) - Q1 2019 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2019. Cross Timbers Royalty Trust is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust receives 90% of net proceeds from royalty interests and 75% of net proceeds from working interests in Texas, Oklahoma, and New Mexico. As of May 1, 2019, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net Profits Income | $1,335,885 | $2,277,499 |
| Total Income (incl. interest) | $1,342,656 | $2,280,959 |
| Distributable Income | $1,083,084 | $2,030,280 |
| Distributable Income Per Unit | $0.180514 | $0.338380 |
| Administration Expense | $259,572 | $250,679 |
| Cash and Short-Term Investments (Mar 31, 2019) | $1,434,985 | $1,600,694 (Dec 31, 2018) |
| Net Profits Interests (Net) | $8,437,697 | $8,526,512 (Dec 31, 2018) |
| Expense Reserve | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
Net profits income decreased by 41% ($941,614) compared to the first quarter of 2018. The decline was driven by the following factors:
- Production Volumes: Oil sales volumes decreased 11% and gas sales volumes decreased 36% due to natural production decline (estimated 6-8% annually) and timing of cash receipts.
- Sales Prices: Average oil prices fell 10% to $48.88 per barrel, and gas prices fell 8% to $4.22 per Mcf.
- Costs: While production expenses and development costs decreased, excess costs increased by 50% to $225,963. Excess costs occur when monthly costs exceed revenues for specific conveyances and must be recovered from future net proceeds.
Despite the revenue decline, the Trust recovered $224,847 of cumulative excess costs on Texas working interests and fully recovered excess costs on Oklahoma working interests during the quarter.
Outlook, Risks, and Contingencies
Management Commentary: The Trustee notes that distributable income for interim periods is not necessarily indicative of full-year results. The Trust continues to face natural production decline and commodity price volatility.
Contingencies (Litigation): A federal court approved a settlement of the Chieftain Royalty Company v. XTO Energy Inc. class action lawsuit in March 2018. XTO Energy advised that approximately $40,000 should be allocated to the Trust as additional production costs. The Trustee has objected to this allocation, citing a pending arbitration regarding a similar claim for the Hugoton Royalty Trust. XTO has agreed to defer accounting entries for this allocation until the arbitration panel issues a final award.
Tax Matters: The Trust is exempt from Texas franchise tax as a passive entity. However, unitholders may be subject to state income taxes in Texas, Oklahoma, or New Mexico depending on their residency and entity type.
Risk Factors: No material changes to risk factors were reported since the 2018 Annual Report. Primary risks include commodity price volatility, production decline, and potential changes in state tax withholding regulations.
Investor Verification Checklist
- Verify the impact of the pending Chieftain litigation arbitration on future net profits income calculations.
- Monitor the recovery status of the remaining $1.6 million in cumulative excess costs (including accrued interest) for the Texas working interest conveyance.
- Review the natural production decline rate (6-8% annually) against actual volume trends in subsequent quarters.
- Confirm state tax withholding obligations for non-resident unitholders, as regulations are subject to change.
- Assess the correlation between NYMEX benchmark prices and the Trust's realized prices for oil and gas.