Cross Timbers Royalty Trust (CRT) - Q2 2019 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2019. Cross Timbers Royalty Trust is a fixed investment trust taxed as a grantor trust, holding net profits interests in oil and gas properties located in Texas, Oklahoma, and New Mexico. The Trust receives net profits income from XTO Energy Inc. (a wholly owned subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. As of August 1, 2019, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net Profits Income | $1,857,396 | $2,333,173 | $3,193,281 | $4,610,672 |
| Total Income | $1,864,253 | $2,337,888 | $3,206,909 | $4,618,847 |
| Distributable Income | $1,719,888 | $2,169,228 | $2,802,972 | $4,199,508 |
| Distributable Income Per Unit | $0.286648 | $0.361538 | $0.467162 | $0.699918 |
| Cash and Short-Term Investments | $1,537,868 | $1,600,694 | N/A | |
| Trust Corpus | $8,324,828 | $8,526,512 | ||
| Administration Expense | $144,365 | $168,660 | $403,937 | $419,339 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 20% in Q2 2019 and 31% year-to-date compared to 2018.
- Production Volumes: Oil sales volumes from underlying properties decreased 15% (Q2) and 13% (YTD) due to natural production decline and timing of cash receipts. Gas sales volumes increased 18% in Q2 but decreased 12% YTD.
- Commodity Prices: Average oil prices decreased 8% to $54.11/Bbl (Q2) and 9% to $51.46/Bbl (YTD). Average gas prices decreased 3% to $4.23/Mcf (Q2) and 6% to $4.23/Mcf (YTD).
- Cost Increases: Production expenses increased 59% in Q2 and 22% YTD, primarily due to the timing of charges and reporting of expense well work activity previously categorized as development costs.
- Excess Costs: The Texas working interest conveyance incurred net excess costs of $387,153 in Q2 2019. Cumulative excess costs remaining to be recovered as of June 30, 2019, totaled $2.0 million (including accrued interest).
Outlook, Risks, and Contingencies
- Production Decline: The estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
- Chieftain Litigation: A federal court approved a settlement of a royalty class action lawsuit against XTO Energy in March 2018. XTO advised that approximately $40,000 should be allocated to the Trust as additional production costs. The Trustee has objected to this allocation. XTO has agreed to defer accounting entries for this allocation until a pending arbitration regarding a similar claim against the Hugoton Royalty Trust is resolved.
- Tax Status: The Trust is exempt from Texas franchise tax as a passive entity. However, unitholders may be subject to state income taxes in Oklahoma and New Mexico on income sourced from properties in those states.
- Forward-Looking Statements: Future distributions are subject to risks including commodity price volatility, production decline, and changes in operating costs. The Trustee assumes no duty to update forward-looking statements.
Investor Verification Checklist
- Verify the impact of the Chieftain settlement arbitration outcome on future net profits income calculations.
- Monitor the $2.0 million in cumulative excess costs for the Texas working interest and the timeline for their recovery from future net proceeds.
- Review the 6-8% annual production decline rate to assess long-term distribution sustainability.
- Confirm state tax withholding requirements for non-resident unitholders in Oklahoma and New Mexico.
- Track commodity price trends (WTI oil and Henry Hub gas) as they directly correlate to the Trust's revenue lagging by 2-3 months.