Cross Timbers Royalty Trust 2014 10-K Summary
Business Context and Reporting Period
Cross Timbers Royalty Trust (CRT) is an express trust created under Texas law, holding defined net profits interests in oil and gas properties owned by XTO Energy Inc. (a wholly-owned subsidiary of Exxon Mobil Corporation). The trust has no employees; administrative functions are performed by the trustee, Southwest Bank (appointed August 29, 2014, succeeding U.S. Trust, Bank of America). The reporting period covers the fiscal year ended December 31, 2014. The trust holds 6,000,000 units of beneficial interest outstanding, traded on the NYSE under the symbol "CRT."
Key Financial Metrics
- Net Profits Income: $16,449,036 for 2014 (up 15% from 2013).
- Distributable Income: $15,945,300 for 2014.
- Distributions per Unit: $2.657550 for 2014 (up from $2.314599 in 2013).
- Total Assets: $12,272,598 as of December 31, 2014, consisting primarily of cash/short-term investments ($1.28 million) and net profits interests ($10.99 million).
- Production Volumes (Net Profits Interests): 95,596 Bbls of oil and 1,464,307 Mcf of gas.
- Average Sales Prices: $91.48 per Bbl for oil and $7.00 per Mcf for gas.
- Proved Reserves: 989,000 Bbls of oil and 20,086,000 Mcf of gas (Net Profits Interests).
- Standardized Measure of Discounted Future Net Cash Flows: $95.9 million (10% discount rate).
Material Changes vs. Prior Period
Net profits income increased by approximately 15% compared to 2013. This increase was driven primarily by higher oil and gas prices ($1.3 million impact), increased oil production volumes ($1.0 million impact), and a one-time purchaser refund of $0.5 million related to coal seam gas deductions. These gains were partially offset by increased taxes, transportation, and other costs ($0.5 million). Total costs deducted in the calculation of net profits income rose 2% to $13.0 million, largely due to higher production taxes and maintenance costs, though development costs decreased by 3% to $3.37 million due to reduced activity.
Outlook, Risks, and Unusual Items
- Outlook: The trust is exposed to significant market risk from fluctuations in oil and gas prices. Future distributions depend on production volumes, prices, and costs deducted by operators. Budgeted development costs for 2015 are approximately $5.9 million, higher than 2014 actuals.
- Unusual Items: A one-time refund of $519,071 (including interest) was received in Q1 2014 regarding coal seam gas wells in the San Juan Basin. Additionally, excess costs (where costs exceeded revenues) occurred on the Texas working interest in January and November 2014, and on the Oklahoma working interest in June 2014. Remaining excess costs totaled $53,971 ($40,478 net to the trust) at year-end, which must be recovered from future proceeds before distributions resume for those specific conveyances.
- Risks: Key risks include the depletion of assets (average reserve-to-production index of 12 years), volatility in commodity prices, and the inability of the trust to influence operations or development of underlying properties. The trust will terminate if gross revenue falls below $1 million for two consecutive years.
Investor Verification Checklist
- Verify the impact of current oil and gas price trends on the trust's monthly distributions, given the high sensitivity of net profits income to price fluctuations.
- Monitor the status of "excess costs" on the Texas and Oklahoma working interests to understand potential delays in distributions from those specific properties.
- Review the reserve-to-production ratio (approx. 12 years) and the rate of natural production decline (6-8% annually) to assess the long-term sustainability of cash flows.
- Confirm the trustee's ability to manage the transition of overhead charges and administrative fees following the change in trustee from U.S. Trust to Southwest Bank.
- Assess the risk of asset depletion and the potential for the trust to terminate if revenues drop below the $1 million threshold for two consecutive years.