CRT

Cross Timbers Royalty Trust (CRT) - Q2 2025 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2025. 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 (a subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. As of August 13, 2025, there were 6,000,000 units of beneficial interest outstanding.

Key Financial Metrics

Note: The Trust has no debt. Liquidity is maintained through cash balances and the expense reserve.

Material Changes vs. Prior Period

• Revenue Decline: Net profits income decreased 17% in Q2 2025 compared to Q2 2024. This was driven by a $1.0 million decrease in oil and gas production volumes, a $0.4 million impact from lower oil prices, and a $0.3 million increase in production expenses.
• Volume Trends: Underlying oil sales volumes dropped 18% (Q2) and 7% (YTD) due to natural production decline and timing of cash receipts. Gas sales volumes fell 35% (Q2) and 12% (YTD), partly due to the absence of out-of-period revenues from non-operated properties in Oklahoma.
• Price Trends: Average oil prices decreased 14% to $66.79/Bbl in Q2. Conversely, gas prices increased 37% to $5.54/Mcf in Q2, partially offsetting revenue declines.
• Cost Dynamics: Production expenses increased 24% in Q2 due to higher gas processing, labor, and power costs. However, development costs plummeted 94% in Q2 due to the absence of drilling activity for the Hewitt Unit that occurred in late 2023.
• Excess Costs: Cumulative excess costs (costs exceeding revenues on specific conveyances) totaled $4.9 million (underlying) or $3.6 million (net to Trust) as of June 30, 2025, including accrued interest. These must be recovered from future net proceeds of the specific conveyances.

Guidance, Outlook, and Risks

• Outlook: The Trustee notes an estimated natural production decline rate of 6% to 8% annually on underlying properties. No specific forward-looking guidance on future distribution amounts was provided beyond historical trends.
• Tax Legislation: The "One Big Beautiful Bill Act" (OBBBA) was signed into law on July 4, 2025. It permanently extends income tax rates from the Tax Cuts and Jobs Act and reinstates favorable tax treatment for certain business provisions. Unitholders are advised to consult tax advisors regarding impacts.
• Risks:
  • Commodity Price Volatility: Income is directly tied to oil and gas prices.
  • Production Decline: The underlying assets are mature, leading to natural depletion.
  • Excess Cost Recovery: Significant cumulative excess costs ($3.6 million net to Trust) must be recovered before full net profits income can be distributed from specific working interest conveyances.
  • State Tax Withholding: Potential changes in state legislation regarding withholding on nonresident oil and gas proceeds could reduce distributions.

Investor Verification Checklist

• Excess Cost Recovery Status: Verify the trajectory of the $3.6 million net excess costs and the timeline for their recovery from future Texas and Oklahoma working interest revenues.
• Production Decline Rate: Monitor if the actual production decline exceeds the estimated 6-8% annual rate, which would accelerate income reduction.
• Commodity Price Sensitivity: Assess the impact of current oil prices ($66.79/Bbl) versus the breakeven points required to cover production expenses and excess cost recovery.
• Tax Implications of OBBBA: Confirm how the new federal tax legislation affects the specific tax treatment of unitholders, particularly regarding the "passive entity" status in Texas.
• Expense Reserve Adequacy: Review if the $1.15 million expense reserve remains sufficient given the increase in administration expenses and potential future cost fluctuations.