Cross Timbers Royalty Trust (CRT) - Q3 2022 10-Q Summary
Business Context and Reporting Period
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 subsidiary of Exxon Mobil Corporation) based on production from underlying properties. This report covers the quarterly period ended September 30, 2022.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | YTD 9M 2022 | YTD 9M 2021 |
|---|---|---|---|---|
| Net Profits Income | $3,817,493 | $2,455,493 | $9,536,782 | $5,602,598 |
| Total Income | $3,822,288 | $2,455,524 | $9,542,519 | $5,602,721 |
| Distributable Income | $3,736,260 | $2,301,702 | $8,980,188 | $5,010,510 |
| Distributable Income Per Unit | $0.622710 | $0.383617 | $1.496698 | $0.835085 |
| Administration Expense | $86,028 | $153,822 | $562,331 | $592,211 |
| Cash and Short-Term Investments | $2,200,234 | $1,822,750 (Dec 31, 2021) | N/A | |
| Net Profits Interests (Carrying Value) | $3,025,815 | $3,266,356 (Dec 31, 2021) |
Liquidity and Debt: The Trust maintains an expense reserve of $1,000,000. There is no traditional debt; however, cumulative excess costs (costs exceeding revenues in specific conveyances) remaining to be recovered as of September 30, 2022, totaled approximately $1.97 million (including accrued interest) for the Texas working interest conveyance.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 55% in Q3 2022 and 70% for the nine-month period compared to 2021.
- Price Drivers: The increase is primarily driven by higher commodity prices. Average oil prices rose 63% to $101.80/Bbl in Q3, and gas prices rose 63% to $8.93/Mcf.
- Production Volumes: Underlying oil sales volumes decreased 12% in Q3 due to natural decline and timing, but increased 53% for the nine-month period due to the receipt of previously reversed sales from the North Cowden Unit. Gas volumes increased 1% in Q3 and 12% YTD.
- Costs: Total costs increased 44% in Q3 and 128% YTD. This includes a 267% increase in development costs for the quarter due to drilling activity in the Hewitt Unit and significant excess cost recoveries.
- Expenses: Administration expenses decreased $67,794 in Q3 and $29,880 YTD, attributed to the timing of payments and professional service terms.
Outlook, Risks, and Contingencies
- Trustee Transition: Simmons Bank is resigning as Trustee. Unitholders approved the appointment of Argent Trust Company as successor trustee. The transition is anticipated to be effective December 30, 2022, following a court order modifying the Trust indenture.
- Development Activity: Nine wells are currently being drilled in the Hewitt Unit, expected to be complete by year-end, contributing to increased development costs.
- Excess Costs: The Trust continues to recover cumulative excess costs from the Texas working interest conveyance. As of Q3 2022, $1.97 million remains to be recovered (including interest).
- Legal Contingency: The Trust is involved in an arbitration regarding the allocation of the Chieftain royalty class action settlement costs. A hearing is scheduled for May 30-31, 2023. If the Trust is determined responsible for a portion of the settlement, it will reduce net profits income.
- Tax Matters: 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.
Investor Verification Checklist
- Verify the impact of the pending trustee transition to Argent Trust Company on administrative fees and operational continuity.
- Monitor the outcome of the Chieftain settlement arbitration scheduled for May 2023, as it could reduce future distributions.
- Track the recovery of cumulative excess costs ($1.97 million remaining), which will reduce net proceeds until fully recovered.
- Assess the sustainability of current oil and gas prices ($101.80/Bbl and $8.93/Mcf) given the Trust's sensitivity to commodity price fluctuations.
- Review the production decline rate (estimated 6-8% annually) against the impact of new drilling in the Hewitt Unit.