Cross Timbers Royalty Trust (CRT) - Q1 2022 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2022. 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 distributes all net income to unitholders. As of May 2, 2022, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net Profits Income | $1,951,672 | $1,355,441 |
| Total Income | $1,951,706 | $1,355,504 |
| Distributable Income | $1,684,932 | $1,039,350 |
| Distributable Income Per Unit | $0.280822 | $0.173225 |
| Administration Expense | $266,774 | $316,154 |
| Cash and Short-Term Investments | $1,325,079 | $1,822,750 (Dec 31, 2021) |
| Net Profits Interests (Carrying Value) | $3,212,791 | $3,266,356 (Dec 31, 2021) |
| Expense Reserve | $1,000,000 | $1,000,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 44% year-over-year, driven primarily by a 229% increase in oil sales volumes and a 37% increase in average oil prices ($60.25/Bbl vs. $43.89/Bbl).
- Production Volumes: While oil volumes surged due to the reversal of a prior quarter's sales reversal at the North Cowden Unit, gas sales volumes decreased 43% due to natural decline and timing of cash receipts.
- Costs: Total costs increased 283% year-over-year. This was largely due to the recovery of $3.8 million in excess costs (net to Trust: $2.9 million) from the Texas working interests, which had been reversed in Q4 2021. Development costs also rose significantly due to activity in the Hewitt Unit.
- Expenses: Administration expenses decreased by $49,380 compared to Q1 2021, attributed to the timing of payments and professional service terms.
Outlook, Risks, and Contingencies
- Trustee Transition: Unitholders approved the appointment of Argent Trust Company as the successor trustee to Simmons Bank at a special meeting on May 4, 2022. The effective date depends on the satisfaction of conditions, including unitholder approval of related trust agreements.
- Chieftain Litigation: The Trust may be required to bear a portion of settlement costs from the Chieftain Royalty Company v. XTO Energy Inc. class action. An arbitration panel previously ruled that XTO could charge the Hugoton Royalty Trust for these costs; similar issues apply to Cross Timbers. If charged, these costs would reduce net profits income.
- Excess Costs: As of March 31, 2022, cumulative excess costs remaining to be recovered totaled approximately $2.5 million (underlying) or $1.9 million (net to Trust), including accrued interest. These costs are recovered from future net proceeds of specific conveyances.
- Market Risk: The Trust is subject to commodity price volatility. The filing notes that actual results may differ materially from expectations due to factors such as oil and gas prices, production levels, and regulatory changes.
Investor Verification Checklist
- Verify the final effective date of the trustee transition from Simmons Bank to Argent Trust Company.
- Monitor the status of the Chieftain litigation arbitration to determine if settlement costs will be deducted from future distributions.
- Review the trajectory of excess cost recoveries, particularly for the Texas working interests, to understand potential impacts on future net profits income.
- Confirm the impact of natural production decline (estimated 6-8% annually) on long-term distributable income.
- Check for any updates on state tax withholding requirements for nonresident unitholders.