CRT

Cross Timbers Royalty Trust (CRT) - 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 in Texas, Oklahoma, and New Mexico. The Trust receives net profits income from XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation) based on 90% and 75% net profits interests. This report covers the quarterly period ended June 30, 2021. The Trust has 6,000,000 units of beneficial interest outstanding.

Key Financial Metrics

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 on specific conveyances) totaling $2.8 million (including accrued interest) remain to be recovered from future net proceeds of the Texas working interest conveyance.

Material Changes vs. Prior Period

• Quarterly Performance: Net profits income increased 43% year-over-year to $1.79 million. This was driven by a 55% increase in average oil prices ($57.15/Bbl vs. $36.83/Bbl) and a 109% increase in gas prices ($5.09/Mcf vs. $2.43/Mcf). These price gains were partially offset by a 6% decrease in oil sales volumes and a 33% decrease in gas sales volumes due to natural production decline and timing of cash receipts.
• Year-to-Date Performance: Net profits income decreased 4% year-over-year to $3.15 million. The decline was primarily due to a 20% decrease in oil production volumes and increased taxes and transportation costs, which offset the 12% increase in average oil prices and 54% increase in gas prices.
• Amortization: Significant amortization of net profits interests occurred in Q2 2021 ($4.08 million) compared to Q2 2020 ($0.13 million), reducing the carrying value of the assets. This is attributed to lower 2020 oil prices used in reserve calculations and the full amortization of working interest net profits interests.
• Excess Costs: In Q2 2021, excess costs of $43,640 were incurred on Texas working interest properties, while $282,654 in excess costs were recovered on Oklahoma working interest properties.

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. XTO advised the Trustee that approximately $40,000 may be allocated to the Trust as additional production costs. The Trustee has objected to similar claims in related arbitration. The arbitration panel has stayed proceedings pending a status update by August 31, 2021. If the Trust is determined responsible, it would reduce net profits income.
• Tax Withholding: Several states have enacted legislation requiring income tax withholding from nonresident recipients. The Trustee currently believes withholding is not required, but regulatory changes could reduce distributions if withholding becomes mandatory.
• Forward-Looking Statements: Future distributions depend on oil and gas prices, production volumes, and costs, all of which are subject to market volatility and natural decline.

Investor Verification Checklist

• Verify the impact of the pending Chieftain litigation settlement allocation on future net profits income.
• Monitor the recovery status of the $2.8 million in cumulative excess costs on the Texas working interest conveyance.
• Review the natural production decline rate (6-8%) against actual volume trends to assess long-term income sustainability.
• Confirm the Trust's exemption status from Texas franchise tax as a passive entity.
• Track commodity price volatility (oil and gas) as the primary driver of quarterly income fluctuations.