CRT

Cross Timbers Royalty Trust (CRT) - Q2 2020 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2020. 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. As of August 3, 2020, there were 6,000,000 units of beneficial interest outstanding.

Key Financial Metrics

Liquidity: The Trust maintains an expense reserve of $1,000,000 to cover obligations if net profits income is insufficient. There is no debt reported in the liabilities section.

Material Changes vs. Prior Period

• Quarterly Decline: Net profits income decreased 32% in Q2 2020 compared to Q2 2019. This was primarily driven by a $1.3 million decrease due to lower oil and gas prices and a $0.3 million decrease due to lower gas production.
• Price Volatility: Average oil sales prices dropped 32% to $36.83 per barrel, and gas prices dropped 43% to $2.43 per Mcf, largely attributed to the COVID-19 pandemic and market supply/demand factors.
• Cost Reductions: The decline in revenue was partially offset by lower costs, including a 73% decrease in development costs and a 28% decrease in production expenses.
• Year-to-Date Growth: Despite the Q2 drop, YTD net profits income increased 3% compared to the prior year, driven by increased oil production volumes and lower development costs.
• Excess Costs: Lower revenues in Q2 resulted in new excess costs on Texas and Oklahoma working interest properties. Cumulative excess costs remaining to be recovered totaled $2.7 million (including accrued interest) as of June 30, 2020.

Outlook, Risks, and Contingencies

• Impairment Assessment: Due to significant price declines in Q2 2020, the Trustee performed an impairment analysis on the 75% net profits interests. The assessment determined that undiscounted future net cash flows exceeded the carrying value; therefore, no impairment was recorded as of June 30, 2020.
• COVID-19 Impact: The Trustee highlights that the pandemic and government responses have significantly decreased demand for oil and gas. The full extent of the impact on future distributions remains uncertain.
• Chieftain Litigation: A royalty class action lawsuit settlement against XTO Energy (Chieftain) may require the Trust to bear approximately $40,000 in production costs. The Trustee has objected to this allocation, and XTO has agreed to defer accounting entries until a pending arbitration regarding a similar trust (Hugoton Royalty Trust) is resolved.
• Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.

Investor Verification Checklist

• Verify the impact of the Chieftain class action settlement on future net profits income, specifically the potential $40,000 cost allocation.
• Monitor the excess costs balance ($2.7 million remaining), as these must be recovered from future net proceeds before distributions can be made from those specific conveyances.
• Assess the sensitivity of distributions to oil and gas price volatility, given the 32% and 43% price drops observed in Q2 2020.
• Review the impairment testing methodology in future filings, as the Trustee noted continued monitoring is required due to price volatility.
• Confirm the timing of cash receipts, as net profits income is recorded with a lag (typically two months for oil, three months for gas) relative to production.