Cross Timbers Royalty Trust - 10-Q Summary (Q3 2018)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2018, for Cross Timbers Royalty Trust, a fixed investment trust taxed as a grantor trust. The Trust holds net profits interests in oil and gas properties owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust has 6,000,000 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis of accounting.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | YTD 9M 2018 | YTD 9M 2017 |
|---|---|---|---|---|
| Net Profits Income | $2,257,576 | $1,674,186 | $6,868,248 | $4,931,974 |
| Distributable Income | $2,144,706 | $1,526,430 | $6,344,214 | $4,431,402 |
| Distributable Income Per Unit | $0.357451 | $0.254405 | $1.057369 | $0.738567 |
| Administration Expense | $118,614 | $150,045 | $537,953 | $505,380 |
| Cash and Short-Term Investments | $1,746,201 | $1,469,830 | As of Sept 30, 2018 | |
| Net Profits Interests (Carrying Value) | $8,705,029 | $9,311,334 | As of Sept 30, 2018 | |
| Expense Reserve | $1,000,000 | $1,000,000 | As of Sept 30, 2018 |
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased 35% in Q3 2018 and 39% for the nine-month period compared to 2017.
- Price Drivers: The increase is primarily driven by higher oil prices (up 43% in Q3 to $62.65/Bbl) and increased oil production volumes (up 4% in Q3).
- Cost Reductions: Development costs decreased significantly (42% in Q3, 33% YTD) due to reduced activity on Texas and Oklahoma properties. Production expenses also declined.
- Volume Declines: Gas sales volumes decreased 18% in Q3 and 5% YTD due to natural production decline and timing of cash receipts, partially offsetting oil gains.
- Excess Costs: The Trust recovered excess costs on Texas working interest properties, reducing the cumulative balance to approximately $1.8 million (including accrued interest) as of September 30, 2018.
Outlook, Risks, and Contingencies
- Chieftain Settlement Contingency: A class action lawsuit against XTO Energy (Chieftain Royalty Company v. XTO Energy Inc.) was settled for $80 million plus costs. XTO advised the Trustee that approximately $40,000 in additional production costs may be allocated to the Trust. The Trustee has objected to similar claims for another trust and is reviewing the allocation for Cross Timbers. If allocated, this would reduce net profits income.
- Production Decline: The estimated natural production decline rate on underlying properties is approximately 6% to 8% annually.
- Tax Status: The Trust is exempt from Texas franchise tax as a passive entity. Unitholders are responsible for their own tax liabilities on income received.
- Forward-Looking Statements: Future distributions depend on oil and gas prices, production volumes, and costs, which are subject to market volatility. The Trustee assumes no duty to update forward-looking statements.
Key Facts for Investor Verification
- Verify the final allocation of the Chieftain settlement costs and whether the Trustee's objection results in a reduction of the $40,000 claim.
- Monitor oil and gas price trends, as the Trust's income is highly sensitive to commodity prices (specifically the NYMEX price for oil and gas).
- Review the excess costs recovery status for the Texas working interest conveyance, as future net proceeds may be used to recover remaining balances.
- Confirm the production decline rate remains within the estimated 6-8% range, as this impacts long-term distributable income.
- Check for any changes in state tax withholding regulations that could affect net distributions to nonresident unitholders.