Cross Timbers Royalty Trust (CRT) - Q1 2020 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2020. 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 90% and 75% net profits interests. As of May 1, 2020, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net Profits Income | $2,023,519 | $1,335,885 |
| Total Income | $2,027,812 | $1,342,656 |
| Distributable Income | $1,808,934 | $1,083,084 |
| Distributable Income Per Unit | $0.301489 | $0.180514 |
| Administration Expense | $218,878 | $259,572 |
| Cash and Short-Term Investments | $1,546,529 | $1,501,398 |
| Net Profits Interests (Carrying Value) | $7,858,632 | $8,161,795 |
| Expense Reserve | $1,000,000 | $1,000,000 |
Note: The Trust operates on a modified cash basis of accounting. There is no debt reported; the Trust is funded by net profits income and cash reserves.
Material Changes vs. Prior Period
- Revenue Growth: Net profits income increased by 51% ($687,634) compared to Q1 2019. Distributable income per unit increased by approximately 67%.
- Production Volumes: Underlying oil sales volumes increased 14% (53,808 Bbls vs. 47,174 Bbls), and gas sales volumes increased 5% (297,904 Mcf vs. 282,549 Mcf).
- Price Dynamics: Average oil prices rose 12% to $54.72/Bbl, while average gas prices fell 25% to $3.16/Mcf. The increase in oil revenue offset the decline in gas revenue.
- Cost Reductions: Total costs decreased 24%. Significant drivers included an 84% drop in development costs (due to absence of drilling on the Hewitt Unit) and a 76% reduction in excess costs recovery.
- Amortization: Amortization of net profits interests increased to $303,163 in Q1 2020 from $88,815 in Q1 2019, reducing the Trust Corpus.
Outlook, Risks, and Contingencies
- COVID-19 Impact: The Trustee notes that the pandemic and government responses have significantly decreased demand for oil and gas, causing a sharp decline in prices starting in March 2020. While Q1 2020 results reflect prices from late 2019/early 2020, future distributions are expected to be adversely affected by current market conditions.
- Impairment Assessment: Due to significant price volatility in Q1 2020, the Trustee performed an impairment test on the 75% net profits interests. Undiscounted future net cash flows exceeded the carrying value; therefore, no impairment was recorded as of March 31, 2020. Monitoring will continue.
- Excess Costs: Cumulative excess costs remaining to be recovered for Texas working interests totaled $2.28 million (including accrued interest) as of March 31, 2020. Partial recovery occurred in Q1 2020.
- Legal Contingency (Chieftain Litigation): A settlement regarding a royalty class action lawsuit against XTO Energy 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.
- Tax Status: The Trust remains exempt from Texas franchise tax as a passive entity. Unitholders are responsible for their own tax liabilities on income received.
Investor Verification Checklist
- Verify the impact of post-March 2020 oil and gas price collapses on Q2 and Q3 2020 distributions, as Q1 results reflect higher prior-month prices.
- Monitor the status of the arbitration regarding the Chieftain class action settlement to determine if the $40,000 cost allocation will be enforced.
- Review future filings for potential impairment charges if oil prices remain depressed, as the Trustee explicitly noted continued monitoring.
- Confirm the trajectory of excess cost recovery for the Texas working interests, which currently total over $2 million.
- Check for any changes in the natural production decline rate (estimated at 6-8% annually) as development costs remain low.