Cross Timbers Royalty Trust (CRT) - Q3 2020 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 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 owned by XTO Energy Inc. (a subsidiary of Exxon Mobil Corporation). The Trust holds 90% net profits interests in royalty/overriding royalty properties and 75% net profits interests in working interests located in Texas, Oklahoma, and New Mexico. As of November 1, 2020, there were 6,000,000 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | YTD 9M 2020 | YTD 9M 2019 |
|---|---|---|---|---|
| Net Profits Income | $829,258 | $1,272,845 | $4,107,869 | $4,466,126 |
| Distributable Income | $613,992 | $1,124,874 | $3,531,918 | $3,927,846 |
| Distributable Income Per Unit | $0.102332 | $0.187479 | $0.588653 | $0.654641 |
| Administration Expense | $215,400 | $154,308 | $581,728 | $558,245 |
| Cash and Short-Term Investments | $1,192,251 | $1,501,398 | N/A (Balance Sheet Item) | |
| Net Profits Interests (Carrying Value) | $7,655,559 | $8,161,795 | ||
| Expense Reserve | $1,000,000 | $1,000,000 | N/A (Balance Sheet Item) | |
| Distributions Payable | $192,282 | $503,040 |
Material Changes vs. Prior Period
- Revenue Decline: Net profits income decreased 35% in Q3 2020 compared to Q3 2019, and 8% for the nine-month period. The primary driver was a significant drop in oil and gas prices.
- Price Volatility: Average oil sales prices fell 47% to $29.36 per barrel in Q3 2020 (from $55.64 in Q3 2019). Average gas prices fell 24% to $2.37 per Mcf.
- Production Volumes: Underlying oil sales volumes increased 16% in Q3 2020 due to decreased downtime and timing of cash receipts, partially offset by natural decline. Gas volumes increased 7% in Q3.
- Cost Reductions: Development costs dropped 98% in Q3 2020 due to reduced drilling in the Hewitt unit. Production expenses decreased 20% due to timing and lower field costs.
- Excess Costs: Lower revenues resulted in excess costs on Texas and Oklahoma working interest properties. Cumulative excess costs remaining to be recovered totaled $2.9 million (including $0.4 million accrued interest) as of September 30, 2020.
Outlook, Risks, and Contingencies
- COVID-19 Impact: The pandemic and government responses have significantly decreased demand for oil and gas, leading to price volatility and potential operational delays. The Trustee notes that the full extent of the economic impact remains uncertain.
- Impairment Review: No impairment trigger event occurred in Q3 2020. The Trustee continues to monitor the carrying value of net profits interests against estimated future cash flows.
- Chieftain Litigation: A settlement regarding a royalty class action lawsuit (Chieftain) may require the Trust to bear approximately $40,000 in production costs. The Trustee has objected to this allocation. XTO Energy has agreed to defer accounting entries for this allocation until an arbitration panel issues a final award, expected in Q1 2021.
- 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.
Investor Verification Checklist
- Verify the impact of the Chieftain litigation settlement on future net profits income once the arbitration award is issued in Q1 2021.
- Monitor the recovery of $2.9 million in cumulative excess costs from future net proceeds, which will reduce distributions until recovered.
- Assess the sensitivity of distributions to oil and gas price fluctuations, given the 47% drop in oil prices in Q3 2020.
- Review the natural production decline rate (estimated 6-8% annually) against the current volume increases driven by timing and downtime reductions.
- Confirm the expense reserve remains fully funded at $1,000,000 to cover potential Trustee obligations.