CRT

Cross Timbers Royalty Trust (CRT) - Q2 2023 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2023. 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 has 6,000,000 units of beneficial interest outstanding. The Trustee is Argent Trust Company.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance: Net profits income decreased 16% ($604,558) compared to Q2 2022. This decline was driven by decreased gas production ($2.8M), lower oil prices ($0.5M), and increased production expenses ($0.2M). These were partially offset by higher gas prices ($2.4M) and reduced taxes/transportation costs ($0.3M).
• Year-to-Date Performance: Net profits income increased 24% ($1.36M) compared to YTD 2022. The increase was primarily due to net excess costs activity ($2.9M), increased gas production ($1.9M), and higher oil prices ($1.0M). This was partially offset by a significant decrease in oil production ($4.0M).
• Production Volumes:
  • Oil: Underlying sales volumes were flat QoQ but decreased 46% YTD due to the absence of a North Cowden Unit adjustment in Q1 2022 and natural decline.
  • Gas: Underlying sales volumes decreased 50% QoQ due to timing of cash receipts and natural decline, but increased 39% YTD due to timing of receipts for New Mexico royalty interests.
• Prices: Average oil price decreased 18% QoQ to $74.03/Bbl but increased 13% YTD to $77.30/Bbl. Average gas price increased 74% QoQ to $11.87/Mcf and 3% YTD to $7.01/Mcf.
• Excess Costs: Cumulative excess costs remaining to be recovered (including interest) totaled $2.3 million ($1.8 million net to the Trust) as of June 30, 2023.

Guidance, Outlook, Risks, and Contingencies

• Outlook: The filing contains no specific forward-looking guidance on future production or prices. Management notes that the estimated rate of natural production decline on underlying properties is approximately 6% to 8% annually.
• Contingencies (Litigation): The Trust may be required to bear a portion of settlement costs from the Chieftain Royalty Company v. XTO Energy Inc. class action lawsuit. An arbitration panel previously ruled that XTO has the right to charge the Trust for these costs, though the specific amount remains to be determined. If charged, these costs will reduce net profits income.
• Tax Matters: The Trust is exempt from Texas franchise tax as a passive entity. However, unitholders may be subject to state income taxes in Oklahoma and New Mexico on their share of income.
• Risks: The Trust is subject to commodity price volatility, natural production decline, and regulatory changes. There have been no material changes to risk factors from the 2022 10-K.

Investor Verification Checklist

• Verify the impact of the pending Chieftain litigation settlement allocation on future net profits income.
• Monitor the recovery status of the $2.3 million in cumulative excess costs, which reduces future distributions until recovered.
• Confirm the natural production decline rate (6-8%) against actual production trends in subsequent quarters.
• Review state tax withholding requirements for non-resident unitholders in Oklahoma and New Mexico.
• Assess the sensitivity of distributions to fluctuations in natural gas prices, given the significant volume variance observed in Q2.