10-Q: Cross Timbers Royalty Trust Q2 Income Plunges 34%

Cross Timbers Royalty Trust reported a significant 33.7% decrease in distributable income per unit for Q2 2025, driven by lower oil and gas production and declining oil prices.

Summary

• Distributable income for the second quarter ended June 30, 2025, was $892,548, a decrease from $1,345,758 in the same period of 2024.
• Distributable income per unit for Q2 2025 was $0.148758, down from $0.224293 in Q2 2024.
• Net profits income decreased by 17% to $1,293,766 for Q2 2025, compared to $1,564,871 in Q2 2024.
• For the six months ended June 30, 2025, net profits income was $3,347,160, a 2% decrease from $3,402,612 in the prior year period.
• Underlying oil sales volumes decreased by 18% for Q2 2025 and 7% for the six-month period, primarily due to natural production decline.
• Underlying gas sales volumes decreased by 35% for Q2 2025 and 12% for the six-month period, due to natural production decline and absence of out-of-period revenues.
• Average oil prices decreased by 14% to $66.79 per Bbl for Q2 2025, and 10% to $68.84 per Bbl for the six-month period.
• Average gas prices increased by 37% to $5.54 per Mcf for Q2 2025, and 11% to $4.71 per Mcf for the six-month period.
• Production expense increased by 24% for Q2 2025, mainly due to higher gas processing, labor, and power/fuel costs.
• Development costs decreased by 94% for Q2 2025 due to the absence of drilling activity from the second half of 2023.
• Cumulative excess costs remaining for Texas and Oklahoma working interest conveyances totaled $4.9 million ($3.6 million net to the Trust) as of June 30, 2025, including $1.3 million ($1.0 million net to the Trust) in accrued interest.
• The expense reserve was increased by $150,000 during the quarter, now funded at $1,150,000.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in distributable income and production volumes, coupled with increasing excess costs. While gas prices increased and development costs decreased, these positives were insufficient to offset the overall negative trends in the Trust's core financial performance.

Positives

• Gas sales prices increased significantly by 37% to $5.54 per Mcf for the second quarter and 11% to $4.71 per Mcf for the six-month period.
• Development costs decreased substantially by 94% for the second quarter and 90% for the six-month period due to the absence of drilling activity.
• Administration expense for the six months ended June 30, 2025, decreased by $51,124 from the prior year six-month period.
• The expense reserve was increased to $1,150,000, providing a larger buffer for the Trustee to pay obligations.

Negatives

• Distributable income per unit decreased by 33.7% to $0.148758 for the second quarter ended June 30, 2025, compared to $0.224293 in the prior year.
• Net profits income decreased by 17% for the second quarter and 2% for the six-month period.
• Underlying oil sales volumes decreased by 18% for the second quarter and 7% for the six-month period, primarily due to natural production decline.
• Underlying gas sales volumes decreased by 35% for the second quarter and 12% for the six-month period, also due to natural production decline.
• Average oil prices decreased by 14% for the second quarter and 10% for the six-month period.
• Production expense increased by 24% for the second quarter and 12% for the six-month period, driven by higher operating costs.
• Cumulative excess costs remaining on underlying properties increased to $4.9 million ($3.6 million net to the Trust) as of June 30, 2025, indicating a growing burden on future net proceeds from specific conveyances.

Risks

• The markets for crude oil and natural gas have a history of significant price volatility, which directly impacts the Trust's net profits income.
• Natural production decline on the underlying oil and gas properties is estimated at approximately 6% to 8% per year, leading to diminishing asset value and future income.
• If monthly costs exceed revenues for any specific conveyance, such excess costs must be recovered with accrued interest from future net proceeds of that conveyance, potentially delaying or preventing distributions from those specific properties.
• State income tax withholding from payments to nonresident recipients of oil and gas proceeds could reduce distributions to unitholders, despite the Trustee's current belief that it is not required to withhold.
• Forward-looking statements are subject to risks and uncertainties, including those related to development activities, future production, oil and gas prices, inflation, government policy, and geopolitical events.

Future Outlook

The Trust's future performance is subject to significant risks, including the inherent volatility of crude oil and natural gas prices, the estimated natural production decline rate of 6% to 8% per year on underlying properties, and the impact of increasing excess costs that must be recovered from future net proceeds. The Trust does not provide specific forward-looking guidance on production or income, but acknowledges that actual financial and operational results may differ materially from expectations due to various market, economic, and regulatory factors.

Management Comments

• The Trustee believes that the disclosures are adequate to make the information presented not misleading.
• All adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets, liabilities and trust corpus, and distributable income and changes in trust corpus, have been included.
• Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.
• The Trustee concluded that the Trust's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed.
• In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy.

Industry Context

The oil and gas industry continues to experience price volatility, with the filing reflecting a decline in oil prices while gas prices saw an increase during the period. Natural production decline is a common challenge for mature oil and gas assets, and the Trust's underlying properties are experiencing this at an estimated annual rate of 6-8%. The increase in excess costs for certain working interests highlights the operational challenges and cost recovery mechanisms inherent in some oil and gas ventures, which can impact distributable income for royalty trusts.

Comparison to Industry Standards

• Royalty trusts like Cross Timbers are passive investment vehicles designed to distribute income from mature oil and gas properties. Their performance is directly tied to commodity prices and production volumes from the underlying assets, which are typically in decline.
• The reported natural production decline rate of 6-8% per year is typical for mature, conventional oil and gas fields, similar to those held by other legacy royalty trusts such as Hugoton Royalty Trust or Permian Basin Royalty Trust, which also face inherent production declines without significant new drilling activity.
• The increase in excess costs, particularly for working interests, is a common issue in the industry where operational expenses can outpace revenues from specific wells or fields, leading to a deferral of net profits until these costs are recovered. This contrasts with pure royalty interests (like the Trust's 90% NPI) which are generally free of production expenses and development costs.
• The Trust's reliance on XTO Energy (a subsidiary of Exxon Mobil Corporation) for operations and reporting is standard for royalty trusts, where the operator manages the underlying properties and calculates net proceeds.

Related Party Transactions

• XTO Energy, a wholly owned subsidiary of Exxon Mobil Corporation, deducts a monthly overhead charge of $53,620 ($40,215 net to the Trust) as reimbursement for costs associated with monitoring the 75% net profits interests.
• XTO Energy also deducts a monthly overhead charge of approximately $37,949 ($28,462 net to the Trust) for administrative expenses as operator of the Hewitt Unit, one of the properties underlying the Oklahoma 75% net profits interests.
• Both overhead charges are subject to annual adjustment based on an oil and gas industry index.

Stakeholder Impact

• Shareholders (unitholders) will experience significantly reduced distributions per unit due to lower net profits income and increased costs.
• The increase in cumulative excess costs means that future distributions from certain properties may be delayed or reduced until these costs are recovered, impacting unitholder cash flow.
• The natural production decline rate of 6-8% per year indicates a long-term diminishing asset base, which will continue to negatively impact future distributions to unitholders.
• The Trust's expense reserve increase provides a stronger financial buffer for the Trustee to meet its obligations, potentially safeguarding the Trust's administrative continuity.

Next Steps

• Unitholders are encouraged to consult their own tax advisor regarding the potential income tax consequences of the One Big Beautiful Bill Act (OBBBA) and its impact on their ownership of Trust units.
• The Trustee will continue to manage the administrative functions of the Trust and meet its reporting obligations to unitholders and regulatory entities.

Key Dates

Recommendation

The Trust exhibits clear signs of a declining asset base, with significant decreases in distributable income per unit (down 33.7% quarterly) and underlying production volumes (oil down 18%, gas down 35% quarterly). While gas prices increased, this was insufficient to offset the negative impact of lower oil prices and declining production. The increasing cumulative excess costs further erode future distributable income. As a royalty trust, there are no growth prospects, and the consistent decline in key financial metrics suggests a deteriorating investment. A seasoned investor would likely seek to exit or reduce exposure to a perpetually declining asset.

Keywords

Royalty Trust, Oil and Gas, Energy, Distributable Income, Net Profits Interest, Production Decline, Commodity Prices, SEC Filing, 10-Q, XTO Energy, Exxon Mobil