10-Q: Cross Timbers Royalty Trust Q3 Income Plunges 55% Amid Production Declines

Cross Timbers Royalty Trust reported a significant 55% drop in net profits income for the third quarter of 2025, driven by decreased oil and gas production and lower oil prices.

Summary

• Net profits income for the third quarter of 2025 was $761,552, representing a 55% decrease from $1,697,724 in the third quarter of 2024.
• Distributable income for the third quarter of 2025 was $453,318, or $0.075553 per unit, a substantial decline from $1,521,252 or $0.253542 per unit in the prior year's quarter.
• For the nine months ended September 30, 2025, net profits income decreased 19% to $4,108,712 from $5,100,336 in the same 2024 period.
• Nine-month distributable income was $3,129,804, or $0.521634 per unit, compared to $4,360,224 or $0.726704 per unit in the corresponding 2024 period.
• The primary drivers for the decrease in net profits income were decreased oil and gas production volumes (oil down 20% in Q3, gas down 47% in Q3) and lower average oil prices (down 20% in Q3).
• Underlying cumulative excess costs for the Texas working interest conveyance totaled $5.1 million ($3.8 million net to the Trust) as of September 30, 2025, including $1.4 million ($1.0 million net to the Trust) in accrued interest.
• The expense reserve was increased by $150,000 in Q3 2025 and $300,000 for the nine months, reaching $1,300,000 as of September 30, 2025.

Sentiment

Score: 3

Explanation: The significant year-over-year declines in net profits income and distributable income, coupled with substantial drops in production volumes and oil prices, indicate a negative financial performance. While some costs decreased and the expense reserve increased, the core revenue-generating metrics are substantially worse year-over-year.

Positives

• Administration expense decreased by $19,973 for the third quarter and $71,097 for the nine-month period compared to the prior year, reflecting efficient cost management.
• Gas prices for the nine-month period increased by 10% to $4.41 per Mcf, providing a partial offset to other revenue declines.
• Development costs decreased significantly by 58% for Q3 and 89% for the nine-month period, primarily due to the absence of drilling activity that occurred in the second half of 2023 for the Hewitt Unit.
• The expense reserve was increased to $1,300,000 as of September 30, 2025, enhancing the Trust's ability to cover its obligations.
• Disclosure controls and procedures were evaluated and concluded to be effective, with no material changes to internal control over financial reporting.

Negatives

• Net profits income decreased by 55% for the third quarter and 19% for the nine-month period year-over-year, indicating a significant decline in core revenue.
• Distributable income per unit decreased by 70% for the third quarter ($0.075553 vs $0.253542) and 28% for the nine-month period ($0.521634 vs $0.726704), directly impacting unitholder returns.
• Oil sales volumes from underlying properties decreased by 20% in Q3 and 11% for the nine-month period, primarily due to natural production decline and timing of cash receipts.
• Gas sales volumes from underlying properties decreased by 47% in Q3 and 26% for the nine-month period, attributed to natural production decline, timing of cash receipts, and the absence of out-of-period revenues.
• Average oil sales prices decreased by 20% in Q3 to $62.21 per Bbl and 13% for the nine-month period to $66.93 per Bbl.
• Total revenues from underlying properties decreased by 40% in Q3 and 22% for the nine-month period.
• Cumulative excess costs for the Texas working interest conveyance increased to $5.1 million ($3.8 million net to the Trust) as of September 30, 2025, which must be recovered from future net proceeds.

Risks

• The Trust's financial and operational results are subject to various risks, including those detailed in Part I, Item 1A of the Trust's Annual Report on Form 10-K for the year ended December 31, 2024, with no material changes noted in this filing.
• Future performance is uncertain and depends on development activities, future development plans, reserve-to-production ratios, future production, and future net cash flows from the underlying properties.
• Volatility in oil and gas sales prices and expectations for future demand significantly impact the Trust's income.
• Economic factors such as inflation and general economic downturns can affect economic activity and commodity prices.
• Government policy, including tax and environmental regulations, climate policy, trade barriers, tariffs, and sanctions, can influence oil and gas prices and future supply and demand.
• The development and competitiveness of alternative energy sources could reduce demand for oil and gas.
• State income tax withholding regulations for non-resident recipients of oil and gas proceeds are subject to change, which could reduce distributions to unitholders.
• 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 only, and cannot reduce net proceeds from other conveyances.

Future Outlook

The Trust's future performance is subject to various uncertainties, including development activities, future production levels, net cash flows, and the volatility of oil and gas prices. The estimated natural production decline rate on the underlying oil and gas properties is approximately 6 to 8 percent annually. The Trustee assumes no duty to update forward-looking statements.

Management Comments

• "The Trustee believes that the disclosures are adequate to make the information presented not misleading."
• "In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement... have been included."
• "Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year."
• "The Trustee believes that it is not required to withhold on payments made to the unitholders. However, regulations are subject to change by the various states, which could change this conclusion."
• "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 by the Trust."

Industry Context

The significant declines in oil and gas production volumes and oil prices reflect broader market dynamics and the inherent challenges of managing mature oil and gas assets. While gas prices showed a 10% increase over the nine-month period, this was insufficient to offset the substantial drops in oil prices and overall production. The continued natural production decline rate of 6-8% annually is a key factor for royalty trusts, which typically do not engage in new drilling to offset declines, relying instead on the operator (XTO Energy) to manage the underlying properties. The decrease in development costs suggests reduced capital expenditure by XTO Energy on these specific properties, which contributes to the production decline but also reduces immediate expenses.

Comparison to Industry Standards

• The Trust's performance is directly tied to the underlying properties operated by XTO Energy, a subsidiary of Exxon Mobil Corporation. Direct comparisons to integrated oil and gas companies like Exxon Mobil are not appropriate due to the Trust's passive royalty structure.
• Compared to other royalty trusts, a 55% quarterly decline in net profits income and a 70% drop in distributable income per unit are substantial and indicate significant underperformance relative to a stable or growing asset base.
• The natural production decline rate of 6-8% annually is typical for mature oil and gas fields, but the reported declines in sales volumes (oil down 20% in Q3, gas down 47% in Q3) are higher than this natural rate, suggesting additional factors like timing of cash receipts or specific operational issues on the underlying properties.
• The significant reduction in development costs (89% for nine months) indicates a lack of new capital investment in the underlying properties, which is a common characteristic for royalty trusts where the operator's focus may shift to more profitable ventures. This contrasts with exploration and production (E&P) companies that actively invest in drilling to maintain or grow production.

Corporate Governance

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 deducts a monthly overhead charge of approximately $37,696 ($28,272 net to the Trust) as operator of the Hewitt Unit, one of the properties underlying the Oklahoma 75% net profits interests.

Stakeholder Impact

• Shareholders (Unitholders): Will experience significantly lower distributable income per unit, directly reducing cash distributions. The increase in cumulative excess costs for the Texas working interest could further impact future distributions until recovered.
• Trustee (Argent Trust Company): Continues to manage the Trust's administrative functions and reporting obligations, with administration expenses decreasing slightly.
• XTO Energy (Operator): Continues to operate the underlying properties and deducts overhead charges. The decrease in development costs suggests reduced capital allocation to these specific properties.

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 assumes no duty to update forward-looking statements as of any future date.

Key Dates

Recommendation

The significant year-over-year declines in net profits income (55% for Q3, 19% for 9M) and distributable income per unit (70% for Q3, 28% for 9M) are strong indicators of deteriorating performance. This is driven by substantial decreases in oil and gas production volumes and lower oil prices. The increase in cumulative excess costs for the Texas working interest further burdens future distributions. While administration expenses decreased and the expense reserve increased, these positives are overshadowed by the fundamental decline in the Trust's revenue-generating capacity. Given the passive nature of a royalty trust and the ongoing natural production decline, a sustained recovery without new significant development by the operator is unlikely. Investors seeking income or capital appreciation would likely find better opportunities elsewhere.

Keywords

Royalty Trust, Oil and Gas, Net Profits Income, Distributable Income, Production Decline, Oil Prices, Gas Prices, SEC Filing, 10-Q, Energy Sector, XTO Energy, Exxon Mobil, Texas, Oklahoma, New Mexico