10-K: Cross Timbers Royalty Trust Reports 2023 Annual Results, Cites Production and Price Volatility

Cross Timbers Royalty Trust's 2023 annual report reveals a slight decrease in net profits income due to fluctuating oil and gas prices and production costs.

Summary

• Cross Timbers Royalty Trust reported a net profits income of $12.3 million for 2023, a 2% decrease compared to $12.5 million in 2022.
• The decrease was primarily due to lower gas prices, decreased oil production, and increased production expenses, partially offset by decreased development costs and increased gas production.
• Approximately 57% of the Trust's net profits income in 2023 was derived from natural gas sales.
• The Trust's administration expenses were $816,185 in 2023, compared to $765,955 in 2022.
• The Trust's cash reserve remained at $1 million as of December 31, 2023.
• The average oil price for 2023 was $77.05 per barrel, while the average gas price was $6.00 per Mcf, a 26% decrease from 2022.
• The Trust's proved reserves are estimated at 548,000 barrels of oil and 11.049 Bcf of gas as of December 31, 2023.
• The Trust's future net cash flows from proved reserves are estimated at $44.7 million, discounted at 10%.

Sentiment

Score: 4

Explanation: The sentiment is slightly negative due to the decrease in net profits income and gas prices, along with increased production expenses. However, the Trust's cash reserve remains stable, and there are some positive aspects such as increased gas production and decreased development costs. The overall outlook is cautious due to the volatility of the oil and gas market.

Positives

• The Trust's cash reserve remains fully funded at $1 million.
• The Trust's gas sales volumes increased by 28% year-over-year.
• Development costs decreased by 60% year-over-year, from $2.6 million in 2022 to $1.1 million in 2023.

Negatives

• Net profits income decreased by 2% year-over-year.
• Gas prices decreased by 26% year-over-year.
• Oil sales volumes decreased by 19% year-over-year.
• Production expenses increased by $1.8 million year-over-year.

Risks

• The Trust's distributions are highly dependent on volatile oil and natural gas prices.
• Higher production expenses and development costs can decrease net proceeds payable to the Trust.
• Government regulations and policies could impact the price of oil and natural gas.
• Operational risks and hazards associated with oil and gas production may decrease Trust distributions.
• Cybersecurity disruptions could cause harm to the Trust's operations and financial condition.
• The Trust's assets are depleting, and future production depends on successful development projects.
• The Trust has limited ability to influence third parties, including operators of the underlying properties.
• The Trust's financial statements are prepared on a modified cash basis, not U.S. GAAP.

Future Outlook

The Trust expects oil and gas prices to remain volatile. The Trust's future performance is dependent on the prices realized from the sale of natural gas and oil, as well as the costs associated with production and development.

Management Comments

• The Trustee has concluded that the Trust's disclosure controls and procedures were effective as of the end of the period covered by this annual report.
• The Trustee concluded that the Trust's internal control over financial reporting was effective as of December 31, 2023.

Industry Context

The report highlights the volatility in the oil and gas industry, with fluctuating prices and production levels impacting the Trust's income. This is consistent with broader industry trends where companies are facing challenges due to market volatility and regulatory uncertainty.

Comparison to Industry Standards

• The Trust's reliance on net profits interests is a common structure for royalty trusts, but its performance is directly tied to the operational decisions of XTO Energy and other operators.
• The Trust's reserve-to-production index of approximately 10 years is within the typical range for mature oil and gas fields, but the actual production rates and reserve recovery may vary.
• The Trust's financial reporting on a modified cash basis is consistent with SEC guidelines for royalty trusts, but it differs from U.S. GAAP used by most other energy companies.
• The Trust's performance is comparable to other royalty trusts that are exposed to similar market risks and operational dependencies, such as the San Juan Basin Royalty Trust (SJT) and the Permian Basin Royalty Trust (PBT).
• The Trust's reliance on mature fields and secondary recovery operations is similar to other trusts focused on established production areas, but this also means that the Trust is more susceptible to natural production declines.

Management Changes

Legal Proceedings

• Certain of the underlying properties are involved in various lawsuits and governmental proceedings arising in the ordinary course of business.
• The Trust may be required to bear a portion of the settlement costs arising from the Chieftain royalty class action settlement.

Related Party Transactions

• The underlying properties are owned by XTO Energy or other affiliated companies of ExxonMobil.
• XTO Energy deducts an overhead charge for monitoring the 75% net profits interests.
• XTO Energy deducts a monthly overhead charge for administrative expenses as operator of the Hewitt Unit.

Stakeholder Impact

• Shareholders will experience fluctuations in monthly distributions due to the volatility of oil and gas prices.
• Employees of the Trustee will continue to manage the Trust's administrative functions.
• Customers of XTO Energy will continue to purchase oil and gas from the underlying properties.
• Suppliers and creditors of XTO Energy will continue to provide services and goods to the underlying properties.

Next Steps

• The Trustee will continue to monitor the performance of the underlying properties and the market conditions.
• The Trustee will continue to make monthly distributions to unitholders based on the Trust's net profits income.
• The Trustee will continue to manage the Trust's cash reserves and administrative expenses.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Net Profits Interest, Production, Reserves, Distributions, XTO Energy, Energy Prices, Natural Gas, Crude Oil