10-Q: Cross Timbers Royalty Trust Reports Lower Distributable Income Due to Decreased Production and Prices

Cross Timbers Royalty Trust's distributable income decreased significantly in the third quarter of 2024 due to lower oil and gas prices and reduced production volumes.

Summary

• Cross Timbers Royalty Trust reported a decrease in distributable income for both the three and nine months ended September 30, 2024, compared to the same periods in 2023.
• Net profits income for the third quarter of 2024 was $1,697,724, a 37% decrease from $2,676,180 in the third quarter of 2023.
• The decrease in net profits income was primarily due to decreased oil production, increased production expenses, and lower gas prices.
• Distributable income for the third quarter of 2024 was $1,521,252, or $0.253542 per unit, compared to $2,451,192, or $0.408532 per unit, in the third quarter of 2023.
• For the nine months ended September 30, 2024, net profits income was $5,100,336, a 48% decrease from $9,751,943 in the same period of 2023.
• The decrease in net profits income for the nine-month period was primarily due to lower gas prices, decreased gas production, decreased oil production, increased development costs, and increased production expenses.
• Distributable income for the nine months ended September 30, 2024, was $4,360,224, or $0.726704 per unit, compared to $9,131,004, or $1.521834 per unit, in the same period of 2023.
• The Trust's financial statements are prepared on a modified cash basis, which differs from U.S. GAAP.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant decreases in income and production, coupled with increased costs. The overall tone is cautious and highlights challenges.

Positives

• Administration expenses for the third quarter decreased by $50,648 compared to the prior year quarter.
• Average oil prices increased slightly in both the third quarter and the nine-month period.

Negatives

• Net profits income decreased significantly for both the three and nine-month periods.
• Distributable income per unit decreased substantially for both the three and nine-month periods.
• Oil sales volumes decreased for both the three and nine-month periods.
• Gas sales volumes decreased for the nine-month period.
• Average gas prices decreased significantly for both the three and nine-month periods.
• Production expenses increased for both the three and nine-month periods.
• Development costs increased significantly for the nine-month period.
• The Trust has cumulative excess costs of $3.8 million for the Texas working interest conveyance.

Risks

• The Trust's income is highly dependent on oil and gas prices, which are subject to volatility.
• Production volumes are subject to natural decline.
• Excess costs can reduce future net proceeds.
• Changes in regulations could impact the Trust's operations and distributions.
• The Trust's financial statements are prepared on a modified cash basis, which may not provide a complete picture of its financial health.

Future Outlook

The report includes forward-looking statements regarding future development plans, production, and costs, but actual results may differ materially due to various risks and uncertainties. The Trustee and XTO Energy assume no duty to update these statements.

Management Comments

• The Trustee believes that the disclosures are adequate to make the information presented not misleading.
• The Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy in its evaluation of disclosure controls and procedures.

Industry Context

The decrease in the Trust's income reflects broader trends in the oil and gas industry, including price volatility and production fluctuations. The report highlights the impact of lower gas prices on the Trust's performance, which is consistent with the challenges faced by many energy companies in the current market.

Comparison to Industry Standards

• The Cross Timbers Royalty Trust is a specific type of entity, a royalty trust, which has a different structure and financial reporting than typical oil and gas exploration and production companies such as EOG Resources, Pioneer Natural Resources, or Devon Energy.
• Unlike these companies, the Trust does not directly operate oil and gas properties but receives a share of net profits from XTO Energy. This means its financial performance is directly tied to XTO's operational efficiency and the prices they receive for oil and gas.
• The Trust's results are more comparable to other royalty trusts such as the Permian Basin Royalty Trust or the San Juan Basin Royalty Trust, which also experience fluctuations in income based on commodity prices and production volumes.
• The reported decrease in distributable income is consistent with the challenges faced by many royalty trusts in the current market, where gas prices have been particularly weak.
• The Trust's reliance on a modified cash basis of accounting also makes direct comparisons to companies using U.S. GAAP difficult.

Legal Proceedings

• A settlement agreement was reached regarding the Chieftain royalty class action lawsuit, resulting in a deduction to the Trust's net profits income.

Related Party Transactions

• 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 receive lower distributions due to decreased net profits income.
• The Trust's performance is directly tied to the operational efficiency of XTO Energy, impacting the Trust's financial results.
• The Trust's modified cash basis of accounting may not provide a complete picture of its financial health to stakeholders.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Net Profits Income, Distributable Income, Production Volumes, Oil Prices, Gas Prices, Production Expenses, Development Costs, Excess Costs