10-K: Cross Timbers Royalty Trust Reports Lower Net Profits Income for 2024 Amidst Production Declines and Price Volatility

Cross Timbers Royalty Trust's 2024 net profits income decreased by 47% compared to 2023, primarily due to lower production volumes and commodity prices.

Summary

• Cross Timbers Royalty Trust (CRT) reported a net profits income of $6,563,177 for 2024, a 47% decrease from the $12,300,176 reported in 2023.
• The decline is attributed to decreased oil and gas production, lower oil and gas prices, and increased development costs.
• Approximately 46% of the net profits income in 2024 was derived from gas sales.
• Trust administration expenses increased to $945,612 in 2024 from $816,185 in 2023.
• The Trust maintains a cash reserve of $1,000,000 for contingencies.
• Underlying oil sales volumes decreased by 14% and gas sales volumes decreased by 31% from 2023 to 2024.
• The average oil price decreased by 2% to $75.68 per Bbl, while the average gas price decreased by 34% to $3.97 per Mcf.
• Total costs deducted in the calculation of net profits income were $9.8 million in 2024, a 14% decrease from $11.5 million in 2023.
• Unit operators have reported underlying budgeted development costs of approximately $0.75 million for 2025 and $0.85 million for 2026.
• Remaining cumulative excess costs for the Texas working interest conveyance totaled $4.3 million, including accrued interest, as of December 31, 2024.

Sentiment

Score: 4

Explanation: The document presents a negative outlook due to decreased net profits income, lower production volumes, and price volatility. While there are some positives, the overall tone is cautious.

Positives

• Total costs deducted in the calculation of net profits income decreased by 14% from 2023 to 2024.
• The Trust maintains a cash reserve of $1,000,000 for contingencies, providing a financial buffer.
• The Trust is exempt from Texas franchise tax as a passive entity.
• The Trust's disclosure controls and procedures were effective as of the end of the period covered by the annual report.

Negatives

• Net profits income decreased significantly by 47% year-over-year.
• Oil and gas sales volumes decreased, indicating lower production from the underlying properties.
• Average oil and gas prices decreased, impacting the Trust's revenue.
• Administration expenses increased, reducing distributable income.
• The Trust is exposed to risks associated with fluctuating oil and natural gas prices.
• The Trust is exposed to risks associated with higher production expense and/or development costs.
• The Trust is exposed to risks associated with government action, policies or regulations designed to discourage production, reduce demand for, or promote alternatives to oil and natural gas.

Risks

• Fluctuations in oil and natural gas prices could adversely affect net proceeds and Trust distributions.
• Higher production expense and/or development costs, without concurrent increases in revenue, will directly decrease the net proceeds payable to the Trust from the properties underlying the 75% net profits interests.
• Government action, policies or regulations designed to discourage production, reduce demand for, or promote alternatives to oil and natural gas could impact the price of oil and natural gas produced on the properties underlying the Trusts net profits interests.
• War, terrorism, geopolitical hostilities, and other military actions or political instability could adversely affect Trust distributions or the market price of the Trust units.
• Proved reserve estimates depend on many assumptions that may turn out to be inaccurate.
• Operational risks and hazards associated with the development and operations of the underlying properties may decrease Trust distributions.
• The Trust may be subject to attempted cybersecurity disruptions from a variety of sources including state-sponsored actors.
• Future net profits may be subject to risks relating to the creditworthiness of third parties.
• Trust unitholders and the Trustee have no influence over the operations on, or future development of, the underlying properties.
• The assets of the Trust represent interests in depleting assets and, if XTO Energy or any other operators developing the underlying properties do not perform additional successful development projects, the assets may deplete faster than expected.
• XTO Energy may transfer its interest in the underlying properties without the consent of the Trust or the Trust unitholders.
• XTO Energy or any other operator of any underlying property may abandon the property, thereby terminating the related net profits interest payable to the Trust.
• Trust unitholders have limited voting rights and have limited ability to enforce the Trusts rights against XTO Energy or any other operator of the underlying properties.
• The limited liability of Trust unitholders is uncertain.
• Drilling oil and natural gas wells is a high-risk activity and subjects the Trust to a variety of factors that it cannot control.
• The underlying properties are subject to complex federal, state and local laws and regulations that could adversely affect net proceeds payable to the Trust and Trust distributions.
• Cash held by the Trustee is not insured by the Federal Deposit Insurance Corporation.
• The tax treatment of an investment in Trust units could be affected by recent and potential legislative changes, possibly on a retroactive basis.

Future Outlook

The Trust's future performance is subject to fluctuations in oil and gas prices, production volumes, and development costs. Unit operators have reported underlying budgeted development costs of approximately $0.75 million for 2025 and $0.85 million for 2026. The Trust is also subject to risks related to government regulations and potential cybersecurity disruptions.

Industry Context

The oil and gas industry is highly competitive, with market prices determined by external supply and demand factors. The Trust's performance is affected by the performance of XTO Energy and other operators of the underlying properties. The industry is also facing increasing scrutiny regarding greenhouse gas emissions and sustainability.

Comparison to Industry Standards

• It's difficult to directly compare Cross Timbers Royalty Trust to other royalty trusts without detailed knowledge of their specific asset base and operational structure.
• However, generally, royalty trusts are sensitive to commodity price fluctuations, and CRT's performance aligns with this industry characteristic.
• For example, Sabine Royalty Trust (SBR) and Permian Basin Royalty Trust (PBT) also experience volatility in their distributions based on oil and gas prices and production volumes.
• CRT's reliance on XTO Energy's operations is a key factor, similar to how other trusts depend on the efficiency and investment decisions of their underlying operators.
• The reported reserve-to-production index of approximately 11 years is a metric that can be compared to other trusts to assess the longevity of their assets, but this requires detailed analysis of their reserve base and production profiles.

Legal Proceedings

• The Trust was involved in a settlement agreement related to the Chieftain royalty class action lawsuit, resulting in a deduction allocated to the Trust as a production cost.

Related Party Transactions

• The underlying properties are owned by XTO Energy or affiliated companies of ExxonMobil.
• XTO Energy deducts an overhead charge for costs associated with monitoring the interests and as operator of the Hewitt Unit.

Stakeholder Impact

• Shareholders will experience lower distributions due to decreased net profits income.
• The Trust's performance is dependent on the operations of XTO Energy and other operators of the underlying properties.
• The Trust is exposed to risks related to government regulations and potential cybersecurity disruptions.

Next Steps

• Monitor oil and gas prices and production volumes.
• Assess the impact of development costs on future net profits income.
• Evaluate the potential impact of government regulations and cybersecurity threats.
• Track the progress of excess cost recovery for the Texas working interest conveyance.

Key Dates

Keywords

Royalty Trust, Net Profits Income, Oil and Gas, Production, Reserves, XTO Energy, Distributions, Texas, Oklahoma, New Mexico