10-Q: Cross Timbers Royalty Trust Reports Lower Q1 2024 Distributable Income Due to Production and Price Declines

Cross Timbers Royalty Trust's distributable income for the first quarter of 2024 decreased significantly compared to the same period last year, primarily due to lower oil and gas production and prices.

Summary

• Cross Timbers Royalty Trust reported a distributable income of $1,493,214 for the quarter ended March 31, 2024, which is equivalent to $0.248869 per unit.
• This is a substantial decrease compared to the $3,639,198, or $0.606533 per unit, reported for the same quarter in 2023.
• The decline is primarily attributed to a 53% decrease in net profits income, which fell from $3,912,704 in Q1 2023 to $1,837,741 in Q1 2024.
• The decrease in net profits income was driven by lower gas production, lower gas prices, increased development costs, lower oil prices, and decreased oil production.
• These negative factors were partially offset by net excess costs activity, decreased taxes, transportation and other costs, and decreased production expenses.
• The average oil price decreased by 6% to $75.30 per barrel, and the average gas price decreased by 16% to $4.57 per Mcf.
• Gas sales volumes decreased by 69% and oil sales volumes decreased by 1% compared to the first quarter of 2023.
• The Trust's administrative expenses increased to $361,500, up from $287,844 in the same quarter last year.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant decreases in income and production, coupled with increased costs. While the trust is operating as expected, the financial results are poor.

Positives

• Net excess costs activity, decreased taxes, transportation and other costs, and decreased production expenses partially offset the negative impacts of lower production and prices.
• The Trust's disclosure controls and procedures are deemed effective.

Negatives

• The Trust experienced a significant decrease in distributable income and net profits income compared to the same quarter last year.
• There were substantial decreases in both gas sales volumes and average gas prices.
• Development costs increased by 87% for the quarter.
• Administrative expenses increased compared to the same quarter last year.

Risks

• The Trust's income is highly dependent on oil and gas prices, which are subject to volatility.
• Natural production decline in the underlying oil and gas properties is estimated at approximately six to eight percent per year.
• Excess costs must be recovered from future net proceeds, potentially impacting future distributions.
• The Trust is subject to potential legal costs related to the Chieftain royalty class action settlement.
• Changes in state income tax withholding regulations could reduce distributions to unitholders.

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 concluded that the Trust's disclosure controls and procedures are effective.
• The Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy.

Industry Context

The decrease in distributable income reflects broader trends in the oil and gas industry, including price volatility and production declines. The report highlights the impact of these factors on royalty trusts, which are particularly sensitive to changes in commodity prices and production volumes.

Comparison to Industry Standards

• The report does not provide specific comparisons to other royalty trusts or industry benchmarks.
• However, the challenges faced by Cross Timbers Royalty Trust, such as production declines and price volatility, are common among royalty trusts in the oil and gas sector.
• The report's focus on net profits interests and the specific cost structures associated with working interests and royalty interests is typical for royalty trust reporting.
• The discussion of excess costs and their impact on future distributions is also a standard consideration for royalty trusts.

Legal Proceedings

• The Trust is involved in ongoing issues related to the Chieftain royalty class action settlement, which may result in additional costs.

Related Party Transactions

• XTO Energy deducts an overhead charge as reimbursement for costs associated with monitoring the 75% net profits interests.
• XTO Energy deducts a monthly overhead charge for reimbursement of administrative expenses as operator of the Hewitt Unit.

Stakeholder Impact

• Shareholders will experience reduced distributions due to lower net profits income.
• The Trust's performance is directly tied to the success of the underlying oil and gas properties and the prevailing market conditions.
• The Trust's ability to distribute income is affected by excess costs and potential legal liabilities.

Next Steps

• The Trustee will continue to monitor the performance of the underlying properties and the impact of commodity prices on the Trust's income.
• The Trustee will continue to manage the administrative functions of the Trust and meet its reporting obligations.
• The Trustee will continue to address the Chieftain settlement issues.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Net Profits Income, Distributable Income, Production Volumes, Oil Prices, Gas Prices, Excess Costs, Working Interests, Royalty Interests