10-Q: Cross Timbers Royalty Trust Reports Lower Distributable Income Due to Gas Price Decline in Q2 2024

Cross Timbers Royalty Trust's distributable income decreased significantly in the second quarter of 2024, primarily due to lower natural gas prices.

Summary

• Cross Timbers Royalty Trust reported a substantial decrease in distributable income for the second quarter of 2024, falling to $1,345,758, or $0.224293 per unit, compared to $3,040,614, or $0.506769 per unit, in the same period of 2023.
• The decline is primarily attributed to a 51% decrease in net profits income, which was $1,564,871 in Q2 2024, down from $3,163,059 in Q2 2023.
• This decrease in net profits income was mainly due to lower gas prices, which had a $1.9 million negative impact, along with net excess costs activity and increased development costs.
• For the six months ended June 30, 2024, distributable income was $2,838,972, or $0.473162 per unit, compared to $6,679,812, or $1.113302 per unit, for the same period in 2023.
• Net profits income for the first six months of 2024 was $3,402,612, a 52% decrease from $7,075,763 in the first six months of 2023, primarily due to lower gas prices and decreased gas production.
• The Trust's net profits interests are based on 90% and 75% of net proceeds from underlying oil and gas properties, with costs deducted before calculating the net profits income.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the significant decrease in distributable income and the impact of lower gas prices. While there are some positive aspects, the overall tone is concerning for investors.

Positives

• Oil sales volumes increased by 3% in Q2 2024 and 1% for the six-month period, partially offsetting the negative impact of lower gas prices.
• There was a decrease in taxes, transportation, and other costs, which partially mitigated the overall decline in net profits income.
• Production expenses decreased slightly for both the quarter and the six-month period.

Negatives

• Gas prices decreased significantly, by 66% in Q2 2024 and 39% for the six-month period, severely impacting net profits income.
• Gas sales volumes decreased by 45% for the six-month period, further contributing to the decline in net profits income.
• Development costs increased significantly, by 290% in Q2 2024 and 115% for the six-month period, due to the timing of costs for drilling activity.
• The Trust experienced a significant decrease in distributable income per unit for both the quarter and the six-month period.

Risks

• The Trust is exposed to the volatility of oil and gas prices, which can significantly impact its net profits income and distributable income.
• Excess costs, if not recovered, can reduce future net proceeds and impact the Trust's financial performance.
• The Trust is subject to litigation risks, including the Chieftain royalty class action settlement, which could result in additional costs.
• Changes in state income tax regulations could impact the Trust's distributions to unitholders.
• The natural production decline of the underlying oil and gas properties, estimated at 6-8% per year, poses a long-term risk to the Trust's revenue.

Future Outlook

The report includes forward-looking statements regarding future development plans, production, costs, and oil and gas prices, but these are subject to 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 Trusts disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Trust.
• The Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy.

Industry Context

The decrease in distributable income reflects the broader challenges in the oil and gas industry, particularly the volatility in natural gas prices. The report highlights the impact of market conditions on royalty trusts, which are directly tied to commodity prices and production volumes.

Comparison to Industry Standards

• The Cross Timbers Royalty Trust's performance is directly linked to the production and pricing of oil and gas from its underlying properties, similar to other royalty trusts such as the Permian Basin Royalty Trust (PBT) and the San Juan Basin Royalty Trust (SJT).
• The significant decrease in distributable income due to lower gas prices is a common challenge faced by royalty trusts with exposure to natural gas, as seen in the recent performance of trusts like the Sabine Royalty Trust (SBR).
• The reported production volumes and price realizations are comparable to those of other trusts operating in similar regions, such as the Texas and Oklahoma areas.
• The Trust's administrative expenses and overhead charges are typical for royalty trusts, which require ongoing management and compliance efforts.
• The impact of development costs on the 75% net profits interests is a common factor for trusts with working interests, as seen in the financial reports of trusts with similar structures.

Legal Proceedings

• The Trust is involved in the Chieftain royalty class action settlement, which may result in additional costs.
• The Trustee has objected to similar claims relating to the Chieftain settlement with respect to another trust for which it serves as trustee.

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 a significant decrease in distributions due to lower net profits income.
• The Trust's performance is directly tied to the success of XTO Energy's operations and the market prices of oil and gas.
• The Trust's financial results may impact the market value of its units.

Next Steps

• The allocation of a portion of the Chieftain settlement to the Trust will be resolved in the third quarter of 2024.
• The Trustee will continue to monitor the performance of the underlying properties and the impact of market conditions on the Trust's financial results.

Key Dates

Keywords

Royalty Trust, Oil and Gas, Net Profits Income, Distributable Income, Production, Gas Prices, Oil Prices, XTO Energy, Working Interest, Royalty Interest