Cross Timbers Royalty Trust: Form 10-Q for the period ended Jun 30, 2024

The following discussion should be read in conjunction with the Trustee’s discussion and analysis contained in the Trust’s 2023 Annual Report on Form 10-K, as well as the condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The Trust’s Annual Report on Form 10-K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8-K and all amendments to those reports are available on the Trust’s website at www.crt-crosstimbers.com (http://www.crt-crosstimbers.com).

Distributable Income

Quarter

For the quarter ended June 30, 2024, net profits income was $1,564,871 compared to $3,163,059 for second quarter 2023. This 51 percent decrease in net profits income is primarily the result of lower gas prices ($1.9 million), net excess costs activity ($0.2 million), increased development costs ($0.2 million), partially offset by increased gas and oil production ($0.3 million), decreased taxes, transportation and other costs ($0.2 million), higher oil prices ($0.1 million), and decreased production expenses ($0.1 million). See “Net Profits Income” below.

After considering interest income of $15,173 and administration expense of $234,286, distributable income for the quarter ended June 30, 2024,was $1,345,758, or $0.224293 per unit of beneficial interest. Administration expense for the quarter increased $94,832 from the prior year quarter, primarily related to the timing of receipt and payment of Trust expenses and terms of professional services. Changes in interest income are attributable to fluctuations in net profits income, expense reserve, and interest rates. For second quarter 2023, distributable income was $3,040,614, or $0.506769 per unit.

Distributions to unitholders for the quarter ended June 30, 2024, were:

Six Months

For the six months ended June 30, 2024, net profits income was $3,402,612 compared to $7,075,763 for the same 2023 period. This 52 percent decrease in net profits income is primarily the result of lower gas prices ($2.7 million), decreased gas production ($1.8 million), increased development costs ($0.6 million), and decreased oil production ($0.1 million), partially offset by decreased taxes, transportation and other costs ($0.8 million), net excess costs activity ($0.6 million), and decreased production expenses ($0.1 million). See “Net Profits Income” below.

After considering interest income of $32,146 and administration expense of $595,786, distributable income for the six months ended June 30, 2024, was $2,838,972, or $0.473162 per unit of beneficial interest. Administration expense for the six months ended June 30, 2024, increased $168,488 from the prior year six-month period, primarily related to the timing of receipt and payment of Trust expenses and terms of professional services. Changes in interest income are attributable to fluctuations in net profits income, expense reserve, and interest rates. For the six months ended June 30, 2023, distributable income was $6,679,812, or $1.113302 per unit.

Net Profits Income

Net profits income is recorded when received by the Trust, which is the month following receipt by XTO Energy, and generally two months after oil production and three months after gas production. Net profits income is generally affected by three major factors:

1. oil and gas sales volumes;

2. oil and gas sales prices; and

3. costs deducted in the calculation of net profits income.

Because properties underlying the 90% net profits interests are primarily royalty and overriding royalty interests, the calculation of net profits income from these interests includes deductions for production and property taxes, legal costs, and marketing and transportation charges. In addition to these costs, the calculation of net profits income from the 75% net profits interests includes deductions for production expense, development costs and overhead since the related underlying properties are working interests.

The following is a summary of the calculation of net profits income received by the Trust:

(a) Because of the interval between time of production and receipt of royalty income by the Trust, (1) oil and gas sales for the quarter ended June 30 generally represent oil production for the period February through April and gas production for the period January through March and (2) oil and gas sales for the six-months ended June 30 generally represent oil production for the period November through April and gas production for the period October through March.

(b) Oil and gas sales volumes are allocated to the net profits interests by dividing Trust net cash inflows by average sales prices. As oil and gas prices change, the Trust’s allocated production volumes are impacted as the quantity of production necessary to cover expenses changes inversely with price. As such, the underlying property production volume changes may not correlate with the Trust’s allocated production volumes in any given period. Therefore, comparative discussion of oil and gas sales volumes is based on the underlying properties.

(c) Production expense includes an overhead charge which is deducted and retained by the operator. XTO Energy deducts an overhead charge as reimbursement for costs associated with monitoring these interests. See Note 5 to Condensed Financial Statements.

(d) See Note 4 to Condensed Financial Statements.

The following are explanations of significant variances on the underlying properties from second quarter 2023 to second quarter 2024 and from the first six months of 2023 to the comparable period in 2024:

Sales Volumes

Oil

Oil sales volumes increased three percent for the second quarter and increased one percent for the six-month period primarily due to the timing of cash receipts, partially offset by natural production decline.

Gas

Gas sales volumes increased 27 percent for the second quarter primarily because of out of period revenues related to non-operated properties in the Oklahoma royalty interest net profits interests, partially offset by timing of receipts and natural production decline. Gas sales volumes decreased 45 percent for the six-month period primarily due to absence of receipts for the New Mexico royalty interest net profits interests related to March 2018 to December 2020 production and natural production decline, partially offset by out of period revenues attributable to non-operated properties in the Oklahoma royalty interest net profits interests.

The estimated rate of natural production decline on the underlying oil and gas properties is approximately six to eight percent a year.

Sales Prices

Oil

The average oil price for the second quarter increased four percent to $77.24 per Bbl and for the six-month period decreased one percent to $76.28 per Bbl.

Gas

Gas prices for the second quarter decreased 66 percent to $4.04 per Mcf and for the six-month period decreased 39 percent to $4.26 per Mcf.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs decreased 33 percent for the second quarter and 48 percent for the six-month period primarily because of decreased gas deductions and gas production taxes on lower revenues driven by timing of receipts.

Production Expense

Production expense decreased four percent for the second quarter primarily because of decreased power and fuel costs and miscellaneous non-operated costs, partially offset by increased repairs and maintenance and labor costs. Production expense decreased three percent for the six-month period primarily because of the absence of higher processing costs driven by timing of receipts, decreased power and fuel costs and miscellaneous non-operated costs, partially offset by increased repairs and maintenance and labor costs.

Development Costs

Development costs related to properties underlying the 75% net profits interests increased 290 percent for the second quarter and 115 percent for the six-month period primarily because of the timing of the receipt of costs for drilling activity that occurred in the second half of 2023 for the Hewitt Unit.

Excess Costs

If monthly costs exceed revenues for any conveyance, such excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net proceeds from any other conveyance. Underlying cumulative excess costs for the Texas and Oklahoma working interest conveyances remaining as of June 30, 2024, totaled $3.7 million ($2.8 million net to the Trust), including accrued interest of $1.0 million ($0.7 million net to the Trust). For further information on excess costs, see Note 4 to Condensed Financial Statements.

Contingencies

For information on contingencies, see Note 3 to Condensed Financial Statements.

Forward-Looking Statements

Certain information included in this Quarterly Report and other materials filed, or to be filed, by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by XTO Energy or the Trustee) contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, relating to the Trust, operations of the underlying properties and the oil and gas industry. Such forward-looking statements are based on XTO Energy’s and the Trustee’s current plans, expectations, assumptions, projections and estimates and are identified by words such as “may,” “expects,” “intends,” “plans,” “believes,” “estimates,” “should,” “could,” “would,” and similar words that convey the uncertainty of future events. Such forward-looking statements may concern, among other things, development activities, future development plans by area, increased density drilling, reserve-to-production ratios, future production, future net cash flows, maintenance projects, development, production, regulatory and other costs, oil and gas prices and expectations for future demand, the impact of inflation and economic downturns on economic activity, government policy and its impact on oil and gas prices and future demand, the development and competitiveness of alternative energy sources, pricing differentials, proved reserves, production levels, expense reserve budgets, availability of financing, arbitration, litigation, liquidity, financing, political and regulatory matters, such as tax and environmental policy, climate policy, trade barriers, sanctions, competition, war and other political or security disturbances. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, including those detailed in Part I, Item 1A of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023, which is incorporated by this reference as though fully set forth herein. Therefore, actual financial and operational results may differ materially from expectations, estimates or assumptions expressed in, implied in, or forecasted in such forward-looking statements. XTO Energy and the Trustee assume no duty to update these statements as of any future date.

As of the end of the period covered by this report, the Trustee carried out an evaluation of the effectiveness of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded that the Trust’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 and are effective in ensuring that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Trustee to allow timely decisions regarding required disclosure. In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by XTO Energy. There has not been any change in the Trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.

There have been no material changes in the risk factors disclosed under Part I, Item 1A of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023.