Cross Timbers Royalty Trust(CRT) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited financial statements and the Trustee's analysis of the Trust's financial performance and condition Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed financial statements of Cross Timbers Royalty Trust, including statements of assets, liabilities and trust corpus, distributable income, and changes in trust corpus, along with accompanying notes. The financial statements are prepared on a modified cash basis, not in conformity with U.S. GAAP, as permitted for royalty trusts by the SEC Condensed Statements of Assets, Liabilities and Trust Corpus (Unaudited) Presents the unaudited condensed statements of assets, liabilities, and trust corpus as of March 31, 2024, and December 31, 2023 Condensed Statements of Assets, Liabilities and Trust Corpus | Metric | March 31, 2024 | December 31, 2023 | | :--------------------------------------------------------------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash and short-term investments | $1,111,159 | $1,852,320 | | Interest to be received | $5,181 | $5,062 | | Net profits interests in oil and gas properties - net | $2,620,517 | $2,671,583 | | Total Assets | $3,736,857 | $4,528,965 | | LIABILITIES AND TRUST CORPUS | | | | Distribution payable to unitholders | $116,340 | $857,382 | | Expense reserve (a) | $1,000,000 | $1,000,000 | | Trust corpus (6,000,000 units of beneficial interest authorized and outstanding) | $2,620,517 | $2,671,583 | | Total Liabilities and Trust Corpus | $3,736,857 | $4,528,965 | - The expense reserve is currently funded at $1,000,000, allowing the Trustee to pay obligations if unable to do so from net profits income[31] Condensed Statements of Distributable Income (Unaudited) Details the unaudited distributable income for the three months ended March 31, 2024, and 2023 Condensed Statements of Distributable Income | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Net profits income | $1,837,741 | $3,912,704 | | Interest income | $16,973 | $14,338 | | Total income | $1,854,714 | $3,927,042 | | Administration expense | $361,500 | $287,844 | | Distributable income | $1,493,214 | $3,639,198 | | Distributable income per unit (6,000,000 units) | $0.248869 | $0.606533 | Condensed Statements of Changes in Trust Corpus (Unaudited) Outlines the unaudited changes in trust corpus for the three months ended March 31, 2024, and 2023 Condensed Statements of Changes in Trust Corpus | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Trust corpus, beginning of period | $2,671,583 | $2,961,955 | | Amortization of net profits interests | $(51,066) | $(129,025) | | Distributable income | $1,493,214 | $3,639,198 | | Distributions declared | $(1,493,214) | $(3,639,198) | | Trust corpus, end of period | $2,620,517 | $2,832,930 | Notes to Condensed Financial Statements (Unaudited) Provides explanatory notes to the unaudited condensed financial statements, detailing accounting policies and other relevant information 1. Basis of Accounting Details the modified cash basis of accounting used for the Trust's financial statements, not conforming to U.S. GAAP - The Trust's financial statements are prepared on a modified cash basis, not in conformity with U.S. GAAP, recognizing revenues when received and expenses when paid, as permitted for royalty trusts by the SEC[20][24][25] - Net profits income is computed by XTO Energy based on net proceeds from underlying properties, multiplied by 90% for 90% net profits interests and 75% for 75% net profits interests[20] - Costs deducted vary by net profits interest type; 90% interests deduct taxes, transportation, marketing, and legal costs, while 75% interests also include deductions for production expense, development costs, and operating charges[21] - The Trustee reviews net profits interests for impairment when events indicate the carrying value may not be recoverable, but temporarily low prices are not considered an indication of impairment due to historical price volatility[50][62][72] 2. Income Taxes Explains the Trust's federal and state income tax treatment, including its status as a grantor trust and state tax exemptions - For federal income tax purposes, the Trust is a fixed investment trust taxed as a grantor trust, meaning it is not subject to tax at the trust level; unitholders are considered to own and are taxed on the Trust's income directly[74] - The Trust is exempt from Texas franchise tax as a 'passive entity' because at least 90% of its federal gross income is from passive sources like mineral royalties[76] - Oklahoma and New Mexico tax income of nonresidents from real property within those states, and the Trust files an Oklahoma income tax return reflecting income and deductions attributable to properties in that state[75] 3. Contingencies Discusses potential liabilities and legal matters that could impact the Trust's net profits income and unitholder distributions - The Trust may be required to bear a portion of the settlement costs from the Chieftain royalty class action lawsuit against XTO Energy Inc., which would reduce net profits income payable to the Trust and thus taxable income for unitholders[77][80][81] - The Trustee has objected to similar claims for another trust (Hugoton Royalty Trust) in an ongoing arbitration, with the final resolution of this arbitration expected to influence the Trust's allocation[81] - The Trustee believes it is not required to withhold state income tax from payments made to nonresident unitholders, but acknowledges that regulations are subject to change[82] 4. Excess Costs Describes the treatment and recovery of excess costs incurred when monthly expenses exceed revenues for specific conveyances - If monthly costs exceed revenues for any conveyance, such excess costs, with accrued interest, must be recovered from future net proceeds of that specific conveyance and cannot reduce net proceeds from other conveyances[67] Cumulative Excess Costs and Accrued Interest (Net to Trust) | Metric | TX WI (Net to Trust) | OK WI (Net to Trust) | Total (Net to Trust) | | :-------------------------------------- | :------------------- | :------------------- | :------------------- | | Cumulative excess costs remaining at 12/31/23 | $1,707,053 | $- | $1,707,053 | | Net excess costs (recovery) for Q1 2024 | $162,341 | $543,245 | $705,586 | | Cumulative excess costs remaining at 3/31/24 | $1,869,394 | $543,245 | $2,412,639 | | Accrued interest at 3/31/24 | $661,967 | $85 | $662,052 | | Total remaining to be recovered at 3/31/24 | $2,531,361 | $543,330 | $3,074,691 | - Underlying cumulative excess costs for Texas and Oklahoma working interest conveyances totaled $4.1 million ($3.1 million net to the Trust) as of March 31, 2024, including $0.9 million ($0.7 million net to the Trust) in accrued interest[96][107] 5. Related Party Transactions Outlines transactions and overhead charges with XTO Energy related to monitoring specific net profits interests - XTO Energy deducts a monthly overhead charge for monitoring the Hewitt Unit (Oklahoma 75% net profits interests), which was approximately $33,820 ($25,365 net to the Trust) as of March 31, 2024[45] - XTO Energy also deducts a monthly overhead charge for monitoring other 75% net profits interests, which was $48,224 ($36,168 net to the Trust) as of March 31, 2024[85] 6. Administration Expense Details the types of expenses incurred by the Trustee for administrative functions and reporting obligations - Administration expenses are incurred by the Trustee to meet its reporting obligations and manage administrative functions, including compensation, fees for consultants, accountants, attorneys, and other professional services[86] Item 2. Trustee's Discussion and Analysis This section provides an analysis of the Trust's financial condition and results of operations for the quarter ended March 31, 2024, focusing on distributable income, net profits income, and the factors influencing them, such as sales volumes, prices, and costs Distributable Income Analyzes the distributable income for the quarter, highlighting changes and key drivers compared to the prior year - Distributable income for Q1 2024 was $1,493,214, or $0.248869 per unit, representing a significant decrease from $3,639,198 ($0.606533 per unit) in Q1 2023[89] - The 53% decrease in net profits income was primarily driven by decreased gas production ($2.3 million), lower gas prices ($0.6 million), increased development costs ($0.4 million), and lower oil prices ($0.2 million), partially offset by net excess costs activity ($0.8 million) and decreased taxes, transportation, and production expenses[88] - Administration expense increased by $73,656 from the prior year quarter, mainly due to the timing of expense receipt and payment, and terms of professional services[89] Net Profits Income Examines the factors influencing net profits income, including sales volumes, prices, and associated costs for oil and gas properties - Net profits income is primarily affected by oil and gas sales volumes, oil and gas sales prices, and costs deducted in its calculation[101] Summary of Net Profits Income Calculation (Q1 2024 vs. Q1 2023) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Sales Volumes | | | | | Oil (Bbls) - Underlying properties | 42,662 | 43,158 | (1%) | | Gas (Mcf) - Underlying properties | 253,799 | 811,264 | (69%) | | Average Sales Prices | | | | | Oil (per Bbl) | $75.30 | $80.49 | (6%) | | Gas (per Mcf) | $4.57 | $5.43 | (16%) | | Revenues | | | | | Oil sales | $3,212,363 | $3,474,032 | (8%) | | Gas sales | $1,159,078 | $4,403,962 | (74%) | | Total Revenues | $4,371,441 | $7,877,994 | (45%) | | Costs | | | | | Taxes, transportation and other | $537,506 | $1,232,816 | (56%) | | Production expense | $1,565,161 | $1,592,149 | (2%) | | Development costs | $1,113,069 | $593,964 | 87% | | Excess costs | $(940,783) | $111,616 | (943%) | | Total Costs | $2,274,953 | $3,530,545 | (36%) | | Net Proceeds | $2,096,488 | $4,347,449 | (52%) | | Net Profits Income | $1,837,741 | $3,912,704 | (53%) | - Oil sales volumes decreased 1% primarily due to natural production decline, while gas sales volumes decreased 69% mainly due to the absence of receipts for New Mexico royalty interest net profits interests related to March 2018-December 2020 production and natural decline[48][106] - The average oil price decreased 6% to $75.30 per Bbl, and the average gas price decreased 16% to $4.57 per Mcf for Q1 2024[93][118] - Development costs increased 87% for Q1 2024, primarily due to the timing of cost receipts for drilling activity that occurred in the second half of 2023 for the Hewitt Unit[71] - Taxes, transportation, and other costs decreased 56% for Q1 2024, mainly due to decreased gas deductions and gas severance taxes on lower revenues[119] - Production expense decreased 2% for Q1 2024, primarily due to lower processing costs driven by timing of receipts, partially offset by increased repairs and maintenance costs and labor costs[120] Distributions to Unitholders Presents the per-unit distributions declared to unitholders for the first quarter of 2024 Distributions per Unit for Q1 2024 | Record Date | Payment Date | Distribution per Unit | | :------------------- | :------------------- | :-------------------- | | January 31, 2024 | February 14, 2024 | $0.115323 | | February 29, 2024 | March 14, 2024 | $0.114156 | | March 28, 2024 | April 12, 2024 | $0.019390 | | Total | | $0.248869 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the registrant qualifies as a smaller reporting company - This information is no longer required for the Trust upon qualifying as a smaller reporting company[110] Item 4. Controls and Procedures The Trustee evaluated the effectiveness of the Trust's disclosure controls and procedures, concluding they are effective. There have been no material changes in internal control over financial reporting during the period - The Trustee concluded that the Trust's disclosure controls and procedures are effective in recording, processing, summarizing, and timely reporting information required under the Securities Exchange Act of 1934[14] - There has been no material change in the Trust's internal control over financial reporting during the period covered by this report[14] PART II - OTHER INFORMATION This section provides additional information including risk factors, other disclosures, and required exhibits for the Trust Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Trust's Annual Report on Form 10-K for the year ended December 31, 2023 - No material changes in the risk factors were disclosed compared to the Trust's Annual Report on Form 10-K for the year ended December 31, 2023[123] Item 5. Other Information The Trust does not have directors or officers, and therefore, no Rule 10b5-1 trading arrangements were adopted or terminated - The Trust does not have any directors or officers, and as a result, no Rule 10b5-1 trading arrangements were adopted or terminated[112] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including required certifications - Exhibits include Rule 13a-14(a)/15d-14(a) Certification and Section 1350 Certification[113] Signatures This section contains the required signatures for the quarterly report, confirming its submission - The report was signed on May 14, 2024, by Wendi Powell, Upstream Controller, and Nancy Willis, Director of Royalty Trust Services, on behalf of Argent Trust Company, Trustee[19][115]