Cross Timbers Royalty Trust 10-Q, filed Nov 14, 2022
Cross Timbers Royalty Trust (CRT)
About this 10-Q
Cross Timbers Royalty Trust filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Cross Timbers Royalty Trust
(Exact name of registrant as specified in its charter)
| Texas | 1-10982 | 75-6415930 | ||
| (State or other jurisdiction of incorporation or organization) |
(Commission File Number) | (I.R.S. Employer Identification No.) |
c/o The Corporate Trustee:
Simmons Bank
2911 Turtle Creek Blvd, Suite 850
Dallas, Texas 75219
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (855) 588-7839
(Former name, former address and former fiscal year, if change since last report) NONE
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading symbol |
Name of each exchange on which registered | ||
| Units of Beneficial Interest | CRT | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer |
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☐ |
Accelerated filer |
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☐ | |||||
| Non-accelerated filer |
☑ |
Smaller reporting company |
☑ | |||||||
| Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of units of beneficial interest outstanding, as of the latest practicable date:
Outstanding as of November 1, 2022
6,000,000
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CROSS TIMBERS ROYALTY TRUST
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
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CROSS TIMBERS ROYALTY TRUST
The following are definitions of significant terms used in this Form 10-Q:
| Bbl |
Barrel (of oil) |
| Mcf |
Thousand cubic feet (of natural gas) |
| MMBtu |
One million British Thermal Units, a common energy measurement |
| net proceeds |
Gross proceeds received by XTO Energy from sale of production from the underlying properties, less applicable costs, as defined in the net profits interest conveyances. |
| net profits income |
Net proceeds multiplied by the applicable net profits percentage of 75% or 90%, which is paid to the Trust by XTO Energy. “Net profits income” is referred to as “royalty income” for income tax purposes. |
| net profits interest |
An interest in an oil and gas property measured by net profits from the sale of production, rather than a specific portion of production. The following defined net profits interests were conveyed to the Trust from the underlying properties: |
| 90% net profits interests - interests that entitle the Trust to receive 90% of the net proceeds from the underlying properties that are substantially all royalty or overriding royalty interests in Texas, Oklahoma and New Mexico. |
| 75% net profits interests - interests that entitle the Trust to receive 75% of the net proceeds from the underlying properties that are working interests in Texas and Oklahoma. |
| royalty interest |
A non-operating interest in an oil and gas property that provides the owner a specified share of production without any production expense or development costs. |
| underlying properties |
XTO Energy’s interest in certain oil and gas properties from which the net profits interests were conveyed. The underlying properties include royalty and overriding royalty interests in producing and nonproducing properties in Texas, Oklahoma and New Mexico, and working interests in producing properties located in Texas and Oklahoma. |
| working interest |
An operating interest in an oil and gas property that provides the owner a specified share of production that is subject to all production expense and development costs. |
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CROSS TIMBERS ROYALTY TRUST
PART I - FINANCIAL INFORMATION
The condensed financial statements included herein are presented, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Unless specified otherwise, all amounts included herein are presented in U.S. dollars. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Trust’s latest Annual Report on Form 10-K. In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the assets, liabilities and trust corpus of the Cross Timbers Royalty Trust at September 30, 2022, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2022 and 2021, have been included. Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.
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CROSS TIMBERS ROYALTY TRUST
Condensed Statements of Assets, Liabilities and Trust Corpus (Unaudited)
| September 30, 2022 |
December 31, 2021 |
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| ASSETS |
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| Cash and short-term investments |
$ | 2,200,234 | $ | 1,822,750 | ||||
| Interest to be received |
2,172 | 24 | ||||||
| Net profits interests in oil and gas properties - net (Note 1) |
3,025,815 | 3,266,356 | ||||||
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| $ | 5,228,221 | $ | 5,089,130 | |||||
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| LIABILITIES AND TRUST CORPUS |
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| Distribution payable to unitholders |
$ | 1,202,406 | $ | 822,774 | ||||
| Expense reserve (a) |
1,000,000 | 1,000,000 | ||||||
| Trust corpus (6,000,000 units of beneficial interest authorized and outstanding) |
3,025,815 | 3,266,356 | ||||||
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| $ | 5,228,221 | $ | 5,089,130 | |||||
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| (a) | Expense reserve allows the Trustee to pay its obligations should it be unable to pay them out of the net profits income. The reserve is currently funded at $1,000,000. |
The accompanying notes to condensed financial statements are an integral part of these statements.
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CROSS TIMBERS ROYALTY TRUST
Condensed Statements of Distributable Income (Unaudited)
| Three Months Ended September 30 |
Nine Months Ended September 30 |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net profits income |
$ | 3,817,493 | $ | 2,455,493 | $ | 9,536,782 | $ | 5,602,598 | ||||||||
| Interest income |
4,795 | 31 | 5,737 | 123 | ||||||||||||
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| Total income |
3,822,288 | 2,455,524 | 9,542,519 | 5,602,721 | ||||||||||||
| Administration expense |
86,028 | 153,822 | 562,331 | 592,211 | ||||||||||||
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| Distributable income |
$ | 3,736,260 | $ | 2,301,702 | $ | 8,980,188 | $ | 5,010,510 | ||||||||
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| Distributable income per unit (6,000,000 units) |
$ | 0.622710 | $ | 0.383617 | $ | 1.496698 | $ | 0.835085 | ||||||||
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The accompanying notes to condensed financial statements are an integral part of these statements.
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CROSS TIMBERS ROYALTY TRUST
Condensed Statements of Changes in Trust Corpus (Unaudited)
| Three Months Ended September 30 |
Nine Months Ended September 30 |
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| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Trust corpus, beginning of period |
$ | 3,096,807 | $ | 3,339,402 | $ | 3,266,356 | $ | 7,523,065 | ||||||||
| Amortization of net profits interests |
(70,992 | ) | (75,099 | ) | (240,541 | ) | (4,258,762 | ) | ||||||||
| Distributable income |
3,736,260 | 2,301,702 | 8,980,188 | 5,010,510 | ||||||||||||
| Distributions declared |
(3,736,260 | ) | (2,301,702 | ) | (8,980,188 | ) | (5,010,510 | ) | ||||||||
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| Trust corpus, end of period |
$ | 3,025,815 | $ | 3,264,303 | $ | 3,025,815 | $ | 3,264,303 | ||||||||
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The accompanying notes to condensed financial statements are an integral part of these statements.
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CROSS TIMBERS ROYALTY TRUST
Notes to Condensed Financial Statements (Unaudited)
| 1. | Basis of Accounting |
The financial statements of Cross Timbers Royalty Trust (the “Trust”) are prepared on the following basis and are not intended to present financial position and results of operations in conformity with U.S. generally accepted accounting principles (“GAAP”):
| - | Net profits income recorded for a month is the amount computed and paid by XTO Energy Inc. (“XTO Energy”), the owner of the underlying properties, to Simmons Bank, as trustee (the “Trustee”) for the Trust. XTO Energy is a wholly owned subsidiary of Exxon Mobil Corporation. Net profits income consists of net proceeds received by XTO Energy from the underlying properties in the prior month, multiplied by net profit percentages of 90% for the 90% net profits interests, and 75% for the 75% net profits interests. |
| - | Costs deducted in the calculation of net proceeds for the 90% net profits interests generally include applicable taxes, transportation, marketing and legal costs. In addition to those costs, the 75% net profits interests include deductions for production expense, development costs, operating charges and other costs. |
| - | Net profits income is computed separately for each of five conveyances under which the net profits interests were conveyed to the Trust. 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 the other conveyances. |
| - | Interest income and distribution payable to unitholders include interest earned on the previous month’s investment. |
| - | Trust expenses are recorded based on liabilities paid and cash reserves established by the Trustee for liabilities and contingencies. |
| - | Distributions to unitholders are recorded when declared by the Trustee. |
The Trust’s financial statements differ from those prepared in conformity with U.S. GAAP because revenues are recognized when received rather than accrued in the month of production, expenses are recognized when paid rather than when incurred, and certain cash reserves may be established by the Trustee for contingencies which would not be recorded under U.S. GAAP. This comprehensive basis of accounting other than U.S. GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with U.S. GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements.
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Impairment of Net Profits Interests
The Trustee reviews the Trust’s net profits interests (“NPI”) in oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the NPI may not be recoverable. In general, the Trustee does not view temporarily low prices as an indication of impairment. The markets for crude oil and natural gas have a history of significant price volatility and though prices will occasionally drop significantly, industry prices over the long term will continue to be driven by market supply and demand. If events and circumstances indicate the carrying value may not be recoverable, the Trustee would use the estimated undiscounted future net cash flows from the NPI to evaluate the recoverability of the Trust assets. If the undiscounted future net cash flows from the NPI are less than the NPI carrying value, the Trust would recognize an impairment loss for the difference between the NPI carrying value and the estimated fair value of the NPI. The determination as to whether the NPI is impaired requires a significant amount of judgment by the Trustee and is based on the best information available to the Trustee at the time of the evaluation, including commodity pricing and other information provided by XTO Energy such as estimates of future production and development and operating expenses.
During the third quarter of 2022, no trigger event occurred that would indicate a need for an impairment assessment. Accordingly, there was no impairment of the NPI as of September 30, 2022. Any impairment recorded for book purposes will not result in a loss deductible by the unitholders for tax purposes until the loss is recognized.
Net profits interests in oil and gas properties
The initial carrying value of the net profits interests of $61,100,449 represents XTO Energy’s historical net book value for the interests on February 12, 1991, the creation date of the Trust. Amortization of the net profits interests is calculated on a unit-of-production basis using proved reserves and is charged directly to trust corpus. Accumulated amortization was $58,074,634 as of September 30, 2022 and $57,834,093 as of December 31, 2021. Amortization of the NPI does not impact unitholder distributions.
| 2. | Income Taxes |
For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. Accordingly, no provision for income taxes has been made in the financial statements. The unitholders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each unitholder at the time such income is received or accrued by the Trust and not when distributed by the Trust. Impairments recorded for book purposes will not result in a loss deductible by the unitholders for tax purposes until the loss is recognized.
All revenues from the Trust are from sources within Texas, Oklahoma or New Mexico. Because it distributes all of its net income to unitholders, the Trust has not been taxed at the trust level in New Mexico or Oklahoma. While the Trust has not owed tax, the Trustee is required to file an Oklahoma income tax return reflecting the income and deductions of the Trust attributable to properties located in that state, along with a schedule that includes information regarding distributions to unitholders. Oklahoma and New Mexico tax the income of nonresidents from real property located within those states, and the Trust has been advised by counsel that such states will tax nonresidents on income from the net profits interests located in those states. Oklahoma and New Mexico also impose a corporate income tax that may apply to unitholders organized as corporations (subject to certain exceptions for S corporations and limited liability companies, depending on their treatment for federal income tax purposes).
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Texas imposes a franchise tax at a rate of 0.75% on gross revenues less certain deductions, as specifically set forth in the Texas franchise tax statutes. Entities subject to tax generally include trusts and most other types of entities that provide limited liability protection, unless otherwise exempt. Trusts that receive at least 90% of their federal gross income from certain passive sources, including royalties from mineral properties and other non-operated mineral interest income, and do not receive more than 10% of their income from operating an active trade or business, generally are exempt from the Texas franchise tax as “passive entities.” The Trust has been and expects to continue to be exempt from Texas franchise tax as a passive entity. Because the Trust should be exempt from Texas franchise tax at the trust level as a passive entity, each unitholder that is a taxable entity under the Texas franchise tax will generally be required to include its Texas portion of Trust revenues in its own Texas franchise tax computation. This revenue is sourced to Texas under provisions of the Texas Administrative Code providing that such income is sourced according to the principal place of business of the Trust, which is Texas.
The Trust may be required to bear a portion of the settlement costs arising from the Chieftain royalty class action settlement. For information on contingencies, see Note 3 to Condensed Financial Statements. In the event that the Trust is determined to be responsible for such costs, XTO Energy will deduct the costs in its calculation of the net profits income payable to the Trust from the applicable net profits interests. Thus, for unitholders, the portion of the settlement payment to the Chieftain royalty owner class for which the Trust is determined to be responsible will be reflected through a reduction in net profits income received from the Trust and thus in a reduction in the gross royalty income reported by and taxable to the unitholders. In the event that the Trustee objects to such claimed reductions, the Trustee may also incur legal fees in representing the Trust’s interests. For unitholders, such costs would be reflected through an increase in the Trust’s administrative expenses, which would be deductible by unitholders in determining the net royalty income from the Trust.
Each unitholder should consult their own tax advisor regarding income tax requirements, if any, applicable to such person’s ownership of Trust units.
Unitholders should consult the Trust’s latest annual report on Form 10-K for a more detailed discussion of federal and state tax matters.
| 3. | Contingencies |
Litigation
A federal district court approved the settlement of a royalty class action lawsuit against XTO Energy Inc. (Chieftain Royalty Company v. XTO Energy Inc.) in March 2018. In July 2018, the class plaintiffs submitted their plan to allocate the settlement funds among members of the class. After that plan of allocation was approved, XTO Energy advised the Trustee that, based upon that plan, approximately $40,000 should be allocated to the Trust as additional production costs.
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The Trustee has objected to similar claims relating to the Chieftain settlement with respect to another trust for which it serves as trustee (the Hugoton Royalty Trust) in an arbitration styled Simmons Bank (successor to Southwest Bank and Bank of America, N.A.) vs. XTO Energy Inc. through the American Arbitration Association. In that arbitration, the Trustee requested a declaratory judgment that the Chieftain settlement is not a production cost and that XTO Energy is prohibited from charging the settlement as a production cost under the conveyance or otherwise reducing the Hugoton Royalty Trust’s payments now or in the future as a result of the Chieftain litigation. Similar issues have arisen as between XTO Energy and the Trust, but it was agreed those issues would be considered once the Panel issued its decisions with respect to the Hugoton Royalty Trust. On January 20, 2021, the Panel issued its Corrected Interim Final Award (i) “reject[ing] the Trust’s contention that XTO has no right under the Conveyance to charge the [Hugoton Royalty] Trust with amounts XTO paid under section 1.18(a)(i) as royalty obligations to settle the Chieftain litigation” and (ii) stating “[t]he next phase will determine how much of the Chieftain settlement can be so charged, if any of it can be, in the exercise of the right found by the Panel.” Following briefing by both parties, on May 18, 2021, the Panel issued its second interim final award over the amount of XTO Energy’s settlement in the Chieftain class action lawsuit that can be charged to the Hugoton Royalty Trust as a production cost. The allocation of a portion of the Chieftain settlement to the Trust will be considered in the now re-commenced arbitration. The hearing date for the arbitration is scheduled to take place May 30-31, 2023.
Other
Several states have enacted legislation requiring state income tax withholding from payments made to nonresident recipients of oil and gas proceeds. After consultation with its tax counsel, the Trustee believes that it is not required to withhold on payments made to the unitholders. However, regulations are subject to change by the various states, which could change this conclusion. Should amounts be withheld on payments made to the Trust or the unitholders, distributions to the unitholders would be reduced by the required amount, subject to the filing of a claim for refund by the Trust or unitholders for such amount.
| 4. | 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 other conveyances.
The following summarizes excess costs activity, cumulative excess costs balances and accrued interest to be recovered by conveyance as calculated by XTO Energy:
| Underlying | ||||||||||||
| TX WI | OK WI | Total | ||||||||||
| Cumulative excess costs remaining at 12/31/21 |
$ | 5,767,457 | $ - | $ | 5,767,457 | |||||||
| Net excess costs (recovery) for the quarter ended 3/31/22 |
(3,882,904 | ) | 70,898 | (3,812,006 | ) | |||||||
| Net excess costs (recovery) for the quarter ended 6/30/22 |
(293,494 | ) | (70,898 | ) | (364,392 | ) | ||||||
| Net excess costs (recovery) for the quarter ended 9/30/22 |
(239,731 | ) | - | (239,731 | ) | |||||||
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| Cumulative excess costs remaining at 9/30/22 |
1,351,328 | - | 1,351,328 | |||||||||
| Accrued interest at 9/30/22 |
614,378 | - | 614,378 | |||||||||
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| Total remaining to be recovered at 9/30/22 |
$ | 1,965,706 | $ - | $ | 1,965,706 | |||||||
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| NPI | ||||||||||||
| TX WI | OK WI | Total | ||||||||||
| Cumulative excess costs remaining at 12/31/21 |
$ | 4,325,593 | $ - | $ | 4,325,593 | |||||||
| Net excess costs (recovery) for the quarter ended 3/31/22 |
(2,912,178 | ) | 53,174 | (2,859,004 | ) | |||||||
| Net excess costs (recovery) for the quarter ended 6/30/22 |
(220,120 | ) | (53,174 | ) | (273,294 | ) | ||||||
| Net excess costs (recovery) for the quarter ended 9/30/22 |
(179,799 | ) | - | (179,799 | ) | |||||||
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| Cumulative excess costs remaining at 9/30/22 |
1,013,496 | - | 1,013,496 | |||||||||
| Accrued interest at 9/30/22 |
460,783 | - | 460,783 | |||||||||
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| Total remaining to be recovered at 9/30/22 |
$ | 1,474,279 | $ - | $ | 1,474,279 | |||||||
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For the quarter ended September 30, 2022, excess costs of $239,731 ($179,799 net to the Trust) were recovered on properties underlying the Texas working interest net profits interests.
Underlying cumulative excess costs for the Texas working interest conveyance remaining as of September 30, 2022 totaled $2.0 million ($1.5 million net to the Trust), including accrued interest of $0.6 million ($0.5 million net to the Trust).
| 5. | XTO Energy Inc. |
In computing net proceeds for the 75% net profits interests, XTO Energy deducts an overhead charge as reimbursement for costs associated with monitoring these interests. This monthly overhead charge at September 30, 2022 was $44,445 ($33,334 net to the Trust) and is subject to annual adjustment based on an oil and gas industry index.
XTO Energy deducts a monthly overhead charge for reimbursement of administrative expenses as operator of the Hewitt Unit, which is one of the properties underlying the Oklahoma 75% net profits interests. As of September 30, 2022, this monthly charge was approximately $31,000 ($23,000 net to the Trust) and is subject to annual adjustment based on an oil and gas industry index. Other than this property, XTO Energy and ExxonMobil do not operate or control any of the properties underlying the 75% net profits interests.
| 6. | Administration Expense |
Administrative expenses are incurred so that the Trustee may meet its reporting obligations to the unitholders and regulatory entities and otherwise manage the administrative functions of the Trust. These obligations include, but are not limited to, all expenses, taxes, compensation to the Trustee for managing the Trust, fees to consultants, accountants, attorneys, transfer agents, other professional and expert persons, expenses for clerical and other administrative assistance, and fees and expenses for all other services.
Item 2. Trustee’s Discussion and Analysis
The following discussion should be read in conjunction with the Trustee’s discussion and analysis contained in the Trust’s 2021 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.
Distributable Income
Quarter
For the quarter ended September 30, 2022, net profits income was $3,817,493 compared to $2,455,493 for third quarter 2021. This 55% increase in net profits income is primarily the result of increased oil and gas prices ($2.4 million), partially offset by decreased oil production ($0.4 million), increased production expenses ($0.3 million), increased taxes, transportation and other costs ($0.1 million), increased development costs ($0.1 million), and net excess costs activity ($0.1 million). See “Net Profits Income” below.
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After considering interest income of $4,795 and administration expense of $86,028, distributable income for the quarter ended September 30, 2022 was $3,736,260, or $0.622710 per unit of beneficial interest. Administration expense for the quarter decreased $67,794 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 third quarter 2021, distributable income was $2,301,702, or $0.383617 per unit.
Distributions to unitholders for the quarter ended September 30, 2022 were:
| Record Date | Payment Date | Distribution per Unit |
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| July 29, 2022 |
August 12, 2022 | $ | 0.191690 | |||||
| August 31, 2022 |
September 15, 2022 | 0.230619 | ||||||
| September 30, 2022 |
October 17, 2022 | 0.200401 | ||||||
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| $ | 0.622710 | |||||||
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Nine Months
For the nine months ended September 30, 2022, net profits income was $9,536,782 compared to $5,602,598 for the same 2021 period. This 70% increase in net profits income is primarily the result of increased oil and gas production ($4.6 million), and increased oil and gas prices ($4.5 million), partially offset by net excess costs activity ($3.1 million), increased development costs ($1.0 million), increased production expenses ($0.6 million), and increased taxes, transportation and other costs ($0.5 million). See “Net Profits Income” below.
After considering interest income of $5,737 and administration expense of $562,331, distributable income for the nine months ended September 30, 2022 was $8,980,188, or $1.496698 per unit of beneficial interest. Administration expense for the nine months ended September 30, 2022 decreased $29,880 from the prior year nine-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 nine months ended September 30, 2021, distributable income was $5,010,510, or $0.835085 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.
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The following is a summary of the calculation of net profits income received by the Trust:
| Three Months | Nine Months | |||||||||||||||||||||||
| Ended September 30 (a) | Increase | Ended September 30 (a) | Increase | |||||||||||||||||||||
| 2022 | 2021 | (Decrease) | 2022 | 2021 | (Decrease) | |||||||||||||||||||
| Sales Volumes |
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| Oil (Bbls) (b) |
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| Underlying properties |
41,219 | 46,595 | (12%) | 199,710 | 130,861 | 53% | ||||||||||||||||||
| Average per day |
448 | 506 | (11%) | 732 | 479 | 53% | ||||||||||||||||||
| Net profits interests |
19,457 | 21,632 | (10%) | 48,739 | 45,691 | 7% | ||||||||||||||||||
| Gas (Mcf) (b) |
||||||||||||||||||||||||
| Underlying properties |
321,952 | 318,902 | 1% | 1,096,395 | 975,722 | 12% | ||||||||||||||||||
| Average per day |
3,538 | 3,504 | 1% | 4,016 | 3,574 | 12% | ||||||||||||||||||
| Net profits interests |
272,896 | 277,361 | (2%) | 924,388 | 834,899 | 11% | ||||||||||||||||||
| Average Sales Prices |
||||||||||||||||||||||||
| Oil (per Bbl) |
$ 101.80 | $ 62.29 | 63% | $ 75.11 | $ 55.40 | 36% | ||||||||||||||||||
| Gas (per Mcf) |
$ 8.93 | $ 5.49 | 63% | $ 7.45 | $ 4.67 | 60% | ||||||||||||||||||
| Revenues |
||||||||||||||||||||||||
| Oil sales |
$4,196,109 | $2,902,419 | 45% | $15,000,434 | $7,249,378 | 107% | ||||||||||||||||||
| Gas sales |
2,875,462 | 1,751,177 | 64% | 8,166,523 | 4,556,465 | 79% | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Revenues |
7,071,571 | 4,653,596 | 52% | 23,166,957 | 11,805,843 | 96% | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Costs |
||||||||||||||||||||||||
| Taxes, transportation and other |
704,688 | 528,941 | 33% | 2,258,139 | 1,625,048 | 39% | ||||||||||||||||||
| Production expense (c) |
1,514,225 | 1,115,262 | 36% | 4,193,132 | 3,405,539 | 23% | ||||||||||||||||||
| Development costs |
168,430 | 45,849 | 267% | 1,357,945 | 50,378 | N/A | ||||||||||||||||||
| Excess costs (d) |
239,731 | 138,207 | 73% | 4,417,097 | 291,309 | N/A | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Costs |
2,627,074 | 1,828,259 | 44% | 12,226,313 | 5,372,274 | 128% | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Other Proceeds |
- | - | - | - | (33,956) | - | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net Proceeds |
$4,444,497 | $2,825,337 | 57% | $10,940,644 | $6,399,613 | 71% | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net Profits Income |
$3,817,493 | $2,455,493 | 55% | $9,536,782 | $5,602,598 | 70% | ||||||||||||||||||
|
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|
|
|
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|
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|
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| (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 September 30 generally represent oil production for the period May through July and gas production for the period April through June and (2) oil and gas sales for the nine-months ended September 30 generally represent oil production for the period November through July and gas production for the period October through June. |
| (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. |
14
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The following are explanations of significant variances on the underlying properties from third quarter 2021 to third quarter 2022 and from the first nine months of 2021 to the comparable period in 2022:
Sales Volumes
Oil
Oil sales volumes decreased 12% for the third quarter primarily because of timing of cash receipts and natural production decline. Oil sales volumes increased 53% for the nine-month period primarily because of receipt of oil sales by the operator of the North Cowden Unit that had been reversed by the oil purchaser in fourth quarter 2021, partially offset by natural production decline.
Gas
Gas sales volumes increased 1% for the third quarter and increased 12% for the nine-month period primarily because of timing of cash receipts, partially offset by natural production decline.
The estimated rate of natural production decline on the underlying oil and gas properties is approximately 6% to 8% a year.
Sales Prices
Oil
The average oil price for the third quarter increased 63% to $101.80 per Bbl and for the nine-month period increased 36% to $75.11 per Bbl.
Gas
Gas prices for the third quarter increased 63% to $8.93 per Mcf and for the nine-month period increased 60% to $7.45 per Mcf.
Costs
Taxes, Transportation and Other
Taxes, transportation and other costs increased 33% for the third quarter primarily because of production taxes on higher revenues, partially offset by decreased property taxes. Taxes, transportation and other costs increased 39% for the nine-month period primarily because of production taxes on higher revenues, increased gas deductions, and decreased oil production tax refunds, partially offset by decreased property taxes.
Production Expense
Production expense increased 36% for the third quarter and 23% for the nine-month period primarily because of increased gas processing, repairs and maintenance, and power and fuel costs.
15
Table of Contents
Development Costs
Development costs related to properties underlying the 75% net profits interests increased $0.1 million for the third quarter and $1.3 million for the nine-month period primarily because of increased recompletion, drilling and completion activity in the Hewitt Unit. There are nine wells currently being drilled in the Hewitt Unit which are expected to be complete by year-end.
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 working interest conveyance remaining as of September 30, 2022 totaled $2.0 million ($1.5 million net to the Trust), including accrued interest of $0.6 million ($0.5 million net to the Trust). For further information on excess costs, see Note 4 to Condensed Financial Statements.
Trustee Resignation
On November 4, 2021, the Trustee announced that it has entered into an agreement with Argent Trust Company, a Tennessee chartered trust company (“Argent”), pursuant to which the Trustee will be resigning as trustee of the Trust and will nominate Argent as successor trustee of the Trust. The Trustee’s resignation as trustee, and Argent’s appointment as successor trustee, are subject to certain conditions set forth in the agreement, including approval by the unitholders of the Trust and of certain other trusts of which Simmons Bank acts as trustee (or a court) of (i) Argent’s appointment as successor trustee and (ii) any amendments to the indenture of the Trust and the trust agreements and indentures of the other trusts necessary to permit Argent to serve as successor trustee.
At a special meeting of the Trust’s unitholders held May 4, 2022, the unitholders of the Trust voted to approve the appointment of Argent Trust Company as successor trustee to serve as trustee of the Trust once the resignation of Simmons Bank, the current Trustee of the Trust, takes effect. The proposal of related amendments to the Trust indenture was not approved. On October 13, 2022, upon request of the Trustee and a unitholder of the Trust, the District Court of Tarrant County, Texas, 153rd Judicial District approved an order modifying the Trust indenture so that Argent Trust Company would qualify as a successor trustee. The effective date of the Trustee’s resignation and appointment of Argent Trust Company as successor trustee is anticipated to be December 30, 2022, subject to the satisfaction or waiver of the conditions set forth in the Trustee’s notice of resignation and the Trust’s definitive proxy statement.
Contingencies
For information on contingencies, see Note 3 to Condensed Financial Statements.
16
Table of Contents
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, 2021, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable. Upon qualifying as a smaller reporting company, this information is no longer required.
Item 4. Controls and Procedures
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.
17
Table of Contents
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, 2021.
| (4) |
| (31) |
| (32) |
| (99) |
18
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| CROSS TIMBERS ROYALTY TRUST By SIMMONS BANK, TRUSTEE |
||||||||
| By |
/s/ NANCY WILLIS |
|||||||
| Nancy Willis | ||||||||
|
|
Vice President | |||||||
| EXXON MOBIL CORPORATION | ||||||||
| Date: November 14, 2022 |
By | /s/ DAVID LEVY |
||||||
| David Levy | ||||||||
| Vice President - Upstream Business Services | ||||||||
19
EXHIBIT 31
CERTIFICATIONS
I, Nancy Willis, certify that:
| 1. | I have reviewed this report on Form 10-Q of Cross Timbers Royalty Trust, for which Simmons Bank acts as Trustee; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the periods presented in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), or for causing such controls and procedures to be established and maintained, for the registrant and I have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
In giving the certifications in paragraphs 4 and 5 above, I have relied to the extent I consider reasonable on information provided to me by XTO Energy Inc.
| Date: November 14, 2022 |
By |
/s/ NANCY WILLIS |
||||
| Nancy Willis | ||||||
| Vice President | ||||||
| Simmons Bank |
EXHIBIT 32
Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Cross Timbers Royalty Trust (the “Trust”) on Form 10-Q for the quarterly period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, not in its individual capacity but solely as the Trustee of the Trust, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to its knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. |
| Simmons Bank, | ||||||
| Trustee for Cross Timbers Royalty Trust | ||||||
| November 14, 2022 |
By | /s/ NANCY WILLIS |
||||
| Nancy Willis | ||||||
| Vice President | ||||||