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, 2020

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-10982

 

 

Cross Timbers Royalty Trust

(Exact name of registrant as specified in its charter)

 

 

 

Texas		75-6415930
(State or other jurisdiction of incorporation or organization)		(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)

(855) 588-7839

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if change since last report)

 

 

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		☐		Accelerated filer		☒
		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, 2020

6,000,000

 

 

 

CROSS TIMBERS ROYALTY TRUST

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

 

				Page
		Glossary of Terms		3
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)		4
		Report of Independent Registered Public Accounting Firm		5
		Condensed Statements of Assets, Liabilities and Trust Corpus at September 30, 2020 and December 31, 2019		6
		Condensed Statements of Distributable Income for the Three and Nine Months Ended September 30, 2020 and 2019		7
		Condensed Statements of Changes in Trust Corpus for the Three and Nine Months Ended September 30, 2020 and 2019		8
		Notes to Condensed Financial Statements		9
Item 2.		Trustee’s Discussion and Analysis		13
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		17
Item 4.		Controls and Procedures		18
PART II.		OTHER INFORMATION
Item 1A.		Risk Factors		18
Item 6.		Exhibits		19
		Signatures		20

 

2

CROSS TIMBERS ROYALTY TRUST

 

GLOSSARY OF TERMS

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 (and overriding 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.

 

3

CROSS TIMBERS ROYALTY TRUST

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial

Statements.

The condensed financial statements included herein are presented, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. 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, 2020, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2020 and 2019, have been included. Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. The condensed financial statements as of September 30, 2020, and for the three-month and nine-month periods ended September 30, 2020 and 2019 have been subjected to a review by PricewaterhouseCoopers LLP, the Trust’s independent registered public accounting firm, whose report is included herein.

 

4

Report of Independent Registered Public Accounting Firm

To the Unitholders of Cross Timbers Royalty Trust and

Simmons Bank, Trustee

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed statement of assets, liabilities and trust corpus of Cross Timbers Royalty Trust (the “Trust”) as of September 30, 2020, and the related condensed statements of distributable income and of changes in trust corpus for the three-month and nine-month periods ended September 30, 2020 and 2019, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with the modified cash basis of accounting described in Note 1.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of assets, liabilities and trust corpus as of December 31, 2019, and the related statements of distributable income and of changes in trust corpus for the year then ended (not presented herein), and in our report dated March 12, 2020, which included a paragraph describing the modified cash basis of accounting, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2019, is fairly stated, in all material respects, in relation to the statement of assets, liabilities and trust corpus from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Trustee. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Basis of Accounting

As described in Note 1, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

November 6, 2020

 

5

CROSS TIMBERS ROYALTY TRUST

 

 

Condensed Statements of Assets, Liabilities and Trust Corpus (Unaudited)

 

		September 30, 2020				December 31, 2019
ASSETS
Cash and short-term investments		$	1,192,251			$	1,501,398
Interest to be received			31				1,642
Net profits interests in oil and gas properties - net (Note 1)			7,655,559				8,161,795
		$	8,847,841			$	9,664,835
LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders		$	192,282			$	503,040
Expense reserve (a)			1,000,000				1,000,000
Trust corpus (6,000,000 units of beneficial interest authorized and outstanding)			7,655,559				8,161,795
		$	8,847,841			$	9,664,835

 

(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.

 

6

CROSS TIMBERS ROYALTY TRUST

 

 

Condensed Statements of Distributable Income (Unaudited)

 

		Three Months Ended September 30								Nine Months Ended September 30
		2020				2019				2020				2019
Net profits income		$	829,258			$	1,272,845			$	4,107,869			$	4,466,126
Interest income			134				6,337				5,777				19,965
Total income			829,392				1,279,182				4,113,646				4,486,091
Administration expense			215,400				154,308				581,728				558,245
Distributable income		$	613,992			$	1,124,874			$	3,531,918			$	3,927,846
Distributable income per unit (6,000,000 units)		$	0.102332			$	0.187479			$	0.588653			$	0.654641

The accompanying notes to condensed financial statements are an integral part of these statements.

 

7

CROSS TIMBERS ROYALTY TRUST

 

 

Condensed Statements of Changes in Trust Corpus (Unaudited)

 

		Three Months Ended September 30								Nine Months Ended September 30
		2020				2019				2020				2019
Trust corpus, beginning of period		$	7,733,514			$	8,324,828			$	8,161,795			$	8,526,512
Amortization of net profits interests			(77,955	)			(87,057	)			(506,236	)			(288,741	)
Distributable income			613,992				1,124,874				3,531,918				3,927,846
Distributions declared			(613,992	)			(1,124,874	)			(3,531,918	)			(3,927,846	)
Trust corpus, end of period		$	7,655,559			$	8,237,771			$	7,655,559			$	8,237,771

The accompanying notes to condensed financial statements are an integral part of these statements.

 

8

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., 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.

 

9

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 information provided by XTO Energy such as estimates of future production and development and operating expenses.

During the third quarter 2020, no trigger event occurred indicating a need for further analysis. Accordingly, there was no impairment of the NPI as of September 30, 2020. The Trustee will continue to monitor the NPI for impairment in future periods in light of continued price volatility. Impairments recorded for book purposes will not result in a loss for tax purposes for the unitholders 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 and is charged directly to trust corpus. Accumulated amortization was $53,444,890 as of September 30, 2020 and $52,938,654 as of December 31, 2019.

 

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 for tax purposes for the unitholders 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 tax purposes).

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.

 

10

The Trust could potentially be required to bear a portion of the amounts paid by XTO to resolve the royalty claims asserted in the Chieftain class action lawsuit. 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 may deduct the costs in its calculation of the net profits income payable to the Trust from the applicable net profits interests. Thus, for unitholders, these costs 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. However, as discussed in Note 3 to Condensed Financial Statements, the Trustee and XTO have entered into an agreement regarding the timing of XTO making the accounting entries to allocate to the Trust its proportional share of the Chieftain settlement.

Each unitholder should consult his or her 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.

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) pursuant to a demand for arbitration styled Simmons Bank (successor to Southwest Bank and Bank of America, N.A.) vs. XTO Energy Inc. through the American Arbitration Association seeking 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. Therefore, the Trustee and XTO have agreed that XTO will defer making the accounting entries to allocate to the Trust its proportional share of the Chieftain settlement until the panel in the pending arbitration issues its final award on the Trustee’s request for a declaratory judgment expected to occur in the first quarter 2021. The Trustee intends to review any claimed reductions in payment to the Trust based on the facts and circumstances of the settlement.

 

11

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:

 

		Underlying
		TX WI				OK WI				Total
Cumulative excess costs remaining at 12/31/19		$	1,961,767			$	—			$	1,961,767
Net excess costs (recovery) for the quarter ended 3/31/20			(54,987	)			—				(54,987	)
Net excess costs (recovery) for the quarter ended 6/30/20			164,666				195,276				359,942
Net excess costs (recovery) for the quarter ended 9/30/20			103,667				91,580				195,247
Cumulative excess costs remaining at 9/30/20			2,175,113				286,856				2,461,969
Accrued interest at 9/30/20			407,753				2,191				409,944
Total remaining to be recovered at 9/30/20		$	2,582,866			$	289,047			$	2,871,913

 

		NPI
		TX WI				OK WI				Total
Cumulative excess costs remaining at 12/31/19		$	1,471,326			$	—			$	1,471,326
Net excess costs (recovery) for the quarter ended 3/31/20			(41,241	)			—				(41,241	)
Net excess costs (recovery) for the quarter ended 6/30/20			123,500				146,457				269,957
Net excess costs (recovery) for the quarter ended 9/30/20			77,750				68,685				146,435
Cumulative excess costs remaining at 9/30/20			1,631,335				215,142				1,846,477
Accrued interest at 9/30/20			305,814				1,643				307,457
Total remaining to be recovered at 9/30/20		$	1,937,149			$	216,785			$	2,153,934

For the quarter ended September 30, 2020, lower oil revenues due to a decline in prices resulted in excess costs on properties underlying the Texas and Oklahoma working interests.

 

12

Underlying cumulative excess costs for the Texas and Oklahoma working interest conveyances remaining as of September 30, 2020 totaled $2.9 million, including accrued interest of $0.4 million.

 

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, 2020 was $43,874 ($32,906 NPI) 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, 2020, this monthly charge was approximately $28,000 ($21,000 NPI) 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 underlying properties or related working interests.

 

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 2019 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 web site at www.crt-crosstimbers.com.

Distributable Income

Quarter

For the quarter ended September 30, 2020, net profits income was $829,258 compared to $1,272,845 for third quarter 2019. This 35% decrease in net profits income is primarily the result of lower oil and gas prices ($0.9 million), partially offset by decreased production expenses ($0.2 million), increased oil and gas production ($0.2 million), and decreased development costs ($0.1 million). See “Net Profits Income” below.

After considering interest income of $134 and administration expense of $215,400, distributable income for the quarter ended September 30, 2020 was $613,992, or $0.102332 per unit of beneficial interest. Administration expense for the quarter increased $61,092 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 and interest rates. For third quarter 2019, distributable income was $1,124,874, or $0.187479 per unit.

Distributions to unitholders for the quarter ended September 30, 2020 were:

 

Record Date		Payment Date		Distribution per Unit
July 31, 2020		August 14, 2020		$	0.032331
August 31, 2020		September 15, 2020			0.037954
September 30, 2020		October 15, 2020			0.032047
				$0.102332

 

13

Nine Months

For the nine months ended September 30, 2020, net profits income was $4,107,869 compared to $4,466,126 for the same 2019 period. This 8% decrease in net profits income is primarily the result of lower oil and gas prices ($2.3 million) and decreased gas production ($0.2 million), partially offset by increased oil production ($0.7 million), decreased production expenses ($0.5 million), decreased taxes, transportation and other costs ($0.4 million), decreased development costs ($0.4 million) and net excess costs activity on the Texas and Oklahoma working interest properties ($0.1 million).

See “Net Profits Income” below.

After considering interest income of $5,777 and administration expense of $581,728, distributable income for the nine months ended September 30, 2020 was $3,531,918, or $0.588653 per unit of beneficial interest. Administration expense for the nine months ended September 30, 2020 increased $23,483 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 and interest rates. For the nine months ended September 30, 2019, distributable income was $3,927,846, or $0.654641 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:

 

•

oil and gas sales volumes,

 

•

oil and gas sales prices, and

 

•

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.

 

14

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
		2020				2019				(Decrease)				2020				2019				(Decrease)
Sales Volumes
Oil (Bbls) (b)
Underlying properties			42,937				36,914				16%				148,645				129,971				14%
Average per day			467				401				16%				543				476				14%
Net profits interests			10,822				11,827				(8%)				54,787				36,264				51%
Gas (Mcf) (b)
Underlying properties			324,615				303,977				7%				947,698				1,017,774				(7%)
Average per day			3,567				3,340				7%				3,459				3,728				(7%)
Net profits interests			294,590				269,140				9%				847,109				886,158				(4%)
Average Sales Prices
Oil (per Bbl)		$	29.36			$	55.64				(47%)			$	41.15			$	52.64				(22%)
Gas (per Mcf)		$	2.37			$	3.11				(24%)			$	2.64			$	3.89				(32%)
Revenues
Oil sales		$	1,260,725			$	2,053,842				(39%)			$	6,116,353			$	6,842,133				(11%)
Gas sales			768,385				945,349				(19%)				2,500,615				3,962,750				(37%)
Total Revenues			2,029,110				2,999,191				(32%)				8,616,968				10,804,883				(20%)
Costs
Taxes, transportation and other			325,929				344,420				(5%)				974,073				1,472,039				(34%)
Production expense (c)			972,730				1,212,724				(20%)				3,307,422				3,924,149				(16%)
Development costs			4,300				178,699				(98%)				124,372				706,728				(82%)
Excess costs (d)			(195,247	)			(174,789	)			12%				(500,202	)			(335,932	)			49%
Total Costs			1,107,712				1,561,054				(29%)				3,905,665				5,766,984				(32%)
Other Proceeds
Interest Income			—				—				—				8,188				—				—
Net Proceeds		$	921,398			$	1,438,137				(36%)			$	4,719,491			$	5,037,899				(6%)
Net Profits Income		$	829,258			$	1,272,845				(35%)			$	4,107,869			$	4,466,126				(8%)

 

(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.

 

15

The following are explanations of significant variances on the underlying properties from third quarter 2019 to third quarter 2020 and from the first nine months of 2019 to the comparable period in 2020:

Sales Volumes

Oil

Oil sales volumes increased 16% for the third quarter and increased 14% for the nine-month period primarily because of the timing of cash receipts and decreased downtime, partially offset by natural production decline.

Gas

Gas sales volumes increased 7% for third quarter primarily because of timing of cash receipts, partially offset by natural production decline. Gas sales volumes decreased 7% for the nine-month period primarily because of natural production decline and timing of cash receipts.

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 decreased 47% to $29.36 per Bbl for the third quarter and decreased 22% to $41.15 per Bbl for the nine-month period. The third quarter 2020 oil price is primarily related to production from May through July 2020, when the average NYMEX price was $35.96 per Bbl.

Gas

Gas prices for the third quarter decreased 24% to $2.37 per Mcf and for the nine-month period decreased 32% to $2.64 per Mcf. The third quarter 2020 gas price is primarily related to production from April through June 2020, when the average NYMEX price was $1.72 per MMBtu.

Beginning in March 2020 and continuing into the third quarter of 2020, numerous events have continued to have a downward impact on sales prices of products produced from the underlying properties. The COVID-19 pandemic and the government responses to this pandemic have significantly decreased the demand for oil and gas. It is not clear at the present time when or whether the pandemic will lift or when government policies may change. Additionally, market factors, including abundant supplies, have also negatively impacted prices. Even when demand returns, it could take time for these accumulated supplies to decrease and a new market equilibrium, which may be lower than the pre-pandemic equilibrium, to emerge.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs decreased 5% for the third quarter primarily because of lower production taxes due to decreased revenues, partially offset by higher transportation costs due to increased gas volumes. Taxes, transportation and other costs decreased 34% for the nine-month period primarily because of lower production taxes due to decreased revenues and receipt of oil severance tax incentives, lower transportation costs due to decreased gas volumes, and lower property taxes due to the timing of property tax invoices.

 

16

Production Expense

Production expense decreased 20% for the third quarter and decreased 16% for the nine-month period primarily because of timing of charges, decreased field costs, and repairs and maintenance.

Development Costs

Development costs related to properties underlying the 75% net profits interests decreased 98% for the third quarter and 82% for the nine-month period primarily because of decreased drilling and completion costs in 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 September 30, 2020 totaled $2.9 million, including accrued interest of $0.4 million. 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

Statements in this report relating to future plans, predictions, production, excess costs, litigation, arbitration, regulatory or court decisions, economic activity and recovery, and the impact of one or more waves of the COVID-19 pandemic and the accompanying government response on trade, travel and energy demand and pricing are forward-looking statements. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements regarding the net profits interests, underlying properties, development activities, annual or monthly development, production and other costs and expenses, estimated rates of natural production decline, oil and gas prices and differentials to NYMEX prices, estimated changes in expenses, distributions to unitholders, and industry and market conditions, are forward-looking statements that are subject to risks and uncertainties, including those detailed in Part I, Item 1A of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019, which is incorporated by this reference as though fully set forth herein. 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.

 

17

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.

PART II - OTHER INFORMATION

 

Item 1A.

Risk Factors.

The recent spread of COVID-19, or the novel coronavirus, and the continually changing measures taken to mitigate the impact of single or multiple waves of the COVID-19 pandemic, are likely adversely affecting the business and operations of the operators of the properties underlying the net profits interests, which in turn could have an adverse effect on Trust distributions.

The business of the operators of the properties underlying the net profits interests is likely being adversely affected by the COVID-19 pandemic and measures being taken to mitigate its impact, especially to the extent areas experience multiple waves of the pandemic. As the coronavirus pandemic and government responses are rapidly escalating and de-escalating, the extent of the impact on domestic sales of crude oil and natural gas remains unknown and is constantly evolving. The industry has experienced a sharp and rapid decline in the demand for crude oil and natural gas as the U.S. and global economy, and commodity prices, have been negatively impacted as economic activity is curtailed in response to the COVID-19 pandemic, as well as due to other geopolitical factors. Official restrictions on non-essential activities, including “shelter in place” and “stay at home” orders, have recently been introduced or re-introduced throughout the U.S. and the world, which may impact operators’ production activities and the length of time such measures are in place may further adversely affect Trust distributions. Fewer businesses than normal are open and fewer people are going to work which has reduced the demand for oil and natural gas, plus our operators’ reliance on third-party suppliers, contractors, and service providers exposes them to possibility of delay or interruption of operations. At this time, the full extent to which COVID-19 will negatively impact the global economy and the oil and gas industry is uncertain, but pandemics or other significant public health events will most likely have a material adverse effect on operators’ business and financial condition which would likely have an adverse effect on Trust distributions.

Risk factors relating to the Trust are contained in Item 1A of the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Other than the item listed above, 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, 2019.

 

18

Item 6. Exhibits.

 

 

19

SIGNATURES

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 6, 2020				By		/s/ DAVID LEVY
						David Levy
						Vice President - Upstream Business Services

 

20