CROSS TIMBERS ROYALTY TRUST Calculation of Net Profits Income
The following is a summary of the calculation of net profits income received by
the Trust:
Year Ended Three Months Ended
December 31 (a) December 31(a)
2022 2021 2022 2021
Sales Volumes
Oil (Bbls) (b)
Underlying properties 237,447 92,602 37,737 (38,259 )
Average per day 651 254 410 (416 )
Net profits interests 58,036 60,669 9,297 14,978
Gas (Mcf) (b)
Underlying properties 1,382,565 939,350 286,170 (36,372 )
Average per day 3,788 2,574 3,111 (395 )
Net profits interests 1,169,758 827,456 245,370 (7,443 )
Average Sales Price
Oil (per Bbl) $ 77.21 $ 64.14 $ 88.30 $ 34.23
Gas (per Mcf) $ 8.08 $ 5.93 $ 10.52 $ (27.98 )
Revenues
Oil sales $ 18,332,657 $ 5,939,937 $ 3,332,223 $ (1,309,441 )
Gas sales 11,177,646 5,573,982 3,011,123 1,017,517
Total Revenues 29,510,303 11,513,919 6,343,346 (291,924 )
CostsTaxes, transportation and other 2,909,480 1,522,567
651,341 (102,481 )
Production expense (c) 5,821,761 4,555,193 1,628,629 1,149,654
Development costs 2,656,813 152,884 1,298,868 102,506
Excess costs (d) 3,896,111 (3,289,369 ) (520,986 ) (3,580,678 )
Total Costs 15,284,165 2,941,275 3,057,852 (2,430,999 )
Other Proceeds - (33,956 ) - -
Net Proceeds $ 14,226,138 $ 8,538,688 $ 3,285,494 $ 2,139,075
Net Profits Income $ 12,493,727 $ 7,438,451 $ 2,956,945 $ 1,835,853 (a) Because of the interval between time of production and receipt of net profits
income by the Trust, oil and gas sales for the year ended
generally relate to oil production from November through October and gas
production from October through September, while oil and gas sales for the
quarter ended
through October and gas production from July through September.
(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.
costs associated with monitoring these interests. See Note 5 to Financial
Statements under Item 8. Financial Statements and Supplementary Data.
(d) See Note 7 to Financial Statements under Item 8. Financial Statements and
Supplementary Data.
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Results of Operations
Years Ended
Net profits income for 2022 was$12,493,727 as compared with$7,438,451 for 2021. The 68 percent increase in net profits income from 2021 to 2022 was primarily the result of increased oil and gas production ($11.5 million ) and higher oil and gas prices ($3.1 million ), partially offset by net excess costs activity ($5.4 million ), increased development costs ($1.9 million ), increased taxes, transportation and other costs ($1.2 million ), and increased production expenses ($1.0 million ). During 2022 and 2021, 62 percent and 53 percent, respectively, of net profits income was derived from gas sales. Trust administration expense was$765,955 in 2022 as compared to$765,317 in 2021. Cash reserve activity was$0 in 2022 and 2021. As ofDecember 31, 2022 , the reserve is funded at$1,000,000 . Interest income was$15,464 in 2022 and$168 in 2021. Other changes in interest income are attributable to fluctuations in net profits income and interest rates. Net profits income is recorded when received by the Trust, which is the month following receipt byXTO 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.
Volumes
Oil. Underlying oil sales volumes increased 156 percent from 2021 to 2022 primarily because of receipt of oil sales volumes 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. Underlying gas sales volumes increased 47 percent from 2021 to 2022 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 percent a year.
Prices
Oil. The average oil price for 2022 was$77.21 per Bbl, up 20 percent from the 2021 average oil price of$64.14 per Bbl. Oil prices are expected to remain volatile. The average NYMEX price forNovember 2022 throughJanuary 2023 was$79.78 per Bbl. AtMarch 15, 2023 , the average NYMEX oil price for the following 12 months was$67.70 per Bbl. Gas. The 2022 average gas price was$8.08 per Mcf, up 36 percent from the 2021 average gas price of$5.93 per Mcf. Natural gas prices are affected by natural gas liquids prices, the level of North American production, weather, crude oil prices, theU.S. economy, storage levels and export levels of liquefied natural gas. Natural gas prices are expected to remain volatile. The average NYMEX price for fourth quarter 2022 was$8.20 per MMBtu. AtMarch 15, 2023 , the average NYMEX gas price for the following 12 months was$3.22 per MMBtu.
Costs
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 and development costs since the
related underlying properties are working interests. Net profits income is
calculated monthly for each of the five conveyances under which the
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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 profits income from other conveyances. Costs have never exceeded revenues from the 90% net profits interests, nor are they expected to in the future. For further information on excess costs, see Note 7 to Financial Statements under Item 8. Financial Statements and Supplementary Data. Total costs deducted in the calculation of net profits income were$15.3 million in 2022 and$2.9 million in 2021. This increase of$12.4 million from 2021 to 2022 is attributable to net excess costs ($7.2 million ), increased development costs ($2.5 million ), taxes, transportation and other costs ($1.4 million ), and production expense ($1.3 million ). Unit operators of the properties underlying the 75% net profits interests have reported underlying budgeted development costs of approximately$1.4 million for 2023 and$1.6 million for 2024 ($1.1 million and$1.2 million , respectively, net to the Trust), as compared to underlying budgeted development costs of$1.4 million ($1.0 million net to the Trust) and actual development costs of$2.7 million ($2.0 million net to the Trust) for 2022. Actual development costs often differ from amounts budgeted because of changes in product prices and other factors that may affect the timing or selection of projects. Changes in oil or natural gas prices could impact future development plans on the underlying properties.
Other Proceeds
The calculation of net profits income for the year ended
Fourth Quarter 2022 and 2021 During the quarter endedDecember 31, 2022 , the Trust received net profits income totaling$2,956,945 , compared with fourth quarter 2021 net profits income of$1,835,853 . This 61 percent increase in net profits income is primarily the result of increased oil and gas production and prices ($5.3 million ), partially offset by net excess costs activity ($2.3 million ), increased development costs ($0.9 million ), increased taxes, transportation and other costs ($0.6 million ), and increased production expenses ($0.3 million ).
Administration expense was
Distributions to unitholders for the quarter ended
Record Date Payment Date Per Unit
October 31, 2022 November 15, 2022 $ 0.149149
November 30, 2022 December 14, 2022 0.161024
December 30, 2022 January 17, 2023 0.150335
$0.460508
Volumes
Fourth quarter 2022 underlying oil sales volumes were up 75,996 Bbls from fourth
quarter 2021 primarily because of absence of the reversal of oil sales volumes
by the oil purchaser of the North Cowden Unit in fourth quarter 2021, partially
offset by natural production decline. These oil sales were subsequently paid by
the operator in first quarter 2022. Underlying gas sales volumes for fourth
quarter 2022 were up 322,542 Mcf from fourth quarter 2021 because of timing of
cash receipts and adjustments, partially offset by natural production decline.
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Prices
The average fourth quarter 2022 oil price was$88.30 per Bbl, up 158 percent from the fourth quarter 2021 average price of$34.23 per Bbl primarily because of the absence of the reversal of oil sales volumes by the oil purchaser of the North Cowden Unit in fourth quarter 2021. The average fourth quarter 2022 gas price was$10.52 per Mcf, up$38.50 from the fourth quarter 2021 average price of ($27.98 ) per Mcf primarily because of adjustments recorded in fourth quarter 2021. For further information about oil and gas prices, see "Years EndedDecember 31, 2022 and 2021 - Prices" above.
Costs
Costs deducted in the calculation of fourth quarter 2022 net profits income increased$5.5 million from fourth quarter 2021. This increase was primarily attributable to net excess costs ($3.1 million ), increased development costs ($1.2 million ), taxes, transportation and other costs ($0.7 million ), and production expenses ($0.5 million ). For further information about development and excess costs, see "Years EndedDecember 31, 2022 and 2021 - Costs" above.
Liquidity and Capital Resources
The Trust's only cash requirement is any declared monthly distribution of its income to unitholders, which is funded by the monthly receipt of net profits income after payment of Trust administration expenses. The Trust is not liable for any production costs or liabilities attributable to the underlying properties. If at any time the Trust receives net profits income in excess of the amount due, the Trust is not obligated to return such overpayment, but future net profits income payable to the Trust will be reduced by the overpayment, plus interest at the prime rate. The Trustee may establish cash reserves for certain contingencies. The Trust may borrow funds required to pay Trust liabilities if fully repaid prior to further distributions to unitholders. The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust's liquidity or the availability of capital resources.
Greenhouse Gas Emissions and Climate Change Regulations
There is an increased focus by local, national and international regulatory bodies on greenhouse gas (GHG) emissions and climate change. A number of nations andU.S. states have adopted or are considering some form of climate change legislation and regulations, including carbon taxes, cap-and-trade policies and bans on drilling in certain areas or in certain ways. The climate accord reached at the Conference of the Parties (COP21 ) inParis set many new goals, and while many related policies are still emerging,XTO Energy has informed the Trustee that it continues to anticipate that such policies will increase the cost of carbon dioxide emissions over time. As these regulations are under development,XTO Energy is unable to predict the total impact of the potential regulations upon the operators of the underlying properties, and it is possible that the operators of the underlying properties could face increases in operating costs or a ban of certain types of activities in order to comply with climate change or GHG emissions legislation, which costs could reduce or eliminate net proceeds payable to the Trust and Trust distributions.
Off-Balance Sheet Arrangements
The Trust has no off-balance sheet financing arrangements. The Trust has not guaranteed the debt of any other party, nor does the Trust have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt, losses or contingent obligations.
Related Party Transactions
The underlying properties from which the net profits interests were carved are
currently owned by
Approximately 28 of the underlying royalty interests burden working interests in properties operated byXTO Energy .XTO Energy operates the Hewitt Unit which is one of the properties underlying theOklahoma 75% net profits interests. 23
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Other than these properties,
In computing net proceeds for the 75% net profits interests (Note 3),XTO Energy deducts an overhead charge as reimbursement for costs associated with monitoring these interests. This overhead charge atDecember 31, 2022 was approximately$44,445 per month, or$533,340 annually (net to the Trust of$33,334 per month, or$400,008 annually), 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 theOklahoma 75% net profits interests. As ofDecember 31, 2022 , this charge was approximately$30,333 per month, or$363,996 annually (net to the Trust of$22,750 per month, or$273,000 annually), and is subject to annual adjustment based on an oil and gas industry index.
The calculation of net profits income for the year ended
On
Critical Accounting Policies
The financial statements of the Trust are significantly affected by its basis of accounting and estimates related to its oil and gas properties and proved reserves, as summarized below.
Basis of Accounting
The Trust's financial statements are prepared on a modified cash basis, which is a comprehensive basis of accounting other thanU.S. GAAP. This method of accounting is consistent with reporting of taxable income to Trust unitholders. The most significant differences between the Trust's financial statements and those prepared in accordance withU.S. GAAP are: 1. net profits income is recognized in the month received rather than accrued in the month of production; 2. expenses are recognized when paid rather than when incurred; and 3. cash reserves may be established by the Trustee for certain contingencies that would not be recorded underU.S. GAAP. This comprehensive basis of accounting other thanU.S. GAAP corresponds to the accounting permitted for royalty trusts by theU.S. Securities and Exchange Commission , as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts. For further information regarding the Trust's basis of accounting, see Note 2 to Financial Statements under Item 8. Financial Statements and Supplementary Data. All amounts included in the Trust's financial statements are based on cash amounts received or disbursed, or on the carrying value of the net profits interests, which was derived from the historical cost of the interests at the date of their transfer fromXTO Energy , less accumulated amortization to date. Accordingly, there are no fair value estimates included in the financial statements based on either exchange or non-exchange trade values.
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
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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 byXTO Energy such as estimates of future production and development and operating expenses. During 2022, including fourth quarter, no trigger event occurred that would indicate a need for an impairment assessment. Accordingly, there was no impairment of the NPI as ofDecember 31, 2022 . Any impairment 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 wasXTO Energy's historical net book value of the interests onFebruary 12, 1991 , the date of the transfer to 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$58,138,494 as ofDecember 31, 2022 and$57,834,093 as ofDecember 31, 2021 . As previously disclosed, significantly lower 2020 oil prices used in calculating the net profits interests proved reserves have resulted in significantly higher amortization in 2021 and full amortization of the working interest new profits interests. Amortization of the NPI does not impact unitholder distributions or the determination of proved reserves.
Oil and Gas Reserves
The proved oil and gas reserves for the underlying properties are estimated by independent petroleum engineers. The estimated reserves for the underlying properties are then used byXTO Energy to calculate the estimated oil and gas reserves attributable to the net profits interests. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof. Estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using 12-month average prices, based on the first-day-of-the-month price for each month in the period, estimated reserve quantities can be significantly impacted by changes in product prices. Accordingly, oil and gas quantities ultimately recovered and the timing of production may be substantially different from original estimates. The standardized measure of discounted future net cash flows and changes in such cash flows, as reported in Note 8 to Financial Statements under Item 8. Financial Statements and Supplementary Data, is prepared using assumptions required by theFinancial Accounting Standards Board and theSecurities and Exchange Commission . Such assumptions include using 12-month average oil and gas prices, based on the first-day-of-the-month price for each month in the period, and year end costs for estimated future development and production expenditures, including recovery of cumulative excess costs remaining at year end. Discounted future net cash flows are calculated using a 10 percent rate. Changes in any of these assumptions, including consideration of other factors, could have a significant impact on the standardized measure. Accordingly, the standardized measure does not representXTO Energy's or the Trustee's estimated current market value of proved reserves.
Forward-Looking Statements
Certain information included in this annual report and other materials filed, or to be filed, by the Trust with theSecurities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made byXTO 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 may concern, 25
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among other things, development activities, future development plans, 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, arbitration, litigation, liquidity, financing, political and regulatory matters, such as tax and environmental policy, climate policy, trade barriers, sanctions, war and other political or security disturbances, and competition. Such forward-looking statements are based onXTO Energy's and the Trustee's current plans, expectations, assumptions, projections and estimates and are identified by words such as "may," "expects," "intends," "plans," "projects," "anticipates," "predicts," "believes," "goals," "estimates," "should," "could," "would," and similar words that convey the uncertainty of future events. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. 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. Some of the risk factors that could cause actual results to differ materially are explained in Item 1A. Risk Factors.
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