10-Q

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10-Q 1 d258170d10q.htm 10-Q 10-Q

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, 2021

☐	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:

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, 2021

6,000,000

CROSS TIMBERS ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

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, 2021 and December 31, 2020		6

	Condensed Statements of Distributable Income for the Three and Nine Months Ended September 30, 2021 and 2020		7

	Condensed Statements of Changes in Trust Corpus for the Three and Nine Months Ended September 30, 2021 and 2020		8

	Notes to Condensed Financial Statements		9

Item 2.	Trustee’s Discussion and Analysis		14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		18

Item 4.	Controls and Procedures		18

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors		19

Item 6.	Exhibits		19

	Signatures		20

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.

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. 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, 2021, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2021 and 2020, 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, 2021, and for the three-month and nine-month periods ended September 30, 2021 and 2020 have been subjected to a review by PricewaterhouseCoopers LLP, the Trust’s independent registered public accounting firm, whose report is included herein.

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, 2021, 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, 2021 and 2020, 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, 2020, 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 April 13, 2021, 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, 2020, 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 generally accepted accounting principles.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

November 12, 2021

CROSS TIMBERS ROYALTY TRUST

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


	September 30, 2021		December 31, 2020
ASSETS
Cash and short-term investments	$	1,975,416	$	1,372,799
Interest to be received		10		23
Net profits interests in oil and gas properties - net (Note 1)		3,264,303		7,523,065

	$	5,239,729	$	8,895,887

LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders	$	975,426	$	372,822
Expense reserve (a)		1,000,000		1,000,000
Trust corpus (6,000,000 units of beneficial interest authorized and outstanding)		3,264,303		7,523,065

	$	5,239,729	$	8,895,887

(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.

CROSS TIMBERS ROYALTY TRUST

Condensed Statements of Distributable Income (Unaudited)


	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Net profits income	$	2,455,493	$	829,258	$	5,602,598	$	4,107,869
Interest income		31		134		123		5,777

Total income		2,455,524		829,392		5,602,721		4,113,646
Administration expense		153,822		215,400		592,211		581,728

Distributable income	$	2,301,702	$	613,992	$	5,010,510	$	3,531,918

Distributable income per unit (6,000,000 units)	$	0.383617	$	0.102332	$	0.835085	$	0.588653

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

CROSS TIMBERS ROYALTY TRUST

Condensed Statements of Changes in Trust Corpus (Unaudited)


	Three Months Ended September 30						Nine Months Ended September 30
	2021			2020			2021			2020
Trust corpus, beginning of period	$	3,339,402		$	7,733,514		$	7,523,065		$	8,161,795
Amortization of net profits interests		(75,099	)		(77,955	)		(4,258,762	)		(506,236	)
Distributable income		2,301,702			613,992			5,010,510			3,531,918
Distributions declared		(2,301,702	)		(613,992	)		(5,010,510	)		(3,531,918	)

Trust corpus, end of period	$	3,264,303		$	7,655,559		$	3,264,303		$	7,655,559

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

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.

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 2021, 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, 2021. 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 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 $57,836,146 as of September 30, 2021 and $53,577,384 as of December 31, 2020. 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 net profits interests. Amortization of the NPI does not impact unitholder distributions or the determination of proved reserves.

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.

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.

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 Panel has stayed proceedings. The allocation of a portion of the Chieftain settlement to the Trust, if ever, will be considered if the arbitration re-commences.

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

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 12/31/20	$	2,283,825		$	187,544		$	2,471,369
Net excess costs (recovery) for the quarter ended 3/31/21		(2,479	)		95,110			92,631
Net excess costs (recovery) for the quarter ended 6/30/21		43,640			(282,654	)		(239,014	)
Net excess costs (recovery) for the quarter ended 9/30/21		(138,207	)		—			(138,207	)

Cumulative excess costs remaining at 9/30/21		2,186,779			—			2,186,779
Accrued interest at 9/30/21		495,907			—			495,907

Total remaining to be recovered at 9/30/21	$	2,682,686		$	—		$	2,682,686


	NPI
	TX WI			OK WI			Total
Cumulative excess costs remaining at 12/31/20	$	1,712,869		$	140,658		$	1,853,527
Net excess costs (recovery) for the quarter ended 3/31/21		(1,859	)		71,332			69,473
Net excess costs (recovery) for the quarter ended 6/30/21		32,730			(211,990	)		(179,260	)
Net excess costs (recovery) for the quarter ended 9/30/21		(103,656	)		—			(103,656	)

Cumulative excess costs remaining at 9/30/21		1,640,084			—			1,640,084
Accrued interest at 9/30/21		371,931			—			371,931

Total remaining to be recovered at 9/30/21	$	2,012,015		$	—		$	2,012,015

For the quarter ended September 30, 2021, excess costs of $138,207 ($103,656 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, 2021 totaled $2.7 million ($2.0 million net to the Trust), including accrued interest of $0.5 million ($0.4 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, 2021 was $44,269 ($33,202 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, 2021, this monthly charge was approximately $29,000 ($22,000 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 underlying properties or related working interests.

The calculation of net profits income for the nine months ended September 30, 2021 included an expense adjustment from XTO Energy of $33,956 ($30,560 net to the Trust).

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.

7. Subsequent Events

XTO Energy has advised the Trustee that adjustments in the Texas working interest net profits interests had a significant impact on the oil sales volumes and average prices reported in the October 2021 distribution. XTO Energy advised the Trustee that these adjustments were primarily a timing issue due to the Texas working interest net profits interests having a reversal of sales from the oil purchaser for the North Cowden Unit. XTO Energy has also advised the Trustee that it expects to receive payment for these oil sales directly from the operator, once the operator has recorded the sales in their system. This timing issue increased the excess costs on the properties underlying the Texas working interest net profits interests approximately $3,643,000 (approximately $2,732,000 net to the Trust).

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.

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 2020 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, 2021, net profits income was $2,455,493 compared to $829,258 for third quarter 2020. This 196% increase in net profits income is primarily the result of increased oil and gas prices ($2.0 million) and increased oil production ($0.2 million), partially offset by net excess costs activity on the Texas and Oklahoma working interest properties ($0.3 million), increased taxes, transportation and other costs ($0.2 million), and production expenses ($0.1 million). See “Net Profits Income” below.

After considering interest income of $31 and administration expense of $153,822, distributable income for the quarter ended September 30, 2021 was $2,301,702, or $0.383617 per unit of beneficial interest. Administration expense for the quarter decreased $61,578 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 2020, distributable income was $613,992, or $0.102332 per unit.

Distributions to unitholders for the quarter ended September 30, 2021 were:


Record Date	Payment Date	Distribution per Unit
July 30, 2021	August 13, 2021	$0.123792
August 31, 2021	September 15, 2021	0.097254
September 30, 2021	October 15, 2021	0.162571

		$0.383617

Nine Months

For the nine months ended September 30, 2021, net profits income was $5,602,598 compared to $4,107,869 for the same 2020 period. This 36% increase in net profits income is primarily the result of higher oil and gas prices ($3.4 million), and increased gas production ($0.1 million), partially offset by decreased oil production ($0.8 million), net excess costs activity on the Texas and Oklahoma working interest properties ($0.6 million), increased taxes, transportation and other costs ($0.6 million). See “Net Profits Income” below.

After considering interest income of $123 and administration expense of $592,211, distributable income for the nine months ended September 30, 2021 was $5,010,510, or $0.835085 per unit of beneficial interest. Administration expense for the nine months ended September 30, 2021 increased $10,483 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, 2020, distributable income was $3,531,918, or $0.588653 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.

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


	Three Months Ended September 30 *(a)*					Increase		Nine Months Ended September 30 *(a)*						Increase
	2021		2020			(Decrease)		2021			2020			(Decrease)
Sales Volumes
Oil (Bbls) (b)
Underlying properties		46,595		42,937			9%		130,861			148,645			(12%)
Average per day		506		467			8%		479			543			(12%)
Net profits interests		21,632		10,822			100%		45,691			54,787			(17%)
Gas (Mcf) (b)
Underlying properties		318,902		324,615			(2%)		975,722			947,698			3%
Average per day		3,504		3,567			(2%)		3,574			3,459			3%
Net profits interests		277,361		294,590			(6%)		834,899			847,109			(1%)
Average Sales Prices
Oil (per Bbl)	$	62.29	$	29.36			112%	$	55.40		$	41.15			35%
Gas (per Mcf)	$	5.49	$	2.37			132%	$	4.67		$	2.64			77%
Revenues
Oil sales	$	2,902,419	$	1,260,725			130%	$	7,249,378		$	6,116,353			19%
Gas sales		1,751,177		768,385			128%		4,556,465			2,500,615			82%

Total Revenues		4,653,596		2,029,110			129%		11,805,843			8,616,968			37%

Costs
Taxes, transportation and other		528,941		325,929			62%		1,625,048			974,073			67%
Production expense (c)		1,115,262		972,730			15%		3,405,539			3,307,422			3%
Development costs		45,849		4,300			966%		50,378			124,372			(59%)
Excess costs (d)		138,207		(195,247	)		(171%)		291,309			(500,202	)		(158%)

Total Costs		1,828,259		1,107,712			65%		5,372,274			3,905,665			38%

Other Proceeds		—		—			—		(33,956	)		8,188			(515%)

Net Proceeds	$	2,825,337	$	921,398			207%	$	6,399,613		$	4,719,491			36%

Net Profits Income	$	2,455,493	$	829,258			196%	$	5,602,598		$	4,107,869			36%

(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.

The following are explanations of significant variances on the underlying properties from third quarter 2020 to third quarter 2021 and from the first nine months of 2020 to the comparable period in 2021:

Sales Volumes

Oil

Oil sales volumes increased 9% for the third quarter primarily because of timing of cash receipts, partially offset by natural production decline. Oil sales volumes decreased 12% for the nine-month period primarily because of timing of cash receipts and natural production decline.

Gas

Gas sales volumes decreased 2% for third quarter and increased 3% for the nine-month period primarily because of timing of cash receipts and 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 112% to $62.29 per Bbl and for the nine-month period increased 35% to $55.40 per Bbl. The third quarter 2021 oil price is primarily related to production from May through July 2021, when the average NYMEX price was $69.76 per Bbl.

Gas

Gas prices for the third quarter increased 132% to $5.49 per Mcf and for the nine-month period increased 77% to $4.67 per Mcf. The third quarter 2021 gas price is primarily related to production from April through June 2021, when the average NYMEX price was $2.83 per MMBtu.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs increased 62% for the third quarter primarily because of increased severance taxes on higher revenues, property taxes, and gas deductions. Taxes, transportation and other costs increased 67% for the nine-month period primarily because of increased property taxes, gas deductions, severance taxes on higher revenues and decreased oil severance tax refunds.

Production Expense

Production expense increased 15% for the third quarter primarily because of increased repairs and maintenance and field costs, partially offset by timing of charges. Production expense increased 3% for the nine-month period primarily because of repairs and maintenance, partially offset by decreased field costs.

Development Costs

Development costs related to properties underlying the 75% net profits interests increased 966% for the third quarter because of timing of charges and decreased 59% for the nine-month period primarily because of reduction in activity.

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, 2021 totaled $2.7 million ($2.0 million net to the Trust), including accrued interest of $0.5 million ($0.4 million net to the Trust). For further information on excess costs, see Note 4 to Condensed Financial Statements.

Other Proceeds

The calculation of net profits income for the nine months ended September 30, 2021 included an expense adjustment from XTO Energy of $33,956 ($30,560 net to the Trust).

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 public health events and the accompanying government response on trade, travel, energy production, and future market 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, regulatory and other costs and expenses, estimated rates of natural production decline, oil and gas prices and expectation for future demand, 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, 2020, 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.

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.

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, 2020.

Item 6. Exhibits.


(31)		Rule 13a-14(a)/15d-14(a) Certification

(32)		Section 1350 Certification

(99)		Items 1A, 7 and 7A to the Annual Report on Form 10-K for Cross Timbers Royalty Trust filed with the Securities and Exchange Commission on April 13, 2021 (incorporated herein by reference)

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 12, 2021	By	/s/ DAVID LEVY
		David Levy
		Vice President - Upstream Business Services

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company