UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberMarch 30, 202231, 2023

OR

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

For the transition period from                     to                     .

Cross Timbers Royalty Trust

(Exact name of registrant as specified in its charter)

c/o The Corporate Trustee:

Simmons BankArgent Trust Company

2911 Turtle Creek Blvd, Suite 850

Dallas, Texas 75219

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (855) 588-7839

(Former                                  (Former name, former address and former fiscal year, if change since last report) NONE

Securities registered pursuant to Section 12(b) of the Act:

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, 2022May 2, 2023

6,000,000

CROSS TIMBERS ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022MARCH 31, 2023

Table of Contents

CROSS TIMBERS ROYALTY TRUST

GLOSSARY OF TERMS

The following are definitions of significant terms used in this Form 10-Q:

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, 2022,March 31, 2023, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30,March 31, 2023 and 2022, and 2021, have been included. Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

CROSS TIMBERS ROYALTY TRUST

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

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

CROSS TIMBERS ROYALTY TRUST

Condensed Statements of Distributable Income (Unaudited)

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)

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

CROSS TIMBERS ROYALTY TRUST

Notes to Condensed Financial Statements (Unaudited)

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”):

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 thirdfirst quarter of 2022,2023, no trigger event occurred that would indicate a need for an impairment assessment. Accordingly, there was no impairment of the NPI as of September 30, 2022.March 31, 2023. Any impairment recorded for book purposes willwould not result in a loss deductible by the unitholders 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 $58,074,634$58,267,519 as of September 30, 2022March 31, 2023, and $57,834,093$58,138,494 as of December 31, 2021.2022. Amortization of the NPI does not impact unitholder distributions.

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 deductible loss deductible by the unitholders for tax purposes until the loss is recognized.

All revenues from the Trust are from sources within Texas, Oklahoma or New Mexico. Because it distributes all of its net income to unitholders, the Trust has not been taxed at the trust level in New Mexico or Oklahoma. While the Trust has not owed tax, the Trustee is required to file an Oklahoma income tax return reflecting the income and deductions of the Trust attributable to properties located in that state, along with a schedule that includes information regarding distributions to unitholders. Oklahoma and New Mexico tax the income of nonresidents from real property located within those states, and the Trust has been advised by counsel that such states will tax nonresidents on income from the net profits interests located in those states. Oklahoma and New Mexico also impose a corporate income tax that may apply to unitholders organized as corporations (subject to certain exceptions for S corporations and limited liability companies, depending on their treatment for federal income tax purposes).

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.

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.

Corrected Interim Final Award (i) “reject[ing] the Trust’s contention that XTO has no right under the Conveyance to charge the [Hugoton Royalty] Trust with amounts XTO paid under section 1.18(a)(i) as royalty obligations to settle the Chieftain litigation” and (ii) stating “[t]he next phase will determine how much of the Chieftain settlement can be so charged, if any of it can be, in the exercise of the right found by the Panel.” Following briefing by both parties, on May 18, 2021, the Panel issued its second interim final award over the amount of XTO Energy’s settlement in the Chieftain class action lawsuit that can be charged to the Hugoton Royalty Trust as a production cost. The allocation of a portion of the Chieftain settlement to the Trust will be considered in the now re-commenced arbitration. The hearing date for the arbitration is scheduled to take place May 30-31, 2023.

Other

Several states have enacted legislation requiring state income tax withholding from payments made to nonresident recipients of oil and gas proceeds. After consultation with its tax counsel, the Trustee believes that it is not required to withhold on payments made to the unitholders. However, regulations are subject to change by the various states, which could change this conclusion. Should amounts be withheld on payments made to the Trust or the unitholders, distributions to the unitholders would be reduced by the required amount, subject to the filing of a claim for refund by the Trust or unitholders for such amount.

If monthly costs exceed revenues for any conveyance, such excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net proceeds from other conveyances.

The following summarizes excess costs activity, cumulative excess costs balances and accrued interest to be recovered by conveyance as calculated by XTO Energy:

For the quarter ended March 31, 2023, excess costs were $39,834 ($29,876 net to the Trust) on properties underlying the Texas working interest net profits interests.

For the quarter ended September 30, 2022,March 31, 2023, excess costs of $239,731$151,450 ($179,799113,587 net to the Trust) were recovered on properties underlying the TexasOklahoma working interest net profits interests.

Underlying cumulative excess costs for the Texas and Oklahoma working interest conveyanceconveyances remaining as of September 30, 2022March 31, 2023, totaled $2.0$2.5 million ($1.51.8 million net to the Trust), including accrued interest of $0.6$0.7 million ($0.5 million net to the Trust).

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, 2022as of March 31, 2023, was $44,445 ($33,334 net to the Trust) and is subject to annual adjustment based on an oil and gas industry index.

XTO Energy deducts a monthly overhead charge for reimbursement of administrative expenses as operator of the Hewitt Unit, which is one of the properties underlying the Oklahoma 75% net profits interests. As of September 30, 2022,March 31, 2023, this monthly charge was approximately $31,000$30,823 ($23,00023,118 net to the Trust) and is subject to annual adjustment based on an oil and gas industry index. Other than this property, XTO Energy and ExxonMobil do not operate or control any of the properties underlying the 75% net profits interests.

Administrative expenses are incurred so that the Trustee may meet its reporting obligations to the unitholders and regulatory entities and otherwise manage the administrative functions of the Trust. These obligations include, but are not limited to, all expenses, taxes, compensation to the Trustee for managing the Trust, fees to consultants, accountants, attorneys, transfer agents, other professional and expert persons, expenses for clerical and other administrative assistance, and fees and expenses for all other services.

Item 2.  Trustee’s Discussion and Analysis

The following discussion should be read in conjunction with the Trustee’s discussion and analysis contained in the Trust’s 20212022 Annual Report on Form 10-K, as well as the condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The Trust’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the Trust’s website at www.crt-crosstimbers.com.

Distributable Income

Quarter

For the quarter ended September 30, 2022,March 31, 2023, net profits income was $3,817,493$3,912,704 compared to $2,455,493$1,951,672 for thirdfirst quarter 2021.2022. This 55%100 percent increase in net profits income is primarily the result of net excess costs activity ($2.8 million), increased gas production ($2.7 million), higher oil and gas prices ($2.41.6 million), and decreased development costs ($0.3 million), partially offset by decreased oil production ($0.44.2 million), increased taxes, transportation and other costs ($0.6 million), increased production expenses ($0.3 million), increased taxes, transportation and other costslower gas prices ($0.1 million), increased development costs ($0.1 million), and net excess costs activity ($0.10.3 million). See “Net Profits Income” below.

Distributions to unitholders for the quarter ended September 30, 2022March 31, 2023, were:

Nine Months

For the nine months ended September 30, 2022, net profits income was $9,536,782 compared to $5,602,598 for the same 2021 period. This 70% increase in net profits income is primarily the result of increased oil and gas production ($4.6 million), and increased oil and gas prices ($4.5 million), partially offset by net excess costs activity ($3.1 million), increased development costs ($1.0 million), increased production expenses ($0.6 million), and increased taxes, transportation and other costs ($0.5 million). See “Net Profits Income” below.

After considering interest income of $5,737 and administration expense of $562,331, distributable income for the nine months ended September 30, 2022 was $8,980,188, or $1.496698 per unit of beneficial interest. Administration expense for the nine months ended September 30, 2022 decreased $29,880 from the prior year nine-month period, primarily related to the timing of receipt and payment of Trust expenses and terms of professional services. Changes in interest income are attributable to fluctuations in net profits income, expense reserve, and interest rates. For the nine months ended September 30, 2021, distributable income was $5,010,510, or $0.835085 per unit.

Record Date		Payment Date		Distribution per Unit
January 31, 2023		February 14, 2023		$	0.312668
February 28, 2023		March 14, 2023			0.114609
March 31, 2023		April 14, 2023			0.179256
				$	0.606533

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:

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:

The following are explanations of significant variances on the underlying properties from third quarter 2021 to thirdfirst quarter 2022 and from theto first nine months of 2021 to the comparable period in 2022:quarter 2023:

Sales Volumes

Oil

Oil sales volumes decreased 12% for63 percent from first quarter 2022 to first quarter 2023 primarily due to the third quarter primarily becauseabsence of timing of cash receipts and natural production decline. Oil sales volumes increased 53% for the nine-month period primarily because of receipt of oil sales by the operator of the North Cowden Unit that had been reversed by the oil purchaseradjustment in fourthfirst quarter 2021, partially offset by2022 and natural production decline.

Gas

Gas sales volumes increased 1%226 percent from first quarter 2022 to first quarter 2023 primarily due to timing of receipts for the third quarter and increased 12% for the nine-month period primarily because of timing of cash receipts,New Mexico royalty interest net profits interests related to March 2018 to December 2020 production, partially offset by natural production decline.

The estimated rate of natural production decline on the underlying oil and gas properties is approximately 6%6 to 8%8 percent a year.

Sales Prices

Oil

The average oil price for the third quarter increased 63%34 percent to $101.80$80.49 per Bbl and for first quarter 2023. The first quarter 2023 oil price is primarily related to production from November 2022 through January 2023, when the nine-month period increased 36% to $75.11average NYMEX price was $79.78 per Bbl.

Gas

Gas prices for the third quarter increased 63%The average gas price decreased 21 percent to $8.93$5.43 per Mcf and for first quarter 2023. The first quarter 2023 gas price is primarily related to production from October through December 2022, when the nine-month period increased 60% to $7.45average NYMEX price was $6.26 per Mcf.MMBtu.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs increased 33%120 percent for the thirdfirst quarter 2023 primarily because of productionincreased gas deductions and gas severance taxes on higher revenues partially offsetdriven by decreased property taxes. Taxes, transportation and other costs increased 39% for the nine-month period primarily becausetiming of production taxes on higher revenues, increased gas deductions, and decreased oil production tax refunds, partially offset by decreased property taxes.receipts.

Production Expense

Production expense increased 36%35 percent for the thirdfirst quarter and 23% for the nine-month period2023 primarily because of increased gashigher processing repairscosts driven by timing of receipts and maintenance, andincreased power and fuel costs.

Development Costs

Development costs related to properties underlying the 75% net profits interests increased $0.1 milliondecreased 40 percent for the thirdfirst quarter and $1.3 million for the nine-month period2023 primarily because of increased recompletion,decreased drilling and completion activity in the Hewitt Unit. There are nine wells currently being drilled in the Hewitt Unit which are expected to be complete by year-end.

Excess Costs

If monthly costs exceed revenues for any conveyance, such excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net proceeds from any other conveyance. Underlying cumulative excess costs for the Texas and Oklahoma working interest conveyanceconveyances remaining as of September 30, 2022March 31, 2023, totaled $2.0$2.5 million ($1.51.8 million net to the Trust), including accrued interest of $0.6$0.7 million ($0.5 million net to the Trust). For further information on excess costs, see Note 4 to Condensed Financial Statements.

Trustee Resignation

On November 4, 2021, the Trustee announced that it has entered into an agreement with Argent Trust Company, a Tennessee chartered trust company (“Argent”), pursuant to which the Trustee will be resigning as trustee of the Trust and will nominate Argent as successor trustee of the Trust. The Trustee’s resignation as trustee, and Argent’s appointment as successor trustee, are subject to certain conditions set forth in the agreement, including approval by the unitholders of the Trust and of certain other trusts of which Simmons Bank acts as trustee (or a court) of (i) Argent’s appointment as successor trustee and (ii) any amendments to the indenture of the Trust and the trust agreements and indentures of the other trusts necessary to permit Argent to serve as successor trustee.

At a special meeting of the Trust’s unitholders held May 4, 2022, the unitholders of the Trust voted to approve the appointment of Argent Trust Company as successor trustee to serve as trustee of the Trust once the resignation of Simmons Bank, the current Trustee of the Trust, takes effect. The proposal of related amendments to the Trust indenture was not approved. On October 13, 2022, upon request of the Trustee and a unitholder of the Trust, the District Court of Tarrant County, Texas, 153rd Judicial District approved an order modifying the Trust indenture so that Argent Trust Company would qualify as a successor trustee. The effective date of the Trustee’s resignation and appointment of Argent Trust Company as successor trustee is anticipated to be December 30, 2022, subject to the satisfaction or waiver of the conditions set forth in the Trustee’s notice of resignation and the Trust’s definitive proxy statement.

Contingencies

For information on contingencies, see Note 3 to Condensed Financial Statements.

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, 2021.2022.

Item 6.  Exhibits

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.

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