Cross Timbers Royalty Trust (CRT0 is an express trust. Net profits interests are the principal asset of this issue. It has net profit interests in properties in Texas, Oklahoma, and New Mexico. These were properties owned by XTO Energy, Inc. and are operated by XTO. Bank of America, N.A. is the trustee of the trust.
Below are some graphs to help understand the history of the trust:
Click to enlarge images.
The chart directly above shows that CRT is close to its low for the year. It had a high of just over $50.00 per share in January and is now selling for just over $26.00 per share. The reason for this sharp slide is the declining dividends. The dividend in December of last year was over $.25 per month. The dividend in November of this year was under $0.19 per share. Investors are wary because the trusts assets are depleting and the price of gas is very low.
Is this trust a solid, reasonable investment? To determine that one must attempt to quantify how long the oil and gas reserves will last and at what price. The 2011 annual report of the trust said the following:
As of Dec. 31, 2011, proved reserves for the underlying properties were estimated by independent engineers to be 2.3 million Bbls of oil and 27.7 Bcf of natural gas. Based on an allocation of these reserves, proved reserves attributable to the net profits interests were estimated to be 1.1 million Bbls of oil and 24.6 Bcf of natural gas. Estimated future net cash flows from proved reserves of the net profits interests at December 31, 2011 were $231.4 million. Using an annual discount factor of 10%, the present value of estimated future net cash flows at December 31,2011 was $114.5 million. Proved reserve estimates and To Unitholders: related future net cash flows have been determined based on a 12-month average oil price of $90.05 Bbl and a 12-month average gas price of $6.24 per Mcf, based on the first-day-of-the-month price for each month in the period, and year end costs.
Looking at the production figures for 3 years, the production of gas and oil has been decreasing about 10% annually.
The reason for the small reduction of oil production from 2010 to 2011 is because several oil wells were done over. Therefore one can readily determine probable future loss of production of the wells into the future at about 10%. The one thing one cannot determine is the prices that XTO will receive for its gas and oil production. If one is convinced that oil prices will remain high and that gas will go somewhat higher over time, than one can hope to see a minimum of 7% to 10% returns on the current price of the trust over the next three years. In that case the present price of the trust is a bargain.
On the other hand if one is convinced that the price of oil and gas is going down over the next several years, one will see further erosion in the trust's dividend. Further erosion of the dividend will also have a negative impact on the price of the trust. Herein lies the danger for the dividend investor. Even a small erosion of the price of the issue will have a huge negative impact on one's return.
The price of oil is likely to remain in $80.00 to $120.00 region for the next several years because of the increasing appetite of third world nations for autos and the fuel to run them. The price of gas will also climb slowly over the next several years even with our abundance for a couple of reasons: 1) the Obama administration has systematically forced electric utilities to stop using coal generators and most are being replaced by gas fed furnaces, and 2) several pipelines and terminals are presently being built to ship our natural gas overseas. These new markets will help drive the price upward.
There is some hope for the trust in the future, since it does have an interest in some non-producing acreage. The annual report also stated:
The underlying non-producing royalties contain approximately 240,000 gross (approximately 30,000 net) acres in Texas, Oklahoma, and New Mexico which were non-producing at the date of the trust's creation. The trust is entitled to 10% of oil and gas production attributable to the underlying mineral interests, but is not entitled to delay rental payments or lease bonuses. There has been no significant development of such non-producing acreage since the trust's creation.
Of course, there are no guarantees of any kind that this acreage will produce oil and/or gas in the future, but there is a possibility that it may.
If you decide to purchase this issue, buy it below $28.50 per share and hold it in a taxable account rather than in a non-taxable retirement account. Dividends paid by the trust are not taxable at the full amount of the payment. Part of the dividend is considered a capital return because of well depletion and a taxable account allows you to take this depletion allowance as a deduction on your taxes.
Therefore if you are like me, starving for return on your investments, you are willing to take the risk associated with this trust at its current price. This issue depends on a depreciating asset for its cash flow, so one must take this fact into account when purchasing the issue. As the years go by if there is no work on the non-producing acreage, the returns from this issue will decline. So one must be willing to sell and move on when the dividends are below 8%. If the price of the issue rises to the point where the dividend is less than 8%, the risk inherent in this issue does not warrant holding the stock any longer.
Disclosure: I am long CRT.