Published by Bob Ciura on June 1st, 2017
Investors can buy stock in companies of all shapes and sizes.
Companies with market capitalizations of $10 billion or more are considered large-caps. Small-caps have market capitalizations below $2 billion.
However, there are even smaller companies that trade on the NYSE.
Microcaps are generally companies with market capitalizations of $300 million or less.
Cross Timbers Royalty Trust (CRT) is a microcap, and a tiny one at that—it has a market capitalization of just $91 million.
Its market cap is minuscule, but its dividend is anything but. If CRT’s market cap were larger it would be one of 295 established stocks with a 5%+ dividend yield (as it stands now, the list below excludes microcap stocks).
Plus, CRT pays a monthly dividend, which means investors get paid each month, rather than the more typical quarterly or semi-annual dividend schedule.
There are currently just 21 stocks that pay monthly dividends.
This article will discuss CRT’s business model and its appeal to income investors.
Cross Timbers Royalty Trust was created on February 12, 1991. The Trust makes money from two sources.
First, income is derived from a 75% net profits interest from seven oil-producing properties in Texas and Oklahoma, operated by established oil companies.
In addition, income is generated from a 90% net profits interests from gas-producing properties in Texas, Oklahoma, and New Mexico. The primary-gas producing field is the San Juan Basin in northwestern New Mexico.
The San Juan Basin gas production represented approximately 76% of the Trust’s gas sales volumes and 50% of the net profits income for 2016.
The trust was created to collect net profits income, then make distribution payments to unitholders.
Net profits income received by the trust on the last business day of each month is paid by XTO Energy, a subsidiary of ExxonMobil (XOM).
CRT’s 75% net profits interest is reduced by production and development costs, while the 90% net profits interest is not subject to these costs.
Without production and development costs, the 75% net profits interest income is usually only affected by changes in sales volumes or commodity prices.
2016 was a challenging year for CRT, as it was for most of the oil and gas industry.
Net profits income was $7.5 million for the year. Distributable income was $6.4 million, or $1.06 per unit, down 22% from the previous year.
The decline was due primarily to lower oil and gas prices, partially offset by falling production and development costs. Average production costs per barrel of oil fell by approximately one-third last year.
Fortunately for CRT, commodity prices have recovered over the past year, which could fuel stronger financial results going forward.
One of the major catalysts for CRT moving forward would be higher oil and gas prices. Falling commodity prices weighed on the income derived by the trust last year.
Now that oil prices have fallen back below $50 per barrel in the U.S., 2017 could be another challenging year.
However, conditions should remain more favorable last year. CRT had an average realized oil price of $38.02 per barrel in 2016, along with an average gas price of $3.55 per thousand cubic feet.
Commodity prices are down significantly over the past few years, which has had a major impact on CRT. Consider that the company had average oil prices of $52.62 per barrel in 2015, and $91.48 per barrel in 2014.
Similarly, gas prices fell by nearly half from 2014-2016.
As a result, rising oil and gas prices would be a boost for CRT. There is some reason for optimism in this area—oil prices have come back considerably, and are currently near $50 per barrel.
This helped CRT in the first quarter. The ﬁrst quarter 2017 average oil price was $45.22 per barrel, up 25% from the same quarter last year.
Supply cuts from OPEC could keep oil prices near this level for the remainder of the year. And, OPEC’s recent decision to extend the cuts into 2018 could be a continued catalyst.
Equally important to CRT is the condition of its reserves. It is critical for the company to maintain sufficient reserves to enable continuing operation of the trust.
Source: 2016 Annual Report, page 20
The discounted net cash flow from proved reserves of the trust are estimated to be $29.4 million. These estimates were compiled based on a 12-month average oil price of $38.19 per barrel, and $2.45 per Mcf for gas.
If oil and gas prices remain above these levels going forward, the projected future cash flows could be significantly higher.
There are a few important dates to keep in mind when it comes to CRT’s dividend.
Since CRT is a trust, its dividends are classified as royalty income. And, the distributions are considered ordinary income, and as a result are taxed at the individual’s marginal tax rate.
CRT’s dividends are declared 10 calendar days prior to the record date, which is the last business day of each month.
In the past 12 months, CRT paid cumulative dividends of approximately $0.995 per share, good for a 6.5% dividend yield.
The trailing distributions comprised roughly 94% of distributable income in 2016. The Trust will continue to distribute virtually all of distributable income.
Future distribution growth is reliant upon higher distributable income. As a result, the company’s dividend growth potential is essentially a bet on oil and gas prices.
If commodity prices continue to rise over the remainder of 2017, there is a good chance for continued distribution growth in 2018.
CRT gives investors a unique way to play potentially higher oil and gas prices in the future – and realize monthly income along the way.
At the same time, there are risks and downsides that investors should take into account before buying.
CRT is a microcap, meaning it can be more volatile and thinly-traded than larger companies. And, it is a trust, which carry their own risks. Finally, CRT is not a long-term ‘sleep well at night’ dividend growth stock. It’s future results are dependent upon oil and gas prices and the true amount of reserves in the properties it has interests in.