Updated on June 18th, 2021 by Bob Ciura
Investors can buy stock in companies of all shapes and sizes thanks to the diverse offerings available in the stock market. Companies with market capitalizations of $10 billion or more are considered large cap stocks. Small-caps have market capitalizations below $2 billion.
However, there are even smaller companies that trade in the United States. For example, micro-caps are generally companies with market capitalizations of $300 million or less.
Cross Timbers Royalty Trust (CRT) is a micro-cap, and a tiny one at that—it has a market capitalization of just ~$60 million. Its market capitalization is minuscule, but its dividend is quite large. Cross Timbers stock has a high dividend yield of nearly 9%.
Plus, Cross Timbers pays a monthly dividend. Sure Dividend has compiled a database of 53 monthly dividend stocks (along with important financial metrics such as dividend yields and payout ratios) which you can access below:
Despite its high yield and monthly dividend payouts, Cross Timbers has a highly uncertain outlook. The company has a very risky business model, and its annual dividend payouts have declined steadily since 2014.
Therefore, only the most risk-tolerant investors should consider buying Cross Timbers.
Cross Timbers Royalty Trust was created on February 12, 1991, and it 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 trust was created to collect net income, then make distribution payments to unitholders based upon that income. Net 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.
CRT had royalty income of $5.9 million in 2019, and $5.3 million in 2020.
In mid–May, CRT reported (5/14/20) financial results for the first quarter of fiscal2021. Production of gas grew 47% over last year’s quarter thanks to timing of cash receipts but production of oil declined –34% due to timing of cash receipts and the natural decline of the fields. The average realized gas price grew 22% but the average realized oil price fell 20%.
Overall,net income decreased by 33%. The trust does not provide any guidance for the running year. CRT will benefit from the recent oil price rally to pre–COVID levels thanks to the aggressive production cuts of OPEC and Russia and the ongoing vaccination program, which could put the pandemic under control this year.
One of the major catalysts for Cross Timbers moving forward would be higher oil and gas prices. Falling commodity prices weighed on the income derived by the trust in recent years. We believe the recent decline in commodity prices will again weigh on the company in the second quarter. Weak commodity pricing will continue to limit distributable income, and therefore, the share price.
Oil is currently above $70 per barrel in the US after a huge swing down and then a major recovery after the period of COVID-19-related economic weakness. With oil prices strong in the first quarter, Cross Timbers was able to produce a strong distribution. Should oil prices continue to rebound, we see a nice runway of growth ahead.
Indeed, the company’s financial results should improve meaningfully in 2021 versus 2020. Natural gas prices for 2020 averaged $2.56 per Mcf for Cross Timbers, down 32% from the 2019 average price of $3.74 per Mcf. Meanwhile, the average oil price was $40.74 per barrel, down 23% from the 2019 average price of $52.79 per barrel.
As both natural gas and oil are currently trading well above the 2020 average levels, this year should represent a significant recovery for Cross Timbers.
As a result, rising oil prices should be a boost for Cross Timbers, helping to offset some of the damage done last year. That would indicate that perhaps the worst has been seen for Cross Timbers at this point.
Cross Timbers has very minimal operating expenses since it is a royalty trust. This means that its operating leverage is huge when revenue rises. As stated above, if oil prices continue to rebound, Cross Timbers will accrue significant benefits.
Because of this, oil and gas prices are absolutely critical for the trust’s distributable income, and therefore, its growth is almost entirely dependent upon commodity prices. As of December 31st 2020, proved reserves for the underlying properties were estimated to be 1.5 million barrels of oil and 14.6 billion cubic feet of natural gas.
There isn’t much the trust can do to impact growth, so shareholders should certainly be aware of this. Cross Timbers is a passive play on collecting royalty income and by extension, oil and gas prices.
Since Cross Timbers is a trust, its dividends are classified as royalty income. And since the distributions are considered ordinary income, they are taxed at the individual’s marginal tax rate.
Cross Timbers’ dividends are declared 10 calendar days prior to the record date, which is the last business day of each month. The company’s dividend payouts have declined steadily over the past few years, a reflection of weak commodity prices.
Source: Investor Presentation
In 2018, Cross Timber paid cumulative dividends of approximately $1.43 per share. However, 2019 saw distributions fall to $0.88 per share, followed by a further decline to $0.78 per share in 2020.
Fortunately, distributions have picked up to start 2021, as oil and gas prices have rallied considerably off the pandemic lows. Over the first half of 2021, the company has declared distributions of $0.451468. Annualized, the projected payout of $0.903 would represent a dividend yield of 8.8%.
There is no doubt that Cross Timbers is a high dividend stock. But it has a variable payout that can swing wildly, depending almost entirely on the direction of oil and gas prices.
These payments highlight the variable nature of Cross Timber’s distribution – since it is based upon current income for the trust – as well as the impact of declining oil and gas prices. With the rebound in oil and gas prices, we’d expect Cross Timbers to be able to pay at least $0.08 per share monthly for the foreseeable future, so its yield will still be sizable.
However, we note that the trust is entirely dependent upon commodity prices it has no control over. The trust continues to distribute essentially all of its income, as it has since its inception. Dividend coverage is never going to be strong given that Cross Timbers is required to distribute basically all of its income.
Future distribution growth is reliant upon higher distributable income. As a result, the trust’s dividend growth potential is essentially a bet on oil and gas prices. If commodity prices continue to rise, there is a good chance for distribution growth through 2021.
The bottom line for Cross Timbers’ distribution is that it is very unpredictable and while the headline yield is enticing, keep in mind there is significant variability in any particular month’s payout, depending on commodity prices and production levels. Investors should keep in mind the risk and volatility associated with oil and gas royalty trusts before buying Cross Timbers.
Cross Timbers gives investors a unique way to play potentially higher oil and gas prices in the future, all while realizing monthly income along the way. At the same time, there are risks and unique characteristics that investors should take into account before buying shares of a royalty trust.
Cross Timbers is a micro-cap, meaning it is more volatile and thinly-traded than larger companies. It is also a royalty trust, which carries its own risks.
Finally, Cross Timbers is not a long-term ‘sleep well at night’ dividend growth stock. Future results are dependent upon oil and gas prices and the true amount of reserves in the properties it has interests in.
As a result, Cross Timbers is only a recommended stock for investors who accept the risks of royalty trusts and micro-caps.