Evaluating Cross Timbers Royalty Trust's Cash Flow Sustainability in a Volatile Energy Market

The Cross Timbers Royalty Trust (CRT), a vehicle for income-seekers in the energy sector, has long drawn attention for its dual exposure to oil and gas production through net profits interests in Texas, Oklahoma, and New Mexico. Its July 2025 distribution of $0.030376 per unit, payable on August 14, 2025, reflects a blend of production volumes, commodity prices, and operational costs. Yet, in an era of energy market turbulence, investors must scrutinize whether CRT's cash flow remains predictable—or if volatility threatens its reliability as an income source.

The Mechanics of CRT's Cash Flow

CRT's income derives from two distinct net profits interests: 90% net profits interests from gas properties and 75% net profits interests from oil-producing properties. The gas assets, concentrated in the San Juan Basin, are largely insulated from production costs, offering a stable revenue stream. In contrast, the oil properties, which bear 75% of net profits after operational expenses, are far more sensitive to price swings and cost inflation.

For July 2025, CRT reported 9,000 barrels of oil and 47,000 Mcf of gas produced, with average prices of $60.88 per barrel and $4.84 per Mcf. These figures suggest a modest recovery in oil prices compared to the 2014–2016 slump, but they remain below the peaks of the mid-2020s. Meanwhile, excess costs—expenses exceeding the original cost estimates for properties—have risen to $4.824 million (Texas Working Interest) and $33,000 (Oklahoma Working Interest). While these costs are manageable today, they highlight a risk: as production declines naturally over time, the burden of fixed costs on shrinking cash flows could amplify volatility.

Historical Volatility and the 30% Growth Paradox

CRT's distribution history tells a tale of resilience and instability. From 2015 to 2025, its dividends swung wildly, from $0.1687 to $0.0524 per unit during the 2014–2016 oil crash. Yet, over the past three years, the average dividend growth rate has surged by 30%, driven by a rebound in energy prices and a strategic focus on high-margin gas assets. This duality—volatility coexisting with growth—poses a critical question: Is CRT's income stream a reliable bet, or a gamble tied to the whims of the energy cycle?

The 90% net profits interests, which accounted for the bulk of CRT's cash flow in July 2025, offer a degree of insulation. These interests are not subject to production costs, meaning they thrive when commodity prices rise or production volumes stabilize. However, the 75% net profits interests, which face cost overruns and declining production, are far less predictable. For instance, the Texas Working Interest's cumulative excess costs have grown to $4.824 million, including accrued interest of $1.311 million. If production from these properties continues to decline, the trust may face margin compression, reducing the capacity to maintain its forward dividend yield of 4.39%.

The Case for CRT as an Income Investment

Despite its volatility, CRT retains appeal for investors seeking high yields in a low-growth world. Its 4.39% forward dividend yield compares favorably to risk-free assets like Treasuries, which hover near 3%. Moreover, CRT's gas assets, with their long-lived reserves and cost-insulated structure, provide a floor for cash flow. In 2024, for example, CRT's third-quarter distribution rose despite a broader energy slump, underscoring the stabilizing role of gas in its portfolio.

However, prudence is warranted. The 75% net profits interests, while a source of growth in the past, are increasingly exposed to cost inflation and production declines. For instance, the Oklahoma Working Interest's excess costs were only partially offset in July 2025, leaving $33,000 in unrecovered expenses. As aging oil properties become less productive, the trust's ability to sustain its 30% average dividend growth rate will hinge on its capacity to offset these costs through higher commodity prices or operational efficiency.

Risk Mitigation and the Path Forward

CRT's future as a reliable income generator depends on three factors:
1. Commodity Price Stability: A sustained recovery in oil and gas prices would bolster both the 90% and 75% net profits interests. However, geopolitical risks and the rise of renewable energy could cap long-term price gains.
2. Cost Management: The trust must address rising excess costs, particularly in the Texas Working Interest, where cumulative expenses now exceed $4.8 million. Any further deterioration in production efficiency could erode margins.
3. Production Profile: The natural decline of oil-producing assets means CRT's cash flow will increasingly rely on gas—a positive development, given its cost-insulated structure—but also a limitation, as gas prices are subject to seasonal and cyclical swings.

Conclusion: A High-Yield Gamble or a Steady Income Play?

CRT's July 2025 distribution and historical trends reveal a trust that is both resilient and vulnerable. Its gas assets offer a reliable base, while its oil properties introduce volatility. For investors with a high-risk tolerance, CRT's 4.39% yield and potential for growth in a rebounding energy market may justify the risks. However, those seeking unshakeable income should weigh CRT's volatility against alternatives with more predictable cash flows, such as dividend aristocrats or infrastructure REITs.

In the end, CRT is a microcosm of the energy sector's duality: a source of outsized returns in bull markets and a potential underperformer in downturns. For the discerning investor, the key lies in balancing CRT's yield with hedging strategies or diversification across asset classes. In an era of uncertainty, the trust's sustainability as an income play will depend not just on the price of oil and gas, but on the skill with which its managers navigate the interplay of production, costs, and market forces.