Evaluating the Sustainability of Cross Timbers Royalty Trust's Dividend Amid Declining Production and Rising Costs

Investors seeking income from the energy sector often turn to royalty trusts like Cross Timbers Royalty Trust (CRT). These entities derive revenue from oil and gas production without the operational risks of active drilling. However, CRT faces a critical challenge: declining production and rising costs in a volatile energy market. This article examines whether CRT's monthly dividend remains sustainable in the long term, given these pressures.

CRT's Financial Structure and Recent Performance

CRT operates as a passive entity, collecting 90% net profits from gas properties in the San Juan Basin of New Mexico and 75% net profits from oil-producing properties in Texas and Oklahoma. These interests are structured to shield CRT from production costs (for the 90% interests) or to reduce profits by such costs (for the 75% interests).

In Q3 2024, CRT's net profits income dropped 36% year-over-year to $1.7 million, reflecting lower gas prices, reduced production volumes, and higher operational expenses in its oil properties. The trust's reliance on long-lived gas assets makes it particularly sensitive to commodity price swings. For example, the 90% net profits interests—derived from gas fields with minimal production costs—declined as gas prices fell below 2023 levels. Meanwhile, the 75% net profits interests faced pressure from rising transportation and development costs in Texas and Oklahoma.

Dividend Sustainability: A Delicate Balance

CRT's dividend has historically been robust, with a 9.46% yield as of 2025. However, the trust's payout ratio of 30.67% raises questions. While this ratio suggests a conservative approach to reinvesting earnings, the recent 36% drop in net profits income highlights the fragility of this model.

The trust's debt-free balance sheet is a key strength. With no long-term obligations, CRT can prioritize dividend payments even in lean periods. This contrasts sharply with active E&P companies, which often carry debt burdens that amplify financial stress during downturns. Additionally, CRT's structure—passively collecting and distributing income—reduces exposure to operational risks like equipment failures or drilling delays.

Yet, the trust's low payout ratio is a double-edged sword. A 30.67% payout implies that CRT retains most of its earnings, which could fund future distributions during downturns. However, if production declines persist, even this buffer may not be enough to maintain the dividend. For example, if gas prices remain depressed and oil production costs rise further, CRT's net profits could shrink to levels insufficient to support current payouts.

Risks and Rewards in a Shifting Energy Landscape

CRT's performance is inextricably tied to the energy market's volatility. Natural gas prices, for instance, have historically been cyclical, influenced by weather, storage levels, and global demand. While CRT's gas assets are long-lived, they are not immune to prolonged price declines. Similarly, the trust's oil properties are subject to the same cost inflation affecting the broader industry, such as higher labor and equipment expenses.

The trust's passive structure also limits its ability to adapt. Unlike active E&P firms, CRT cannot explore new reserves or optimize production to offset declines. Its income is entirely dependent on the performance of legacy assets, which may face declining output as fields mature.

Investment Implications: A Cautionary Case for Income Seekers

For income-focused investors, CRT's high yield and monthly distributions remain attractive. However, the trust's recent financial trends suggest caution. The 36% drop in Q3 2024 net profits income, coupled with the absence of a dividend reinvestment plan (DRIP), means investors must rely on external markets to accumulate additional units—a risk in a volatile stock.

CRT's P/E ratio of 9.91 and P/B ratio of 25.1 indicate it is valued for its income potential rather than growth. This aligns with its structure as a passive trust but also limits upside potential for capital appreciation. Investors should weigh CRT's yield against alternatives, such as high-yield bonds or REITs, which may offer more stability in a low-growth environment.

Conclusion: A Dividend to Watch, but Not to Rely On

CRT's dividend appears sustainable in the short term, bolstered by a debt-free balance sheet and conservative payout ratio. However, the trust's reliance on volatile energy prices and legacy assets makes long-term sustainability uncertain. Investors should monitor CRT's quarterly reports for signs of further production declines or cost pressures. For those comfortable with moderate risk and prioritizing income over growth, CRT remains a viable option—but one that demands close scrutiny in a challenging energy landscape.