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Microcap With 6% Yield and Monthly Distributions

- By Ben Reynolds

(Published by Bob Ciura on June 1)

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-cap companies have market capitalizations below $2 billion.

There are even smaller companies that trade on the New York Stock Exchange, however.

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 Cross Timbers' market cap were larger, it would be one of 295 established stocks with a 5%-plus dividend yield (as it stands now, the list below excludes microcap stocks).

You can see the full list of established 5%-plus yielding stocks here.

Plus, the company 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.

You can see all 21 monthly dividend stocks here.

Business overview

Cross Timbers was created on Feb. 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, which are operated by established oil companies.

In addition, income is generated from a 90% net profits interest 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 company'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).

Cross Timber'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 the company, 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 Cross Timbers, commodity prices have recovered over the past year, which could fuel stronger financial results going forward.

Growth prospects

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 last year.

Now that oil prices have fallen back below $50 per barrel in the U.S., 2017 could be another challenging year.

Conditions should remain more favorable than last year, however. Cross Timbers 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 have declined significantly over the past few years, which has had a major impact on the company. 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 to 2016.

As a result, rising oil and gas prices would be a boost for Cross TImbers. There is some reason for optimism in this area--oil prices have come back considerably and are currently near $50 per barrel.

This increase helped the company 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. In addition, OPEC's recent decision to extend the cuts into 2018 could be a continued catalyst.

Equally important to Cross Timbers is the condition of its reserves. It is critical for the company to maintain sufficient reserves to enable continuing operation of the trust.

CRT Reserves

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 thousand cubic feet for gas.

If oil and gas prices remain above these levels going forward, the projected future cash flows could be significantly higher.

Dividend analysis

There are a few important dates to keep in mind when it comes to Cross Timbers' dividend.

Since the company is a trust, its dividends are classified as royalty income. The distributions are considered ordinary income and, as a result, 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.

In the past 12 months, the trust paid cumulative dividends of approximately 99.5 cents 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 its 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 for the remainder of 2017, there is a good chance for continued distribution growth in 2018.

Final thoughts

Cross Timbers 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 investors should take into account before buying.

Cross Timbers is a microcap, meaning it can be more volatile and thinly-traded than larger companies. It is also a trust, which carries its own risks. Finally, the company is not a long-term, "sleep well at night" dividend growth stock. Its future results are dependent upon oil and gas prices and the true amount of reserves in the properties it has interests in.

Disclosure: I am long XOM.

This article first appeared on GuruFocus.