# To the Unitholders of Cross Timbers Royalty Trust and Simmons Bank

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_CRT_2020/NYSE_CRT_2020.mmd` · pages 32-38_

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To the Unitholders of Cross Timbers Royalty Trust and Simmons Bank, as Trustee

## Opinion on the Financial Statements

We have audited the accompanying statements of assets, liabilities and trust corpus of Cross Timbers Royalty Trust (the "Trust") as of December 31, 2020 and 2019, and the related statements of distributable income and of changes in trust corpus for the years then ended, including the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the assets, liabilities and trust corpus of the Trust as of December 31, 2020 and 2019, and its distributable income and its changes in trust corpus for the years then ended in conformity with the modified cash basis of accounting described in Note 2.

## Basis for Opinion

These financial statements are the responsibility of the Trustee. Our responsibility is to express an opinion on the Trust's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by the Trustee, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

## Basis of Accounting

As described in Note 2, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles.

## Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

## The Impact of Proved Oil and Gas Reserves on Net Profits Interests in Oil and Gas Properties, Net

The Trust's net profits interests ("NPI") in oil and gas properties, net balance was \(7,523 thousand as of December 31, 2020 and amortization of net profits interests for the year ended December 31, 2020 was \)639 thousand. As described in Note 2, amortization of the net profits interests is calculated on a unit-of-production basis using proved reserves and charged directly to

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trust corpus. As disclosed by the Trustee, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods in which the cost of the required equipment is relatively minor compared with the cost of a new well. Physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using 12-month average prices, based on the first-day-of-the-month price for each month in the period, estimated reserve quantities can be significantly impacted by changes in product prices. Accordingly, oil and gas quantities ultimately recovered and the timing of production may be substantially different from original estimates. The proved oil and gas reserves for the underlying properties are estimated by independent petroleum engineers ("specialists").

The principal considerations for our determination that performing procedures relating to the impact of proved oil and gas reserves on net profits interests in oil and gas properties, net is a critical audit matter are (i) the significant judgment by the Trustee, including the use of specialists, when developing the estimates of proved oil and gas reserves, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence related to the data, methods, and assumptions used by the Trustee and its specialists in developing the estimates of the reserve quantities.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others, testing the completeness and accuracy of the data related to estimates of reserve quantities. The work of the Trustee's specialists was used in performing the procedures to evaluate the reasonableness of the reserve quantities. As a basis for using this work, the specialists' qualifications and objectivity were understood, as well as the methods used by the specialists. The procedures performed also included tests of the data used by the specialists and an evaluation of the specialists' results.

## Second Quarter Impairment Assessment of Net Profits Interests in Oil and Gas Properties, Net

The Trust's net profits interest in oil and gas properties, net balance was \(7,523 thousand as of December 31, 2020. As described in Note 2, the Trustee reviews the Trust's NPI in oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the NPI may not be recoverable. If events and circumstances indicate the carrying value may not be recoverable, the Trustee would use the estimated undiscounted future net cash flows from the NPI to evaluate the recoverability of the Trust assets. If the undiscounted future net cash flows from the NPI are less than the NPI carrying value, the Trust would recognize an impairment loss for the difference between the NPI carrying value and the estimated fair value of the NPI. The determination as to whether the NPI is impaired requires a significant amount of judgment by the Trustee and is based on the best information available to the Trustee at the time of the evaluation, including commodity pricing and other information provided by XTO Energy such as estimates of future production and development and operating expenses. During the first and second quarter of 2020, trigger events occurred indicating a need for impairment assessments. Impairment assessments were completed and no impairment was indicated.

The principal considerations for our determination that performing procedures relating to the second quarter impairment assessment of net profits interest in oil and gas properties is a critical audit matter are (i) the significant judgment by the Trustee, including the use of specialists, when developing the undiscounted future net cash flows; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the Trustee's significant assumptions related to future production and commodity prices.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others (i) testing the Trustee's process for developing the undiscounted future net cash flows; (ii) evaluating the appropriateness of the undiscounted future net cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of significant assumptions used by the Trustee related to future production and commodity prices. Evaluating the reasonableness of the Trustee's assumptions related to future commodity prices involved comparing the prices against observable market data and

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evaluating differentials through the use of historical data. The work of the Trustee's specialists was used in performing the procedures to evaluate the reasonableness of the proved reserve quantities as stated in the Critical Audit Matter titled "The Impact of Proved Oil and Gas Reserves on Net Profits Interests in Oil and Gas Properties, Net" and the reasonableness of the future production. As a basis for using this work, the specialists' qualifications and objectivity were understood, as well as the methods used by the specialists. The procedures performed also included tests of the data used by the Trustee's specialists and an evaluation of the specialists' findings.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

April 13, 2021