MARINE PETROLEUM TRUST - Quarter Report: 2006 December (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from                      to                      .

Marine Petroleum Trust

(Exact name of registrant as specified in its charter)

Texas		75-6008017
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
Bank of America, N.A.		75283-0650
P.O. Box 830650, Dallas, Texas		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code (800) 985-0794

None
(Former name, former address and former fiscal year
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ                     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                     Accelerated filer o                     Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                      No þ.

Indicate number of units of beneficial interest outstanding as of the latest practicable date:
As of January 30, 2007, we had 2,000,000 units of beneficial interest outstanding.

 

 

MARINE PETROLEUM TRUST

INDEX

		Page
		Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2006			1
Condensed Consolidated Statements of Income and Undistributed Income for the Three Months and Six Months Ended December 31, 2006			2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2005			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			5
Item 3. Quantitative and Qualitative Disclosures About Market Risk			8
Item 4. Controls and Procedures			8
PART II. OTHER INFORMATION
Item 6. Exhibits			9
Certification of the Corporate Trustee Pursuant to Section 302
Certification of the Corporate Trustee Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARINE PETROLEUM TRUST AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2006 and June 30, 2006
(Unaudited)

		December 31,				June 30,
		2006				2006
ASSETS
Current Assets:
Cash and cash equivalents		$	1,504,779			$	1,454,283
Oil and gas royalties receivable			840,607				919,494
Receivable from affiliate			260,911				67,123
Total current assets		$	2,606,297			$	2,440,900
Investment in affiliate			549,632				343,856
Producing oil and gas properties			7				7
		$	3,155,936			$	2,784,763
LIABILITIES AND TRUST EQUITY
Current Liabilities – Federal income taxes payable		$	3,200			$	1,800
Trust Equity:
Corpus – authorized 2,000,000 units of beneficial interest, issued 2,000,000 units at nominal value			8				8
Undistributed income			3,152,728				2,782,955
Total trust equity			3,152,736				2,782,963
		$	3,155,936			$	2,784,763

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND UNDISTRIBUTED INCOME

For the Three Months and Six Months Ended December 31, 2006 and 2005
(Unaudited)

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2005				2006				2005
Income:
Oil and gas royalties		$	1,088,364			$	695,164			$	2,284,772			$	1,526,699
Equity in earnings of affiliate			269,194				55,589				455,280				310,040
Interest income			20,489				14,408				39,246				26,398
			1,378,047				765,161				2,779,298				1,863,137
Expenses:
General and administrative			72,218				48,305				112,444				98,219
Income before Federal income taxes			1,305,829				716,856				2,666,854				1,764,918
Federal income taxes of subsidiary			3,600				2,400				7,400				3,200
Net income			1,302,229				714,456				2,659,454				1,761,718
Undistributed income at beginning of year			3,003,194				2,909,452				2,782,955				3,080,014
			4,305,423				3,623,908				5,442,409				4,841,732
Distributions to unitholders			1,152,695				1,578,226				2,289,681				2,796,050
Undistributed income at end of year		$	3,152,728			$	2,045,682			$	3,152,728			$	2,045,682
Net income per unit		$	0.65			$	0.36			$	1.33			$	0.88
Distributions per unit		$	0.58			$	0.79			$	1.14			$	1.40

See accompanying notes to condensed consolidated financial statements.

MARINE PETROLEUM TRUST AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 2006 and 2005
(Unaudited)

		Six Months Ended
		December 31,
		2006				2005
Cash flows from operating activities:
Net income		$	2,659,454			$	1,761,718
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			—				568
Equity in undistributed earnings of affiliate			(455,280	)			(310,040	)
Distributions of earnings of affiliate			249,504				501,974
Change in assets and liabilities:
Oil and gas royalties receivable			78,887				746,018
Receivable from affiliate			(193,788	)			(47,826	)
Interest receivable			—				1,426
Income taxes payable			1,400				200
Net cash provided by operating activities			2,340,177				2,654,038
Cash flows from investing activities – proceeds from U.S. Agency bonds			—				200,000
Cash flows used in financing activities—distributions to unitholders			(2,289,681	)			(2,796,050	)
Net increase in cash and cash equivalents			50,496				57,988
Cash and cash equivalents at beginning of period			1,454,283				1,171,006
Cash and cash equivalents at end of period		$	1,504,779			$	1,228,994

See accompanying notes to condensed consolidated financial statements.

MARINE PETROLEUM TRUST AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)

Accounting Policies

     The financial statements include the financial statements of Marine Petroleum Trust (the “Trust”) and its wholly-owned subsidiary, Marine Petroleum Corporation (“MPC”). The financial statements are condensed and should be read in conjunction with the Trust’s annual report on Form 10-K for the fiscal year ended June 30, 2006. The financial statements included herein are unaudited, but in the opinion of management they include all adjustments necessary for a fair presentation of the results of operations for the periods indicated. Operating results for the three and six months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007.

     As an overriding royalty owner, actual production results are not known to us until reported by the operator, which could be a period of 60-90 days later than the actual month of production. To comply with accounting principles generally accepted in the United States of America, we must estimate earned but unpaid royalties from this production. To estimate this amount, we utilize historical information based on the latest production reports from the individual leases and current average prices as reported for oil by Chevron Corporation and the well head price for natural gas as reported by the Energy Information Agency, a division of the U.S. Department of Energy for the period under report.

Distributable Income

     The Trust’s Indenture provides that the trustee is to distribute all cash in the trust, less an amount reserved for the payment of accrued liabilities and estimated future expenses, to unitholders on the 28^th day of March, June, September and December of each year. If the 28^th falls on a Saturday, Sunday or legal holiday, the distribution is payable on the immediately preceding business day.

     As stated under “Accounting Policies” above, the financial statements in this Form 10-Q are the condensed and consolidated account balances of the Trust and MPC. However, distributable income is paid from the unconsolidated account balances of the Trust. Distributable income is comprised of (i) royalties from offshore Texas leases owned directly by the Trust, (ii) 98% of the overriding royalties received by MPC that are paid to the Trust on a quarterly basis, (iii) cash distributions from the Trust’s equity interest in the Tidelands Royalty Trust B (“Tidelands”), a separate publicly traded royalty trust, (iv) dividends paid by MPC, less (v) administrative expenses incurred by the Trust.

     The Trust relies on public records for information regarding drilling operations. The public records available up to the date of this report indicate that there were 25 new well completions made during the six months ended December 31, 2006 on leases in which the Trust has an interest. Public records also indicate that there were 19 wells in the process of being drilled and nine permits for wells to be drilled in the future.

     Based on the latest public records reviewed by the Trust, there are approximately 230 wells subject to the Trust’s overriding royalty interest that are listed as active oil or natural gas wells on the records of the Minerals Management Service.

     The Trust cannot project either net income or distributable net income in the future.

Undistributed Income

     A contract between the Trust and MPC provides that 98% of the overriding royalties received by MPC are paid to the Trust each quarter. MPC retains the remaining 2% of the overriding royalties along with other items of income and expense until such time as MPC’s Board of Directors declares a dividend out of the retained earnings. Beginning in the first quarter of 2004 the Board of Directors of MPC has declared quarterly dividends equal to 2% of overriding royalties collected each quarter. On December 31, 2006, undistributed income of the Trust and MPC amounted to $2,245,493 and $907,235, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition – Liquidity and Capital Resources

     The Trust is a royalty trust that was created in 1956 under the laws of the State of Texas. The Trust is not permitted to engage in any business activity because it was organized for the sole purpose of providing an efficient, orderly, and practical means for the administration and liquidation of rights to payments from certain oil and natural gas leases in the Gulf of Mexico, pursuant to license agreements and amendments between the Trust’s predecessors and Gulf Oil Corporation (“Gulf”). As a result of various transactions that have occurred since 1956, the Gulf interests now are held by Chevron Corporation, Elf Exploration, Inc., and their assignees.

     The Trust’s rights are generally referred to as overriding royalty interests in the oil and natural gas industry. An overriding royalty interest is created by an assignment by the owner of a working interest. The ownership rights associated with an overriding royalty interest terminate when the underlying lease terminates. All production and marketing functions are conducted by the working interest owners of the leases. Revenues from the overriding royalties are paid to the Trust either (i) on the basis of the selling price of oil, natural gas and other minerals produced, saved or sold, or (ii) at the value at the wellhead as determined by industry standards, when the selling price does not reflect the value at the wellhead.

     The Trust holds an overriding royalty interest equal to three-fourths of 1% of the value at the well of any oil, natural gas, or other minerals produced and sold from 59 leases covering 215,136 gross acres located in the Gulf of Mexico. The Trust’s overriding royalty interest applies only to existing leases and does not apply to any new leases that Chevron or Elf may acquire. The Trust also owns a 32.6% equity interest in Tidelands. Tidelands has an overriding royalty interest in five leases covering 22,948 gross acres located in the Gulf of Mexico. As a result of this ownership, the Trust receives periodic distributions from Tidelands.

     Due to the limited purpose of the Trust as stated in the Trust’s Indenture, there is no requirement for capital. The Trust’s only obligation is to distribute to unitholders the net income actually collected. As an administrator of oil and natural gas royalty properties, the Trust collects royalties monthly, pays administration expenses, and disburses all net royalties collected to its unitholders each quarter. Because all of the Trust’s revenues are invested in liquid funds pending distribution, the Trust does not experience any liquidity problems.

     The Trust’s Indenture (and MPC’s charter and by-laws) expressly prohibits the operation of any kind of trade or business. The Trust’s oil and natural gas properties are depleting assets and are not being replaced due to the prohibition against these investments. Because of these restrictions, the Trust does not require short term or long term capital. These restrictions, along with other factors, allow the Trust to be treated as a grantor trust. Thus, all income and deductions, for tax purposes, should flow through to each individual unitholder. The Trust is not a taxable entity.

Critical Accounting Policies

     As an overriding royalty owner, actual production results are not known to us until reported by the operator, which could be a period of 60-90 days later than the actual month of production. To comply with accounting principles generally accepted in the United States of America, we must estimate earned but unpaid

royalties from this production. To estimate this amount, we utilize historical information based on the latest production reports from the individual leases and current average prices as reported for oil by Chevron USA and the well head price for natural gas as reported by the Energy Information Agency, a division of the U.S. Department of Energy for the period under report.

     We did not have any changes in our critical accounting policies or in our significant accounting estimates during the six months ended December 31, 2006. Please see our annual report on Form 10-K for the year ended June 30, 2006 for a detailed discussion of our critical accounting policies.

General

     The Trust realized 56% of its revenue from the sale of oil and 44% from the sale of natural gas during the six months ended December 31, 2006. Revenue includes estimated royalties of oil and natural gas produced but payment for that production has not been received from producers.

     Distributions fluctuate from quarter to quarter due to changes in oil and natural gas prices and production quantities. Net income is determined by the revenue from oil and natural gas produced and sold during the accounting period. Distributions, however, are determined by the cash available to the Trust on the determination date.

     Current operations and hurricane damage. Wells in the South Timbalier Block 131, South Marsh Island Block 48, East Cameron Block 64 fields and one lease in the Ship Shoal Block 154 field remained shut in during the current quarter. The Minerals Management Service granted a suspension of production until September 30, 2006 on the lease in the Ship Shoal Block 154 field and approved suspension on the other fields to the first quarter of 2007.

Summary Review of Operating Results

     Net income for the six months ended December 31, 2006 increased approximately 51% to $1.33 per unit as compared to $0.88 per unit for the comparable period in 2005. Oil production for the six months ended December 31, 2006 increased approximately 6,200 barrels and natural gas production increased approximately 79,000 mcf from the levels realized in the comparable period in 2005. For the six months ended December 31, 2006, the average price realized for a barrel of oil increased $3.81 over the price realized in the comparable period in 2005 and the average price realized for a thousand cubic feet (mcf) of natural gas decreased $2.09 over the price realized in the comparable period in 2005.

     Distributions to unitholders amounted to $1.14 per unit for the six months ended December 31, 2006, a decrease of approximately 19% from the $1.40 distribution for the comparable period in 2005.

     The following table presents the net production quantities of oil and natural gas and net income and distributions per unit for the last five quarters.

		Production (1)
						Natural				Net				Cash
Quarter		Oil (bbls)				Gas (mcf)				Income				Distribution
December 31, 2005			6,363				32,537				0.36				0.79
March 31, 2006			7,482				61,295				0.49				0.39
June 30, 2006			13,704				85,681				0.72				0.45
September 30, 2006			12,327				54,523				0.68				0.57
December 31, 2006			7,975				108,885				0.65				0.58

     The Trust’s revenues are derived from the oil and natural gas production activities of unrelated parties. The Trust’s revenues and distributions fluctuate from period to period based upon factors beyond the Trust’s control, including, without limitation, the number of productive wells drilled and maintained on leases subject to the Trust’s interest, the level of production over time from such wells and the prices at which the oil and natural gas from such wells are sold. The Trust believes that it will continue to have enough revenues to allow distributions to be made to unitholders for the foreseeable future, although no assurance can be made regarding the amount of any future distributions. The foregoing sentence is a forward-looking statement. For more information, see “Forward-Looking Statements.” Actual results may differ from expected results because of reductions in the price or demand for oil and natural gas, which might then lead to decreased production; reductions in production due to the depletion of existing wells or disruptions in service, which may be caused by storm damage to production facilities, blowouts or other production accidents, or geological changes such as cratering of productive formations; and the expiration or release of leases subject to the Trust’s interests.

     Important aspects of the Trust’s operations are conducted by third parties. Oil and natural gas companies that lease tracts subject to the Trust’s interests are responsible for the production and sale of oil and natural gas and the calculation of royalty payments to the Trust. The Trust’s distributions are processed and paid by Mellon Investor Services LLC as the agent for the trustee of the Trust.

Results of Operations—Three Months Ended December 31, 2006 and 2005

     Net income increased 82% to $1,302,229 for the three months ended December 31, 2006, from $714,456 realized for the comparable three months in 2005.

     Operations in the Gulf of Mexico during the quarter ended December 31, 2005 were affected by two hurricanes. Katrina made landfall near New Orleans on August 29, 2005 and Rita made landfall near Port Arthur on September 24, 2005. Because of these storms, a number of fields were shut in for part of August and all of September 2005.

     The Trust’s revenue is dependent on the operations of the working interest owners of the leases burdened with the Trust’s overriding royalty interest. The only obligation of the working interest owners to the Trust is to make monthly overriding royalty payments of the Trust’s interest in the oil and natural gas sold. The volume of oil and gas produced and its selling price are primary factors in the calculation of overriding royalty payments. Production is affected by the declining capability of the producing wells, the number of new wells drilled, the number of existing wells re-worked and placed back in production. Production from existing wells is anticipated to decrease in the future due to normal well depletion. The Trust has no input with the operators regarding future drilling operations which could impact the Trust’s future oil and natural gas production.

     Revenue from oil royalties, excluding the Trust’s equity interest in Tidelands, for the three months ended December 31, 2006 increased 25% to approximately $462,000, from approximately $371,000 realized for the comparable three months in 2005. There was a 23% increase in production and a 1% decrease in the price realized.

     Revenue from natural gas royalties, excluding the Trust’s equity interest in Tidelands, increased 93% to approximately $626,000 from approximately $324,000 for the comparable three months in 2005. There was a 235% increase in production and a 42% decrease in the price realized.

     Income from the Trust’s equity in Tidelands increased approximately 384% for the three months ended December 31, 2006 as compared to the comparable three months of 2005. The wells on West Cameron Block 165 that were shut-in due to hurricane damage to the pipeline transporting the natural gas from this field were back on production during the current quarter.

     The following table presents the quantities of oil and natural gas sold and the average price realized from current operations for the three months ended December 31, 2006, and those realized in the comparable three months in 2005, excluding the Trust’s equity interest in Tidelands.

		Three Months Ended December 31,
		2006				2005
OIL
Barrels sold			7,975				6,363
Average price		$	57.94			$	58.36
NATURAL GAS
Mcf sold			108,885				32,537
Average price		$	5.75			$	9.95

Results of Operations—Six Months Ended December 31, 2006 and 2005

     Net income increased 51% to $2,659,454 for the six months ended December 31, 2006, from $1,761,718 realized for the comparable six months in 2005.

     Operations in the Gulf of Mexico during the six months ended December 31, 2005 were affected by two hurricanes. Katrina made landfall near New Orleans on August 29, 2005 and Rita made landfall near Port Arthur on September 24, 2005. Because of these storms, a number of fields were shut in for part of August and all of September 2005.

     The Trust’s revenue is dependent on the operations of the working interest owners of the leases burdened with the Trust’s overriding royalty interest. The only obligation of the working interest owners to the Trust is to make monthly overriding royalty payments of the Trust’s interest in the oil and natural gas sold. The volume of oil and gas produced and its selling price are primary factors in the calculation of overriding royalty payments. Production is affected by the declining capability of the producing wells, the number of new wells drilled, the number of existing wells re-worked and placed back in production. Production from existing wells is anticipated to decrease in the future due to normal well depletion. The Trust has no input with the operators regarding future drilling operations which could impact the Trust’s future oil and natural gas production.

     Revenue from oil royalties, excluding the Trust’s equity interest in Tidelands, for the six months ended December 31, 2006 increased 54% to approximately $1,282,000, from approximately $833,000 realized for the comparable six months in 2005. There was a 43% increase in production and a 7% increase in the price realized.

     Revenue from natural gas royalties, excluding the Trust’s equity interest in Tidelands, increased 44% to approximately $1,002,000 from approximately $694,000 for the comparable six months in 2005. There was a 93% increase in production and a 25% decrease in the price realized.

     Income from the Trust’s equity in Tidelands decreased approximately 47% for the six months ended December 31, 2006 as compared to the comparable six months of 2005. The wells on West Cameron Block 165 that were shut-in due to hurricane damage to the pipeline transporting the natural gas from this field were back on production during the current six-month period.

     The following table presents the quantities of oil and natural gas sold and the average price realized from current operations for the six months ended December 31, 2006, and those realized in the comparable six months in 2005, excluding the Trust’s equity interest in Tidelands.

		Six Months Ended December 31,
		2006				2005
OIL
Barrels sold			20,302				14,150
Average price		$	63.17			$	58.86
NATURAL GAS
Mcf sold			163,408				84,835
Average price		$	6.13			$	8.18

Forward-Looking Statements

     The statements discussed in this quarterly report on Form 10-Q regarding our future financial performance and results, and other statements that are not historical facts, are forward-looking statements as defined in Section 27A of the Securities Act of 1933. We use the words “may,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget,” or other similar words to identify forward-looking statements. You should read statements that contain these words carefully because they discuss future expectations, contain projections of our financial condition, and/or state other “forward-looking” information. Events may occur in the future that we are unable to accurately predict, or over which we have no control. If one or more of these uncertainties materialize, or if underlying assumptions prove incorrect, actual outcomes may vary materially from those forward-looking statements included in this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     As described elsewhere herein, the Trust’s only function is to collect overriding royalties from leases operated by others and distribute those royalties to its unitholders after paying the cost of collection and administration. The Trust’s income is highly dependent on the prices realized from the sale of oil and natural gas. Oil and natural gas prices have historically experienced significant volatility. The Trust does not attempt to manage its commodity price risk through the use of fixed price contracts or financial derivatives.

     Due to the short span of time between receipts and disbursements, cash held by the Trust is held in a non-interest bearing trust account.

     Oil and natural gas royalties received by MPC prior to payment of the 98% net profits interest are held in money market accounts that invest in U.S. Treasury securities and are considered not at risk.

     The retained earnings of MPC are held in either money market accounts or U.S. Treasury or agency securities to be held to maturity. Funds held in money market accounts and U.S. Treasury securities that mature in less than one year are considered not at risk.

Item 4. Controls and Procedures

     Bank of America, N.A., as Trustee of the Trust, is responsible for establishing and maintaining the Trust’s disclosure controls and procedures. These controls and procedures were designed to ensure that material information relating to the Trust and its subsidiary is communicated to the Trustee. As of the end of the period covered by this report, the Trustee evaluated the effectiveness of the design and operation of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded that the Trust’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act (i) is recorded,

processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to the Trustee to allow timely decisions regarding required disclosure. There has not been any change in the Trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

     The following exhibits are included herein:

31.1		Certification of the Corporate Trustee pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Corporate Trustee pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

c/o Bank of America, N.A.
P.O. Box 830650
Dallas, Texas 75283-0650