VOC Energy Trust - Quarter Report: 2012 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number: 001-35160
VOC ENERGY TRUST
(Exact name of registrant as specified in its charter)
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Delaware |
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80-6183103 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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The Bank of New York Mellon Trust Company, N.A., Trustee Global Corporate Trust 919 Congress Avenue Austin, Texas |
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78701 |
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(Address of principal executive offices) |
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(Zip Code) |
1-855-802-1094
(Registrant’s telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 9, 2012, 17,000,000 Units of Beneficial Interest in VOC Energy Trust were outstanding.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
VOC ENERGY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME
(Unaudited)
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Three months ended |
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Nine months ended |
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2012 |
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2011 |
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2012 |
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2011 |
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Income from net profits interest |
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$ |
10,608,758 |
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$ |
15,131,500 |
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$ |
30,107,703 |
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$ |
15,131,500 |
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Cash on hand withheld for Trust expenses |
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(220,083 |
) |
(241,526 |
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(144,411 |
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(241,526 |
) | ||||
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General and administrative expenses (1) |
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(188,675 |
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(269,974 |
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(553,292 |
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(269,974 |
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Distributable income |
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$ |
10,200,000 |
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$ |
14,620,000 |
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$ |
29,410,000 |
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$ |
14,620,000 |
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Distributions per Trust unit (17,000,000 Trust units issued and outstanding at September 30, 2012 and 2011) |
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$ |
0.60 |
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$ |
0.86 |
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$ |
1.73 |
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$ |
0.86 |
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(1) Includes $39,000 and $0 paid to VOC Brazos Energy Partners, LP (“VOC Brazos”) during the three months ended September 30, 2012 and 2011, respectively, and $57,750 and $0 during the nine months ended September 30, 2012 and 2011, respectively. Also includes $40,000 and $50,000 paid to The Bank of New York Mellon Trust Company, N.A. during the three months ended September 30, 2012 and 2011, respectively, and $120,100 and $50,000 during the nine months ended September 30, 2012 and 2011, respectively.
CONDENSED STATEMENTS OF ASSETS AND TRUST CORPUS
(Unaudited)
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September 30, 2012 |
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December 31, 2011 |
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ASSETS |
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Cash and cash equivalents |
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$ |
442,558 |
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$ |
298,147 |
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Investment in net profits interest |
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140,591,606 |
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140,591,606 |
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Accumulated amortization |
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(16,019,305 |
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(7,270,490 |
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Total assets |
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$ |
125,014,859 |
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$ |
133,619,263 |
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TRUST CORPUS |
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Trust corpus, 17,000,000 Trust units issued and outstanding at September 30, 2012 and December 31, 2011 |
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$ |
125,014,859 |
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$ |
133,619,263 |
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VOC ENERGY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS
(Unaudited)
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Three months ended |
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Nine months ended |
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2012 |
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2011 |
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2012 |
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2011 |
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Trust corpus, beginning of period |
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$ |
127,684,467 |
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$ |
140,592,606 |
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$ |
133,619,263 |
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$ |
1,000 |
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Investment in net profits interest — May 10, 2011 |
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— |
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— |
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— |
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140,591,606 |
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Income from net profits interest |
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10,608,758 |
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15,131,500 |
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30,107,703 |
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15,131,500 |
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Cash distributions |
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(10,200,000 |
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(14,620,000 |
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(29,410,000 |
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(14,620,000 |
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Trust expenses |
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(188,675 |
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(269,974 |
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(553,292 |
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(269,974 |
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Amortization of net profits interest |
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(2,889,691 |
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(4,502,229 |
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(8,748,815 |
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(4,502,229 |
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Trust corpus, end of period |
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$ |
125,014,859 |
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$ |
136,331,903 |
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$ |
125,014,859 |
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$ |
136,331,903 |
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The accompanying notes are an integral part of these condensed financial statements.
VOC ENERGY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization of the Trust
VOC Energy Trust (the “Trust”) is a statutory trust formed on November 3, 2010 (capitalized on December 17, 2010), under the Delaware Statutory Trust Act pursuant to a trust agreement dated November 3, 2010 (as amended and restated on May 10, 2011, the “Trust Agreement”) among VOC Brazos Energy Partners, L.P., a Texas limited partnership (“VOC Brazos”), as trustor, The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), and Wilmington Trust Company, as Delaware trustee (the “Delaware Trustee”). The Trust was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders. Prior to the conveyance of the net profits interest in May 2011 (as described below), including during the first quarter of 2011, the Trust had no distributable income or changes in its trust corpus.
VOC Brazos is a privately-held limited partnership engaged in the production and development of oil and natural gas from properties located in Texas. VOC Kansas Energy Partners, L.L.C., a Kansas limited liability company (“VOC Kansas”), is a privately-held limited liability company engaged in the production and development of oil and natural gas from properties primarily located in Kansas along with a limited number of Texas properties. In connection with the closing of the initial public offering of units of beneficial interest in the Trust (“Trust units”) in May 2011, VOC Brazos acquired all of the membership interests in VOC Kansas in exchange for newly issued limited partner interests in VOC Brazos pursuant to a Contribution and Exchange Agreement, dated August 30, 2010, as amended, by and between VOC Brazos and VOC Kansas. This resulted in VOC Kansas becoming a wholly-owned subsidiary of VOC Brazos.
In connection with the May 2011 closing of the initial public offering and in exchange for 17,000,000 Trust units, VOC Brazos and VOC Kansas conveyed a term net profits interest representing the right to receive 80% of the net proceeds (calculated as described below in Note 6) from production from the underlying properties (as defined below) (the “net profits interest”). The net profits interest consists of net interests in all of the oil and natural gas properties held by VOC Brazos and VOC Kansas in the States of Kansas and Texas as of the date of the conveyance of the net profits interest to the Trust. We refer to the properties in which the Trust holds the net profits interest as the “underlying properties.”
The net profits interest is passive in nature and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The net profits interest entitles the Trust to receive 80% of the net proceeds attributable to the net profits interest during the term of the Trust. The net profits interest will terminate on the later to occur of (1) December 31, 2030 or (2) the time when 10.6 million barrels of oil equivalent (“MMBoe”) (which is the equivalent of 8.5 MMBoe in respect of the net profits interest) have been produced from the underlying properties and sold, and the Trust will soon thereafter wind up its affairs and terminate.
The Trustee can authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee or the Delaware Trustee as a lender provided the terms of the loan are similar to the terms it would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself and make other short term investments with the funds distributed to the Trust.
Note 2. Basis of Presentation
The accompanying Condensed Statement of Assets and Trust Corpus as of December 31, 2011, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations.
The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Trustee believes that such information includes all of the disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments that are, in the opinion of the Trustee, necessary for a fair presentation of the results of the interim period presented. The financial information should be read in conjunction with the financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2011.
Note 3. Trust Accounting Policies
The Trust uses the modified cash basis of accounting to report Trust receipts of the term net profits interest and payments of expenses incurred. The term net profits interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses and production and property taxes) and an adjustment for lease equipment costs and lease development expenses (which are capitalized in financial statements prepared in accordance with generally accepted accounting principles) of the underlying properties plus any payments made or net of payments received in connection with the settlement of certain hedge contracts, times 80% (term net profits percentage). Actual cash receipts may vary due to timing delays of actual cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices. The actual cash distributions of the Trust will be made based on the terms of the conveyance creating the Trust’s net profits interest. Expenses of the Trust, which include accounting, engineering, legal and other professional fees, Trustee fees, an administrative fee paid to VOC Brazos and out-of-pocket expenses, are recognized when paid. Under accounting principles generally accepted in the United States of America, revenues and expenses would be recognized on an accrual basis. Amortization of the investment in net profits interest is recorded on a unit-of-production method in the period in which the cash is received with respect to such production. Such amortization does not reduce distributable income, rather it is charged directly to Trust corpus.
This comprehensive basis of accounting other than generally accepted accounting principles corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
Investment in the net profits interest was recorded initially at the historical cost of VOC Brazos and is periodically assessed to determine whether its aggregate value has been impaired below its total capitalized cost based on the underlying properties. The Trust will provide a write-down to its investment in the net profits interest if and when total capitalized costs, less accumulated amortization, exceed undiscounted future net revenues attributable to the proved oil and gas reserves of the underlying properties.
No new accounting pronouncements have been adopted or issued during the quarter ended September 30, 2012 that would impact the financial statements of the Trust.
Note 4. Commodity Hedges
The Trust is exposed to fluctuations in energy prices in the normal course of operations of the underlying properties. The revenues derived from the underlying properties depend substantially on prevailing crude oil prices and, to a lesser extent, natural gas prices. As a result, commodity prices also affect the amount of cash flow available for distribution to the Trust unitholders. Lower prices may also reduce the amount of oil and natural gas that VOC Brazos can economically produce. VOC Brazos has entered into hedge contracts for the years 2012 and 2013 and the six months ending June 30, 2014 at weighted average prices ranging from $99.01 to $102.15 per barrel of oil that hedge approximately 54% of expected oil production for such years from the proved developed producing reserves attributable to the underlying properties as of December 31, 2011. VOC Brazos entered into the hedge contracts to reduce the exposure of the revenues from oil production from the underlying properties to fluctuations in crude oil prices and to achieve more predictable cash flow. However, these contracts limit the amount of cash available for distribution if prices increase above the fixed hedge price. The hedge contracts consist of fixed price swap contracts that have been placed with major trading counterparties whom VOC Brazos believes represent minimal credit risks. The Trust cannot provide assurance, however, that these trading counterparties will not become credit risks in the future. Upon expiration in June 2014, unitholder exposure to fluctuations in crude oil prices will increase significantly.
Note 5. Investment in Net Profits Interest
The net profits interest was recorded at the historical cost of VOC Brazos on May 10, 2011, the date of the conveyance of the net profits interest to the Trust, and was calculated as follows:
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Oil and gas properties |
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$ |
197,270,173 |
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Accumulated depreciation and depletion |
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(17,681,155 |
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Hedge liability |
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(1,717,713 |
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20-year asset retirement liability |
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(2,131,797 |
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Net property to be conveyed |
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175,739,508 |
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Times 80% net profits interest to Trust |
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$ |
140,591,606 |
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Note 6. Income from Net Profits Interest
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Three months ended |
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Nine months ended |
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2012 |
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2011 |
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2012 |
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2011 |
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Excess of revenues over direct operating expenses and lease equipment and development costs(1) |
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$ |
13,760,948 |
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$ |
20,164,375 |
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$ |
37,634,629 |
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$ |
20,164,375 |
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Times net profits interest over the term of the Trust |
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80 |
% |
80 |
% |
80 |
% |
80 |
% | ||||
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Income from net profits interest before reserve adjustments |
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11,008,758 |
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16,131,500 |
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30,107,703 |
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16,131,500 |
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Cash reserve(2) |
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(400,000 |
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(1,000,000 |
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— |
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(1,000,000 |
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Income from net profits interest(3) |
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$ |
10,608,758 |
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$ |
15,131,500 |
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$ |
30,107,703 |
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$ |
15,131,500 |
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(1) Pursuant to the terms of the conveyance of the net profits interest, lease equipment and development costs are to be deducted when calculating the distributable income to the Trust.
(2) Pursuant to the terms of the conveyance of the net profits interest, VOC Brazos can reserve up to $1.0 million for future development, maintenance or operating expenditures at any time. During the three months and nine months ended September 30, 2012, VOC Brazos increased its cash reserve by $0.4 million and $0, respectively. During the three and nine months ended September 30, 2011, VOC Brazos increased its cash reserve by $1.0 million. The reserve balance was $1,000,000 at September 30, 2012 and 2011.
(3) The income from net profits interest is based upon the cash receipts from VOC Brazos from the sale of oil and gas production. The revenues from oil production are typically received by VOC Brazos one month after production; thus, the cash received by the Trust during the three months ended September 30, 2012 substantially represents production by VOC Brazos from March 2012 through May 2012. The cash received by the Trust during the nine months ended September 30, 2012 substantially represents production by VOC Brazos from September 2011 through May 2012. The net profits interest was conveyed to the Trust on May 10, 2011. Because of the terms of the Net Profits Interest and because the first payment thereon to the Trust occurred in August 2011, the cash received by the Trust during the three months and nine months ended September 30, 2011 substantially represents production by VOC Brazos from January 2011 through May 2011.
For the three and nine month periods ended September 30, 2012 and 2011, MV Purchasing, LLC, an affiliate of VOC Brazos, purchased a significant portion of the production of the underlying properties. Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one to six months, using market sensitive pricing.
Note 7. Income Taxes
The Trust is a Delaware statutory trust and is not required to pay federal or state income taxes. Accordingly, no provision for federal or state income taxes has been made.
Note 8. Distributions to Unitholders
The Trustee determines for each quarter the amount available for distribution to the Trust unitholders. This distribution is expected to be made on or before the 45th day following the end of each quarter to the Trust unitholders of record on the 30th day of the month following the end of each quarter (or the next succeeding business day). Such amounts will be equal to the excess, if any, of the cash received by the Trust during the preceding quarter, over the expenses of the Trust paid during such quarter, subject to adjustments for changes made by the Trustee during such quarter in any cash reserves established for future expenses of the Trust.
The first quarterly distribution during 2012 was $0.44 per Trust unit and was made on February 14, 2012 to Trust unitholders owning Trust units as of January 30, 2012. Such distribution was comprised of the net proceeds of production collected by VOC Brazos from October 1, 2011 through December 31, 2011, and reflects a release of the $1,000,000 reserve previously established by VOC Brazos for future development, maintenance or operating expenditures.
The second quarterly distribution during 2012 was $0.69 per Trust unit and was made on May 15, 2012 to Trust unitholders owning Trust units as of April 30, 2012. Such distribution was comprised of the net proceeds of production collected by VOC Brazos from January 1, 2012 through March 31, 2012, and reflects a $600,000 reserve established by VOC Brazos for future development, maintenance or operating expenditures.
The third quarterly distribution during 2012 was $0.60 per Trust unit and was made on August 14, 2012 to Trust unitholders owning Trust units as of July 30, 2012. Such distribution was comprised of the net proceeds of production collected by VOC Brazos from April 1, 2012 through June 30, 2012, and reflects a $400,000 reserve established by VOC Brazos for future development, maintenance or operating expenditures.
The first distribution during 2011 was $0.86 per Trust unit and was made on August 15, 2011 to Trust unitholders owning Trust units as of August 1, 2011. Such distribution was the initial distribution (as the net profits interest was conveyed to the Trust on May 11, 2011) and was comprised of the net proceeds of production collected by VOC Brazos from January 1, 2011 through June 30, 2011, and reflects a $1.0 million reserve established by VOC Brazos for future development, maintenance or operating expenditures.
Note 9. Advance for Trust Expenses
Under the terms of the Trust Agreement, the Trustee is allowed to borrow money to pay Trust expenses. During the three and nine months ended September 30, 2012, there were no borrowings or amounts owed for money borrowed in previous quarters. Under the terms of the Trust Agreement, VOC Brazos has provided a letter of credit in the amount of $1 million to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses.
Note 10. Subsequent Event
On October 18, 2012, the Trust announced a Trust distribution to Trust unitholders of record on October 30, 2012 of $0.46 per Trust unit, which is to be paid on November 14, 2012. Such distribution is comprised of the net proceeds of production collected by VOC Brazos from July 1, 2012 through September 30, 2012, and reflects a release of $750,000 of the reserve previously established by VOC Brazos for future development, maintenance or operating expenditures.
The Trust also announced an operational update regarding the underlying oil and gas properties subject to the Trust’s net profits interest that include properties located in Brazos County, Texas. VOC Brazos is continuing to develop the Woodbine C Sand underlying the Kurten Woodbine Unit in the area, utilizing horizontal wells completed with multiple fracture stimulations together with recompletions of existing vertical wellbores into additional pay intervals. In September 2012, VOC Brazos began producing from the first of three horizontal wells planned for 2012; the second horizontal well was abandoned due to mechanical issues with the wellbore; and the third horizontal well was spudded in October 2012. As a result of the abandoned horizontal well, future production volumes for the underlying properties associated with the one well in the Kurten Woodbine Unit will be delayed. VOC Brazos has informed the Trust that the total cost of the abandoned well with respect to the Trust’s net profits interest is estimated to be approximately $3.0 million, of which approximately $1.2 million was included in calculating the fourth quarterly distribution. While future distributions to the Trust from the net profits interest are anticipated to be impacted by this event, this event does not impair the reserves in the Kurten Field, and the Trust will not lose barrels in connection with calculating the term of the net profits interest. Additionally, VOC Brazos may elect to drill the abandoned well from a new location in 2013.
Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The Trust’s purpose is, in general, to hold the net profits interest, to distribute to the Trust unitholders cash that the Trust receives in respect of the net profits interest and the assigned interest in the hedge contracts and to perform certain administrative functions in respect of the net profits interest and the Trust units. The Trust derives substantially all of its income and cash flows from the net profits interest.
Comparison of Results of the Underlying Properties for the Quarters Ended September 30, 2012 and 2011
The cash received by the Trust from VOC Brazos during the quarter ended September 30, 2012 substantially represents the production by VOC Brazos from March 2012 through May 2012 while the cash received by the Trust from VOC Brazos during the quarter ended September 30, 2011 substantially represents the production by VOC Brazos from January 2011 through May 2011, as the conveyance of the net profits interest took take place on May 10, 2011 and the first distribution was not received until August 2011. The revenues from oil production are typically received by VOC Brazos one month after production.
Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $6,403,427 to $13,760,948 for the period from April 1, 2012 through June 30, 2012, from $20,164,375 for the period from January 1, 2011 through June 30, 2011 (see preceding paragraph regarding period of initial distribution in August 2011). Such decrease was primarily attributable to the fact that quarter ended September 30, 2012 included three months of activity while the quarter ended September 30, 2011 included five months of activity. Included in these amounts are payments made to settle hedges of $69,344 and $475,971 for the quarters ended September 30, 2012 and 2011, respectively. Totals attributable to the net profits interest were $11,008,758 and $16,131,500, respectively, which were decreased by a cash reserve for future development, maintenance or operating expenditures of $400,000 and $1,000,000 and a Trust holdback for future expenses of $408,758 and $511,500 for the quarters ended September 30, 2012 and 2011, respectively, resulting in distributable income of $10,200,000 and $14,620,000 for the quarters ended September 30, 2012 and 2011, respectively.
The average price received for crude oil sold was $98.13 per Bbl and the average price received for natural gas sold was $3.50 per Mcf for the period from April 1, 2012 through June 30, 2012. The average price received for crude oil sold was $92.33 per Bbl and the average price received for natural gas sold was $4.85 per Mcf for the period from January 1, 2011 through June 30, 2011.
The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from April 1, 2012 through June 30, 2012 were 161,125 Bbls of oil and 106,498 Mcf of natural gas for a total of 178,875 barrels of oil equivalent. The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected for the period from January 1, 2011 through June 30, 2011were 244,978 Bbls of oil and 159,239 Mcf of natural gas for a total of 271,517 barrels of oil equivalent.
The Trustee paid general and administrative expenses of $188,675 and $269,974 for the quarter ended September 30, 2012 and 2011, respectively. The distributable income for the quarter ended September 30, 2012 was $10,200,000, a decrease of $4,420,000 from distributable income of $14,620,000 for the quarter ended September 30, 2011.
As noted above, the amounts included in the accompanying financial statements for the Trust’s quarter ended September 30, 2012 reflect cash received by the Trust from production by VOC Brazos from March 2012 through May 2012. VOC Brazos distributed cash to the Trust in October 2012 that will be reflected in the Trust’s financial statements for the year ending December 31, 2012. The cash distributed to the Trust in October 2012 was primarily derived from production by VOC Brazos from June 2012 through August 2012. The discussion below relates to cash received by VOC Brazos during the quarters ended September 30, 2012 and 2011 and distributed to the Trust in October 2012 and 2011. Such distribution to the Trust in October 2012 will be reflected in the Trust’s financial statements for the year ending December 31, 2012.
Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $3,082,829 to $9,068,593 for the period from July 1, 2012 through September 30, 2012, from $12,151,422 for the period from July 1, 2011 through September 30, 2011. Such decrease was primarily attributable to a small decrease in the number of barrels of crude oil sold and a $2.31 per barrel decrease in the price per barrel sold and an increase in lease equipment and development costs. Included in these amounts are payments received to settle hedges of $1,406,621 and $827,600 for the quarters ended September 30, 2012 and 2011, respectively. Totals attributable to the net profits interest were $7,254,874 and $9,721,138, respectively, which were increased by a cash reserve release for future development, maintenance or operating expenditures of $750,000 and $0 and decreased by a Trust holdback for future expenses of $184,874 and $201,138 for the quarters ending December 31, 2012 and 2011, respectively, resulting in distributable income of $7,820,000 and $9,520,000 for the quarters ending December 31, 2012 and 2011, respectively.
The average price received for crude oil sold was $84.87 per Bbl and the average price received for natural gas sold was $3.14 per Mcf for the quarter ended September 30, 2012. The average price received for crude oil sold was $87.18 per Bbl and the average price received for natural gas sold was $5.11 per Mcf for the quarter ended September 30, 2011.
The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from July 1, 2012 through September 30, 2012 were 151,302 Bbls of oil and 107,591 Mcf of natural gas for a total of 169,233 barrels of oil equivalent. The overall production sales volumes collected during the quarter ended September 30, 2011 were 152,585 Bbls of oil and 112,892 Mcf of natural gas for total equivalent barrels of oil of 171,400.
For the quarters ended September 30, 2012 and 2011, MV Purchasing, LLC, an affiliate of VOC Brazos, purchased a significant portion of the production from the underlying properties. Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one to six months, using market sensitive pricing.
Results of Operations for the Nine Months Ended September 30, 2012 and 2011
As noted above, the revenues from oil production are typically received by VOC Brazos one month after production thus, the cash received by the Trust from VOC Brazos during the nine months ended September 30, 2012 substantially represents the production by VOC Brazos from September 2011 through May 2012 while the cash received by the Trust from VOC Brazos during the nine months ended September 30, 2011 substantially represents the production by VOC Brazos from January 2011 through May 2011 as the conveyance of the net profits interest did not take place until May 10, 2011, and was effective January 1, 2011.
Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties increased $17,470,254 to $37,634,629 for the nine months ended September 30, 2012 from $20,164,375 for the nine months ended September 30, 2011. Such increase is primarily attributable to the fact that the nine months ended September 30, 2012 included nine months of activity while the nine months ended September 30, 2011 only included five months of activity. Included in these amounts
are payments received to settle hedges totaling $1,190,595 for the nine months ended September 30, 2012 and payments made to settle hedges totaling $475,971 for the nine months ended September 30, 2011.
Totals attributable to the net profits interest were $30,107,703 and $16,131,500 for the nine months ended September 30, 2012 and 2011, respectively, which were decreased by a cash reserve holdback for future development, maintenance or operating expenditures of $0 and $1,000,000, respectively, which resulted in a total cash proceeds received by the Trust of $30,107,703 and $15,131,500, respectively.
The Trustee paid general and administrative expenses of $553,292 and $269,974 for the nine months ended September 30, 2012 and 2011, respectively. The distributable income for the nine months ended September 30, 2012 was $29,410,000, an increase of $14,790,000 from distributable income of $14,620,000 for the nine months ended September 30, 2011.
The average price received for crude oil sold was $93.71 per Bbl and the average price received for natural gas sold was $4.17 per Mcf for the nine months ended September 30, 2012. The average price received for crude oil sold was $92.33 per Bbl and the average price received for natural gas sold was $4.85 per Mcf for the nine months ended September 30, 2011.
The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from January 1, 2012 through September 30, 2012 were 485,551 Bbls of oil and 336,028 Mcf of natural gas for a total of 541,556 barrels of oil equivalent.
The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from January 1, 2011 through September 30, 2011 were 244,978 Bbls of oil and 159,239 Mcf of natural gas for a total of 271,517 barrels of oil equivalent.
Liquidity and Capital Resources
Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trust’s only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee as well as a quarterly administrative fee to VOC Brazos pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the net profits interest and other sources (such as interest earned on any amounts reserved by the Trustee) in that quarter, over the Trust’s expenses paid for that quarter. Available funds are reduced by any cash that the Trustee decides to hold as a reserve against future expenses.
The Trustee can authorize the Trust to borrow money to pay Trust administrative or incidental expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee as lender provided the terms of the loan are fair to the Trust unitholders. The Trustee may also deposit funds awaiting distribution in an account with itself, if the interest paid to the Trust at least equals amounts paid by the Trustee on similar deposits, and the Trustee makes no other short-term investments with the funds distributed to the Trust. The Trustee has no current plans to authorize the Trust to borrow money. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid. During the three and nine months ended September 30, 2012 and 2011, there were no such borrowings. VOC Brazos has posted a letter of credit in the amount of $1 million in favor of the Trustee to protect the Trustee against the risk that the Trust does not have sufficient cash to pay its expenses.
As substantially all of the underlying properties are located in mature fields, VOC Brazos does not expect future costs for the underlying properties to change significantly compared to recent historical costs other than changes due to fluctuations in the general cost of oilfield services. VOC Brazos may establish a cash reserve of up to $1.0 million in the aggregate at any given time from the dollar amount otherwise distributable to the Trust to reduce the impact on distributions of uneven capital expenditure timing. VOC Brazos released $1.0 million in January 2012, withheld $600,000 in April 2012, withheld $400,000 in July 2012 and released $750,000 in October 2012 in accordance with this cash reserve. The reserve balance was $1,000,000 at September 30, 2012 and 2011.
The amounts received by VOC Brazos from the hedge contract counterparty upon settlement of the hedge contracts will reduce the operating expenses related to the underlying properties in calculating the net proceeds. However, if the hedge payments received by VOC Brazos under the hedge contracts and other non-production revenue exceed operating expenses during a quarterly period, the ability to use such excess amounts to offset operating expenses will be deferred, with interest accruing on such amounts at the prevailing prime rate, until the next quarterly period where the hedge payments and the other non-production revenue are less than such expenses. In addition, the aggregate amounts paid by VOC Brazos on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.
The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust’s liquidity or the availability of capital resources.
Hedge Contracts
The revenues derived from the underlying properties depend substantially on prevailing crude oil prices and, to a lesser extent, natural gas prices. As a result, commodity prices also affect the amount of cash flow available for distribution to the Trust unitholders. Lower prices may also reduce the amount of oil and natural gas that VOC Brazos can economically produce. VOC Brazos sells the oil and natural gas production from the underlying properties under floating market price contracts each month. VOC Brazos has entered into hedge contracts for 2012 and 2013 and for the six months ending June 30, 2014, to reduce the exposure of the revenues from oil production from the underlying properties to fluctuations in crude oil prices and to achieve more predictable cash flow. However, these contracts limit the amount of cash available for distribution if prices increase above the fixed hedge price. The hedge contracts consist of fixed price swap contracts that have been placed with major trading counterparties whom VOC Brazos believes represent minimal credit risk. The Trust cannot provide assurance, however, that these trading counterparties will not become credit risks in the future.
The crude oil swap contracts will settle based on the average of the settlement price for each commodity business day in the contract month. In a swap transaction, the counterparty is required to make a payment to VOC Brazos for the difference between the fixed price and the settlement price if the settlement price is below the fixed price. VOC Brazos is required to make a payment to the counterparty for the difference between the fixed price and the settlement price if the settlement price is above the fixed price. From October 1, 2012 through June 30, 2014, VOC Brazos’ crude oil price risk management positions in swap contracts are as follows:
|
|
|
Fixed Price Swaps |
| |||
|
Month |
|
Volumes |
|
Weighted |
| |
|
October 2012 |
|
35,883 |
|
$ |
100.86 |
|
|
November 2012 |
|
35,562 |
|
$ |
100.87 |
|
|
December 2012 |
|
35,268 |
|
$ |
100.87 |
|
|
January 2013 |
|
34,975 |
|
$ |
99.01 |
|
|
February 2013 |
|
34,686 |
|
$ |
99.01 |
|
|
March 2013 |
|
34,406 |
|
$ |
99.01 |
|
|
April 2013 |
|
34,166 |
|
$ |
99.01 |
|
|
May 2013 |
|
33,959 |
|
$ |
99.01 |
|
|
June 2013 |
|
33,727 |
|
$ |
99.01 |
|
|
July 2013 |
|
33,526 |
|
$ |
99.01 |
|
|
August 2013 |
|
33,317 |
|
$ |
99.01 |
|
|
September 2013 |
|
33,122 |
|
$ |
99.01 |
|
|
October 2013 |
|
32,929 |
|
$ |
99.01 |
|
|
November 2013 |
|
32,741 |
|
$ |
99.01 |
|
|
December 2013 |
|
32,554 |
|
$ |
99.01 |
|
|
January 2014 |
|
13,220 |
|
$ |
102.15 |
|
|
February 2014 |
|
13,149 |
|
$ |
102.15 |
|
|
March 2014 |
|
13,078 |
|
$ |
102.15 |
|
|
April 2014 |
|
13,008 |
|
$ |
102.15 |
|
|
May 2014 |
|
12,939 |
|
$ |
102.15 |
|
|
June 2014 |
|
12,870 |
|
$ |
102.15 |
|
The amounts received by VOC Brazos from the hedge contract counterparty upon settlement of the hedge contracts will reduce the operating expenses related to the underlying properties in calculating the net proceeds. However, if the hedge payments received by VOC Brazos under the hedge contracts and other non-production revenue exceed operating expenses during a quarterly period, the ability to use such excess amounts to offset operating expenses will be deferred, with interest accruing on such amounts at the prevailing prime rate, until the next quarterly period where the hedge payments and the other non-production revenue are less than such expenses. In addition, the aggregate amounts paid by VOC Brazos on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.
Note Regarding Forward-Looking Statements
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including without limitation the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. Although VOC Brazos advised the Trust that it believes that the
expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations (“Cautionary Statements”) are disclosed in this Form 10-Q and in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2011, including under the section “Item 1A. Risk Factors”. All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Substantially all of the income to the Trust is derived from the net profits interest, which generally entitles the Trust to receive 80% of the net proceeds from oil and gas production from the underlying properties and 80% of any proceeds received by VOC Brazos from the settlement of certain hedges in existence on May 10, 2011. Consequently, the Trust is exposed to market risk from fluctuations in oil and gas prices. For more information regarding the hedge contracts, please see “Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations—Hedge Contracts.” Although the Trust may borrow money to pay expenses of the Trust, the amount of any such borrowings is unlikely to be material to the Trust. As a result, the Trust is not subject to any material interest rate market risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and regulations promulgated by the SEC. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by VOC Brazos to the Trustee, as trustee of the Trust, and its employees who participate in the preparation of the Trust’s periodic reports as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Trustee carried out an evaluation of the Trust’s disclosure controls and procedures. A Trust Officer of the Trustee has concluded that the disclosure controls and procedures of the Trust are effective.
Due to the contractual arrangements of (i) the Trust Agreement and (ii) the conveyance of the net profits interest, the Trustee relies on (A) information provided by VOC Brazos, including historical operating data, plans for future operating and capital expenditures, reserve information and information relating to projected production, and (B) conclusions and reports regarding reserves by the Trust’s independent reserve engineers. See “Risk Factors—Neither the Trust nor the Trust’s unitholders have the ability to influence VOC Brazos or control the operations or development of the underlying properties” in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2011.
Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2012, there was no change in the Trust’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, and makes no statement concerning, the internal control over financial reporting of VOC Brazos.
PART II—OTHER INFORMATION
Item 1A. Risk Factors.
There have not been any material changes from the risk factors previously disclosed in the Trust’s response to Item 1A. to Part 1 of its Annual Report on Form 10-K for the year ended December 31, 2011.
Item 6. Exhibits.
The exhibits listed in the accompanying index are filed as part of the Quarterly Report on Form 10-Q.
|
Exhibit |
|
Description |
|
|
|
|
|
31 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32 |
|
Certification 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.
|
|
|
VOC ENERGY TRUST | |
|
|
|
| |
|
|
|
By: |
The Bank of New York Mellon Trust Company, N.A., as Trustee |
|
|
|
| |
|
|
|
By: |
/s/ Mike Ulrich |
|
|
|
|
Mike Ulrich |
|
|
|
|
Vice President |
Date: November 13, 2012
The Registrant, VOC Energy Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available and none have been provided. In signing the report above, the Trustee does not imply that it has performed any such function or that such function exists pursuant to the terms of the Trust Agreement under which it serves.