VOC Energy Trust - Quarter Report: 2015 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, 2015
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 incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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The Bank of New York Mellon Trust Company, N.A., Trustee |
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Global Corporate Trust |
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919 Congress Avenue |
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Austin, Texas |
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78701 |
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(Address of principal executive offices) |
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(Zip Code) |
1-512-236-6599
(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. (Check one):
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Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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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 4, 2015, 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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2015 |
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2014 |
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2015 |
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2014 |
| ||||
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Income from net profits interest |
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$ |
2,017,494 |
|
$ |
6,898,298 |
|
$ |
6,639,668 |
|
$ |
25,956,483 |
|
|
Cash on hand used (withheld) for Trust expenses |
|
28,039 |
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(123,680 |
) |
265,499 |
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(104,767 |
) | ||||
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General and administrative expenses (1) |
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(175,533 |
) |
(144,618 |
) |
(615,167 |
) |
(691,716 |
) | ||||
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Distributable income |
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$ |
1,870,000 |
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$ |
6,630,000 |
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$ |
6,290,000 |
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$ |
25,160,000 |
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Distributions per Trust unit (17,000,000 Trust units issued and outstanding at September 30, 2015 and 2014) |
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$ |
0.11 |
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$ |
0.39 |
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$ |
0.37 |
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$ |
1.48 |
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(1) Includes $43,870 and $21,090 paid to VOC Brazos Energy Partners, LP (“VOC Brazos”) during the three months ended September 30, 2015 and 2014, respectively, and $64,960 and $62,460 during the nine months ended September 30, 2015 and 2014, respectively. Also includes $37,500 paid to The Bank of New York Mellon Trust Company, N.A. during each of the three months ended September 30, 2015 and 2014, and $112,600 during each of the nine months ended September 30, 2015 and 2014.
CONDENSED STATEMENTS OF ASSETS AND TRUST CORPUS
(Unaudited)
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September 30, |
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December 31, |
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ASSETS |
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Cash and cash equivalents |
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$ |
149,600 |
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$ |
415,099 |
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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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(45,334,230 |
) |
(39,403,876 |
) | ||
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Total assets |
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$ |
95,406,976 |
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$ |
101,602,829 |
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TRUST CORPUS |
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Trust corpus, 17,000,000 Trust units issued and outstanding at September 30, 2015 and December 31, 2014 |
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$ |
95,406,976 |
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$ |
101,602,829 |
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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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2015 |
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2014 |
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2015 |
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2014 |
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Trust corpus, beginning of period |
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$ |
97,332,448 |
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$ |
106,373,584 |
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$ |
101,602,829 |
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$ |
111,439,640 |
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Income from net profits interest |
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2,017,494 |
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6,898,298 |
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6,639,668 |
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25,956,483 |
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Cash distribution |
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(1,870,000 |
) |
(6,630,000 |
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(6,290,000 |
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(25,160,000 |
) | ||||
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Trust expenses |
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(175,533 |
) |
(144,618 |
) |
(615,167 |
) |
(691,716 |
) | ||||
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Amortization of net profits interest |
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(1,897,433 |
) |
(2,440,673 |
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(5,930,354 |
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(7,487,816 |
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Trust corpus, end of period |
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$ |
95,406,976 |
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$ |
104,056,591 |
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$ |
95,406,976 |
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$ |
104,056,591 |
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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.
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 VOC Brazos’ interest from the sale of production from the underlying properties 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 Statements of Assets and Trust Corpus as of December 31, 2014, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of September 30, 2015 and for the three and nine month periods ended September 30, 2015 and September 30, 2014, 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Trustee believes such information includes all 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, 2014.
Note 3. Trust Accounting Policies
The Trust uses the modified cash basis of accounting to report receipts by the Trust 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”)) of the underlying properties plus any payments made or net of payments received in connection with the settlement of certain hedge contracts, times 80%. 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 U.S. GAAP, 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 U.S. GAAP 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, 2015 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 had entered into hedge contracts covering a portion of the expected oil production from the proved developed producing reserves attributable to the underlying properties, however, all such hedge contracts expired on June 30, 2014 and the terms of the conveyance of the net profits interest prohibit VOC Brazos from entering into new hedging arrangements for the benefit of the Trust. Upon expiration in June 2014, unitholder exposure to fluctuations in crude oil prices increased 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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2015 |
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2014 |
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2015 |
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2014 |
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Excess of revenues over direct operating expenses and lease equipment and development costs(1) |
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$ |
3,521,868 |
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$ |
8,622,872 |
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$ |
8,924,586 |
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$ |
32,445,604 |
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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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2,817,494 |
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6,898,298 |
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7,139,668 |
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25,956,483 |
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Cash reserve(2) |
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(800,000 |
) |
0 |
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(500,000 |
) |
0 |
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Income from net profits interest(3) |
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$ |
2,017,494 |
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$ |
6,898,298 |
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$ |
6,639,668 |
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$ |
25,956,483 |
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(1) Excess of revenues over direct operating expenses and lease equipment and development costs reflect expenses and costs incurred by VOC Brazos during the March through May production period for the three months ended September 30 and during the September through May production period for the nine months ended September 30. 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 ended September 30, 2015 and 2014, VOC Brazos increased its cash reserve by $800,000 and $0, respectively. During the nine months ended September 30, 2015 and 2014, VOC Brazos increased its cash reserve by $500,000 and $0, respectively. The reserve balance was $1,000,000 at September 30, 2015 and 2014.
(3) The income from net profits interest is based upon the cash receipts from VOC Brazos for the 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, 2015 substantially represents production by VOC Brazos from March 2015 through May 2015 and the cash received by the Trust during the three months ended September 30, 2014 substantially represents production by VOC Brazos from March 2014 through May 2014. The cash received by the Trust during the nine months ended September 30, 2015 substantially represents production by VOC Brazos from September 2014 through May 2015 and the cash received by the Trust during the nine months ended September 30, 2014 substantially represents production by VOC Brazos from September 2013 through May 2014.
For the three and nine months ended September 30, 2015 and 2014, 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
VOC Brazos makes quarterly payments of the net profits interest to the Trust. 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 relating to the preceding quarter, over the expenses of the Trust paid for 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 2015 was $0.10 per Trust unit and was made on February 14, 2015 to Trust unitholders owning Trust units as of January 30, 2015. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2014 through December 31, 2014.
The second quarterly distribution during 2015 was $0.16 per Trust unit and was made on May 15, 2015 to Trust unitholders owning Trust units as of April 30, 2015. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2015 through March 31, 2015.
The third quarterly distribution during 2015 was $0.11 per Trust unit and was made on August 14, 2015 to Trust unitholders owning Trust units as of July 30, 2015. Such distribution included the net proceeds of production collected by VOC Brazos from April 1, 2015 through June 30, 2015.
The first quarterly distribution during 2014 was $0.57 per Trust unit and was made on February 14, 2014 to Trust unitholders owning Trust units as of January 30, 2014. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2013 through December 31, 2013.
The second quarterly distribution during 2014 was $0.52 per Trust unit and was made on May 15, 2014 to Trust unitholders owning Trust units as of April 30, 2014. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2014 through March 31, 2014.
The third quarterly distribution during 2014 was $0.39 per Trust unit and was made on August 14, 2014 to Trust unitholders owning Trust units as of July 30, 2014. Such distribution included the net proceeds of production collected by VOC Brazos from April 1, 2014 through June 30, 2014.
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, 2015 and 2014, 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 19, 2015, the Trust announced a Trust distribution to unitholders of record on October 30, 2015 of $1.70 million, or $0.10 per unit, which is to be paid on November 13, 2015.
Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The Trust’s purpose is, in general, to hold the net profits interest, to distribute to the Trust unitholders cash that the Trust receives in respect of the net profits interest and the assigned interest in the hedge contracts and to perform certain administrative functions in respect of the net profits interest and the Trust units. The Trust derives substantially all of its income and cash flows from the net profits interest and the hedge contracts.
Results of Operations for the Quarters Ended September 30, 2015 and 2014
The following is a summary of income from net profits interest received by the Trust for the three months ended September 30, 2015 and 2014 consisting of the July distribution for each respective year:
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Three months ended |
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2015 |
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2014 |
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Sales volumes: |
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|
|
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Oil (Bbl) |
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159,730 |
|
180,601 |
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Natural gas (Mcf) |
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102,422 |
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130,477 |
| ||
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Total (BOE) |
|
176,800 |
|
202,347 |
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Average sales prices: |
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Oil (per Bbl) |
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$ |
48.32 |
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$ |
96.20 |
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|
Natural gas (per Mcf) |
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$ |
2.29 |
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$ |
5.24 |
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|
Gross proceeds: |
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|
|
|
| ||
|
Oil sales |
|
$ |
7,717,484 |
|
$ |
17,374,569 |
|
|
Natural gas sales |
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234,066 |
|
683,056 |
| ||
|
Sale of leases |
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229,344 |
|
0 |
| ||
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Total gross proceeds |
|
8,180,894 |
|
18,057,625 |
| ||
|
Costs: |
|
|
|
|
| ||
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Production and development costs: |
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|
|
|
| ||
|
Lease operating expenses |
|
3,073,104 |
|
3,791,707 |
| ||
|
Production and property taxes |
|
1,506,393 |
|
1,716,318 |
| ||
|
Development expenses |
|
79,529 |
|
3,954,278 |
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Total |
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4,659,026 |
|
9,462,303 |
| ||
|
Settlement of hedge contracts — payments received |
|
0 |
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(27,550 |
) | ||
|
Total costs |
|
4,659,026 |
|
9,434,753 |
| ||
|
|
|
|
|
|
| ||
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
3,521,868 |
|
8,622,872 |
| ||
|
Times net profits interest over the term of the Trust |
|
80 |
% |
80 |
% | ||
|
Income from net profits interest before reserve adjustments |
|
2,817,494 |
|
6,898,298 |
| ||
|
Cash reserve |
|
(800,000 |
) |
0 |
| ||
|
Income from net profits interest |
|
$ |
2,017,494 |
|
$ |
6,898,298 |
|
The cash received by the Trust from VOC Brazos during the quarter ended September 30, 2015 substantially represents the production by VOC Brazos from March 2015 through May 2015. The cash received by the Trust from VOC Brazos during the quarter ended September 30, 2014 substantially represents the production and settlement of hedge contracts by VOC Brazos from March 2014 through May 2014. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds. Oil and natural gas sales were $7,951,550 for the three months ended September 30, 2015, a decrease of $10,106,075 or 56.0% from $18,057,625 for the three months ended September 30, 2014. Revenues are a function of oil and natural gas sales prices and volumes sold. The decrease in gross proceeds was due to decreases in oil and natural gas sales volumes and lower market prices for oil and natural gas during the third quarter of 2015, offset by sales of leases as allowed under the terms of the Trust Agreement of $229,344. During the three months ended September 30, 2015, the average price for oil decreased 49.8% to $48.32 per Bbl from $96.20 per Bbl for the same period in 2014 and the average price for natural gas decreased 56.3% to $2.29 per Mcf from $5.24 per Mcf for the same period in 2014. Oil sales volumes were 159,730 Bbls for the three months ended September 30, 2015, a decrease of 20,871 Bbls or 11.6% from 180,601 Bbls for the same period in 2014, while natural gas sales volumes were 102,422 Mcf, a decrease of 28,055 Mcf or 21.5% from 130,477 Mcf for the same period in 2014.
Costs. Lease operating expenses were $3,073,104 for the three months ended September 30, 2015, a decrease of $718,603 or 19.0% from $3,791,707 for the three months ended September 30, 2014. Production and property taxes were $1,506,393 for the three months ended September 30, 2015, a decrease of $209,925 or 12.2% from $1,716,318 for the same period in 2014. Such decrease is primarily due to a 58.0% decrease in production taxes as a result of lower prices for oil and gas. Development expenses were $79,529 for the three months ended September 30, 2015, a decrease of $3,874,749 or 98.0% from $3,954,278 for the same period in 2014. Such decrease was primarily due to incurring a portion of the completion costs of one horizontal well in 2015 as compared to incurring a portion of the drilling and completion costs of one horizontal well and a portion of the drilling costs of two other horizontal wells in 2014.
Settlement of hedge contracts. There were no cash settlements during the three months ended September 30, 2015, as the hedges expired on June 30, 2014. Cash settlements relating to hedge contracts resulted in gains of $27,550 for the three months ended September 30, 2014. The gains were due primarily to lower market prices for oil and higher hedge strike prices.
Excess of revenues over direct operating expenses and lease equipment and development costs. The excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $3,521,868 for the three months ended September 30, 2015, a decrease of $5,101,004 or 59.2% from $8,622,872 for the three months ended September 30, 2014. The Trust’s 80% net profits interest of these totals were $2,817,494 and $6,898,298, respectively. During the three months ended September 30, 2015 and 2014, VOC Brazos increased its cash reserve by $800,000 and $0, respectively, for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $2,017,494 and $6,898,298 for such periods, respectively. These amounts were reduced by a Trust holdback for future expenses of $147,494 and $268,298 for the three months ended September 30, 2015 and 2014, respectively. The Trustee paid general and administrative expenses of $175,533 for the three months ended September 30, 2015, an increase of $30,915 from $144,618 for the three months ended September 30, 2014. These factors resulted in distributable income for the three months ended September 30, 2015 of $1,870,000, a decrease of $4,760,000 from $6,630,000 for the three months ended September 30, 2014.
Results of Operations for the Nine Months Ended September 30, 2015 and 2014
The following is a summary of income from net profits interest received by the Trust for the nine months ended September 30, 2015 and 2014 consisting of the January, April and July distributions for each respective year:
|
|
|
Nine months ended |
| ||||
|
|
|
2015 |
|
2014 |
| ||
|
Sales volumes: |
|
|
|
|
| ||
|
Oil (Bbl) |
|
493,222 |
|
552,299 |
| ||
|
Natural gas (Mcf) |
|
356,166 |
|
410,899 |
| ||
|
Total (BOE) |
|
552,583 |
|
620,782 |
| ||
|
Average sales prices: |
|
|
|
|
| ||
|
Oil (per Bbl) |
|
$ |
58.77 |
|
$ |
94.99 |
|
|
Natural gas (per Mcf) |
|
$ |
3.48 |
|
$ |
4.83 |
|
|
Gross proceeds: |
|
|
|
|
| ||
|
Oil sales |
|
$ |
28,988,395 |
|
$ |
52,463,522 |
|
|
Natural gas sales |
|
1,239,142 |
|
1,986,425 |
| ||
|
Sale of leases |
|
229,344 |
|
0 |
| ||
|
Total gross proceeds |
|
30,456,881 |
|
54,449,947 |
| ||
|
Costs: |
|
|
|
|
| ||
|
Production and development costs: |
|
|
|
|
| ||
|
Lease operating expenses |
|
10,495,653 |
|
11,018,939 |
| ||
|
Production and property taxes |
|
3,937,408 |
|
4,556,855 |
| ||
|
Development expenses |
|
7,099,234 |
|
6,484,676 |
| ||
|
Total |
|
21,532,295 |
|
22,060,470 |
| ||
|
Settlement of hedge contracts — payments received |
|
0 |
|
(56,127 |
) | ||
|
Total costs |
|
21,532,295 |
|
22,004,343 |
| ||
|
|
|
|
|
|
| ||
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
8,924,586 |
|
32,445,604 |
| ||
|
Times net profits interest over the term of the Trust |
|
80 |
% |
80 |
% | ||
|
Income from net profits interest before reserve adjustments |
|
7,139,668 |
|
25,956,483 |
| ||
|
Cash reserve |
|
(500,000 |
) |
0 |
| ||
|
Income from net profits interest |
|
$ |
6,639,668 |
|
$ |
25,956,483 |
|
The cash received by the Trust from VOC Brazos during the nine months ended September 30, 2015 substantially represents the production by VOC Brazos from September 2014 through May 2015. The cash received by the Trust from VOC Brazos during the nine months ended September 30, 2014 substantially represents the production and settlement of hedge contracts by VOC Brazos from September 2013 through May 2014. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds. Oil and natural gas sales were $30,227,537 for the nine months ended September 30, 2015, a decrease of $24,222,410 or 44.5% from $54,449,947 for the nine months ended September 30, 2014. Revenues are a function of oil and natural gas sales prices and volumes sold. The decrease in gross proceeds was due to lower market prices for oil and gas sales during the first nine months of 2015 and a decrease in oil sales volumes and gas sales volumes during the first nine months of 2015, offset by sales of leases as allowed under the terms of the Trust Agreement of $229,344. During the nine months ended September 30, 2015, the average price for oil decreased 38.1% to $58.77 per Bbl from $94.99 per Bbl for the same period in 2014 and the average price for natural gas decreased 28.0% to $3.48 per Mcf from $4.83 per Mcf for the same period in 2014. Oil sales volumes were 493,222 Bbls for the nine months ended September 30, 2015, a decrease of 59,077 Bbls or 10.7% from 552,299 Bbls for the same period in 2014, while natural gas sales volumes were 356,166 Mcf, a decrease of 54,733 Mcf or 13.3% from 410,899 Mcf for the same period in 2014.
Costs. Lease operating expenses were $10,495,653 for the nine months ended September 30, 2015, a decrease of $523,286 or 4.7% from $11,018,939 for the nine months ended September 30, 2014. The decrease was primarily due to decreases in the costs of oilfield goods and services. Production and property taxes were $3,937,408 for the nine months ended September 30, 2015, a decrease of $619,447 or 13.6% from $4,556,855 for the same period in 2014. Such decrease is primarily due to a 45.5% decrease in production taxes as a result of lower prices for oil and gas. Development expenses were $7,099,234 for the nine months ended September 30, 2015, an increase of $614,558 or 9.5% from $6,484,676 for the same period in 2014. The increase was primarily due to incurring a portion of drilling and completion costs of one horizontal well and a portion of the drilling costs of one horizontal well in the lower EagleBine interval that was abandoned in 2015 as compared to a portion of the drilling costs of two horizontal wells and a portion of the completion costs of two horizontal wells in 2014.
Settlement of hedge contracts. There were no cash settlements during the nine months ended September 30, 2015, as the hedges expired on June 30, 2014. Cash settlements relating to hedge contracts resulted in gains of $56,127 for the nine months ended September 30, 2014. The gains were primarily due to lower market prices for oil and higher hedge strike prices.
Excess of revenues over direct operating expenses and lease equipment and development costs. The excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $8,924,586 for the nine months ended September 30, 2015, a decrease of $23,521,018 or 72.5% from $32,445,604 for the nine months ended September 30,
2014. The Trust’s 80% net profits interest of these totals were $7,139,668 and $25,956,483, respectively. During the nine months ended September 30, 2015 and 2014, VOC Brazos increased its cash reserve by $500,000 and $0, respectively, which resulted in income from the net profits interest of $6,639,668 and $25,956,483 for such periods, respectively. These amounts were further reduced by a Trust holdback for future expenses of $349,668 and $796,483 for the nine months ended September 30, 2015 and 2014, respectively. The Trustee paid general and administrative expenses of $615,167 for the nine months ended September 30, 2015, a decrease of $76,547 from $691,714 for the nine months ended September 30, 2014. These factors resulted in distributable income for the nine months ended September 30, 2015 of $6,290,000, a decrease of $18,870,000 from $25,160,000 for the nine months ended September 30, 2014.
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 reserve for future development, maintenance or operating expenses. As of September 30, 2015, $149,600 was held by the Trustee as such a reserve.
The Trustee may cause the Trust to borrow funds required to pay expenses if the Trustee determines that the cash on hand and the cash to be received are insufficient to cover the Trust’s expenses. 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, 2015 and 2014, there were no such borrowings. 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.
Income to the Trust from the net profits interest is based on the calculation and definitions of “gross proceeds” and “net proceeds” contained in the conveyance.
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 $500,000 in January 2015, withheld $200,000 in April 2015 and withheld $800,000 in July 2015 in accordance with this cash reserve. No amounts were released or withheld in 2014 as of September 30, 2014. The reserve balance was $1,000,000 at September 30, 2015 and 2014.
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 had entered into hedge contracts covering a portion of the expected oil production from the proved developed producing reserves attributable to the underlying properties, however, all such hedge contracts expired on June 30, 2014, and the terms of the conveyance of the net profits interest prohibit VOC Brazos from entering into new hedging arrangements for the benefit of the Trust. As a result, unitholder exposure to fluctuations in crude oil prices has increased substantially since June 30, 2014.
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (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 “Trustee’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, 2014 (the “Form 10-K”), 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. Historically the Trust has also derived income from the settlement of hedge contracts covering the underlying properties, however, all such hedge contracts expired on June 30, 2014 and consequently the Trust is exposed to market risk from fluctuations in oil and gas prices. For more information regarding the history of the Trust’s 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 Securities Exchange Act of 1934, as amended, 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 Form 10-K.
Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2015, 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 the Form 10-K.
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/ Michael J. Ulrich |
|
|
|
Michael J. Ulrich |
|
|
|
Vice President |
Date: November 5, 2015
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.