VOC Energy Trust - Quarter Report: 2016 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended June 30, 2016
OR
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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 August 8, 2016, 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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Six months ended |
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2016 |
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2015 |
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2016 |
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2015 |
| ||||
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Income from net profits interest |
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$ |
1,074,894 |
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$ |
2,828,014 |
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$ |
2,070,733 |
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$ |
4,622,174 |
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Cash on hand used (withheld) for Trust expenses |
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(108,615 |
) |
16,594 |
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(21,957 |
) |
237,460 |
| ||||
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General and administrative expenses (1) |
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(116,279 |
) |
(124,608 |
) |
(433,776 |
) |
(439,634 |
) | ||||
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Distributable income |
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$ |
850,000 |
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$ |
2,720,000 |
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$ |
1,615,000 |
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$ |
4,420,000 |
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Distributions per Trust unit (17,000,000 Trust units issued and outstanding at June 30, 2016 and 2015) |
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$ |
0.05 |
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$ |
0.16 |
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$ |
0.095 |
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$ |
0.26 |
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(1) Includes $22,810 and $0 paid to VOC Brazos Energy Partners, LP (“VOC Brazos”) during the three months ended June 30, 2016 and 2015, respectively, and $44,745 and $21,090 during the six months ended June 30, 2016 and 2015, respectively. Also includes $37,600 paid to The Bank of New York Mellon Trust Company, N.A. during each of the three months ended June 30, 2016 and 2015 and $75,100 during each of the six months ended June 30, 2016 and 2015, respectively.
CONDENSED STATEMENTS OF ASSETS AND TRUST CORPUS
(Unaudited)
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June 30, |
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December 31, |
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ASSETS |
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Cash and cash equivalents |
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$ |
273,494 |
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$ |
251,537 |
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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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(51,415,426 |
) |
(47,387,598 |
) | ||
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Total assets |
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$ |
89,449,674 |
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$ |
93,455,545 |
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TRUST CORPUS |
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Trust corpus, 17,000,000 Trust units issued and outstanding at June 30, 2016 and December 31, 2015 |
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$ |
89,449,674 |
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$ |
93,455,545 |
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CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS
(Unaudited)
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Three months ended |
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Six months ended |
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2016 |
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2015 |
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2016 |
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2015 |
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Trust corpus, beginning of period |
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$ |
91,393,894 |
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$ |
99,317,329 |
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$ |
93,455,545 |
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$ |
101,602,829 |
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Income from net profits interest |
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1,074,894 |
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2,828,014 |
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2,070,733 |
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4,622,174 |
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Cash distribution |
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(850,000 |
) |
(2,720,000 |
) |
(1,615,000 |
) |
(4,420,000 |
) | ||||
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Trust expenses |
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(116,279 |
) |
(124,608 |
) |
(433,776 |
) |
(439,634 |
) | ||||
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Amortization of net profits interest |
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(2,052,835 |
) |
(1,968,287 |
) |
(4,027,828 |
) |
(4,032,921 |
) | ||||
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Trust corpus, end of period |
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$ |
89,449,674 |
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$ |
97,332,448 |
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$ |
89,449,674 |
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$ |
97,332,448 |
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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, 2015, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of June 30, 2016 and for the three and six month periods ended June 30, 2016 and June 30, 2015, 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, 2015.
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, 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 June 30, 2016 that would impact the financial statements of the Trust.
Note 4. 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 5. Income from Net Profits Interest
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Three months ended |
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Six months ended |
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2016 |
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2015 |
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2016 |
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2015 |
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Excess of revenues over direct operating expenses and lease equipment and development costs(1) |
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$ |
1,343,617 |
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$ |
3,785,018 |
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$ |
2,588,416 |
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$ |
5,402,718 |
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Times 80% net profits interest to 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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1,074,894 |
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3,028,014 |
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2,070,733 |
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4,322,174 |
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Cash reserve(2) |
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0 |
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(200,000 |
) |
0 |
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300,000 |
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Income from net profits interest(3) |
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$ |
1,074,894 |
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$ |
2,828,014 |
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$ |
2,070,733 |
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$ |
4,622,174 |
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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 December through February production period for the three months ended June 30 and during the September through February production period for the six months ended June 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. Included in the three months and six months ended June 30, 2016 is $447,017 for a one-time event associated with the collection of suspended funds from ten wells in Texas related to a working interest owner that elected to go non-consent.
(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 June 30, 2016 and 2015, VOC Brazos increased its cash reserve by $0 and $200,000, respectively. During the six months ended June 30, 2016 and 2015, VOC Brazos released and paid to the Trust $0 and $300,000, respectively, from the previously established cash reserve. The reserve balance was $1,000,000 and $200,000 at June 30, 2016 and 2015, respectively.
(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 June 30, 2016 substantially represents production by VOC Brazos from December 2015 through February 2016 and the cash received by the Trust during the three months ended June 30, 2015 substantially represents production by VOC Brazos from December 2014 through February 2015. The cash received by the Trust during the six months ended June 30, 2016 substantially represents production by VOC Brazos from September 2015 through February 2016 and the cash received by the Trust during the six months ended June 30, 2015 substantially represents production by VOC Brazos from September 2014 through February 2015.
For the three and six months ended June 30, 2016 and 2015, 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 6. 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 7. 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 2016 was $765,000, or $0.045 per Trust Unit, and was made on February 12, 2016 to Trust unitholders owning Trust Units as of February 1, 2016. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2015 through December 31, 2015.
The second quarterly distribution during 2016 was $850,000, or $0.05 per Trust Unit, and was made on May 13, 2016 to Trust unitholders owning Trust Units as of May 2, 2016. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2016 through March 31, 2016.
The first quarterly distribution during 2015 was $1,700,000, or $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 $2,720,000, or $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.
Note 8. 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 six months ended June 30, 2016 and 2015, 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 9. Subsequent Event
On July 20, 2016, the Trust announced a Trust distribution to unitholders of record on August 1, 2016 of $1,530,000, or $0.09 per Trust Unit, which is to be paid on August 12, 2016.
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 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.
Results of Operations for the Quarters Ended June 30, 2016 and 2015
The following is a summary of income from net profits interest received by the Trust for the three months ended June 30, 2016 and 2015 consisting of the January distribution for each respective year:
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Three months ended |
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2016 |
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2015 |
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Sales volumes: |
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|
|
|
| ||
|
Oil (Bbl) |
|
150,815 |
|
163,674 |
| ||
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Natural gas (Mcf) |
|
96,212 |
|
118,396 |
| ||
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Total (BOE) |
|
166,850 |
|
183,407 |
| ||
|
Average sales prices: |
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|
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| ||
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Oil (per Bbl) |
|
$ |
30.46 |
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$ |
47.50 |
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|
Natural gas (per Mcf) |
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$ |
1.80 |
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$ |
3.28 |
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|
Gross proceeds: |
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|
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Oil sales |
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$ |
4,594,404 |
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$ |
7,773,952 |
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|
Natural gas sales |
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172,730 |
|
388,148 |
| ||
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Total gross proceeds |
|
4,767,134 |
|
8,162,100 |
| ||
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Costs: |
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|
|
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Production and development costs: |
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|
|
|
| ||
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Lease operating expenses |
|
3,070,932 |
|
3,491,402 |
| ||
|
Production and property taxes |
|
136,081 |
|
251,817 |
| ||
|
Development expenses |
|
216,504 |
|
633,863 |
| ||
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Total costs |
|
3,423,517 |
|
4,377,082 |
| ||
|
|
|
|
|
|
| ||
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Excess of revenues over direct operating expenses and lease equipment and development costs |
|
1,343,617 |
|
3,785,018 |
| ||
|
Times net profits interest over the term of the Trust |
|
80 |
% |
80 |
% | ||
|
Income from net profits interest before reserve adjustments |
|
1,074,894 |
|
3,028,014 |
| ||
|
Cash reserve |
|
0 |
|
(200,000 |
) | ||
|
Income from net profits interest |
|
$ |
1,074,894 |
|
$ |
2,828,014 |
|
Included in the results of operations for the quarter ended ended June 30, 2016 is the following information representing a one-time event associated with the collection of suspended funds from ten wells in Texas related to a working interest owner that elected to go non-consent.
|
Sales volumes: |
|
|
| |
|
Oil (Bbl) |
|
4,502 |
| |
|
Natural gas (Mcf) |
|
3,389 |
| |
|
Total (BOE) |
|
5,067 |
| |
|
Average sales prices: |
|
|
| |
|
Oil (per Bbl) |
|
$ |
93.03 |
|
|
Natural gas (per Mcf) |
|
$ |
5.72 |
|
|
Gross proceeds: |
|
|
| |
|
Oil sales |
|
$ |
418,804 |
|
|
Natural gas sales |
|
19,375 |
| |
|
Total gross proceeds |
|
438,179 |
| |
|
Costs: |
|
|
| |
|
Production and development costs: |
|
|
| |
|
Lease operating expenses |
|
(27,906 |
) | |
|
Production and property taxes |
|
19,068 |
| |
|
Development expenses |
|
0 |
| |
|
Total costs reimbursed by working interest owner |
|
(8,838 |
) | |
|
|
|
|
| |
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
$ |
447,017 |
|
The cash received by the Trust from VOC Brazos during the quarter ended June 30, 2016 substantially represents the production by VOC Brazos from December 2015 through February 2016. The cash received by the Trust from VOC Brazos during the quarter ended June 30, 2015 substantially represents the production by VOC Brazos from December 2014 through February 2015. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds. Oil and natural gas sales were $4,767,134 (including $438,179 as noted above for a one-time event) for the three months ended June 30, 2016, a decrease of $3,394,966 or 41.6% from $8,162,100 for the three months ended June 30, 2015. 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 first quarter of 2016. During the three months ended June 30, 2016, the average price for oil decreased 35.9% to $30.46 per Bbl and the average price for natural gas decreased 45.1% to $1.80 per Mcf. Oil sales volumes were 150,815 Bbls (including 4,502 BBls as noted above for a one-time event) for the three months ended June 30, 2016, a decrease of 12,859 Bbls or 7.9% from 163,674 Bbls, while natural gas sales volumes were 96,212 Mcf (including 3,389 Mcf as noted above for a one-time event), a decrease of 22,184 Mcf or 18.7%.
Costs. Lease operating expenses were $3,070,932 (offset by a $27,906 reimbursement as noted above for a one-time event) for the three months ended June 30, 2016, a decrease of $420,470 or 12.0% from $3,491,402 for the three months ended June 30, 2015. Production and property taxes were $136,081 (including $19,068 as noted above for a one-time event) for the three months ended June 30, 2016, a decrease of $115,736 or 46.0% from $251,817 for the same period in 2015. Such decrease is primarily due to a 84.9% decrease in property taxes and a 44.1% decrease in production taxes. Development expenses were $216,504 for the three months ended June 30, 2016, a decrease of $417,359 or 65.8% from $633,863 for the same period in 2015. Such decrease was primarily due to limited drilling activity and corresponding limited development expenses during the three months ended June 30, 2016, compared to development expenses covering certain completion costs for one horizontal well and certain drilling costs for one horizontal well that was abandoned during three months ended June 30, 2015.
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 $1,343,617 (including $447,017 as noted above for a one-time event) for the three months ended June 30, 2016, a decrease of $2,441,401 or 64.5% from $3,785,018 for the three months ended June 30, 2015. The Trust’s 80% net profits interest of these totals were $1,074,894 and $3,028,014, respectively. During the three months ended June 30, 2016 and 2015, VOC Brazos increased its cash reserve by $0 and $200,000, respectively, for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $1,074,894 and $2,828,014 for such periods, respectively. These amounts were reduced by a Trust holdback for future expenses of $224,894 and $108,014 for the three months ended June 30, 2016 and 2015, respectively. The Trustee paid general and administrative expenses of $116,279 for the three months ended June 30, 2016, a decrease of $8,329 from $124,608 for the three months ended June 30, 2015. These factors resulted in distributable income for the three months ended June 30, 2016 of $850,000, a decrease of $1,870,000 from $2,720,000 for the three months ended June 30, 2015.
Results of Operations for the Six Months Ended June 30, 2016 and 2015
The following is a summary of income from net profits interest received by the Trust for the six months ended June 30, 2016 and 2015 consisting of the January and April distributions for each respective year:
|
|
|
Six months ended |
| ||||
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|
|
2016 |
|
2015 |
| ||
|
Sales volumes: |
|
|
|
|
| ||
|
Oil (Bbl) |
|
295,236 |
|
333,492 |
| ||
|
Natural gas (Mcf) |
|
192,833 |
|
253,744 |
| ||
|
Total (BOE) |
|
327,375 |
|
375,783 |
| ||
|
Average sales prices: |
|
|
|
|
| ||
|
Oil (per Bbl) |
|
$ |
35.39 |
|
$ |
63.78 |
|
|
Natural gas (per Mcf) |
|
$ |
1.93 |
|
$ |
3.96 |
|
|
Gross proceeds: |
|
|
|
|
| ||
|
Oil sales |
|
$ |
10,447,726 |
|
$ |
21,270,911 |
|
|
Natural gas sales |
|
371,604 |
|
1,005,076 |
| ||
|
Total gross proceeds |
|
10,819,330 |
|
22,275,987 |
| ||
|
Costs: |
|
|
|
|
| ||
|
Production and development costs: |
|
|
|
|
| ||
|
Lease operating expenses |
|
6,148,667 |
|
7,422,549 |
| ||
|
Production and property taxes |
|
1,149,023 |
|
2,431,015 |
| ||
|
Development expenses |
|
933,224 |
|
7,019,705 |
| ||
|
Total costs |
|
8,230,914 |
|
16,873,269 |
| ||
|
|
|
|
|
|
| ||
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
2,588,416 |
|
5,402,718 |
| ||
|
Times net profits interest over the term of the Trust |
|
80 |
% |
80 |
% | ||
|
Income from net profits interest before reserve adjustments |
|
2,070,733 |
|
4,322,174 |
| ||
|
Cash reserve |
|
0 |
|
300,000 |
| ||
|
Income from net profits interest |
|
$ |
2,070,733 |
|
$ |
4,622,174 |
|
Included in the results of operations for the six months ended June 30, 2016 is the following information representing a one-time event associated with the collection of suspended funds from ten wells in Texas related to a working interest owner that elected to go non-consent..
|
Sales volumes: |
|
|
| |
|
Oil (Bbl) |
|
4,502 |
| |
|
Natural gas (Mcf) |
|
3,389 |
| |
|
Total (BOE) |
|
5,067 |
| |
|
Average sales prices: |
|
|
| |
|
Oil (per Bbl) |
|
$ |
93.03 |
|
|
Natural gas (per Mcf) |
|
$ |
5.72 |
|
|
Gross proceeds: |
|
|
| |
|
Oil sales |
|
$ |
418,804 |
|
|
Natural gas sales |
|
19,375 |
| |
|
Total gross proceeds |
|
438,179 |
| |
|
Costs: |
|
|
| |
|
Production and development costs: |
|
|
| |
|
Lease operating expenses |
|
(27,906 |
) | |
|
Production and property taxes |
|
19,068 |
| |
|
Development expenses |
|
0 |
| |
|
Total costs reimbursed by working interest owner |
|
(8,838 |
) | |
|
|
|
|
| |
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
$ |
447,017 |
|
The cash received by the Trust from VOC Brazos during the six months ended June 30, 2016 substantially represents the production by VOC Brazos from September 2015 through February 2016. The cash received by the Trust from VOC Brazos during the six months ended June 30, 2015 substantially represents the production by VOC Brazos from September 2014 through February 2015. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds. Oil and natural gas sales were $10,819,330 (including $438,179 as noted above for a one-time event) for the six months ended June 30, 2016, a decrease of $11,456,657 or 51.4% from $22,275,987 for the six months ended June 30, 2015. 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 six months of 2016 and a decrease in oil sales volumes and gas sales volumes during the first six months of 2016. During the six months ended June 30, 2016, the average price for oil decreased 44.5% to $35.39 per Bbl and the average price for natural gas decreased 51.3% to $1.93 per Mcf. Oil sales volumes were 295,236 Bbls (including 4,502 BBls as noted above for a one-time event) for the six months ended June 30, 2016, a decrease of 38,256 Bbls or 11.5% from 333,492 Bbls,
while natural gas sales volumes were 192,833 Mcf (including 3,389 Mcf as noted above for a one-time event), a decrease of 60,911 Mcf or 24.0% from 253,744 Mcf.
Costs. Lease operating expenses were $6,148,667 (offset by a $27,906 reimbursement as noted above for a one-time event) for the six months ended June 30, 2016, a decrease of $1,273,882 or 17.2% from $7,422,549 for the six months ended June 30, 2015. The decrease was primarily due to decreases in the costs of oilfield goods and services. Production and property taxes were $1,149,023 (including $19,068 as noted above for a one-time event) for the six months ended June 30, 2016, a decrease of $1,281,992 or 52.7% from $2,431,015 for the same period in 2015. Such decrease is primarily due to a 57.3% decrease in production taxes due to lower prices for oil and gas as well as a 51.0% decrease in property taxes. Development expenses were $933,224 for the six months ended June 30, 2016, a decrease of $6,086,481 or 86.7% from $7,019,705 for the same period in 2015. The decrease was primarily due to limited drilling activity and corresponding limited development expenses during the six months ended June 30, 2016, compared to development expenses covering certain completion costs for one horizontal well and certain drilling costs for one horizontal well in the lower EagleBine interval that was abandoned during the six months ended June 30, 2015.
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 $2,588,416 (including $447,017 as noted above for a one-time event) for the six months ended June 30, 2016, a decrease of $2,814,302 or 52.1% from $5,402,718 for the six months ended June 30, 2015. The Trust’s 80% net profits interest of these totals were $2,070,733 and $4,322,174, respectively. During the six months ended June 30, 2016 and 2015, VOC Brazos released and paid to the trust $0 and $300,000, respectively, from the previously established cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $2,070,733 and $4,622,174 for such periods, respectively. These amounts were further reduced by a Trust holdback for future expenses of $455,733 and $202,174 for the six months ended June 30, 2016 and 2015, respectively. The Trustee paid general and administrative expenses of $433,776 for the six months ended June 30, 2016, a decrease of $5,858 from $439,634 for the six months ended June 30, 2015. These factors resulted in distributable income for the six months ended June 30, 2016 of $1,615,000, a decrease of $2,805,000 from $4,420,000 for the six months ended June 30, 2015.
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 June 30, 2016, $273,494 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 six months ended June 30, 2016 and 2015, 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 2016 as of June 30, 2016. The cash reserve balance was $1,000,000 and $200,000 at June 30, 2016 and 2015, respectively.
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.
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 “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, 2015 (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. Consequently, the Trust is exposed to market risk from fluctuations in oil and gas prices. 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 June 30, 2016, 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: August 9, 2016 |
|
|
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.