VOC Energy Trust - Quarter Report: 2019 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, 2019
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)
|
Delaware |
|
80-6183103 |
|
(State or other jurisdiction of incorporation or organization) |
|
(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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601 Travis Street, Floor 16 |
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|
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Houston, Texas |
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77002 |
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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)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Units of Beneficial Interest |
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VOC |
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The New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company x |
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Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 13, 2019, 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)
|
|
|
Three months ended |
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Nine months ended |
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|
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September 30, |
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September 30, |
| ||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
| ||||
|
Income from net profits interest |
|
$ |
3,751,554 |
|
$ |
3,676,676 |
|
$ |
9,321,096 |
|
$ |
8,991,288 |
|
|
Cash on hand used (withheld) for Trust expenses |
|
(65,632 |
) |
(155,111 |
) |
87,569 |
|
(75,267 |
) | ||||
|
General and administrative expenses (1) |
|
(200,922 |
) |
(121,565 |
) |
(738,665 |
) |
(586,021 |
) | ||||
|
Distributable income |
|
$ |
3,485,000 |
|
$ |
3,400,000 |
|
$ |
8,670,000 |
|
$ |
8,330,000 |
|
|
Distributions per Trust unit (17,000,000 Trust units issued and outstanding at September 30, 2019 and 2018) |
|
$ |
0.205 |
|
$ |
0.20 |
|
$ |
0.51 |
|
$ |
0.49 |
|
(1) Includes $51,320 and $24,675 paid to VOC Brazos Energy Partners, LP (“VOC Brazos”) during the three months ended September 30, 2019 and 2018, respectively, and $75,995 and $96,800 during the nine months ended September 30, 2019 and 2018, respectively. Also includes $37,500 paid to The Bank of New York Mellon Trust Company, N.A. during each of the three-month periods ended September 30, 2019 and 2018 and $112,500 during each of the nine-month periods ended September 30, 2019 and 2018, respectively.
CONDENSED STATEMENTS OF ASSETS AND TRUST CORPUS
(Unaudited)
|
|
|
September 30, |
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December 31, |
| ||
|
ASSETS |
|
|
|
|
| ||
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Cash and cash equivalents |
|
$ |
272,596 |
|
$ |
360,165 |
|
|
Investment in net profits interest |
|
140,591,606 |
|
140,591,606 |
| ||
|
Accumulated amortization |
|
(76,102,716 |
) |
(70,938,616 |
) | ||
|
Total assets |
|
$ |
64,761,486 |
|
$ |
70,013,155 |
|
|
|
|
|
|
|
| ||
|
TRUST CORPUS |
|
|
|
|
| ||
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Trust corpus, 17,000,000 Trust units issued and outstanding at September 30, 2019 and December 31, 2018 |
|
$ |
64,761,486 |
|
$ |
70,013,155 |
|
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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2019 |
|
2018 |
|
2019 |
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2018 |
| ||||
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Trust corpus, beginning of period |
|
$ |
66,524,834 |
|
$ |
73,579,322 |
|
$ |
70,013,155 |
|
$ |
77,711,186 |
|
|
Income from net profits interest |
|
3,751,554 |
|
3,676,676 |
|
9,321,096 |
|
8,991,288 |
| ||||
|
Cash distribution |
|
(3,485,000 |
) |
(3,400,000 |
) |
(8,670,000 |
) |
(8,330,000 |
) | ||||
|
Trust expenses |
|
(200,922 |
) |
(121,565 |
) |
(738,665 |
) |
(586,021 |
) | ||||
|
Amortization of net profits interest |
|
(1,828,980 |
) |
(2,034,378 |
) |
(5,164,100 |
) |
(6,086,398 |
) | ||||
|
Trust corpus, end of period |
|
$ |
64,761,486 |
|
$ |
71,700,055 |
|
$ |
64,761,486 |
|
$ |
71,700,055 |
|
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, 2018, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of September 30, 2019 and for the three and nine month periods ended September 30, 2019 and September 30, 2018, 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, 2018.
Note 3. Trust Accounting Policies
The Trust uses the modified cash basis of accounting to report receipts of the term net profits interest and payments of expenses incurred. The term net profits interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses, lease maintenance, lease overhead, 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, exceeds 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, 2019 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:
|
Oil and gas properties |
|
$ |
197,270,173 |
|
|
Accumulated depreciation and depletion |
|
(17,681,155 |
) | |
|
Hedge liability |
|
(1,717,713 |
) | |
|
20-year asset retirement liability |
|
(2,131,797 |
) | |
|
Net property to be conveyed |
|
175,739,508 |
| |
|
Times 80% net profits interest to Trust |
|
$ |
140,591,606 |
|
Note 5. Income from Net Profits Interest
|
|
|
Three months ended |
|
Nine months ended |
| ||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
| ||||
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Excess of revenues over direct operating expenses and lease equipment and development costs(1) |
|
$ |
4,689,442 |
|
$ |
4,595,845 |
|
$ |
11,651,370 |
|
$ |
11,239,110 |
|
|
Times 80% net profits interest to Trust |
|
80 |
% |
80 |
% |
80 |
% |
80 |
% | ||||
|
Income from net profits interest before reserve adjustments |
|
3,751,554 |
|
3,676,676 |
|
9,321,096 |
|
8,991,288 |
| ||||
|
VOC Brazos reserve for future development, maintenance or operating expenditures(2) |
|
0 |
|
0 |
|
0 |
|
0 |
| ||||
|
Income from net profits interest(3) |
|
$ |
3,751,554 |
|
$ |
3,676,676 |
|
$ |
9,321,096 |
|
$ |
8,991,288 |
|
(1) Excess of revenues over direct operating expenses and lease equipment and development costs reflect expenses and costs incurred by VOC Brazos during each of the March through May production periods for the three months ended September 30 and during each of the September through May production periods 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, 2019 and 2018, and the nine months ended September 30, 2019 and 2018, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the reserve. The reserve balance was $1,000,000 at September 30, 2019 and 2018, 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 September 30, 2019 substantially represents production by VOC Brazos from March 2019 through May 2019 and the cash received by the Trust during the three months ended September 30, 2018 substantially represents production by VOC Brazos from March 2018 through May 2018. The cash received by the Trust during the nine months ended September 30, 2019 substantially represents production by VOC Brazos from September 2018 through May 2019 and the cash received by the Trust during the nine months ended September 30, 2018 substantially represents production by VOC Brazos from September 2017 through May 2018.
For the three and nine months ended September 30, 2019 and 2018, 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 2019 was $2,465,000, or $0.145 per Trust Unit, and was made on February 14, 2019 to Trust unitholders owning Trust Units as of January 30, 2019. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2018 through December 31, 2018.
The second quarterly distribution during 2019 was $2,720,000, or $0.16 per Trust Unit, and was made on May 15, 2019 to Trust unitholders owning Trust Units as of April 30, 2019. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2019 through March 31, 2019.
The third quarterly distribution during 2019 was $3,485,000, or $0.205 per Trust Unit, and was made on August 14, 2019 to Trust unitholders owning Trust Units as of July 30, 2019. Such distribution included the net proceeds of production collected by VOC Brazos from April 1, 2019 through June 30, 2019.
The first quarterly distribution during 2018 was $1,870,000, or $0.11 per Trust Unit, and was made on February 14, 2018 to Trust unitholders owning Trust Units as of January 30, 2018. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2017 through December 31, 2017.
The second quarterly distribution during 2018 was $3,060,000, or $0.18 per Trust Unit, and was made on May 15, 2018 to Trust unitholders owning Trust Units as of April 30, 2018. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2018 through March 31, 2018.
The third quarterly distribution during 2018 was $3,400,000, or $0.20 per Trust Unit, and was made on August 14, 2018 to Trust unitholders owning Trust Units as of July 30, 2018. Such distribution included the net proceeds of production collected by VOC Brazos from April 1, 2018 through June 30, 2018.
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 nine months ended September 30, 2019 and 2018, 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 $1,700,000 to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses.
Note 9. Subsequent Events
On October 17, 2019, the Trust announced a Trust distribution of net profits for the third quarterly payment period ended September 30, 2019. Unitholders of record on October 30, 2019 will receive a distribution amounting to $3,145,000, or $0.185 per Trust Unit, which will be paid on November 14, 2019.
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. All information regarding operations has been provided to the Trustee by VOC Brazos.
Results of Operations for the Quarters Ended September 30, 2019 and 2018
The following is a summary of income from net profits interest received by the Trust for the three months ended September 30, 2019 and 2018 consisting of the July distribution for each respective year:
|
|
|
Three months ended |
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|
|
September 30, |
| ||||
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|
|
2019 |
|
2018 |
| ||
|
Sales volumes: |
|
|
|
|
| ||
|
Oil (Bbl) |
|
148,496 |
|
132,705 |
| ||
|
Natural gas (Mcf) |
|
78,786 |
|
80,036 |
| ||
|
Total (BOE) |
|
161,627 |
|
146,044 |
| ||
|
Average sales prices: |
|
|
|
|
| ||
|
Oil (per Bbl) |
|
$ |
58.63 |
|
$ |
62.84 |
|
|
Natural gas (per Mcf) |
|
$ |
2.83 |
|
$ |
3.31 |
|
|
Gross proceeds: |
|
|
|
|
| ||
|
Oil sales |
|
$ |
8,705,923 |
|
$ |
8,338,594 |
|
|
Natural gas sales |
|
223,269 |
|
264,969 |
| ||
|
Total gross proceeds |
|
8,929,192 |
|
8,603,563 |
| ||
|
Costs: |
|
|
|
|
| ||
|
Production and development costs: |
|
|
|
|
| ||
|
Lease operating expenses |
|
3,170,157 |
|
2,993,076 |
| ||
|
Production and property taxes |
|
550,970 |
|
675,789 |
| ||
|
Development expenses |
|
518,623 |
|
338,853 |
| ||
|
Total costs |
|
4,239,750 |
|
4,007,718 |
| ||
|
|
|
|
|
|
| ||
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
4,689,442 |
|
4,595,845 |
| ||
|
Times net profits interest over the term of the Trust |
|
80 |
% |
80 |
% | ||
|
Income from net profits interest before reserve adjustments |
|
3,751,554 |
|
3,676,676 |
| ||
|
VOC Brazos reserve for future development, maintenance or operating expenditures |
|
0 |
|
0 |
| ||
|
Income from net profits interest |
|
$ |
3,751,554 |
|
$ |
3,676,676 |
|
The cash received by the Trust from VOC Brazos during the quarter ended September 30, 2019 substantially represents the production by VOC Brazos from March 2019 through May 2019. The cash received by the Trust from VOC Brazos during the quarter ended September 30, 2018 substantially represents the production by VOC Brazos from March 2018 through May 2018. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds. Oil and natural gas sales were $8,929,192 for the three months ended September 30, 2019, an increase of $325,629 or 3.8% from $8,603,563 for the three months ended September 30, 2018. Revenues are a function of oil and natural gas sales prices and volumes sold. The increase in gross proceeds was due to increases in oil sales volumes partially offset by a decrease in natural gas sales volumes and decreases in market prices for oil and natural gas sales prices during the third quarter of 2019. Oil sales volumes were 148,496 Bbls for the three months ended September 30, 2019, an increase of 15,791 Bbls or 11.9% from 132,705 Bbls for the three months ended September 30, 2018, while natural gas sales volumes were 78,786 Mcf, a decrease of 1,250 Mcf or 1.6% from 80,036 Mcf for the same period in 2018. During the three months ended September 30, 2019, the average price for oil decreased 6.7% to $58.63 per Bbl and the average price for natural gas decreased 14.5% to $2.83 per Mcf.
Costs. Lease operating expenses were $3,170,157 for the three months ended September 30, 2019, an increase of $177,081 or 5.9% from $2,993,076 for the three months ended September 30, 2018. Production and property taxes were $550,970 for the three months ended September 30, 2019, a decrease of $124,819 or 18.5% from $675,789 for the same period in 2018. Such decrease is primarily due to a decrease in property taxes of $176,116 or 38.6% offset by an increase of $51,297 or 23.3% in production taxes due to higher sales volumes for oil. Development expenses were $518,623 for the three months ended September 30, 2019, an increase of $179,770 or 53.1% from $338,853 for the same period in 2018. Such increase was primarily due to increased drilling activity and development expenses during the three months ended September 30, 2019, compared to the three months ended September 30, 2018.
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 $4,689,442 for the three months ended September 30, 2019, an increase of $93,597 or 2.0% from $4,595,845 for the three months ended September 30, 2018. The Trust’s 80% net profits interest of these totals was $3,751,554 and $3,676,676, respectively. During the three months ended September 30, 2019 and 2018, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the previously established cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $3,751,554 and $3,676,676 for such periods, respectively. These amounts were reduced by a Trust holdback for future expenses of $266,554 and $276,676 for the three months ended September 30, 2019 and 2018, respectively. The Trustee paid general and administrative expenses of $200,922 for the three months ended September 30, 2019, an increase of $79,357 from $121,565 for the three months ended September 30, 2018. This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income for the three months ended September 30, 2019 of $3,485,000, an increase of $85,000 from $3,400,000 for the three months ended September 30, 2018.
Results of Operations for the Nine Months Ended September 30, 2019 and 2018
The following is a summary of income from net profits interest received by the Trust for the nine months ended September 30, 2019 and 2018 consisting of the January, April and July distributions for each respective year:
|
|
|
Nine months ended |
| ||||
|
|
|
2019 |
|
2018 |
| ||
|
Sales volumes: |
|
|
|
|
| ||
|
Oil (Bbl) |
|
417,601 |
|
395,668 |
| ||
|
Natural gas (Mcf) |
|
232,498 |
|
247,597 |
| ||
|
Total (BOE) |
|
456,351 |
|
436,934 |
| ||
|
Average sales prices: |
|
|
|
|
| ||
|
Oil (per Bbl) |
|
$ |
56.87 |
|
$ |
57.00 |
|
|
Natural gas (per Mcf) |
|
$ |
3.21 |
|
$ |
3.25 |
|
|
Gross proceeds: |
|
|
|
|
| ||
|
Oil sales |
|
$ |
23,750,531 |
|
$ |
22,554,788 |
|
|
Natural gas sales |
|
746,711 |
|
804,898 |
| ||
|
Total gross proceeds |
|
24,497,242 |
|
23,359,686 |
| ||
|
Costs: |
|
|
|
|
| ||
|
Production and development costs: |
|
|
|
|
| ||
|
Lease operating expenses |
|
9,391,214 |
|
9,280,249 |
| ||
|
Production and property taxes |
|
1,517,824 |
|
1,849,139 |
| ||
|
Development expenses |
|
1,936,834 |
|
991,188 |
| ||
|
Total costs |
|
12,845,872 |
|
12,120,576 |
| ||
|
|
|
|
|
|
| ||
|
Excess of revenues over direct operating expenses and lease equipment and development costs |
|
11,651,370 |
|
11,239,110 |
| ||
|
Times net profits interest over the term of the Trust |
|
80 |
% |
80 |
% | ||
|
Income from net profits interest before reserve adjustments |
|
9,321,096 |
|
8,991,288 |
| ||
|
VOC Brazos reserve for future development, maintenance or operating expenditures |
|
0 |
|
0 |
| ||
|
Income from net profits interest |
|
$ |
9,321,096 |
|
$ |
8,991,288 |
|
The cash received by the Trust from VOC Brazos during the nine months ended September 30, 2019 substantially represents the production by VOC Brazos from September 2018 through May 2019. The cash received by the Trust from VOC Brazos during the nine months ended September 30, 2018 substantially represents the production by VOC Brazos from September 2017 through May 2018. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds. Oil and natural gas sales were $24,497,242 for the nine months ended September 30, 2019, an increase of $1,137,556 or 4.9% from $23,359,686 for the nine months ended September 30, 2018. Revenues are a function of oil and natural gas sales prices and volumes sold. The increase in gross proceeds was due to an increase in oil sales volumes offset by a decease in natural gas sales volumes and slight decreases in market prices for oil and natural gas during the first nine months of 2019. Oil sales volumes were 417,601 Bbls for the nine months ended September 30, 2019, an increase of 21,933 Bbls or 5.5% from 395,668 Bbls for the nine months ended September 30, 2018, while natural gas sales volumes were 232,498 Mcf, a decrease of 15,099 Mcf or 6.1% from 247,597 Mcf for the same period in 2018. During the nine months ended September 30, 2019, the average price for oil decreased 0.2% to $56.87 per Bbl and the average price for natural gas decreased 1.2% to $3.21 per Mcf.
Costs. Lease operating expenses were $9,391,214 for the nine months ended September 30, 2019, an increase of $110,965 or 1.2% from $9,280,249 for the nine months ended September 30, 2018. Production and property taxes were $1,517,824 for the nine months ended September 30, 2019, a decrease of $331,315 or 17.9% from $1,849,139 for the nine months ended September 30, 2018. Such decrease is primarily due to a decrease of $416,510 or 33.5% in property taxes partially offset by an increase of $85,195 or 14.1% in production taxes due to higher sales volumes and prices for oil. Development expenses were $1,936,834 for the nine months ended September 30, 2019, an increase of $945,646 or 95.4% from $991,188 for the same period in 2018. Such increase was primarily due to increased drilling activity and corresponding increased development expenses during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.
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 $11,651,370 for the nine months ended September 30, 2019, an increase of $412,260 or 3.7% from $11,239,110 for the nine months ended September 30, 2018. The Trust’s 80% net profits interest of these totals were $9,321,096 and $8,991,288, respectively. During the nine months ended September 30, 2019 and 2018, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the previously established cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $9,321,096 and $8,991,288 for such periods, respectively. These amounts were further reduced by a Trust holdback for future expenses of $651,096 and $661,288 for the nine months ended September 30, 2019 and 2018, respectively. The Trustee paid general and administrative expenses of $738,665 for the nine months ended September 30, 2019, an increase of $152,644 from $586,021 for the nine months ended September 30, 2018. This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income of $8,670,000 for the nine months ended September 30, 2019 and $8,330,000 for the nine months ended September 30, 2018.
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, 2019, $272,596 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, 2019 and 2018, there were no such borrowings. VOC Brazos has provided a letter of credit in the amount of $1,700,000 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. The cash reserve balance was $1,000,000 at September 30, 2019 and 2018, respectively.
In 2018, VOC Brazos entered into a new joint venture agreement with Hawkwood Energy East Texas, LLC (“Hawkwood Energy”) to develop the lower EagleBine interval, also referred to as the Lower Woodbine Organic Shale (“LWOS”), within the south half of the Kurten Woodbine Unit (the “Contract Area”). Under the terms of the new joint venture agreement, Hawkwood Energy could carry VOC Brazos for its share of drilling and completion costs for up to four LWOS wells (the “Hawkwood Earning Wells”), with the first Hawkwood Earning Well to be spud by August 31, 2018 and the fourth Hawkwood Earning Well to be spud by June 30, 2019. In exchange, Hawkwood Energy would earn a working interest representing 50% of VOC Brazos’ interest in each Hawkwood Earning Well and a 50% interest in VOC Brazos’ acreage in the Contract Area. After the Hawkwood Earning Wells are completed, Hawkwood Energy also has the right to propose and drill up to eight LWOS wells in 2019 and twelve LWOS wells in 2020. There is no contractual limitation of the number of wells per year to propose and drill after 2020.
In 2018, VOC Brazos also entered into a joint venture agreement with MD America Energy, LLC (“MD America”) to develop the LWOS, within the north half of the Kurten Woodbine Unit (the “North Contract Area”). Under the terms of the joint venture agreement, MD America may carry VOC Brazos for its share of drilling and completion costs for up to four LWOS wells (the “MD Earning Wells”), with the first MD Earning Well to be spud by December 31, 2018 and the fourth MD Earning Well to be spud by November 20, 2020. In exchange, MD America has the opportunity to earn a working interest representing 50% of VOC Brazos’ interest in each MD Earning Well and up to a 50% interest in VOC Brazos’ acreage in the North Contract Area. After the MD Earning Wells are completed, MD America also has the right to propose and drill up to three LWOS wells per year.
To date, Hawkwood has drilled and completed all four Hawkwood Earning Wells earning 50% of VOC Brazos’ interest in each Hawkwood Earning Well and a 50% interest in VOC Brazos’ acreage in the Contract Area and MD America has drilled and set production casing for the first MD Earning Well. Additionally, Hawkwood has drilled and completed four additional LWOS wells with production commencing in October 2019. VOC Brazos elected to take an overriding royalty interest in two LWOS wells and a working interest in the other two LWOS wells.
VOC Brazos is evaluating the potential economic benefits associated with development of the LWOS. If these activities are pursued, with the exception of the Hawkwood Earning Wells and MD Earning Wells in which Hawkwood Energy and MD America, respectively, would carry VOC Brazos for its share of drilling and completion costs, such activities would result in increased development costs burdening the net profits interest of the trust relative to historical development costs. As a result of such increased development costs, cash available for distribution by the trust would be temporarily reduced until anticipated production from the various development efforts in the Kurten Woodbine Unit can be brought on-line. To address these emerging opportunities, VOC Brazos will continue to evaluate the appropriate strategy and capital plan to fund development for the trust.
Note Regarding Forward-Looking Statements
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including without limitation the statements under “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, 2018 (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.
The Trust is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended and is not required to provide the information under this Item.
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, 2019, 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 below are filed or furnished as part of this 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 13, 2019
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.