VOC Energy Trust 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2013 for VOC Energy Trust, a Delaware statutory trust. The Trust holds a term net profits interest entitling it to 80% of the net proceeds from oil and natural gas production from underlying properties in Texas and Kansas operated by VOC Brazos Energy Partners, LP. The Trust has no management control over operations and is expected to terminate upon the later of December 31, 2030, or the production of 10.6 million barrels of oil equivalent (MMBoe). As of May 6, 2013, 17,000,000 Trust units were outstanding.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Income from Net Profits Interest | $4,447,381 | $7,615,858 |
| Distributable Income | $4,420,000 | $7,480,000 |
| Distribution per Unit | $0.26 | $0.44 |
| Cash and Cash Equivalents | $243,197 | $474,600 (Dec 31, 2012) |
| Total Assets | $119,352,304 | $122,349,786 (Dec 31, 2012) |
| General & Administrative Expenses | $258,784 | $199,200 |
| Amortization of Net Profits Interest | $2,766,079 | $2,817,209 |
Production and Pricing (Q1 2013 vs Q1 2012):
- Oil Sales: 192,173 Bbls at $87.17/Bbl (vs. 191,374 Bbls at $84.43/Bbl).
- Natural Gas Sales: 148,688 Mcf at $3.68/Mcf (vs. 159,645 Mcf at $4.70/Mcf).
- Total Gross Proceeds: $17,298,985 (vs. $16,907,713).
Material Changes
Distributable income decreased by $3,060,000 (40.9%) compared to the prior year quarter. While gross proceeds increased slightly by 2.3% due to higher oil prices and volumes, this was significantly offset by a 64.7% increase in development expenses ($6.93 million vs. $4.21 million). The spike in development costs was attributed to the timing of expenditures and the abandonment of a horizontal well due to mechanical issues. Additionally, natural gas prices fell 21.7%, reducing revenue from that segment. The Trust released $250,000 from its cash reserve in Q1 2013, compared to $1.0 million released in Q1 2012.
Outlook, Risks, and Subsequent Events
Subsequent Event: On April 18, 2013, the Trust announced a distribution of $0.48 per unit ($8.16 million total) to be paid on May 15, 2013.
Hedging Strategy: VOC Brazos has hedged approximately 45% of expected oil production for 2013 and the first half of 2014 at weighted average prices ranging from $99.01 to $102.15 per barrel. These contracts provide predictable cash flow but limit upside potential if market prices exceed the hedge price. Upon expiration in June 2014, exposure to price fluctuations will increase significantly.
Liquidity: The Trust held $243,197 in cash as of March 31, 2013. No borrowings were made during the quarter. A $1 million letter of credit from VOC Brazos is in place to cover potential future expenses.
Risks: The Trust is exposed to commodity price volatility and the credit risk of hedge counterparties. The Trustee relies entirely on VOC Brazos for operational data and has no control over the underlying properties.
Investor Verification Checklist
- Verify the impact of the abandoned horizontal well on future development costs and production volumes.
- Monitor the expiration of hedge contracts in June 2014 and the resulting exposure to crude oil price fluctuations.
- Confirm the sustainability of the $0.48 per unit distribution announced for Q2 2013 given the significant drop in Q1 distributable income.
- Review the trend in natural gas prices and volumes, which declined significantly in Q1 2013.
- Assess the remaining life of the Trust based on the 10.6 MMBoe production limit versus current production rates.