VOC Energy Trust - 10-Q Summary (Period Ended September 30, 2018)
Business Context and Reporting Period
VOC Energy Trust is a Delaware statutory trust formed to hold a term net profits interest in oil and natural gas properties located in Texas and Kansas. The Trust has no management control over operations, which are conducted by VOC Brazos Energy Partners, LP. The Trust is entitled to 80% of the net proceeds from production. The reporting period covers the three and nine months ended September 30, 2018. As of November 7, 2018, 17,000,000 Trust Units were outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 |
|---|---|---|
| Income from Net Profits Interest | $3,676,676 | $8,991,288 |
| Distributable Income | $3,400,000 | $8,330,000 |
| Distributions per Unit | $0.20 | $0.49 |
| Cash and Cash Equivalents | $391,787 | $391,787 (as of Sep 30) |
| Total Assets | $71,700,055 | $71,700,055 (as of Sep 30) |
| General & Administrative Expenses | $121,565 | $586,021 |
| Debt | $0 | $0 |
Note: The Trust holds no debt. A $1,000,000 letter of credit is provided by VOC Brazos to cover potential future expenses.
Material Changes vs. Prior Period
- Revenue Growth: Income from the net profits interest increased 71.8% year-over-year for the quarter ($3.68M vs. $2.14M) and 20.4% for the nine-month period ($8.99M vs. $7.47M).
- Price Drivers: The increase was primarily driven by higher commodity prices. Average oil prices rose 36.4% to $62.84/Bbl (Q3) and 24.0% to $57.00/Bbl (YTD). Natural gas prices also increased.
- Volume Decline: Despite price increases, production volumes declined slightly. Oil sales volumes decreased 3.7% in Q3 and 4.0% YTD. Natural gas volumes decreased 3.6% in Q3 and 4.3% YTD.
- Cost Management: Development expenses decreased significantly (39.3% in Q3, 29.1% YTD) due to reduced drilling activity. However, lease operating expenses and production taxes increased due to higher service costs and commodity prices.
- One-Time Items: The prior year (2017) nine-month results included a one-time lawsuit settlement of $1,209,412, which is not present in the 2018 results.
Outlook, Risks, and Subsequent Events
- Subsequent Distribution: On October 18, 2018, the Trust announced a distribution of $0.22 per unit ($3,740,000 total) for the quarter ended September 30, 2018, payable November 14, 2018.
- New Joint Venture: VOC Brazos entered a new joint venture with Hawkwood Energy to develop the Lower Woodbine Organic Shale (LWOS). Hawkwood will carry VOC Brazos for up to four "Earning Wells." Two wells have been drilled and set with production casing.
- Future Cash Flow Impact: Future development activities beyond the carried wells may increase development costs, temporarily reducing cash available for distributions until new production comes online.
- Risks: The Trust is passive and relies entirely on VOC Brazos for operations. It faces risks related to commodity price volatility, production decline in mature fields, and the inability to influence operational decisions.
Investor Verification Checklist
- Verify the sustainability of the $0.22 per unit distribution trend given the temporary reduction in cash flow expected from new development costs.
- Monitor the progress of the Hawkwood Energy joint venture and the timeline for the "Earning Wells" to reach production.
- Review the Trust's termination conditions: The interest terminates on the later of December 31, 2030, or the production of 10.6 million barrels of oil equivalent (MMBoe).
- Confirm the status of the $1,000,000 cash reserve held by VOC Brazos for future development, which remains fully reserved as of September 30, 2018.