Business Context and Reporting Period
Company: VOC Energy Trust (a Delaware statutory trust)
Reporting Period: Quarterly period ended June 30, 2016 (Form 10-Q)
Business Overview: 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 is passive; the Trustee has no management control over operations. The interest terminates on the later of December 31, 2030, or the production of 10.6 million barrels of oil equivalent (MMBoe).
Outstanding Units: 17,000,000 Units of Beneficial Interest as of August 8, 2016.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 |
Three Months Ended June 30, 2015 |
Six Months Ended June 30, 2016 |
Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Income from Net Profits Interest | $1,074,894 | $2,828,014 | $2,070,733 | $4,622,174 |
| Distributable Income | $850,000 | $2,720,000 | $1,615,000 | $4,420,000 |
| Distributions per Unit | $0.05 | $0.16 | $0.095 | $0.26 |
| Cash and Cash Equivalents | $273,494 | N/A | $273,494 | $251,537 (Dec 31, 2015) |
| Total Assets | $89,449,674 | N/A | $89,449,674 | $93,455,545 (Dec 31, 2015) |
| General & Admin Expenses | $116,279 | $124,608 | $433,776 | $439,634 |
Production Data (Three Months Ended June 30, 2016):
- Oil Sales Volume: 150,815 Bbls (Average Price: $30.46/Bbl)
- Natural Gas Sales Volume: 96,212 Mcf (Average Price: $1.80/Mcf)
- Total Gross Proceeds: $4,767,134
Material Changes vs. Prior Period
Revenue Decline: Income from the net profits interest decreased by 62.0% for the three months ended June 30, 2016, compared to the same period in 2015. For the six-month period, the decrease was 55.2%.
Drivers of Decline:
- Commodity Prices: Average oil prices fell 35.9% (Q3) and 44.5% (YTD) compared to 2015. Natural gas prices fell 45.1% (Q3) and 51.3% (YTD).
- Production Volumes: Oil volumes decreased 7.9% (Q3) and 11.5% (YTD). Natural gas volumes decreased 18.7% (Q3) and 24.0% (YTD).
- Cost Reductions: Total costs decreased due to lower production taxes and significantly reduced development expenses (down 65.8% Q3 and 86.7% YTD) resulting from limited drilling activity.
One-Time Event: The Q3 2016 results included a one-time collection of $447,017 in suspended funds from ten Texas wells related to a working interest owner who elected to go non-consent. Without this event, the decline in income would have been more severe.
Guidance, Outlook, and Risks
Management Commentary: The Trustee notes that the Trust's income is entirely dependent on the net profits interest. VOC Brazos does not expect future costs to change significantly other than fluctuations in oilfield service costs. The Trustee maintains a cash reserve of up to $1.0 million to smooth distributions; the balance was $1.0 million as of June 30, 2016.
Subsequent Event: On July 20, 2016, the Trust announced a distribution of $0.09 per unit ($1,530,000 total) to be paid on August 12, 2016.
Liquidity and Debt: The Trust had no borrowings during the period. A $1.0 million letter of credit from VOC Brazos is in place to cover potential administrative expenses if cash on hand is insufficient.
Risks:
- Market Risk: The Trust is highly exposed to fluctuations in oil and natural gas prices.
- Passive Nature: Unitholders have no ability to influence VOC Brazos or control operations.
- Depletion: The Trust will terminate upon the production of 10.6 MMBoe or December 31, 2030, whichever is later.
Investor Verification Checklist
- Production Volumes: Verify the reported decline in oil and gas sales volumes against independent reserve reports or operator data.
- Commodity Pricing: Confirm the average realized prices ($30.46/Bbl oil, $1.80/Mcf gas) against market benchmarks for the relevant production period (Dec 2015–Feb 2016).
- One-Time Event Impact: Assess the sustainability of the $447,017 collection from non-consent wells and its effect on the reported distributable income.
- Reserve Balance: Confirm the $1.0 million cash reserve balance held by VOC Brazos and the criteria for its release or replenishment.
- Depletion Rate: Monitor the cumulative production against the 10.6 MMBoe termination threshold to estimate the remaining life of the Trust.