Business Context and Reporting Period
Company: VOC Energy Trust (VOC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2016
Structure: A Delaware statutory trust holding an 80% net profits interest in oil and natural gas properties located in Kansas and Texas, operated by VOC Brazos Energy Partners, L.P. (VOC Brazos). The trust has no employees and is managed by The Bank of New York Mellon Trust Company, N.A.
Termination: The trust will terminate on the later of December 31, 2030, or when 10.6 MMBoe have been produced from the underlying properties (equivalent to 8.5 MMBoe attributable to the trust).
Key Financial Metrics
| Metric | 2016 | 2015 | 2014 |
|---|---|---|---|
| Income from Net Profits Interest | $5,749,845 | $8,627,256 | $32,284,622 |
| Distributable Income | $4,845,000 | $7,990,000 | $31,450,000 |
| Distributions per Unit | $0.285 | $0.470 | $1.850 |
| Total Assets (Year End) | $85,466,531 | $93,455,545 | $101,602,829 |
| Oil Sales Volume (Bbl) | 582,075 | 642,966 | 744,451 |
| Gas Sales Volume (Mcf) | 361,741 | 459,048 | 551,001 |
| Avg. Oil Price (per Bbl) | $37.58 | $56.02 | $95.29 |
| Avg. Gas Price (per Mcf) | $1.83 | $3.20 | $4.96 |
| Proved Reserves (MMBoe) | 5.176 | 5.877 | 7.332 |
Note: Financial statements are prepared on a modified cash basis. The trust bears 80% of net proceeds after deducting operating expenses, taxes, and development costs.
Material Changes vs. Prior Period
- Revenue Decline: Income from the net profits interest decreased 33.4% to $5.75 million in 2016 compared to $8.63 million in 2015. This was driven by a 32.9% drop in average oil prices and a 42.8% drop in average natural gas prices.
- Volume Reduction: Oil sales volumes decreased 9.5% and natural gas sales volumes decreased 21.2% year-over-year.
- Cost Reductions: Development expenses plummeted 81.5% to $1.55 million in 2016 from $8.39 million in 2015 due to limited drilling activity. Lease operating expenses decreased 15.5%.
- Reserve Revisions: Total proved reserves decreased by 205,967 Boe due to negative revisions caused by significant decreases in realized prices, in addition to production depletion.
- One-Time Event: 2016 results included a one-time collection of suspended funds ($447,017 net) from ten Texas wells related to a non-consent working interest owner.
Outlook, Risks, and Management Commentary
- Development Program: VOC Brazos expects to incur approximately $38.0 million in development expenditures through December 31, 2020. This includes drilling eight vertical wells in Kansas and nine horizontal wells in the Kurten Woodbine Unit in Texas. A joint venture with Hawkwood Energy was formed to develop the Lower Woodbine Organic Shale (LWOS), which may increase development costs burdening the trust.
- Production Decline: Without additional development, production is expected to decline at an average annual rate of 6.5% over the next 20 years. Over 90% of estimated oil recovery has already been extracted.
- Key Risks:
- Commodity Price Volatility: Distributions are highly sensitive to oil and gas prices. Low prices may lead to well shut-ins or abandonment.
- Operator Dependency: The trust has no control over operations. The financial condition of VOC Brazos and its operator (Vess Oil Corporation) is critical; neither is a public reporting company.
- Bankruptcy Risk: In the event of VOC Brazos' bankruptcy, the trust's status as a secured creditor in Kansas is uncertain, potentially rendering it an unsecured creditor.
- Environmental Regulation: Stricter regulations on hydraulic fracturing, emissions, and waste disposal could increase costs or restrict operations.
- Subsequent Events: A distribution of $0.08 per unit was paid in February 2017. A lawsuit settlement regarding a well drilled across VOC Brazos land is expected to contribute approximately $0.9 million to the trust in the first quarter of 2017.
Investor Verification Checklist
- Operator Financial Health: Verify the liquidity and solvency of VOC Brazos and Vess Oil Corporation, as the trust relies entirely on their ability to fund development and operations.
- Development Capital Commitment: Confirm VOC Brazos' ability to fund the projected $38 million development plan through 2020, as failure to do so will accelerate production decline.
- Commodity Price Sensitivity: Assess the impact of current oil and gas prices on the economic viability of the remaining mature wells, particularly in the Kurten Woodbine Unit.
- Reserve Accuracy: Review the independent reserve report by Cawley, Gillespie & Associates, Inc., noting the significant negative revisions in 2015 and 2016 due to price declines.
- Legal Title Status: Understand the specific risks regarding the enforceability of the net profits interest in Kansas in the event of a bankruptcy filing by VOC Brazos.