Business Context and Reporting Period
Company: VOC Energy Trust (a Delaware statutory trust)
Reporting Period: Quarterly period ended June 30, 2018 (Form 10-Q)
Business Model: 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 Trust Units as of August 9, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
|---|---|---|
| Income from Net Profits Interest | $3,284,462 | $5,314,612 |
| Distributable Income | $3,060,000 | $4,930,000 |
| Distribution per Unit | $0.18 | $0.29 |
| Cash and Cash Equivalents | $236,676 | $236,676 (as of June 30) |
| Total Assets | $73,579,322 | $73,579,322 (as of June 30) |
| General & Administrative Expenses | $178,698 | $464,456 |
| Debt | $0 | $0 |
Material Changes vs. Prior Period
- Income Decline (QoQ): Income from the net profits interest decreased to $3.28 million for the three months ended June 30, 2018, from $3.81 million in the same period in 2017. This represents a 13.8% decrease in the excess of revenues over direct operating expenses.
- Price vs. Volume: Gross proceeds increased 10.5% year-over-year for the quarter due to higher commodity prices (Oil: +19.9% to $58.46/Bbl; Natural Gas: +15.9% to $3.35/Mcf). However, this was offset by decreased production volumes (Oil: -7.8%; Natural Gas: -6.0%).
- One-Time Item in Prior Year: The 2017 results included a one-time lawsuit settlement of $1,209,412 and related proceeds of $205,370, which inflated the prior year's comparables. Excluding this, the decline in 2018 income is less severe.
- Expense Increases: Lease operating expenses increased 5.4% and production/property taxes increased 19.7% year-over-year for the quarter, primarily driven by higher commodity prices and oilfield service costs.
- Six-Month Stability: For the six months ended June 30, 2018, distributable income remained flat at $4.93 million compared to the prior year period, despite the lawsuit settlement in 2017, due to higher commodity prices offsetting volume declines.
Outlook, Risks, and Unusual Items
- Subsequent Distribution: On July 19, 2018, the Trust announced a distribution of $0.20 per unit ($3.4 million total) for the quarter ended June 30, 2018, payable August 14, 2018.
- Liquidity: The Trust held $236,676 in cash reserves as of June 30, 2018. VOC Brazos maintains a $1.0 million letter of credit to cover potential Trust expenses. No borrowings occurred during the period.
- Market Risk: The Trust is highly exposed to fluctuations in oil and natural gas prices, as substantially all income is derived from production proceeds. There is no material interest rate risk.
- Operational Risk: The Trustee relies entirely on VOC Brazos for operational data and has no control over the development or operations of the underlying properties. Production volumes are declining as the fields mature.
- Reserves: VOC Brazos maintains a cash reserve of $1.0 million for future development or operating expenditures, which was fully utilized at the reporting date.
Investor Verification Checklist
- Production Volumes: Verify the continued decline in oil and natural gas sales volumes (down 7.8% and 6.0% respectively in Q2 2018) and its impact on future cash flows.
- Commodity Price Sensitivity: Assess the sustainability of current oil ($58.46/Bbl) and gas ($3.35/Mcf) prices, as revenue is directly correlated to these rates.
- Depletion Schedule: Confirm the remaining life of the Trust based on the 10.6 MMBoe production limit and current depletion rates.
- Expense Trends: Monitor the rising trend in lease operating expenses and production taxes, which are eroding the margin between gross proceeds and distributable income.
- Related Party Transactions: Note that a significant portion of production is sold to MV Purchasing, LLC, an affiliate of VOC Brazos, under short-term market-sensitive pricing arrangements.