VOC Energy Trust 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for VOC Energy Trust for the period ended September 30, 2016. The Trust is a Delaware statutory trust holding a term net profits interest in oil and natural gas properties located in Texas and Kansas, operated by VOC Brazos Energy Partners, LP. The Trust is entitled to 80% of the net proceeds from production. As of November 8, 2016, 17,000,000 Trust Units were outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2016 | Nine Months Ended Sep 30, 2016 |
|---|---|---|
| Income from Net Profits Interest | $1,696,473 | $3,767,206 |
| Distributable Income | $1,530,000 | $3,145,000 |
| Distributions per Unit | $0.09 | $0.185 |
| Cash and Cash Equivalents | $268,616 | $268,616 (as of Sep 30) |
| Total Assets | $87,502,182 | $87,502,182 (as of Sep 30) |
| Debt | $0 | $0 |
Production Data (Three Months Ended Sep 30, 2016):
- Oil Sales: 144,061 Bbls at an average price of $37.43/Bbl.
- Natural Gas Sales: 82,996 Mcf at an average price of $1.45/Mcf.
- Total Gross Proceeds: $5,512,332.
Material Changes vs. Prior Period
Financial results declined significantly compared to the prior year periods due to lower commodity prices and reduced production volumes.
- Income Decline: Income from the net profits interest decreased 16% for the quarter and 43% for the nine-month period compared to 2015.
- Distribution Decline: Distributable income per unit dropped from $0.11 to $0.09 for the quarter and from $0.37 to $0.185 for the nine-month period.
- Price Impact: Average oil prices fell 22.5% quarter-over-quarter and 38.6% year-to-date. Natural gas prices fell 36.7% quarter-over-quarter and 48.9% year-to-date.
- Volume Impact: Oil sales volumes decreased 9.8% for the quarter and 10.9% for the nine months. Natural gas volumes decreased 19.0% for the quarter and 22.6% for the nine months.
- Cost Reductions: Lease operating expenses and production taxes decreased significantly (18.1% and 51.5% respectively for the quarter), partially offsetting revenue declines. However, development expenses increased 80.8% for the quarter due to workover activity.
Outlook, Risks, and Unusual Items
Unusual Items: The nine-month results included a one-time event of $447,017 in excess revenues associated with the collection of suspended funds from ten wells in Texas related to a non-consenting working interest owner.
Liquidity and Reserves: The Trust held $268,616 in cash as of September 30, 2016. VOC Brazos maintains a cash reserve of up to $1.0 million to smooth distributions; the reserve balance was $1,000,000 at period end. No borrowings were made during the period.
Subsequent Event: On October 20, 2016, the Trust announced a distribution of $0.10 per unit ($1,700,000 total) payable November 14, 2016.
Risks: The Trust is exposed to market risk from fluctuations in oil and gas prices. The Trustee has no management control over the underlying properties. The net profits interest will terminate on the later of December 31, 2030, or when 10.6 million barrels of oil equivalent have been produced.
Investor Verification Checklist
- Verify the sustainability of the $0.10 per unit distribution announced for Q4 2016 given the significant year-over-year decline in production volumes and commodity prices.
- Confirm the status of the $1.0 million cash reserve held by VOC Brazos and its impact on future distributable cash flow.
- Review the specific details of the "non-consent" working interest owner event to understand if the $447,017 one-time gain is repeatable.
- Monitor the Trust's termination triggers (production volume vs. calendar date) as the Trust approaches its maturity.
- Assess the impact of continued low oil and gas prices on the Trust's ability to cover administrative expenses without borrowing.