VOC Energy Trust 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for VOC Energy Trust for the period ended June 30, 2014. 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 these underlying properties. As of August 7, 2014, 17,000,000 Trust Units were outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 |
|---|---|---|
| Income from Net Profits Interest | $9,177,854 | $19,058,186 |
| Distributable Income | $8,840,000 | $18,530,000 |
| Distributions per Unit | $0.52 | $1.09 |
| Cash and Cash Equivalents | $432,357 | $432,357 |
| Total Assets | $106,373,584 | $106,373,584 |
| General and Administrative Expenses | $171,439 | $547,099 |
| Debt | $0 | $0 |
Material Changes vs. Prior Period
- Distributable Income: Increased by $680,000 (8.3%) for the three months ended June 30, 2014, compared to the same period in 2013. For the six months, distributable income increased by $5,950,000 (47.3%).
- Production Volumes: Oil sales volumes decreased by 4.0% (Q2) and 1.5% (YTD) compared to the prior year periods. Natural gas volumes decreased by 7.9% (Q2) and 4.1% (YTD).
- Commodity Prices: Average oil prices increased 2.8% to $92.68/Bbl (Q2) and 6.5% to $94.40/Bbl (YTD). Natural gas prices increased 20.4% to $4.79/Mcf (Q2) and 21.4% to $4.65/Mcf (YTD).
- Costs: Development expenses decreased significantly by 27.0% (Q2) and 72.8% (YTD) due to reduced drilling and completion activity compared to 2013.
- Hedge Settlements: Gains from hedge settlements decreased to $152,207 (Q2) and $28,577 (YTD) from $719,386 and $1,855,395 in the prior year periods, respectively, due to lower hedge volumes.
Outlook, Risks, and Unusual Items
- Hedge Expiration: All commodity hedge contracts expired on June 30, 2014. The Trust Agreement prohibits VOC Brazos from entering into new hedging arrangements for the benefit of the Trust. Consequently, unitholder exposure to fluctuations in crude oil and natural gas prices has increased significantly.
- Cash Reserve: VOC Brazos maintains a cash reserve of up to $1.0 million for future development or operating expenditures. The balance was $1,000,000 as of June 30, 2014. No amounts were withheld or released during the first half of 2014.
- Liquidity: The Trust held $432,357 in cash. VOC Brazos has provided a $1 million letter of credit to cover potential Trust expenses. There were no borrowings during the period.
- Subsequent Event: On July 17, 2014, the Trust announced a distribution of $0.39 per unit ($6.63 million total) to be paid on August 15, 2014.
- Termination: 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 impact of the June 30, 2014 hedge expiration on future cash flow volatility given the prohibition on new hedges.
- Confirm the trend in production volumes (oil and gas) to assess the sustainability of distributable income amidst declining reserves.
- Review the $1.0 million cash reserve status to understand potential future withholdings from distributions.
- Monitor the $0.39 per unit distribution announced for Q3 2014 to gauge near-term cash flow performance.
- Assess the Trust's reliance on VOC Brazos for operational data and reserve estimates, as the Trustee has no management control over operations.