Business Context and Reporting Period
Company: VOC Energy Trust (VOC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2021
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. 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 (8.5 MMBoe attributable to the trust) have been produced and sold. As of year-end 2021, approximately 6.0 MMBoe of the trust's interest had been produced.
Key Financial Metrics
| Metric | 2021 | 2020 | 2019 |
|---|---|---|---|
| Total Gross Proceeds | $29,088,611 | $25,622,133 | $32,951,145 |
| Income from Net Profits Interest | $9,302,296 | $5,006,227 | $12,661,799 |
| Distributable Income | $8,670,000 | $3,825,000 | $11,815,000 |
| Distributions per Unit | $0.510 | $0.225 | $0.695 |
| General & Administrative Expenses | $948,096 | $904,355 | $880,832 |
| Cash on Hand (Dec 31) | $287,204 | $603,004 | N/A |
| Proved Reserves (Trust Share) | 3.61 MMBoe | 2.76 MMBoe | 4.49 MMBoe |
Production Volumes (2021): 528,166 Bbls of oil and 352,159 Mcf of natural gas.
Average Sales Prices (2021): $53.09 per Bbl (Oil) and $2.98 per Mcf (Natural Gas).
Material Changes vs. Prior Period
- Revenue Increase: Total gross proceeds increased 13.5% to $29.1 million in 2021 compared to 2020. This was driven by a 22.8% increase in average oil prices and a 65.6% increase in average natural gas prices, which offset an 8.6% decline in oil sales volumes.
- Income Recovery: Income from the net profits interest rose 85.8% to $9.3 million, recovering from the significant downturn in 2020 caused by low commodity prices.
- Cost Reduction: Development expenses decreased 37.5% to $4.1 million in 2021, primarily due to the completion of only one well (the former MD Earning Well) compared to significant payments for Hawkwood Development wells in 2020.
- Reserve Revisions: Proved reserves increased significantly in 2021 (from 2.76 MMBoe to 3.61 MMBoe) due to net positive revisions driven by higher realized prices and the addition of proved undeveloped reserves.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Development Program: VOC Brazos expects to incur approximately $30.7 million in development expenditures through December 31, 2026, to offset natural production decline. This includes drilling and completing wells in the Kurten Woodbine Unit (Texas) and infill drilling in Kansas.
- Cash Reserve: In November 2021, the Trustee announced a plan to build a cash reserve of approximately $1.175 million for future expenses, commencing with distributions in Q1 2022. This reserve is in addition to a $1.7 million letter of credit provided by VOC Brazos.
- Production Decline: Without additional development, production is expected to decline at an average annual rate of 6.8% over the next 20 years.
Risks and Contingencies:
- Commodity Price Volatility: Distributions are highly sensitive to oil and natural gas prices. A prolonged period of low prices could result in no distributions or the abandonment of marginal wells.
- Depleting Assets: The trust holds depleting assets and cannot acquire new properties. Over 89% of estimated oil recovery has already been extracted.
- Operator Dependency: The trust has no control over operations. The financial condition of VOC Brazos and its operators is critical; bankruptcy of the operator could impede development.
- Environmental & Regulatory: Operations are subject to stringent environmental laws (e.g., methane emissions, hydraulic fracturing regulations) which could increase costs or restrict production.
Investor Verification Checklist
- Reserve Accuracy: Verify the independent reserve report by Cawley, Gillespie & Associates, Inc., particularly the 2021 upward revisions driven by price changes.
- Development Spending: Monitor VOC Brazos' execution of the $30.7 million development plan through 2026 to ensure production decline is mitigated.
- Reserve Build-up: Track the Trustee's progress in building the $1.175 million cash reserve and its impact on quarterly distributions.
- Commodity Prices: Assess the sensitivity of future distributions to fluctuations in WTI Cushing oil and Henry Hub natural gas prices.
- Operator Financial Health: Review the financial stability of VOC Brazos and the VOC Operators, as the trust relies entirely on their ability to fund operations and development.