VOC Energy Trust - 10-Q Summary (Period Ended September 30, 2020)
Business Context and Reporting Period
VOC Energy Trust is a Delaware statutory trust holding an 80% net profits interest in oil and natural gas properties operated by VOC Brazos Energy Partners, LP, primarily in Texas and Kansas. The Trust is a passive entity with no management control over operations. This report covers the quarterly period ended September 30, 2020, and the nine-month period ended on the same date. As of November 9, 2020, 17,000,000 Units of Beneficial Interest were outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 |
|---|---|---|---|---|
| Income from Net Profits Interest | $0 | $3,751,554 | $3,510,895 | $9,321,096 |
| Distributable Income | $0 | $3,485,000 | $2,380,000 | $8,670,000 |
| Distributions per Unit | $0.00 | $0.205 | $0.14 | $0.51 |
| Cash and Cash Equivalents | $795,448 (as of Sep 30, 2020) $326,132 (as of Dec 31, 2019) | |||
| Total Assets | $19,915,749 (as of Sep 30, 2020) $63,345,900 (as of Dec 31, 2019) | |||
| General & Administrative Expenses | $(139,230) | $(200,922) | $(661,579) | $(738,665) |
Liquidity and Debt: The Trust held $795,448 in cash as of September 30, 2020. There were no borrowings during the period. VOC Brazos maintains a $1,700,000 letter of credit to cover potential Trust expenses.
Material Changes vs. Prior Period
- Revenue Collapse: Gross proceeds for the three months ended September 30, 2020, were $2,889,592, a 67.6% decrease from $8,929,192 in the prior year quarter. This was driven by a 61.6% drop in average oil prices (to $22.53/Bbl) and a 56.2% drop in natural gas prices (to $1.24/Mcf).
- Operating Deficit: For the quarter ended September 30, 2020, revenues were insufficient to cover direct operating expenses, resulting in a deficit of $(8,806) before reserve adjustments. Consequently, income from the net profits interest was $0.
- Impairment: A significant impairment expense of $41,261,354 was recorded in the first quarter of 2020 due to the decline in oil futures markets. This reduced the Trust corpus but did not affect distributable income. No additional impairment was recorded in Q3 2020.
- Cost Reductions: Lease operating expenses decreased 29.0% and development expenses decreased 25.9% compared to the prior year quarter, reflecting reduced drilling activity and lower production volumes.
Guidance, Outlook, and Risks
Management Commentary: The Trustee withheld funds from the second quarterly distribution in 2020 to establish a reserve estimated to cover Trust expenses through approximately April 2021. Due to the deficit in the third quarter, no distribution was made to unitholders for that period. VOC Brazos utilized $7,045 from its cash reserve to cover the Q3 deficit.
Outlook: The Trustee warns that if commodity prices remain at reduced levels, subsequent distributions will be substantially lower than historical levels, and there may be periods with no distributions. The West Texas Intermediate spot price of crude oil declined from $63.27 in January 2020 to $38.79 in November 2020, with a low of $16.70 in April 2020.
Risks:
- COVID-19 Impact: The pandemic has caused global economic disruption, reduced demand for oil and gas, and operational challenges.
- Commodity Price Volatility: Disputes between OPEC and Russia regarding production levels have exacerbated oversupply and price declines.
- Production Curtailment: Continued low prices may force operators to shut in or curtail production on marginal wells.
Subsequent Event: On October 20, 2020, the Trust announced a fourth-quarter distribution of $1,445,000 ($0.085 per unit), payable November 13, 2020.
Key Facts for Investor Verification
- Zero Distribution in Q3: Verify the impact of the Q3 operating deficit and the use of the $7,045 reserve to cover costs.
- Impairment Status: Confirm the $41.26 million impairment recorded in Q1 2020 and the current valuation of the net profits interest ($140.6 million cost basis less $121.5 million accumulated amortization/impairment).
- Reserve Balance: Note that VOC Brazos' cash reserve for future expenditures stood at $992,955 as of September 30, 2020, down from $1.0 million.
- Price Sensitivity: Monitor West Texas Intermediate (WTI) crude oil prices, as the Trust's distributable income is directly correlated to commodity prices which have been highly volatile.
- Upcoming Payment: Verify the receipt of the $0.085 per unit distribution scheduled for November 13, 2020.