VOC Energy Trust 10-Q Summary: Period Ended June 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. The trust is passive, with no management control over operations. This filing covers the quarterly period ended June 30, 2020. As of August 10, 2020, 17,000,000 Units of Beneficial Interest were outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
|---|---|---|
| Income from Net Profits Interest | $1,437,635 | $3,510,895 |
| Distributable Income | $510,000 | $2,380,000 |
| Distributions per Unit | $0.03 | $0.14 |
| Cash and Cash Equivalents | $934,678 (as of June 30, 2020) | |
| Total Assets | $20,553,091 (as of June 30, 2020) | |
| Trust Corpus | $20,553,091 (as of June 30, 2020) | |
| Debt | None reported; $1.7M letter of credit provided by VOC Brazos for expenses. |
Material Changes vs. Prior Period
- Revenue Decline: Income from the net profits interest decreased 51.4% year-over-year for the quarter ($1.44M vs. $2.96M) and 37.0% for the six-month period ($3.51M vs. $5.57M).
- Distribution Reduction: Distributable income dropped significantly to $510,000 for the quarter compared to $2.72M in the prior year quarter. Distributions per unit fell from $0.16 to $0.03.
- Cost Increases: Development expenses surged 965.6% for the quarter ($4.17M vs. $0.39M) due to payments for Hawkwood Development wells. Production and property taxes increased 127.3% due to timing differences and higher volumes.
- Asset Impairment: While no new impairment was recorded in Q2 2020, a significant impairment of $41.26M was charged to Trust Corpus in Q1 2020 due to the collapse in oil prices. Total accumulated amortization and impairment increased to $120.97M.
- Production Volumes: Despite lower prices, oil sales volumes increased 20.5% and natural gas volumes increased 34.6% compared to the prior year quarter.
Outlook, Risks, and Management Commentary
- COVID-19 and Oil Prices: The Trustee cites the pandemic and OPEC/Russia production disputes as primary drivers for the decline in West Texas Intermediate crude prices (dropping to a low of $16.70 in April 2020). This has severely impacted cash flows.
- Future Distributions: The Trustee withheld cash from the Q2 distribution to cover estimated Trust expenses through approximately April 2021. On July 20, 2020, the Trust announced no distribution for the third quarter (payment period ended June 30, 2020) as revenues were insufficient to cover costs.
- Reserves: VOC Brazos maintains a $1.0 million cash reserve for future development, which was fully utilized at period end. A subsequent event noted a $7,045 draw from this reserve to cover a deficit.
- Termination Risk: The Trust will terminate upon the later of December 31, 2030, or the production of 10.6 million barrels of oil equivalent (MMBoe). Continued low prices may reduce economic production volumes, potentially accelerating the depletion of reserves.
Investor Verification Checklist
- Verify the July 20, 2020 announcement confirming zero distribution for the Q2 2020 payment period.
- Monitor West Texas Intermediate (WTI) crude oil prices and their correlation to future cash receipts from VOC Brazos.
- Review the status of the $1.7 million letter of credit provided by VOC Brazos to ensure it remains in place to cover Trust expenses.
- Assess the impact of the $41.26 million Q1 2020 impairment on the remaining Trust Corpus and the timeline for Trust termination.
- Confirm the production volumes and pricing for the Hawkwood Development wells, which drove the spike in development expenses.