VOC Energy Trust - 10-Q Summary (Period Ended September 30, 2013)
Business Context and Reporting Period
VOC Energy Trust is a Delaware statutory trust holding a term net profits interest in oil and natural gas properties located in Texas and Kansas. The Trust is entitled to 80% of the net proceeds from production of underlying properties owned by VOC Brazos Energy Partners, LP. The reporting period covers the three and nine months ended September 30, 2013. As of November 6, 2013, 17,000,000 Trust Units were outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 |
|---|---|---|
| Income from Net Profits Interest | $7,315,573 | $20,218,649 |
| Distributable Income | $6,970,000 | $19,550,000 |
| Distributions per Unit | $0.41 | $1.15 |
| Cash and Cash Equivalents | $532,582 | $532,582 (as of Sep 30) |
| Total Assets | $114,152,155 | $114,152,155 (as of Sep 30) |
| General & Administrative Expenses | $119,823 | $610,667 |
| Amortization of Net Profits Interest | $2,825,421 | $8,255,613 |
Material Changes vs. Prior Period
- Revenue Decline: Income from the net profits interest decreased 31.0% for the three months ended September 30, 2013, compared to the same period in 2012 ($7.32M vs. $10.61M). For the nine-month period, income decreased 32.8% ($20.22M vs. $30.11M).
- Distribution Reduction: Distributions per unit fell from $0.60 to $0.41 for the quarter and from $1.73 to $1.15 for the nine-month period.
- Price and Volume Impact: Average oil sales prices decreased 6.1% to $92.12 per barrel for the quarter. Oil sales volumes decreased 1.6% to 198,138 barrels. Natural gas volumes increased 5.8%, but lower oil prices and volumes drove the overall revenue decline.
- Cost Increases: Development expenses surged 383.3% for the quarter ($4.73M vs. $0.98M) due to the drilling and completion of two horizontal wells compared to one in the prior year. For the nine months, development expenses increased 95.7%.
- Hedge Settlements: The Trust benefited from hedge contract settlements, recording a gain of $588,743 for the quarter and $2.44M for the nine months, offsetting some of the impact from lower market prices.
Outlook, Risks, and Unusual Items
- Subsequent Distribution: On October 17, 2013, the Trust announced a distribution of $0.53 per unit ($9.01 million total) payable on November 14, 2013.
- Hedge Expiration Risk: Hedge contracts covering approximately 45% of expected oil production expire in June 2014. Upon expiration, unitholder exposure to crude oil price fluctuations will increase significantly.
- Cash Reserve: VOC Brazos maintains a cash reserve of up to $1.0 million for future development or operating expenditures. The reserve balance was at the maximum $1.0 million as of September 30, 2013.
- Liquidity: The Trust holds $532,582 in cash. A $1.0 million letter of credit from VOC Brazos is in place to cover potential Trust expenses if cash is insufficient. No borrowings occurred during the period.
- Termination: The Trust will terminate on the later of December 31, 2030, or when 10.6 million barrels of oil equivalent have been produced from the underlying properties.
Investor Verification Checklist
- Verify the impact of the June 2014 hedge contract expiration on future cash flows given current oil price volatility.
- Confirm the production volumes and cost structure of the newly drilled horizontal wells to assess long-term sustainability of development expenses.
- Monitor the $1.0 million cash reserve balance to ensure it is not being utilized to mask a decline in distributable income.
- Review the creditworthiness of hedge counterparties, as the Trust relies on these settlements to stabilize income.
- Assess the remaining proved reserves of the underlying properties to estimate the time until the Trust's termination.