VOC Energy Trust - 10-Q Summary (Period Ended June 30, 2012)
Business Context and Reporting Period
VOC Energy Trust is a Delaware statutory trust formed to acquire and hold a term net profits interest in oil and natural gas properties located in Texas and Kansas. The Trust holds an 80% interest in the net proceeds from these underlying properties, which are operated by VOC Brazos Energy Partners, LP. The Trust has no management control over operations. This report covers the quarterly period ended June 30, 2012. As of August 7, 2012, 17,000,000 Trust units were outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Income from Net Profits Interest | $11,883,087 | $19,498,945 |
| Distributable Income | $11,730,000 | $19,210,000 |
| Distributions per Unit | $0.69 | $1.13 |
| General & Administrative Expenses | $(165,416) | $(364,617) |
| Cash and Cash Equivalents | $222,475 (as of June 30, 2012) | N/A |
| Total Assets | $127,684,467 (as of June 30, 2012) | N/A |
| Investment in Net Profits Interest (Net) | $127,461,992 | N/A |
Note: The Trust uses a modified cash basis of accounting. Amortization of the net profits interest is charged directly to Trust corpus and does not reduce distributable income.
Material Changes and Operational Highlights
- Production Volumes: For the six months ended June 30, 2012, production sales volumes attributable to the net profits interest totaled 362,681 barrels of oil equivalent (324,426 Bbls of oil and 229,530 Mcf of natural gas).
- Commodity Prices: The average price received for crude oil was $91.51 per barrel for the six-month period and $97.83 per barrel for the quarter. Natural gas averaged $4.48 per Mcf (six months) and $4.21 per Mcf (quarter).
- Hedge Settlements: The Trust received payments to settle hedge contracts totaling $1,259,939 for the six months ended June 30, 2012.
- Cash Reserve Adjustments: VOC Brazos increased its cash reserve by $0.6 million during the quarter but had a net release and payment to the Trust of $0.4 million for the six-month period.
- Comparison to Prior Period: The filing does not provide a direct financial comparison to the three or six months ended June 30, 2011, as the Trust did not receive distributable income until August 2011 following the May 2011 conveyance of the net profits interest.
Outlook, Risks, and Management Commentary
- Subsequent Distribution: On July 19, 2012, the Trust announced a distribution of $0.60 per unit ($10.2 million total) for the quarter ended June 30, 2012, payable on August 14, 2012.
- Hedging Strategy: VOC Brazos has hedge contracts in place for 2012, 2013, and the first half of 2014, covering approximately 54% of expected oil production. Weighted average hedge prices range from $99.01 to $102.15 per barrel. These contracts limit upside cash flow if market prices exceed the fixed hedge price.
- Liquidity: The Trust holds minimal cash ($222,475) as it distributes nearly all proceeds. A $1 million letter of credit from VOC Brazos secures the Trust against insufficient cash for expenses. There were no borrowings during the period.
- Risks: Primary risks include fluctuations in oil and gas prices, the passive nature of the Trust (no control over operations), and the finite life of the net profits interest (terminating on December 31, 2030, or upon production of 10.6 million barrels of oil equivalent).
Investor Verification Checklist
- Verify the current status of VOC Brazos's hedge contracts and the impact of current market prices relative to the fixed hedge prices ($99.01 - $102.15).
- Confirm the remaining proved reserves of the underlying properties to assess the duration of the Trust's income stream.
- Review the specific terms of the administrative services agreement with VOC Brazos and the Trustee fees to monitor expense growth.
- Monitor the cash reserve adjustments made by VOC Brazos, as these directly impact the timing and amount of cash available for distribution.
- Check for any changes in the creditworthiness of the major trading counterparties for the hedge contracts.