Business Context and Reporting Period
Company: VOC Energy Trust (VOC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2019
Business Model: VOC 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 passive, receiving 80% of the net proceeds from production of underlying properties owned by VOC Brazos Energy Partners, LP. The Trust has no management control over operations. The net profits interest terminates on the later of December 31, 2030, or the production of 10.6 million barrels of oil equivalent (MMBoe).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 |
|---|---|---|
| Income from Net Profits Interest | $3,751,554 | $9,321,096 |
| Distributable Income | $3,485,000 | $8,670,000 |
| Distributions per Unit | $0.205 | $0.51 |
| Cash and Cash Equivalents | $272,596 | $272,596 (as of Sep 30, 2019) |
| Total Assets | $64,761,486 | $64,761,486 (as of Sep 30, 2019) |
| General & Administrative Expenses | $200,922 | $738,665 |
| Amortization of Net Profits Interest | $1,828,980 | $5,164,100 |
Note: The Trust uses a modified cash basis of accounting. Amortization is charged directly to Trust Corpus and does not reduce distributable income.
Material Changes vs. Prior Period
- Revenue Growth: Income from the net profits interest increased 2.0% for the three months ended September 30, 2019, compared to the same period in 2018. For the nine-month period, income increased 3.7%.
- Production Volumes: Oil sales volumes increased 11.9% (three months) and 5.5% (nine months) year-over-year. Natural gas volumes decreased 1.6% (three months) and 6.1% (nine months).
- Pricing: Average oil prices decreased 6.7% to $58.63/Bbl (three months) and 0.2% to $56.87/Bbl (nine months). Natural gas prices decreased 14.5% to $2.83/Mcf (three months) and 1.2% to $3.21/Mcf (nine months).
- Costs: Development expenses increased significantly, up 53.1% for the quarter and 95.4% for the nine months, driven by increased drilling activity in the Kurten Woodbine Unit.
- Distributions: The quarterly distribution increased from $0.20 per unit in Q3 2018 to $0.205 per unit in Q3 2019.
Outlook, Risks, and Unusual Items
- Subsequent Event: On October 17, 2019, the Trust announced a distribution of $0.185 per unit ($3,145,000 total) for the quarter ended September 30, 2019, payable November 14, 2019.
- Development Activity: VOC Brazos is actively developing the Lower Woodbine Organic Shale (LWOS) through joint ventures with Hawkwood Energy and MD America. While partners are carrying VOC Brazos for initial wells, future development costs may temporarily reduce cash available for distribution until new production comes online.
- Liquidity: The Trust held $272,596 in cash as of September 30, 2019. VOC Brazos maintains a $1.7 million letter of credit to cover potential Trust expenses. No borrowings occurred during the period.
- Risks: The Trust is entirely dependent on VOC Brazos for operations and reserve data. The Trustee has no control over production decisions. Future distributions are subject to commodity price volatility and the timing of capital expenditures.
Investor Verification Checklist
- Verify the impact of increased development expenses on future distributable income as new LWOS wells come online.
- Monitor commodity price trends for oil and natural gas, as the Trust's income is directly correlated to market prices.
- Review the status of the joint ventures with Hawkwood Energy and MD America to understand the timeline for new production.
- Confirm the Trust's cash reserve levels and the status of the $1.7 million letter of credit provided by VOC Brazos.
- Check the remaining life of the net profits interest based on the 10.6 MMBoe production limit versus current production rates.