VOC Energy Trust - Form 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2019. 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 managed by The Bank of New York Mellon Trust Company, N.A., and derives income from an 80% interest in the net proceeds of production from underlying properties owned by VOC Brazos Energy Partners, LP. The Trust is classified as a non-accelerated filer and a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Income from Net Profits Interest | $2,610,130 | $2,030,150 |
| Distributable Income | $2,465,000 | $1,870,000 |
| Distribution per Unit | $0.145 | $0.110 |
| General & Administrative Expenses | $379,769 | $285,758 |
| Cash and Cash Equivalents | $125,526 | $360,165 (Dec 31, 2018) |
| Total Assets | $68,193,841 | $70,013,155 (Dec 31, 2018) |
| Debt / Borrowings | $0 | $0 |
Note: The Trust holds a $1,000,000 cash reserve for future development and maintenance expenditures. A $1,700,000 letter of credit is provided by VOC Brazos to cover potential Trust expenses.
Material Changes vs. Prior Period
- Revenue Increase: Income from the net profits interest increased by 28.6% ($579,980) compared to Q1 2018. This was driven by an 18.5% increase in gross proceeds ($8.29M vs $7.00M).
- Price vs. Volume: The revenue increase was primarily due to higher commodity prices. Average oil prices rose 26.6% to $63.18/Bbl, and natural gas prices rose 8.7% to $3.37/Mcf. However, sales volumes declined: oil volumes dropped 5.8% and natural gas volumes dropped 8.4%.
- Cost Fluctuations: Development expenses surged 254.4% to $1.03M due to increased drilling activity. Conversely, production and property taxes decreased 22.0% to $754,851, largely due to a 30.7% drop in property taxes.
- Distribution Growth: Distributable income rose to $2.465M, resulting in a higher distribution per unit of $0.145 compared to $0.110 in the prior year.
Outlook, Risks, and Subsequent Events
- Subsequent Distribution: On April 18, 2019, the Trust announced a distribution of $2,720,000 ($0.16 per unit) for the quarter ended March 31, 2019, payable on May 15, 2019.
- Liquidity: The Trust had no borrowings during the quarter. Cash on hand is used for administrative expenses and distributions. The Trustee may borrow funds if cash is insufficient, but unitholders would not receive distributions until such loans are repaid.
- Risks: The Trust has no management control over the underlying properties. Income is dependent on VOC Brazos's operations, commodity prices, and production volumes. The Trust is subject to the risk that VOC Brazos may not have sufficient cash to pay expenses, though a letter of credit mitigates this.
- Termination: The net profits interest will terminate on the later of December 31, 2030, or when 10.6 million barrels of oil equivalent have been produced.
Investor Verification Checklist
- Verify the timing lag between production and cash receipt (Q1 2019 income reflects production from Sept-Nov 2018).
- Confirm the status of the $1,000,000 reserve for future development expenditures held by VOC Brazos.
- Monitor the impact of increased development expenses on future distributable income.
- Review the $1,700,000 letter of credit provided by VOC Brazos for sufficiency against potential Trust expenses.
- Check for any changes in the 80% net profits interest calculation or reserve adjustments in future filings.