Business Context and Reporting Period
Company: VOC Energy Trust (VOC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2013
Structure: A Delaware statutory trust formed in 2010, managed by The Bank of New York Mellon Trust Company, N.A. The trust holds a term net profits interest entitling it to 80% of the net proceeds from oil and natural gas properties in Kansas and Texas owned by VOC Brazos Energy Partners, L.P.
Termination: The trust will terminate on the later of December 31, 2030, or when 10.6 MMBoe have been produced from the underlying properties.
Key Financial Metrics (Year Ended Dec 31, 2013)
| Metric | 2013 Value | 2012 Value |
|---|---|---|
| Income from Net Profits Interest | $29,274,516 | $38,112,577 |
| Distributable Income | $28,560,000 | $37,230,000 |
| Distributions per Unit | $1.68 | $2.19 |
| Total Assets (Year End) | $111,439,640 | $122,349,786 |
| Net Profits Interest Investment (Net of Amortization) | $110,988,370 | $121,875,186 |
| Proved Reserves (Trust Interest) | 7,125 MBoe | 7,410 MBoe |
| Standardized Measure of Discounted Future Net Cash Flows | $231,220,050 | $246,448,000 |
Note: The trust uses a modified cash basis of accounting. No debt or interest expense is reported as the trust has no borrowings.
Material Changes vs. Prior Period
- Revenue Decline: Income from the net profits interest decreased by 23.2% ($8.8 million) compared to 2012. This was driven by a 19.6% decrease in the excess of revenues over direct operating expenses and development costs.
- Production Volumes: Oil sales volumes decreased by 3.3% (769,584 Bbls in 2013 vs. 796,066 Bbls in 2012), while natural gas volumes increased by 4.0%.
- Price Increases: Average sales prices increased slightly: Oil rose 0.8% to $92.36/Bbl, and Natural Gas rose 0.8% to $3.95/Mcf.
- Cost Increases: Development expenses surged 52.2% to $18.0 million, primarily due to the timing of costs for drilling horizontal wells and increased completion costs. Lease operating expenses increased 1.6%.
- Reserve Revisions: Total proved reserves decreased by 285 MBoe due to production, partially offset by positive revisions of 406 MBoe.
Outlook, Risks, and Management Commentary
- Production Decline: The underlying properties are mature fields. Without additional development, production is expected to decline at an average annual rate of 6.3% over the next 20 years.
- Development Program: VOC Brazos plans to spend approximately $23.3 million through 2016 on development (drilling and workovers) to offset natural decline. The trust indirectly bears 80% of these costs via reduced net proceeds.
- Hedging: Hedge contracts are in place for the first six months of 2014 at a fixed price of $102.15 per barrel, covering approximately 21% of expected oil production. No hedges exist beyond June 30, 2014, exposing the trust to full price volatility thereafter.
- Key Risks:
- Commodity Prices: Distributions are highly sensitive to oil and gas prices.
- Depleting Assets: The trust cannot acquire new properties; distributions will eventually cease as reserves are exhausted.
- Operator Control: Unitholders have no control over VOC Brazos' operations, capital expenditure decisions, or well abandonment policies.
- Counterparty Risk: Reliance on hedge counterparties and purchasers (e.g., MV Purchasing LLC, which bought 34% of 2013 production) for payments.
Investor Verification Checklist
- Reserve Accuracy: Verify the independent reserve report by Cawley, Gillespie & Associates, Inc., as actual production may differ from estimates.
- Development Spending: Monitor VOC Brazos' execution of the $23.3 million development plan through 2016 to ensure production decline rates do not exceed projections.
- Hedge Exposure: Assess the impact of unhedged production after June 30, 2014, given the volatility of crude oil prices.
- Operator Financial Health: Review the financial stability of VOC Brazos and the operator (Vess Oil Corporation), as their bankruptcy could jeopardize operations and distributions.
- Capital Expenditure Limitations: Note that after 2027 (or upon reaching specific production thresholds), capital expenditures deductible from net proceeds will be capped at the average of the prior three years plus 2.5%.