Business Context and Reporting Period
Company: VOC Energy Trust (VOC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2019
Structure: A Delaware statutory trust holding an 80% net profits interest in oil and natural gas properties located in Kansas and Texas, operated by VOC Brazos Energy Partners, L.P. The trust has no employees and is managed by The Bank of New York Mellon Trust Company, N.A.
Termination: The trust will terminate on the later of December 31, 2030, or when 10.6 MMBoe have been produced from the underlying properties (equivalent to 8.5 MMBoe attributable to the trust). As of year-end, approximately 5.1 MMBoe of the trust's interest had been produced.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Income from Net Profits Interest | $12,661,799 | $12,938,703 |
| Distributable Income | $11,815,000 | $12,070,000 |
| Distributions per Unit | $0.695 | $0.710 |
| Total Assets (Year End) | $63,345,900 | $70,013,155 |
| Cash on Hand | $326,132 | $360,165 |
| General & Administrative Expenses | $880,832 | $825,058 |
Production & Pricing (2019):
- Oil Sales: 570,216 Bbls at an average price of $56.11/Bbl.
- Natural Gas Sales: 330,906 Mcf at an average price of $2.90/Mcf.
- Proved Reserves (Year End): 4,488 MBoe (3,438 MBoe Developed; 1,050 MBoe Undeveloped).
Material Changes vs. Prior Period
Revenue and Income: Income from the net profits interest decreased by approximately 2.1% ($276,904) compared to 2018. This decline was driven by a 5.2% decrease in average oil prices and an 11.0% decrease in average natural gas prices, which offset an 8.0% increase in oil sales volumes.
Costs:
- Development Expenses: Increased significantly by 67.6% to $2,680,356 due to increased drilling activity and development costs in 2019 compared to 2018.
- Lease Operating Expenses: Increased slightly by 1.7% to $12,688,464 due to higher costs for oilfield goods and services.
- Production and Property Taxes: Decreased by 15.4% to $1,755,076, primarily due to a 30.6% drop in property taxes.
Reserves: Total proved reserves decreased by 281 MBoe from 2018 to 2019. This reduction was primarily due to production of 537 MBoe, partially offset by positive revisions of 256 MBoe and additions of 401 MBoe of proved undeveloped reserves.
Outlook, Risks, and Management Commentary
Development Program: VOC Brazos plans to incur approximately $32.7 million in development expenditures through December 31, 2022, to drill horizontal wells and perform workovers, primarily in the Kurten Woodbine Unit in Texas. The trust indirectly bears 80% of these costs, which will reduce current cash distributions but are intended to mitigate the natural decline rate of approximately 8.4% per year.
Joint Ventures: VOC Brazos has entered into joint ventures with Hawkwood Energy East Texas, LLC and MD America Energy, LLC to develop the Lower Woodbine Organic Shale. Unpaid costs associated with these ventures as of December 31, 2019, totaled approximately $5.35 million, which will be deducted from future gross proceeds.
Risks and Contingencies:
- Commodity Price Volatility: Distributions are highly sensitive to oil and gas prices. A sharp drop in prices in early 2020 was noted as a risk factor.
- Depleting Assets: The trust holds depleting assets and cannot acquire new properties. Approximately 87% of estimated oil recovery has already been extracted.
- Dissolution Trigger: The trust must dissolve if annual cash proceeds attributable to the net profits interest fall below $1 million for two consecutive years.
- Operator Dependency: The trust has no control over operations; it relies entirely on VOC Brazos and its operators (Vess Oil Corporation, etc.).
Investor Verification Checklist
- Reserve Accuracy: Verify the independent reserve report by Cawley, Gillespie & Associates, Inc., specifically the 8.4% projected decline rate and the impact of the planned $32.7 million development program.
- Joint Venture Costs: Monitor the repayment schedule of the $5.35 million in unpaid joint venture costs, as these will directly reduce future distributions.
- Commodity Prices: Assess the sensitivity of distributions to current WTI and Henry Hub prices, given the trust's lack of hedging and reliance on spot markets.
- Operator Financial Health: Review the financial stability of VOC Brazos and the VOC Operators, as their bankruptcy could jeopardize the net profits interest.
- Production Volumes: Track quarterly production volumes against the 10.6 MMBoe termination threshold to estimate the remaining life of the trust.