VOC Energy Trust 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2017, for VOC Energy Trust, a Delaware statutory trust. The Trust holds a term net profits interest entitling it to 80% of the net proceeds from oil and natural gas production from underlying properties in Texas and Kansas managed by VOC Brazos Energy Partners, LP. As of November 9, 2017, there were 17,000,000 Trust Units outstanding. The Trust is a smaller reporting company and is not subject to federal or state income taxes.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 |
|---|---|---|
| Income from Net Profits Interest | $2,140,348 | $7,470,474 |
| Distributable Income | $1,870,000 | $6,800,000 |
| Distributions per Unit | $0.110 | $0.400 |
| Cash and Cash Equivalents | $386,774 (as of Sep 30, 2017) | $386,774 (as of Sep 30, 2017) |
| Total Assets | $79,801,594 | $79,801,594 |
| General & Administrative Expenses | $215,333 | $522,340 |
| Debt | $0 (No borrowings) | $0 (No borrowings) |
Material Changes vs. Prior Period
- Revenue Growth: Income from the net profits interest increased 26.2% for the three months ended September 30, 2017, compared to the same period in 2016. For the nine-month period, income increased 98.3%.
- Price vs. Volume: The increase in gross proceeds was driven primarily by higher commodity prices. Average oil prices rose 23.1% (Q3) and 27.5% (9M), while natural gas prices rose 95.2% (Q3) and 55.1% (9M). These gains partially offset declines in production volumes (oil volumes decreased 4.4% in Q3 and 6.2% in 9M).
- One-Time Items: The nine-month 2017 results included a one-time lawsuit settlement of $1,209,412 related to an unaffiliated operator drilling on VOC Brazos land, plus $205,370 in retroactive net proceeds from that well. The nine-month 2016 results included a one-time collection of $447,017 from suspended funds.
- Costs: Development expenses increased significantly (288.2% in Q3, 29.8% in 9M) due to increased drilling activity. Conversely, production and property taxes decreased due to lower property tax assessments.
Outlook, Risks, and Unusual Items
- Subsequent Distribution: On October 19, 2017, the Trust announced a distribution of $0.095 per unit ($1,615,000 total) for the quarter ended September 30, 2017, payable November 14, 2017.
- Liquidity: The Trust held $386,774 in cash reserves as of September 30, 2017. VOC Brazos maintains a $1.0 million letter of credit to cover potential Trust expenses. There were no borrowings during the period.
- Reserves: VOC Brazos maintains a cash reserve of up to $1.0 million for future development or operating expenditures. The balance was $1,000,000 at September 30, 2017, with no amounts withheld or released during the period.
- Risks: The Trust is exposed to market risk from fluctuations in oil and gas prices. The Trustee has no management control over the underlying properties. The filing states there have been no material changes to risk factors previously disclosed in the 2016 10-K.
Investor Verification Checklist
- Verify the sustainability of the 98.3% year-over-year income increase, noting the impact of the $1.2 million one-time lawsuit settlement.
- Monitor the trend in oil and natural gas sales volumes, which declined in both Q3 and the nine-month period despite higher prices.
- Confirm the status of the $1.0 million cash reserve held by VOC Brazos and any future withdrawals that may impact distributions.
- Review the upcoming distribution of $0.095 per unit scheduled for November 14, 2017.
- Assess the impact of increased development expenses on future net proceeds as drilling activity continues.