Business Context and Reporting Period
Company: VOC Energy Trust (VOC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2017
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. (VOC Brazos). 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).
Key Financial Metrics
| Metric | 2017 | 2016 | 2015 |
|---|---|---|---|
| Income from Net Profits Interest | $9,209,023 | $5,749,845 | $8,627,256 |
| Distributable Income | $8,415,000 | $4,845,000 | $7,990,000 |
| Distributions per Unit | $0.495 | $0.285 | $0.470 |
| Total Assets (Year End) | $77,711,186 | $85,466,531 | $93,455,545 |
| General & Administrative Expenses | $716,143 | $917,743 | $800,818 |
| Proved Reserves (Trust Share) | 4.285 MMBoe | 5.176 MMBoe | 5.877 MMBoe |
Production & Pricing (2017):
- Oil Sales: 543,854 Bbls at an average price of $45.26/Bbl.
- Natural Gas Sales: 338,930 Mcf at an average price of $2.78/Mcf.
- Lease Operating Expenses: $11,650,665 (approx. $19.41/Boe).
- Development Expenses: $2,049,011.
Material Changes vs. Prior Period
Revenue and Income: Income from the net profits interest increased 60.2% to $9.21 million in 2017 compared to $5.75 million in 2016. This increase was driven primarily by higher commodity prices (oil up 20.4% and gas up 51.9% year-over-year) and a one-time lawsuit settlement of $1,209,412 received in 2017. These gains were partially offset by a 6.6% decrease in oil sales volumes and a 6.3% decrease in gas sales volumes.
Costs:
- Lease Operating Expenses: Decreased slightly by 0.9% to $11.65 million due to lower costs for oilfield goods and services.
- Production and Property Taxes: Decreased 23.9% to $1.56 million, primarily due to a 37.3% drop in property taxes.
- Development Expenses: Increased 31.8% to $2.05 million due to increased development activity.
Reserves: Total proved reserves declined to 4.285 MMBoe at year-end 2017 from 5.176 MMBoe in 2016. This decrease was due to production of 475,578 Boe and negative revisions of 958,682 Boe (primarily from the removal of proved undeveloped locations due to changes in development plans), partially offset by positive price revisions.
Outlook, Risks, and Unusual Items
Unusual Items:
- 2017 Lawsuit Settlement: Included $1,209,412 in proceeds from a settlement regarding a well drilled by an unaffiliated operator across VOC Brazos' land. This amount was distributed in Q1 2017.
- 2016 Suspended Funds: Included $447,017 in proceeds from ten Texas wells related to a working interest owner going non-consent.
Guidance and Outlook:
- Development Program: VOC Brazos expects to incur approximately $22.4 million in development expenditures through December 31, 2021. This includes ~$2.3 million for Kansas properties and ~$20.0 million for Texas properties (specifically the Kurten Woodbine Unit).
- Production Decline: Without additional development, production is expected to decline at an average annual rate of 6.6% over the next 20 years.
- Joint Venture Expiration: A joint venture with Hawkwood Energy to develop the Lower Woodbine Organic Shale expired in December 2017 as the first well was not spudded. VOC Brazos is exploring other options.
Risks and Contingencies:
- Commodity Price Volatility: Distributions are highly sensitive to oil and gas prices. Lower prices could reduce net proceeds and lead to well abandonments.
- Depleting Assets: The trust holds depleting assets and cannot acquire new properties to replace production. Over 90% of estimated oil recovery has already been extracted.
- Operator Control: Unitholders have no control over VOC Brazos' operations, capital expenditure decisions, or the timing of development.
- Bankruptcy Risk: In the event of VOC Brazos' bankruptcy, the trust's status as a secured creditor in Kansas is uncertain; it could be treated as an unsecured creditor.
- Environmental Regulations: Changes in regulations regarding hydraulic fracturing, greenhouse gases, or waste disposal could increase costs or restrict operations.
Investor Verification Checklist
- Reserve Revisions: Verify the impact of the 958,682 Boe reduction in proved undeveloped reserves on future production forecasts and the validity of the remaining development plan.
- Development Capital: Confirm VOC Brazos' ability to fund the projected $22.4 million development program through 2021, as this is critical to mitigating the 6.6% natural decline rate.
- One-Time Items: Assess the sustainability of 2017 income by excluding the $1.2 million lawsuit settlement to understand core operational performance.
- Commodity Exposure: Monitor oil and gas price trends, as the trust has no hedging strategy and distributions fluctuate directly with spot prices.
- Operator Financial Health: Review the financial stability of VOC Brazos and its operator, Vess Oil Corporation, as the trust relies entirely on their solvency and operational decisions.