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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Marine Petroleum Trust    MARPS

MARINE PETROLEUM TRUST (MARPS)
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MARINE PETROLEUM TRUST : Trustee's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/14/2018 | 08:57pm CEST

Organization

Marine Petroleum Trust (the "Trust") is a royalty trust that was created in 1956 under the laws of the State of Texas. Southwest Bank, an independent state bank chartered under the laws of the State of Texas and headquartered in Fort Worth, Texas, serves as corporate trustee (the "Trustee"). The Trust's Indenture (the "Indenture") provides that the term of the Trust will expire on June 1, 2021, unless extended by the vote of the holders of a majority of the outstanding units of beneficial interest. The Trust is not permitted to engage in any business activity because it was organized for the sole purpose of providing an efficient, orderly and practical means for the administration and liquidation of rights to payments from certain oil and natural gas leases in the Gulf of Mexico, pursuant to license agreements and amendments between the Trust's predecessors and Gulf Oil Corporation ("Gulf"). As a result of various transactions that have occurred since 1956, these interests now are held by Chevron Corporation ("Chevron") and its assignees. The Trust holds title to interests in properties that are situated offshore of Texas.




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The Trust's wholly owned subsidiary, Marine Petroleum Corporation ("MPC," and collectively with the Trust, "Marine"), holds title to interests in properties that are situated offshore of Louisiana because at the time the Trust was created, trusts could not hold these interests under Louisiana law. MPC is prohibited from engaging in a trade or business and only takes those actions that are necessary for the administration and liquidation of its properties.

Marine's rights are generally referred to as overriding royalty interests in the oil and natural gas industry. An overriding royalty interest is created by an assignment by the owner of a working interest in an oil or natural gas lease. The royalty rights associated with an overriding royalty interest terminate when the underlying lease terminates. All production and marketing functions are conducted by the working interest owners of the leases. Income from overriding royalties is paid to Marine either (i) on the basis of the selling price of oil, natural gas and other minerals produced, saved or sold, or (ii) at the value at the wellhead as determined by industry standards, when the selling price does not reflect the value at the wellhead.

The Trustee assumes that some units of beneficial interest are held by middlemen, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint owners and brokers holding an interest for a customer in street name). Therefore, the Trustee considers the Trust to be a widely held fixed investment trust ("WHFIT") for U.S. federal income tax purposes. Accordingly, the Trust will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT. The Trustee will provide the required information and the contact information for the Trustee is below:

Southwest Bank

2911 Turtle Creek Blvd., Suite 850

Dallas, Texas 75219

Telephone number: (855) 588-7839

Each unitholder should consult its own tax advisor for compliance with U.S. federal income tax laws and regulations.

Liquidity and Capital Resources

As stated in the Indenture, there is no requirement for capital due to the limited purpose of the Trust. The Trust's only obligation is to distribute the distributable income that is actually collected to unitholders. As an administrator of oil and natural gas royalty interests, the Trust collects royalties monthly, pays administrative expenses and disburses all net royalties that are collected to its unitholders each quarter, subject to the availability of distributable income on the distribution date after the payment of expenses.

The Indenture (and MPC's charter and by-laws) expressly prohibits the operation of any kind of trade or business. The Trust's oil and natural gas properties are depleting assets that are not being replaced due to the prohibition against investments. These restrictions, along with other factors, allow the Trust to be treated as a grantor trust. As a grantor trust, all income and deductions for state and U.S. federal income tax purposes generally flow through to each individual unitholder. The State of Texas imposes a franchise tax, but the Trust does not believe that it is subject to the franchise tax because at least 90% of its income is from passive sources. Please see Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2017 for further information. MPC is a taxable entity that pays state and U.S. federal income taxes and state franchise taxes. However, MPC's income specifically excludes 98% of the oil and natural gas royalties collected by MPC, which are retained by and delivered to the Trust because of the Trust's net profits interest.

The Leases

Marine relies on public records for information regarding drilling and workover operations. The public records available up to the date of this report indicate that there were no new well completions made during the three months ended December 31, 2017 on leases in which Marine has an interest. As of February 1, 2018, public records also indicated that there were no wells in the process of being drilled or recompleted on other leases in which Marine has an interest.




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Marine holds an overriding royalty interest that is equal to three-fourths of one percent of the working interest and is calculated on the value at the well of any oil, natural gas or other minerals produced and sold from 55 leases covering 199,868 gross acres located in the Gulf of Mexico. Marine's overriding royalty interest applies only to existing leases and does not apply to any new leases that Chevron may acquire. The Trust also owns a 32.6% interest in Tidelands Royalty Trust "B" ("Tidelands"). Tidelands has an overriding royalty interest in four oil and natural gas leases covering 17,188 gross acres in the Gulf of Mexico. As a result of this ownership, the Trust receives periodic distributions from Tidelands.

Critical Accounting Policies and Estimates

In accordance with the Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts, Marine uses the modified cash basis method of accounting. Under this accounting method, royalty income is recorded when received, and distributions to unitholders are recorded when declared by the Trustee of the Trust. Expenses of Marine (including accounting, legal, other professional fees, trustees' fees and out-of-pocket expenses) are recorded on an actual paid basis. Marine also reports distributable income instead of net income under the modified cash basis method of accounting. Cash reserves are permitted to be established by the Trustee for certain contingencies that would not be recorded under generally accepted accounting principles in the United States.

Marine did not have any changes in its critical accounting policies or estimates during the three months ended December 31, 2017. Please see Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2017 for a detailed discussion of its critical accounting policies.

New Accounting Pronouncements

Since the Trust financial statements are prepared on a modified-cash basis, most accounting pronouncements are not applicable to the Trust. No new accounting pronouncements have been adopted or issued that would have a significant impact on marine's financial statements.

General

Marine's royalty income is derived from the oil and natural gas production activities of third parties. Marine's royalty income fluctuates from period to period based upon factors beyond Marine's control, including, without limitation, the number of productive wells drilled and maintained on leases that are subject to Marine's interest, the level of production over time from such wells and the prices at which the oil and natural gas from such wells are sold.

Important aspects of Marine's operations are conducted by third parties. Marine's royalty income is dependent on the operations of the working interest owners of the leases on which Marine has an overriding royalty interest. The oil and natural gas companies that lease tracts subject to Marine's interests are responsible for the production and sale of oil and natural gas and the calculation of royalty payments to Marine. The only obligation of the working interest owners to Marine is to make monthly overriding royalty payments that reflect Marine's interest in the oil and natural gas sold. Marine's distributions are processed and paid by its transfer agent, American Stock Transfer & Trust Company, LLC.

The volume of oil and natural gas produced and the selling prices of such oil and natural gas are the primary factors in calculating overriding royalty payments. Production is affected by the natural production decline of the producing wells, the number of new wells drilled and the number of existing wells that are re-worked and placed back in production on the leases. Production from existing wells is anticipated to decrease in the future due to normal well depletion. The operators do not provide Marine with information regarding future drilling or re-working operations that could impact the oil and natural gas production from the leases for which Marine has an overriding royalty interest.

Summary of Operating Results

During the six months ended December 31, 2017, excluding the Trust's interest in Tidelands, the Trust realized approximately 93% of its royalty income from the sale of oil and approximately 7% of its royalty income




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from the sale of natural gas. During the six months ended December 31, 2016, excluding the Trust's interest in Tidelands, the Trust realized approximately 92% of its royalty income from the sale of oil and approximately 8% of its royalty income from the sale of natural gas. Royalty income includes royalties from oil and natural gas received from producers.

Distributable income per unit for the six months ended December 31, 2017 was $0.14 as compared to $0.15 for the comparable period in 2016. Distributions per unit amounted to $0.18 per unit for the six months ended December 31, 2017, an increase from distributions of $0.13 per unit for the comparable period in 2016. During the six months ended December 31, 2017, the difference between distributable income per unit and distributions per unit resulted from timing differences between the closing of the financial statements and the determination date of the distribution amount to unitholders.

For the six months ended December 31, 2017, excluding the Trust's interest in Tidelands, oil production decreased to 7,513 barrels (bbls) from 8,333 bbls and natural gas production decreased to 10,052 thousand cubic feet (mcf) from 17,856 mcf as compared to the comparable period in 2016. For the six months ended December 31, 2017, excluding the Trust's interest in Tidelands, the average price realized for oil increased to $47.18 per bbl as compared to the price of $44.27 realized for the comparable period in 2016 and the average price realized for natural gas (net of expenses) increased to $2.61 per mcf as compared to the average price of $1.75 realized for the comparable period in 2016.


The following table presents the net production quantities of oil and natural
gas and distributable income and distributions per unit for the last six
quarters.



                       Net Production
                       Quantities (1)
                                          Natural        Distributable        Distributions
    Quarter Ended       Oil (bbls)       Gas (mcf)      Income Per Unit         Per Unit
  September 30, 2016          3,941           9,087     $           0.08     $          0.04
  December 31, 2016           4,392           8,769     $           0.07     $          0.09
  March 31, 2017              3,735           7,692     $           0.07     $          0.05
  June 30, 2017               6,371          15,319     $           0.15     $          0.10
  September 30, 2017          4,062           5,566     $           0.09     $          0.13
  December 31, 2017           3,451           4,486     $           0.05     $          0.05


  (1) Excludes the Trust's interest in Tidelands.

Results of Operations-Three Months Ended December 31, 2017 Compared to the Three Months Ended December 31, 2016

Income from oil and natural gas royalties, excluding the Trust's interest in Tidelands, decreased to $172,613 during the three months ended December 31, 2017 from $211,593 realized for the comparable period in 2016. Royalties decreased for the three months ended December 31, 2017 as compared to the comparable period in 2016 primarily due to a decrease in production of oil and natural gas, offset in part by an increase in the price of oil and natural gas.

Distributable income decreased to $93,062 for the three months ended December 31, 2017 from $134,790 realized for the comparable period in 2016.

Income from oil royalties, excluding the Trust's interest in Tidelands, for the three months ended December 31, 2017 decreased to $159,113 from $194,171 realized for the comparable period in 2016. The volume of oil sold in the three months ended December 31, 2017 decreased to 3,451 bbls from 4,392 bbls realized for the comparable




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period in 2016, and the average price realized for oil increased to $46.11 per bbl for the three months ended December 31, 2017 from $44.21 per bbl realized for the comparable period in 2016.

Income from natural gas royalties (net of expenses), excluding the Trust's interest in Tidelands, for the three months ended December 31, 2017 decreased to $13,500 from $17,422 for the comparable period in 2016. The volume of natural gas sold in the three months ended December 31, 2017 decreased to 4,486 mcf from 8,769 mcf realized for the comparable period in 2016, and the average price realized for natural gas (net of expenses) increased to $3.00 per mcf for the three months ended December 31, 2017 from $1.99 per mcf realized for the comparable period in 2016.

Income from distributions received from Tidelands for the three months ended December 31, 2017 decreased to $0.00 from $106 for the comparable period in 2016. The decrease in distributions from Tidelands was the result of a decrease in production of oil and natural gas despite an increase in the price of both oil and natural gas.


The following table presents the quantities of oil and natural gas sold and the
average price realized for the three months ended December 31, 2017, and those
realized for the comparable period in 2016, excluding the Trust's interest in
Tidelands.



                                            Three Months Ended December 31,
                                             2017                     2016
                                         (unaudited)
      Oil
      Bbls sold                                   3,451                    4,392
      Average price                    $          46.11         $          44.21
      Natural gas
      Mcf sold                                    4,486                    8,769
      Average price, net of expenses   $           3.00         $           1.99

General and administrative expenses increased to $81,528 for the three months ended December 31, 2017 from $77,001 for the comparable period of 2016, primarily due to an increase in professional fees and printing expenses.

Results of Operations - Six Months Ended December 31, 2017 Compared to the Six Months Ended December 31, 2016

Income from oil and natural gas royalties, excluding the Trust's interest in Tidelands, decreased to $380,862 during the six months ended December 31, 2017 from $400,139 realized for the comparable period in 2016. Royalties decreased for the six months ended December 31, 2017 primarily due to a decrease in production of oil and natural gas, offset in part by an increase in the price of oil and natural gas, as compared to the comparable period in 2016.

Distributable income decreased to $279,994 for the six months ended December 31, 2017 from $306,169 realized for the comparable period in 2016.

Income from oil royalties, excluding the Trust's interest in Tidelands, for the six months ended December 31, 2017 decreased to $354,463 from $368,902 realized for the comparable period in 2016. The volume of oil sold in the six months ended December 31, 2017 decreased to 7,513 bbls from 8,333 bbls realized for the comparable period in 2016, and the average price realized for oil increased to $47.18 per bbl for the six months ended December 31, 2017 from $44.27 per bbl realized for the comparable period in 2016.

Income from natural gas royalties (net of expenses), excluding the Trust's interest in Tidelands, for the six months ended December 31, 2017 decreased to $26,399 from $31,237 for the comparable period in 2016. The volume of natural gas sold in the six months ended December 31, 2017 decreased to 10,052 mcf from 17,856 mcf realized for the comparable period in 2016, and the average price realized for natural gas (net of expenses) increased




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to $2.61 per mcf for the six months ended December 31, 2017 from $1.75 per mcf realized for the comparable period in 2016.

Income from distributions received from Tidelands for the six months ended December 31, 2017 decreased to $0 from $174 for the comparable period in 2016. The decrease in distributions from Tidelands was the result of a decrease in production of oil and natural gas, offset in part by an increase in the price of oil and natural gas.


The following table presents the quantities of oil and natural gas sold and the
average price realized for the six months ended December 31, 2017, and those
realized for the comparable period in 2016, excluding the Trust's interest in
Tidelands.



                                             Six Months Ended December 31,
                                               2017                 2016
                                           (unaudited)
         Oil
         Bbls sold                                 7,513                8,333
         Average price                    $        47.18$        44.27
         Natural gas
         Mcf sold                                 10,052               17,856
         Average price, net of expenses   $         2.61       $         1.75

General and administrative expenses increased to $104,102 for the six months ended December 31, 2017 from $94,314 for the comparable period of 2016, primarily due to an increase in professional fees and operation data expenses.

Forward-Looking Statements

The statements discussed in this Quarterly Report on Form 10-Q regarding Marine's future financial performance and results, and other statements that are not historical facts, are forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Exchange Act. This report uses the words "anticipate," "believe," "budget," "continue," "estimate," "expect," "intend," "may," "plan," or other similar words to identify forward-looking statements. You should read statements that contain these words carefully because they discuss future expectations, contain projections of Marine's financial condition, and/or state other "forward-looking" information. Actual results may differ from expected results because of: reductions in price or demand for oil and natural gas, which might then lead to decreased production or impair Marine's ability to make distributions; reductions in production due to the depletion of existing wells or disruptions in service, which may be caused by storm damage to production facilities, blowouts or other production accidents, or geological changes such as cratering of productive formations; changes in regulations; general economic conditions; actions and policies of petroleum-producing nations; other changes in domestic and international energy markets; the resignation of the Trustee; and the expiration, termination or release of leases subject to Marine's interests. Additional risks are set forth in Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2017. Events may occur in the future that Marine is unable to accurately predict or over which it has no control. If one or more of these uncertainties materialize, or if underlying assumptions prove incorrect, actual outcomes may vary materially from those forward-looking statements included in this Quarterly Report on Form 10-Q. Except as required by applicable securities laws, Marine does not undertake any obligation to update or revise any forward-looking statements.

Website

Marine makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports at its website at www.marps-marine.com. Each of these reports will be posted on this website as soon as reasonably practicable after such report is electronically filed with, or furnished, to the SEC.




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© Edgar Online, source Glimpses

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