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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Marine Petroleum Trust    MARPS

MARINE PETROLEUM TRUST

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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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02/11/2019 | 01:09pm EDT

Organization

Marine Petroleum Trust (the "Trust") is a royalty trust that was created in 1956 under the laws of the State of Texas. Effective February 20, 2018, Simmons Bank became corporate trustee of the Trust (the "Trustee") as a result of a merger between Simmons Bank and Southwest Bank, the former corporate Trustee of the Trust. 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




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by Chevron Corporation ("Chevron") and its assignees, including Arena Energy, LP (collectively with Chevron and its assignees, the "Interest Owners"). The Trust holds title to interests in properties that are situated offshore of Texas.

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:



                         Simmons Bank2911 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, 2018 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.




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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, 2018 on leases in which Marine has an interest. As of February 1, 2019, 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.

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 the Interest Owners 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, 2018. Please see Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 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.

Revenue Recognition - In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers. This update amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods and services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The Trust has adopted this standards update, as required, beginning with the first quarter of fiscal year 2019. The adoption of this standard has not had a significant impact on its financial statements due to the modified cash basis of reporting used by the Trust.

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.




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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 each of the six months ended December 31, 2018 and 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 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, 2018 was $0.18 as compared to $0.14 for the comparable period in 2017. Distributions per unit amounted to $0.19 per unit for the six months ended December 31, 2018, an increase from distributions of $0.18 per unit for the comparable period in 2017. During the six months ended December 31, 2018, 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, 2018, excluding the Trust's interest in Tidelands, oil production decreased to 6,319 barrels (bbls) from 7,513 bbls and natural gas production decreased to 9,874 thousand cubic feet (mcf) from 10,052 mcf as compared to the comparable period in 2017. For the six months ended December 31, 2018, excluding the Trust's interest in Tidelands, the average price realized for oil increased to $69.03 per bbl as compared to the price of $47.18 realized for the comparable period in 2017 and the average price realized for natural gas (net of expenses) increased to $3.47 per mcf as compared to the average price of $2.61 realized for the comparable period in 2017.


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, 2017          4,062           5,566     $           0.09     $          0.13
  December 31, 2017           3,451           4,486     $           0.05     $          0.05
  March 31, 2018              3,873           5,696     $           0.09     $          0.07
  June 30, 2018               3,752           4,916     $           0.10     $          0.09
  September 30, 2018          3,343           4,193     $           0.11     $          0.09
  December 31, 2018           2,976           5,681     $           0.07     $          0.10



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




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Results of Operations-Three Months Ended December 31, 2018 Compared to the Three Months Ended December 31, 2017

Income from oil and natural gas royalties, excluding the Trust's interest in Tidelands, increased to $231,996 during the three months ended December 31, 2018 from $172,613 realized for the comparable period in 2017. Royalties increased for the three months ended December 31, 2018 as compared to the comparable period in 2017 primarily due to an increase in the prices of oil and natural gas and an increase in natural gas production, offset in part by a decrease in production of oil.

Distributable income increased to $142,450 for the three months ended December 31, 2018 from $93,062 realized for the comparable period in 2017.

Income from oil royalties, excluding the Trust's interest in Tidelands, for the three months ended December 31, 2018 increased to $211,858 from $159,113 realized for the comparable period in 2017. The volume of oil sold in the three months ended December 31, 2018 decreased to 2,976 bbls from 3,451 bbls realized for the comparable period in 2017, and the average price realized for oil increased to $71.19 per bbl for the three months ended December 31, 2018 from $46.11 per bbl realized for the comparable period in 2017.

Income from natural gas royalties (net of expenses), excluding the Trust's interest in Tidelands, for the three months ended December 31, 2018 increased to $20,138 from $13,500 for the comparable period in 2017. The volume of natural gas sold in the three months ended December 31, 2018 increased to 5,681 mcf from 4,486 mcf realized for the comparable period in 2017, and the average price realized for natural gas (net of expenses) increased to $3.54 per mcf for the three months ended December 31, 2018 from $3.00 per mcf realized for the comparable period in 2017.

Income from distributions received from Tidelands for the three months ended December 31, 2018 remained at $0.00, equal to the comparable period in 2017.


The following table presents the quantities of oil and natural gas sold and the
average price realized for the three months ended December 31, 2018, and those
realized for the comparable period in 2017, excluding the Trust's interest in
Tidelands.



                                                     Three Months
                                                         Ended
                                                     December 31,
                                                   2018        2017
                                                      (unaudited)
                 Oil
                 Bbls sold                          2,976       3,451
                 Average price                    $ 71.19$ 46.11

                 Natural gas
                 Mcf sold                           5,681       4,486
                 Average price, net of expenses   $  3.54$  3.00

General and administrative expenses increased to $94,854 for the three months ended December 31, 2018 from $81,528 for the comparable period of 2017, primarily due to an increase in professional fees.

Results of Operations-Six Months Ended December 31, 2018 Compared to the Six Months Ended December 31, 2017

Income from oil and natural gas royalties, excluding the Trust's interest in Tidelands, increased to $470,730 during the six months ended December 31, 2018 from $380,862 realized for the comparable period in 2017. Royalties increased for the six months ended December 31, 2018 primarily due to an increase in the price of oil and natural gas, offset in part by a decrease in the production of oil and natural gas, as compared to the comparable period in 2017.




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Distributable income increased to $364,459 for the six months ended December 31, 2018 from $279,994 realized for the comparable period in 2017.

Income from oil royalties, excluding the Trust's interest in Tidelands, for the six months ended December 31, 2018 increased to $436,443 from $354,463 realized for the comparable period in 2017. The volume of oil sold in the six months ended December 31, 2018 decreased to 6,319 bbls from 7,513 bbls realized for the comparable period in 2017, and the average price realized for oil increased to $69.03 per bbl for the six months ended December 31, 2018 from $47.18 per bbl realized for the comparable period in 2017.

Income from natural gas royalties (net of expenses), excluding the Trust's interest in Tidelands, for the six months ended December 31, 2018 increased to $34,287 from $26,399 for the comparable period in 2017. The volume of natural gas sold in the six months ended December 31, 2018 decreased to 9,874 mcf from 10,052 mcf realized for the comparable period in 2017, and the average price realized for natural gas (net of expenses) increased to $3.47 per mcf for the six months ended December 31, 2018 from $2.61 per mcf realized for the comparable period in 2017.

Income from distributions received from Tidelands for the six months ended December 31, 2018 remained at $0.00, equal to the comparable period in 2017.


The following table presents the quantities of oil and natural gas sold and the
average price realized for the six months ended December 31, 2018, and those
realized for the comparable period in 2017, excluding the Trust's interest in
Tidelands.



                                                   Six Months Ended
                                                     December 31,
                                                   2018         2017
                                                      (unaudited)
                Oil
                Bbls sold                           6,319        7,513
                Average price                    $  69.03$  47.18

                Natural gas
                Mcf sold                            9,874       10,052
                Average price, net of expenses   $   3.47$   2.61

General and administrative expenses increased to $116,078 for the six months ended December 31, 2018 from $104,102 for the comparable period of 2017, primarily due to increased printing fees and professional fees.

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, 2018. Events may occur in the




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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.

© Edgar Online, source Glimpses

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