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VOC ENERGY TRUST (VOC)
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VOC ENERGY TRUST : Trustee's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/10/2018 | 10:17pm CEST

The following discussion of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The Trust's purpose is, in general, to hold the net profits interest, to distribute to the Trust unitholders cash that the Trust receives in respect of the net profits interest and to perform certain administrative functions in respect of the net profits interest and the Trust Units. The Trust derives substantially all of its income and cash flows from the net profits interest.

Results of Operations for the Quarters Ended June 30, 2018 and 2017

The following is a summary of income from net profits interest received by the Trust for the three months ended June 30, 2018 and 2017 consisting of the April distribution for each respective year:



                                                              Three months ended
                                                                   June 30,
                                                             2018           2017
Sales volumes:
Oil (Bbl)                                                     128,000        138,781
Natural gas (Mcf)                                              82,681         87,968
Total (BOE)                                                   141,780        153,442
Average sales prices:
Oil (per Bbl)                                             $     58.46$     48.75
Natural gas (per Mcf)                                     $      3.35$      2.89
Gross proceeds:
Oil sales                                                 $ 7,482,816$ 6,765,748
Natural gas sales                                             276,685        254,299
Total oil and natural gas sales                             7,759,501      7,020,047
Lawsuit settlement                                                  0      1,209,412
Total gross proceeds                                        7,759,501      8,229,459

Costs:

Production and development costs:
Lease operating expenses                                    3,085,442      2,928,656
Production and property taxes                                 206,039        172,166
Development expenses                                          362,442        366,035
Total costs                                                 3,653,923      3,466,857

Excess of revenues over direct operating expenses and lease equipment and development costs

                       4,105,578      4,762,602
Times net profits interest over the term of the Trust              80 %           80 %
Income from net profits interest before reserve
adjustments                                                 3,284,462      3,810,082

VOC Brazos reserve for future development, maintenance or operating expenditures

                                           0              0
Income from net profits interest                          $ 3,284,462$ 3,810,082




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Included in the results of operations for the quarter ended June 30, 2017 is the following information representing a one-time event associated with the collection of proceeds of $1,209,412 , which VOC Brazos Partners, L.P. ("VOC Brazos") received in connection with the settlement of a lawsuit arising from an unaffiliated operator having drilled and completed a well across land partly owned by VOC Brazos without observing VOC Brazos' legal ownership in such well. In connection with the settlement, VOC Brazos received a working interest in the well and the settlement proceeds. The following table includes the well's volumes, average sales prices and net profits for the period from January 2015 through the quarter ended March 31, 2017. The extended period of time reflected in the table below is due to the time it took for the settlement to be finally approved by the court and the parties to the lawsuit. As a result, VOC Brazos was not able to distribute the settlement proceeds and net proceeds received from its net profits interest in such well until the quarter ended March 31, 2017.




Sales volumes:
Oil (Bbl)                                                                   5,864
Natural gas (Mcf)                                                           6,420
Total (BOE)                                                                 6,934
Average sales prices:
Oil (per Bbl)                                                         $     43.75
Natural gas (per Mcf)                                                 $      1.43
Gross proceeds:
Oil sales                                                             $   256,555
Natural gas sales                                                           9,168
Total gross proceeds                                                      265,723

Costs:

Production and development costs:
Lease operating expenses                                                   43,369
Production and property taxes                                              16,984
Development expenses                                                            0
Total costs                                                                60,353

Excess of revenues over direct operating expenses and lease equipment and development costs

                                       $   205,370

The cash received by the Trust from VOC Brazos during the quarter ended June 30, 2018 substantially represents the production by VOC Brazos from December 2017 through February 2018. The cash received by the Trust from VOC Brazos during the quarter ended June 30, 2017 substantially represents the production by VOC Brazos from December 2016 through February 2017. The revenues from oil production are typically received by VOC Brazos one month after production.

Gross proceeds. Oil and natural gas sales were $7,759,501 for the three months ended June 30, 2018, an increase of $739,454 or 10.5% from $7,020,047 for the three months ended June 30, 2017. Revenues are a function of oil and natural gas sales prices and volumes sold. The increase in gross proceeds was due to increases in market prices for oil and natural gas during the second quarter of 2018. These increases were partially offset by decreases in oil and natural gas sales volumes during the second quarter of 2018. During the three months ended June 30, 2018, the average price for oil increased 19.9% to $58.46 per Bbl and the average price for natural gas increased 15.9% to $3.35 per Mcf. Oil sales volumes were 128,000 Bbls for the three months ended June 30, 2018, a decrease of 10,781 Bbls or 7.8% from 138,781 Bbls for the three months ended June 30, 2017, while natural gas sales volumes were 82,681 Mcf, a decrease of 5,287 Mcf or 6.0% from 87,968 Mcf for the same period in 2017.

Costs. Lease operating expenses were $3,085,442 for the three months ended June 30, 2018, an increase of $156,786 or 5.4% from $2,928,656 for the three months ended June 30, 2017. Production and property taxes were $206,039 for the three months ended June 30, 2018, an increase of $33,873 or 19.7% from $172,166 for the same period in 2017. Such increase is primarily due to an increase of $38,960 or 23.3% increase in production taxes due to higher prices for oil and gas. This increase is partially offset by a decrease of $5,087 in property taxes. Development expenses were $362,442 for the three months ended June 30, 2018, a decrease of $3,593 or 1.0% from $366,035 for the same period in 2017. Such decrease was primarily due to reduced drilling activity and corresponding limited development expenses during the three months ended June 30, 2018, compared to the three months ended June 30, 2017.

Excess of revenues over direct operating expenses and lease equipment and development costs. The excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $4,105,578 for the three months ended June 30, 2018, a decrease of $657,024 or 13.8% from $4,762,602 (which includes the lawsuit settlement proceeds of $1,209,412 and the $205,370 of proceeds as noted in the table above) for the three months ended June 30, 2017. The Trust's 80% net profits interest of these totals were $3,284,462 and $3,810,082, respectively. During the three months ended June 30, 2018 and 2017, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the previously established cash reserve for future




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development, maintenance or operating expenditures, which resulted in income from the net profits interest of $3,284,462 and $3,810,082 for such periods, respectively. These amounts were reduced by a Trust holdback for future expenses of $224,462 and $240,082 for the three months ended June 30, 2018 and 2017, respectively. The Trustee paid general and administrative expenses of $178,698 for the three months ended June 30, 2018, an increase of $54,901 from $123,797 for the three months ended June 30, 2017. This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income for the three months ended June 30, 2018 of $3,060,000, a decrease of $510,000 from $3,570,000 for the three months ended June 30, 2017.

Results of Operations for the Six Months Ended June 30, 2018 and 2017

The following is a summary of income from net profits interest received by the Trust for the six months ended June 30, 2018 and 2017 consisting of the January and April distributions for each respective year:



                                                                 Six months ended
                                                                     June 30,
                                                               2018            2017
Sales volumes:
Oil (Bbl)                                                       262,963         274,421
Natural gas (Mcf)                                               167,561         175,562
Total (BOE)                                                     290,890         303,681
Average sales prices:
Oil (per Bbl)                                              $      54.06$      45.91
Natural gas (per Mcf)                                      $       3.22$       2.73
Gross proceeds:
Oil sales                                                  $ 14,216,194$ 12,599,689
Natural gas sales                                               539,929         479,187
Total oil and natural gas sales                              14,756,123      13,078,876
Lawsuit settlement                                                    0       1,209,412
Total gross proceeds                                         14,756,123      14,288,288

Costs:

Production and development costs:
Lease operating expenses                                      6,287,173       5,922,894
Production and property taxes                                 1,173,350         863,487
Development expenses                                            652,335         839,250
Total costs                                                   8,112,858       7,625,631

Excess of revenues over direct operating expenses and lease equipment and development costs

                         6,643,265       6,662,657
Times net profits interest over the term of the Trust                80 %            80 %
Income from net profits interest before reserve
adjustments                                                   5,314,612       5,330,126

VOC Brazos reserve for future development, maintenance or operating expenditures

                                             0               0
Income from net profits interest                           $  5,314,612$  5,330,126

Included in the results of operations for the quarter ended June 30, 2017 is the following information representing a one-time event associated with the collection of proceeds of $1,209,412 , which VOC Brazos Partners, L.P. ("VOC Brazos") received in connection with the settlement of a lawsuit arising from an unaffiliated operator having drilled and completed a well across land partly owned by VOC Brazos without observing VOC Brazos' legal ownership in such well. In connection with the settlement, VOC Brazos received a working interest in the well and the settlement proceeds. The following table includes the well's volumes, average sales prices and net profits for the period from January 2015 through the quarter ended March 31, 2017. The extended period of time reflected in the table below is due to the time it took for the settlement to be finally approved by the court and the parties to the lawsuit. As a result, VOC Brazos was not able to distribute the settlement proceeds and net proceeds received from its net profits interest in such well until the quarter ended March 31, 2017.




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Sales volumes:
Oil (Bbl)                                                                    5,864
Natural gas (Mcf)                                                            6,420
Total (BOE)                                                                  6,934
Average sales prices:
Oil (per Bbl)                                                          $     43.75
Natural gas (per Mcf)                                                  $      1.43
Gross proceeds:
Oil sales                                                              $   256,555
Natural gas sales                                                            9,168
Total gross proceeds                                                       265,723
Costs:
Production and development costs:
Lease operating expenses                                                    43,369
Production and property taxes                                               16,984
Development expenses                                                             0
Total costs                                                                 60,353

Excess of revenues over direct operating expenses and lease equipment and development costs

                                        $   205,370

The cash received by the Trust from VOC Brazos during the six months ended June 30, 2018 substantially represents the production by VOC Brazos from September 2017 through February 2018. The cash received by the Trust from VOC Brazos during the six months ended June 30, 2017 substantially represents the production by VOC Brazos from September 2016 through February 2017. The revenues from oil production are typically received by VOC Brazos one month after production.

Gross proceeds. Oil and natural gas sales were $14,756,123 for the six months ended June 30, 2018, an increase of $1,677,247 or 12.8% from $13,078,876 for the six months ended June 30, 2017. Revenues are a function of oil and natural gas sales prices and volumes sold. The increase in gross proceeds was due to increases in market prices for oil and natural gas during the first six months of 2018. These increases were partially offset by decreases in oil and natural gas sales volumes during the first six months of 2018. During the six months ended June 30, 2018, the average price for oil increased 17.8% to $54.06 per Bbl and the average price for natural gas increased 17.9% to $3.22 per Mcf. Oil sales volumes were 262,963 Bbls for the six months ended June 30, 2018, a decrease of 11,458 Bbls or 4.2% from 274,421 Bbls for the six months ended June 30, 2017, while natural gas sales volumes were 167,561 Mcf, a decrease of 8,001 Mcf or 4.6% from 175,562 Mcf for the same period in 2017.

Costs. Lease operating expenses were $6,287,173 for the six months ended June 30, 2018, an increase of $364,279 or 6.2% from $5,922,894 for the six months ended June 30, 2017. The increase was primarily due to increases in the costs of oilfield goods and services. Production and property taxes were $1,173,350 for the six months ended June 30, 2018, an increase of $309,863 or 35.9% from $863,487 for the six months ended June 30, 2017. Such increase is primarily due to an increase of $250,203 or 46.4% in property taxes and an increase of $59,660 or 18.4% in production taxes due to higher prices for oil and gas. Development expenses were $652,335 for the six months ended June 30, 2018, a decrease of $186,915 or 22.3% from $839,250 for the same period in 2017. The decrease was primarily due to limited drilling activity and corresponding limited development expenses during the six months ended June 30, 2018 compared to the six months ended June 30, 2017.

Excess of revenues over direct operating expenses and lease equipment and development costs. The excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $6,643,265 for the six months ended June 30, 2018, a decrease of $19,392 or 0.3% from $6,662,657 (which includes the lawsuit settlement proceeds of $1,209,412 and the $205,370 of proceeds as noted in the table above) for the six months ended June 30, 2017. The Trust's 80% net profits interest of these totals were $5,314,612 and $5,330,126, respectively. During the six months ended June 30, 2018 and 2017, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the previously established cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $5,314,612 and $5,330,126 for such periods, respectively. These amounts were further reduced by a Trust holdback for future expenses of $384,612 and $400,126 for the six months ended June 30, 2018 and 2017, respectively. The Trustee paid general and administrative expenses of $464,456 for the six months ended June 30, 2018, an increase of $157,449 from $307,007 for the six months ended June 30, 2017. This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income for the six months ended June 30, 2018 of $4,930,000, and $4,930,000 for the six months ended June 30, 2017.

Liquidity and Capital Resources

Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trust's only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee as well as a quarterly administrative fee to VOC Brazos pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the net profits interest and




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other sources (such as interest earned on any amounts reserved by the Trustee) in that quarter, over the Trust's expenses paid for that quarter. Available funds are reduced by any cash that the Trustee decides to reserve for future development, maintenance or operating expenses. As of June 30, 2018, $236,676 was held by the Trustee as such a reserve.

The Trustee may cause the Trust to borrow funds required to pay expenses if the Trustee determines that the cash on hand and the cash to be received are insufficient to cover the Trust's expenses. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid. During the three and six months ended June 30, 2018 and 2017, there were no such borrowings. VOC Brazos has provided a letter of credit in the amount of $1 million to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses.

Income to the Trust from the net profits interest is based on the calculation and definitions of "gross proceeds" and "net proceeds" contained in the conveyance.

As substantially all of the underlying properties are located in mature fields, VOC Brazos does not expect future costs for the underlying properties to change significantly compared to recent historical costs other than changes due to fluctuations in the general cost of oilfield services. VOC Brazos may establish a cash reserve of up to $1.0 million in the aggregate at any given time from the dollar amount otherwise distributable to the Trust to reduce the impact on distributions of uneven capital expenditure timing. The cash reserve balance was $1,000,000 at June 30, 2018 and 2017, respectively.

The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust's liquidity or the availability of capital resources.

Note Regarding Forward-Looking Statements

This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including without limitation the statements under "Trustee's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. Although VOC Brazos advised the Trust that it believes that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are disclosed in this Form 10-Q and in the Trust's Annual Report on Form 10-K for the year ended December 31, 2017 (the "Form 10-K"), including under the section "Item 1A. Risk Factors". All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.




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