The following review 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
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interest and the trust units. The trust derives substantially all of its income
and cash flows from the net profits interest.
Critical Accounting Policies
The trust uses the modified cash basis of accounting to report receipts by
the trust of the net profits interest and payments of expenses incurred. The net
profits interest represents the right to receive revenues (oil, gas and natural
liquid gas sales) less direct operating expenses (lease operating, maintenance
and overhead expenses and production and property taxes) and an adjustment for
lease equipment cost and lease development expenses (which are capitalized in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP")) of the underlying
properties times 80%. Cash distributions of the trust will be made based on the
amount of cash received by the trust pursuant to terms of the conveyance
creating the net profits interest.
The financial statements of the trust, as prepared on a modified cash basis,
reflect the trust's assets, trust corpus, earnings and distributions as follows:
º (a)
º Income from the net profits interest is recorded when distributions
are received by the trust;
º (b)
º Distributions to trust unitholders are recorded when paid by the
trust;
º (c)
º Trust general and administrative expenses (which include the trustee's
fees as well as accounting, engineering, legal and other professional
fees) are recorded when paid;
º (d)
º Cash reserves for trust expenses may be established by the trustee for
certain expenditures that would not be recorded as contingent
liabilities under U.S. GAAP;
º (e)
º Amortization of the investment in net profits interest, calculated
using the units-of-production method based upon total estimated proved
reserves, is charged directly to trust corpus and does not affect
distributable income; and
º (f)
º The trust evaluates its investment in the net profits interest
periodically to determine whether its aggregate value has been
impaired below its total capitalized cost based on the underlying
properties. The trust will provide a write-down to its investment in
the net profits interest if and when total capitalized costs, less
accumulated amortization, exceed undiscounted future net cash flows
attributable to the trust's interests in the proved oil and gas
reserves of the underlying properties.
While these statements differ from financial statements prepared in
accordance with U.S. GAAP, the modified cash basis of reporting revenues and
distributions is considered most meaningful because quarterly distributions to
the trust unitholders are based on net cash receipts received from MV Partners.
This comprehensive basis of accounting other than U.S. GAAP corresponds to the
accounting permitted for royalty trusts by the SEC as specified by Staff
Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
Comparison of Results of the Trust for the Years Ended December 31, 2019 and
2018
Income for the trust from the net profits interest was $13.0 million for the
year ended December 31, 2019 compared to $17.2 million for the year ended
December 31, 2018. General and administrative expense for the trust was
$0.97 million for 2019 and $0.71 million for 2018. The trust paid administration
fees of $0.10 million and $0.07 million to MV Partners for each of 2019 and
2018, respectively. In addition, the trustee used $54,000 and withheld $107,000
for trust expenses for the years ended December 31, 2019 and 2018, respectively.
MV Partners did not withhold or release any dollar amounts owed to the Trust
during 2018 or 2019. These factors resulted in distributable income of
$12.1 million, or $1.050 per unit, in 2019 compared to $16.3 million, or $1.420
per unit, in 2018.
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The revenues from oil production are typically received by MV Partners one
month after production; thus, the cash received by the trust during the year
ended December 31, 2019 substantially represented the production by MV Partners
from September 2018 through August 2019, and the cash received by the trust
during the year ended December 31, 2018 substantially represented the production
by MV Partners from September 2017 through August 2018. MV Partners computes net
proceeds quarterly on a calendar basis and distributes to the trust 80% of the
aggregate of such net proceeds attributable to a computation period on or before
the 25th day of the month following the computation period. As a result, for the
year ended December 31, 2019, the trust's net profits interest represented the
cash proceeds received by the trust, which was based upon the cash receipts for
the oil and gas production collected by MV Partners from October 1, 2018 through
September 30, 2019. For the year ended December 31, 2018, the trust's net
profits interest represented the cash proceeds received by the trust, which was
based upon the cash receipts for the oil and gas production collected by MV
Partners from October 1, 2017 through September 30, 2018.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $16.2 million for the
period from October 1, 2018 through September 30, 2019. The trust's net profits
interest (80%) of this total was $13.0 million for the year ended December 31,
2019. During 2019, MV Partners did not withhold or release any dollar amounts
owed to the Trust, which resulted in total cash proceeds received by the trust
of $13.0 million for the year ended December 31, 2019.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $21.4 million for the
period from October 1, 2017 through September 30, 2018. The trust's net profits
interest (80%) of this total was $17.2 million for the year ended December 31,
2018. During 2018, MV Partners did not withhold or release any dollar amounts
due to the Trust, which resulted in total cash proceeds received by the trust of
$17.2 million for the year ended December 31, 2018.
The average price received for crude oil sold during 2019 was $53.74 per
Bbl, while the average price received for crude oil sold during 2018 was $57.27
per Bbl. The average price received for natural gas sold during 2019 was $2.21
per Mcf, while the average price received for natural gas sold during 2018 was
$2.29 per Mcf. The average prices for 2019 related to production by MV Partners
from September 2018 through August 2019, and the average prices for 2018 related
to production by MV Partners from September 2017 through August 2018.
The overall production volumes sold and delivered to purchasers attributable
to the 80% net profits interest that was for the oil and gas production sold and
delivered during the period from October 1, 2018 to September 30, 2019 were
572,343 Bbls of oil, 30,699 Mcf of natural gas and 238 Bbls of natural gas
liquids for a total equivalent barrels of oil of 577,614. The overall production
volumes sold and delivered to purchasers attributable to the 80% net profits
interest that was for the oil and gas production sold and delivered during the
period from October 1, 2017 to September 30, 2018 were 596,870 Bbls of oil,
43,074 Mcf of natural gas and 363 Bbls of natural gas liquids, for a total of
604,285 barrels of oil equivalent.
As noted above, the amounts reflected in the accompanying financial
statements for the trust's year ended December 31, 2019 reflect cash received by
the trust during the year. Such cash is primarily derived from production by MV
Partners from September 2018 through August 2019. The amounts reflected in the
accompanying financial statements for the trust's year ended December 31, 2018
reflect cash received by the trust during the year. Such cash is primarily
derived from production by MV Partners from September 2017 through August 2018.
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Comparison of Results of the Trust for the Years Ended December 31, 2018 and
2017
Income for the trust from the net profits interest was $17.2 million for the
year ended December 31, 2018 compared to $9.1 million for the year ended
December 31, 2017. General and administrative expense for the trust was
$0.71 million for 2018 and $0.81 million for 2017. The trust paid administration
fees of $0.07 million and $0.09 million to MV Partners for each of 2018 and
2017, respectively. In addition, the trustee withheld $107,000 and $29,000 for
future trust expenses for the years ended December 31, 2018 and 2017,
respectively. MV Partners withheld $250,000 for future capital expenditures
during 2017. During 2018, MV Partners did not withhold or release any dollar
amounts owed to the Trust. These factors resulted in distributable income of
$16.3 million, or $1.420 per unit, in 2018 compared to $8.3 million, or $0.720,
per unit in 2017.
The revenues from oil production are typically received by MV Partners one
month after production; thus, the cash received by the trust during the year
ended December 31, 2018 substantially represented the production by MV Partners
from September 2017 through August 2018, and the cash received by the trust
during the year ended December 31, 2017 substantially represented the production
by MV Partners from September 2016 through August 2017. MV Partners computes net
proceeds quarterly on a calendar basis and distributes to the trust 80% of the
aggregate of such net proceeds attributable to a computation period on or before
the 25th day of the month following the computation period. As a result, for the
year ended December 31, 2018, the trust's net profits interest represented the
cash proceeds received by the trust, which was based upon the cash receipts for
the oil and gas production collected by MV Partners from October 1, 2017 through
September 30, 2018. For the year ended December 31, 2017, the trust's net
profits interest represented the cash proceeds received by the trust, which was
based upon the cash receipts for the oil and gas production collected by MV
Partners from October 1, 2016 through September 30, 2017.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $21.4 million for the
period from October 1, 2017 through September 30, 2018. The trust's net profits
interest (80%) of this total was $17.2 million for the year ended December 31,
2018. During 2018, MV Partners did not withhold or release any dollar amounts
owed to the Trust, which resulted in total cash proceeds received by the trust
of $17.2 million for the year ended December 31, 2018.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $11.7 million for the
period from October 1, 2016 through September 30, 2017. The trust's net profits
interest (80%) of this total was $9.4 million for the year ended December 31,
2017. During 2017, MV Partners withheld $250,000 for future capital expenditures
during 2017, which resulted in total cash proceeds received by the trust of
$9.1 million for the year ended December 31, 2017.
The average price received for crude oil sold during 2018 was $57.27 per
Bbl, while the average price received for crude oil sold during 2017 was $44.03
per Bbl. The average price received for natural gas sold during 2018 was $2.29
per Mcf, while the average price received for natural gas sold during 2017 was
$2.53 per Mcf. The average prices for 2018 related to production by MV Partners
from September 2017 through August 2018, and the average prices for 2017 related
to production by MV Partners from September 2016 through August 2017.
The overall production volumes sold and delivered to purchasers attributable
to the 80% net profits interest that was for the oil and gas production sold and
delivered during the period from October 1, 2017 to September 30, 2018 were
596,870 Bbls of oil, 43,074 Mcf of natural gas and 363 Bbls of natural gas
liquids for a total equivalent barrels of oil of 604,285. The overall production
volumes sold and delivered to purchasers attributable to the 80% net profits
interest that was for the oil and gas production sold and delivered during the
period from October 1, 2016 to September 30,
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2017 were 604,696 Bbls of oil, 36,366 Mcf of natural gas and 666 Bbls of natural
gas liquids, for a total of 611,189 barrels of oil equivalent.
As noted above, the amounts reflected in the accompanying financial
statements for the trust's year ended December 31, 2018 reflect cash received by
the trust during the year. Such cash is primarily derived from production by MV
Partners from September 2017 through August 2018. The amounts reflected in the
accompanying financial statements for the trust's year ended December 31, 2017
reflect cash received by the trust during the year. Such cash is primarily
derived from production by MV Partners from September 2016 through August 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 an annual administrative fee to MV Partners pursuant to
the 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 payments from
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 the trustee decides to hold as a reserve against
future expenses. As of December 31, 2019, the trustee held $202,000 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 liabilities. If the trust borrows
funds, the trust unitholders will not receive distributions until the borrowed
funds are repaid. During each of 2018 and 2019, MV Partners made no advances to
the trust for trust 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 further discussed below, MV Partners' development and workover program
will require MV Partners to make future capital expenditures in connection with
the development, exploration and production of oil and gas. Substantially all of
the underlying properties are located in mature fields and MV Partners does not
expect future costs for the underlying properties to change significantly as
compared to recent historical costs other than increases due to increases in the
general cost of oilfield services.
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.
Planned Development and Workover Program
Since acquiring the underlying properties in 1998 and 1999, MV Partners has
implemented a development program on the underlying properties to develop
further proved undeveloped reserves and to help offset the natural decline in
production. These activities included recompletion of certain existing wells
into new producing horizons, workovers of existing wells, and the drilling of
infill development wells.
The development program that MV Partners currently intends to implement over
the five years ending December 31, 2024 with respect to the underlying
properties categorized as proved undeveloped reserves consists of drilling
development wells, recompletion and workover projects, and polymer workovers.
The development program that MV Partners currently intends to implement over the
next five years with respect to the underlying properties categorized as proved
developed non-producing
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reserves consists of well-reactivation projects, injection well-workover
projects, recompletion projects, and well-workover projects.
MV Partners has undertaken 3-D seismic surveys covering several leases
constituting a part of the underlying properties. These leases have over 32
undrilled offset locations of varying quality based on offset production and
subsurface mapping. The 3-D data was utilized to refine the subsurface mapping
with respect to the size of mapped sink holes and to define smaller structural
features along the edges of the main formation reservoir. Using this data, MV
Partners has scheduled the drilling of 3 proved undeveloped locations over the
five years ending December 31, 2024. MV Partners has expanded its 3-D seismic
program into other fields constituting a part of the underlying properties.
MV Partners expects total capital expenditures for the underlying properties
during the five years ending December 31, 2024 will be approximately
$5.2 million. Of this total, MV Partners contemplates spending approximately
$2.5 million to drill development wells in project areas and approximately
$2.7 million for recompletion and workovers of existing wells. MV Partners
expects that these capital projects will add production that will partially
offset the natural decline in production otherwise expected to occur with
respect to the underlying properties. The trust is not directly obligated to pay
any portion of any capital expenditures made with respect to the underlying
properties; however, capital expenditures made by MV Partners with respect to
the underlying properties will be deducted from the gross proceeds in
calculating the net proceeds from which cash will be paid to the trust. As a
result, the trust will indirectly bear an 80% (subject to certain limitations
during the final three years of the trust, as described above under "Item 1.
Business-Computation of Net Proceeds-Net Profits Interest") share of any capital
expenditures made with respect to the underlying properties. Accordingly, higher
or lower capital expenditures will, in general, directly decrease or increase,
respectively, the cash received by the trust in respect of its net profits
interest, which will have a corresponding effect on cash available for
distribution to unitholders. As the cash received by the trust in respect of the
net profits interest will be reduced by the trust's pro rata share of these
capital expenditures, MV Partners expects that it will incur capital
expenditures with respect to the underlying properties throughout the term of
the trust on a basis that balances the impact of the capital expenditures on
current cash distributions to the trust unitholders with the longer term
benefits of increased oil and natural gas production expected to result from the
capital expenditures. In addition, MV Partners may establish a capital reserve
of up to $1.0 million in the aggregate at any given time to reduce the impact on
distributions of uneven capital expenditure timing.
MV Partners, as the operator of the underlying properties, is entitled to
make all determinations related to capital expenditures with respect to the
underlying properties, and there are no limitations on the amount of capital
expenditures that MV Partners may incur with respect to the underlying
properties, except as described above under "Item 1. Business-Computation of Net
Proceeds-Net Profits Interest." As the trust unitholders would not be expected
to fully realize the benefits of capital expenditures made with respect to the
underlying properties toward the end of the term of the trust, during each
twelve-month period beginning on the later to occur of (1) June 30, 2023, and
(2) the time when 13.2 MMBoe have been produced from the underlying properties
and sold (which is the equivalent of 10.6 MMBoe in respect of the net profits
interest), capital expenditures that may be taken into account in calculating
net proceeds attributable to the net profits interest will be limited to the
average annual capital expenditures during the preceding three years, as
adjusted for inflation. See "Item 1. Business-Computation of Net Proceeds-Net
Profits Interest."
Off-Balance Sheet Arrangements
The trust has no off-balance sheet arrangements. The trust has not
guaranteed the debt of any other party, nor does the trust have any other
arrangements or relationships with other entities that could potentially result
in unconsolidated debt, losses or contingent obligations.
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Contractual Obligations
As of December 31, 2019, the trust had no obligations or commitments to make
future contractual payments other than the administrative services fee and
trustee fee payable to MV Partners and the trustee, respectively. See "Item 8.
Financial Statements and Supplementary Data-Notes to Financial
Statements-Note G-Related Party Transactions."
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MV OIL TRUST 
