Trustee's Discussion and Analysis of Financial Condition and Results of
Operations.
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 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:
(a)
Income from the net profits interest is recorded when distributions are received
by the trust;
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(b)
Distributions to trust unitholders are recorded when paid by the trust;
(c)
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;
(d)
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;
(e)
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
(f)
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, 2021 and
2020
The following represents a discussion of the Comparison of Results of the Trust
for the Years ended December 31, 2021 and 2020. Refer to "Item 7. Trustee's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report on Form 10-K for the year ended December 31, 2020, filed with the
SEC on March 16, 2021 for a discussion of the Comparison of Results of the Trust
for the Years ended December 31, 2020 and 2019.
Income for the trust from the net profits interest was $12.1 million for the
year ended December 31, 2021 compared to $6.8 million for the year ended
December 31, 2020. The trustee withheld $0.8 million and $1.2 million for future
trust expenses for the years ended December 31, 2021 and 2020, respectively.
General and administrative expense for the trust was $0.96 million for 2021 and
$0.85 million for 2020. These factors resulted in distributable income of
$11.3 million, or $0.985 per unit, in 2021 compared to $5.6 million, or $0.490
per unit, in 2020.
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, 2021 substantially represented the production by MV Partners from
September 2020 through August 2021, and the cash received by the trust during
the year ended December 31, 2020 substantially represented the production by MV
Partners from September 2019 through August 2020. 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, 2021, 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, 2020 through
September 30, 2021. For the year ended December 31, 2020, 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, 2019 through September 30, 2020.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $15.1 million for the
period from October 1, 2020 through September 30, 2021. The trust's net profits
interest (80%) of this total was $12.1 million for the year ended December 31,
2021. During the year ended December 31, 2021, MV Partners did not withhold or
release any dollar amounts due to the Trust from previously established cash
reserves for future capital expenditures, which resulted in total cash proceeds
received by the trust of $12.1 million for the year ended December 31, 2021.
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Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $8.5 million for the period
from October 1, 2019 through September 30, 2020. The trust's net profits
interest (80%) of this total was $6.8 million for the year ended December 31,
2020. During the year ended December 31, 2020, MV Partners released $0.4 million
during the third quarter and withheld $0.4 million during the fourth quarter
from previously established cash reserves for future capital expenditures, which
resulted in total cash proceeds received by the trust of $6.8 million for the
year ended December 31, 2020.
The average price received for crude oil sold during 2021 was $51.97 per Bbl,
while the average price received for crude oil sold during 2020 was $41.44 per
Bbl. The average price received for natural gas sold during 2021 was $2.22 per
Mcf, while the average price received for natural gas sold during 2020 was $1.42
per Mcf. The average prices for 2021 related to production by MV Partners from
September 2020 through August 2021, and the average prices for 2020 related to
production by MV Partners from September 2019 through August 2020.
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, 2020 to September 30, 2021 were
519,518 Bbls of oil, 31,708 Mcf of natural gas and 94 Bbls of natural gas
liquids, for a total of 524,864 Boe. 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, 2019 to September 30, 2020 were 530,915 Bbls of oil, 24,029 Mcf of
natural gas and 239 Bbls of natural gas liquids, for a total of 535,075 Boe.
As noted above, the amounts reflected in the accompanying financial statements
for the trust's year ended December 31, 2021 reflect cash received by the trust
during the year. Such cash is primarily derived from production by MV Partners
from September 2020 through August 2021. The amounts reflected in the
accompanying financial statements for the trust's year ended December 31, 2020
reflect cash received by the trust during the year. Such cash is primarily
derived from production by MV Partners from September 2019 through August 2020.
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, 2021, the trustee held $297,000 as such a
reserve.
In November 2021, the Trustee notified MV Partners that the Trustee intends to
build a reserve for the payment of future known, anticipated or contingent
expenses or liabilities, commencing with the distribution payable in the first
quarter of 2022. The Trustee intends to withhold a portion of the proceeds
otherwise available for distribution each quarter to gradually build a cash
reserve to approximately $1.265 million. This amount is in addition to the
letter of credit in the amount of $1.8 million provided to the Trustee by MV
Partners to protect the Trust against the risk that it does not have sufficient
cash to pay future expenses. The Trustee may increase or decrease the targeted
amount at any time, and may increase or decrease the rate at which it is
withholding funds to build the cash reserve at any time, without advance notice
to the unitholders. Cash held in reserve will be invested as required by the
Trust Agreement. Any cash reserved in excess of the amount necessary to pay or
provide for the payment of future known, anticipated or contingent expenses or
liabilities eventually will be distributed to unitholders, together with
interest earned on the funds.
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 2020 and 2021, the trust made no borrowings.
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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, 2026 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 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 20
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 one proved undeveloped location over the
five years ending December 31, 2026. 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, 2026 will be approximately
$1.3 million. Of this total, MV Partners contemplates spending approximately
$0.4 million to drill development wells in project areas and approximately
$0.9 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
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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."
Item 7A.
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MV OIL TRUST 
