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.
All information regarding operations has been provided to the Trustee by VOC
Brazos.
Results of Operations
Results of Operations for the Quarters Ended March 31, 2022 and 2021
The following is a summary of income from net profits interest received by the
Trust for the three months ended March 31, 2022 and 2021 consisting of the
January distribution for each respective year:
Three months ended
March 31,
2022 2021
Sales volumes:
Oil (Bbl) 135,762 136,583
Natural gas (Mcf) 84,632 95,986
Total (BOE) 149,867 152,581
Average sales prices:
Oil (per Bbl) $ 73.79 $ 36.26
Natural gas (per Mcf) $ 5.78 $ 2.07
Gross proceeds:
Oil sales $ 10,017,815 $ 4,952,685
Natural gas sales 489,251 199,136
Total gross proceeds 10,507,066 5,151,821
Costs:
Production and development costs:
Lease operating expenses 3,458,894 2,691,487
Production and property taxes 665,791 751,557
Development expenses 492,148 1,014,161
Total costs 4,616,833 4,457,205
Excess of revenues over direct operating expenses and
lease equipment and development costs
5,890,233 694,616
Times net profits interest over the term of the Trust 80 % 80 %
Income from net profits interest before reserve
adjustments 4,712,186 555,693
VOC Brazos reserve for future development, maintenance or
operating expenditures
- -
Income from net profits interest $ 4,712,186 $ 555,693
5
The cash received by the Trust from VOC Brazos during the quarter ended
March 31, 2022 substantially represents the production by VOC Brazos from
September 2021 through November 2021. The cash received by the Trust from VOC
Brazos during the quarter ended March 31, 2021 substantially represents the
production by VOC Brazos from September 2020 through November 2020. The revenues
from oil production are typically received by VOC Brazos one month after
production.
Gross proceeds. Oil and natural gas sales were $10,507,066 for the three months
ended March 31, 2022, an increase of $5,355,245 or 103.9% from $5,151,821 for
the three months ended March 31, 2021. 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, partially offset by
decreases in oil and natural gas sales volumes during the first quarter of 2022.
During the three months ended March 31, 2022, the average price for oil
increased 103.5% to $73.79 per Bbl and the average price for natural gas
increased 179.2% to $5.78 per Mcf. During the three months ended March 31, 2022,
oil sales volumes were 135,762 Bbls for the three months ended March 31, 2022, a
decrease of 821 Bbls or 0.6% from 136,583 Bbls for the three months ended
March 31, 2021, while natural gas sales volumes were 84,632 Mcf, a decrease of
11,354 Mcf or 11.8% from 95,986 Mcf for the same period in 2021.
Costs. Lease operating expenses were $3,458,894 for the three months ended
March 31, 2022, an increase of $767,407 or 28.5% from $2,691,487 for the three
months ended March 31, 2021. Production and property taxes were $665,791 for the
three months ended March 31, 2022, a decrease of $85,766 or 11.4% from $751,557
for the same period in 2021. Such decrease is primarily due to a $157,275 or
110.1% increase in production taxes due to higher sales prices offset by a
decrease in property taxes of $243,041 or 39.9%. Development expenses were
$492,148 for the three months ended March 31, 2022, a decrease of $522,013 or
51.5% from $1,014,161 for the same period in 2021. Such decrease was primarily
due to decreased development expenses during the three months ended March 31,
2022, compared to the three months ended March 31, 2021.
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
$5,890,233 for the three months ended March 31, 2022, an increase of $5,195,617
or 748.0% from $694,616 for the three months ended March 31, 2021. The Trust's
80% net profits interest of these totals were $4,712,186 and $555,693,
respectively. During the three months ended March 31, 2022 and 2021, 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 $4,712,186 and $555,693 for such periods, respectively. These amounts were
reduced by a Trust holdback for current estimated expenses of $279,269 and
$45,693 for the three months ended March 31, 2022 and 2021, respectively, and a
Trust holdback for future estimated expenses of $182,917 for the three months
ended March 31, 2022. The Trustee paid general and administrative expenses of
$373,765 for the three months ended March 31, 2022, a decrease of $22,634 from
$396,399 for the three months ended March 31, 2021. This decrease 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 March 31, 2022 of $4,250,000, an increase of $3,740,000 from
$510,000 for the three months ended March 31, 2021.
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 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 March 31, 2022, $375,625 was held by
the Trustee as such a reserve.
6
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 months ended March 31, 2022 and 2021, there were no
such borrowings. VOC Brazos has provided a letter of credit in the amount of
$1.7 million to the Trustee to protect the Trust against the risk that it does
not have sufficient cash to pay future expenses.
In November 2021, the Trustee notified VOC Brazos 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 $1.175 million. This amount is in addition to the $1.7
million letter of credit described above. 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 elected to withhold $182,917 from the
proceeds otherwise available for distribution through March 31, 2022 towards the
building of the cash reserve described above.
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 March 31, 2022 and 2021, respectively.
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 (the "Exchange Act"). 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 the Trust's Annual
Report on Form 10-K for the year ended December 31, 2021 (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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