References to the "Trust" in this document refer toWhiting USA Trust II . References to "Whiting" in this document refer toWhiting Petroleum Corporation and its subsidiaries. References to "Whiting Oil and Gas" in this document refer toWhiting Oil and Gas Corporation , a 100%-owned subsidiary ofWhiting Petroleum Corporation . 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, as well as the Trustee's discussion and analysis contained in the Trust's 2019 Annual Report on Form 10-K. The Trust's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available on theSEC's website www.sec.gov.
Note Regarding Forward-Looking Statements
This Quarterly Report on 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 facts included in this Quarterly Report on 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. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words "believes," "expects," "anticipates," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:
? the effect of changes in commodity prices and conditions in the capital
markets;
the effect, impact, potential duration or other implications of the outbreak of
? a novel strain of coronavirus ("COVID-19") which the
declared a pandemic in
? the actions of the
? changes in regional, domestic and global supply and demand for oil and natural
gas and the impacts on storage capacity;
? uncertainty of estimates of oil and natural gas reserves and production;
? risks incidental to the operation and drilling of oil and natural gas wells;
? future production and development costs, which include capital expenditures;
? the inability to access oil and natural gas markets due to market conditions or
operational impediments;
? failure of the underlying properties to yield oil or natural gas in
commercially viable quantities;
? the effect of existing and future laws and regulatory actions;
? competition from others in the energy industry;
? inflation or deflation; and
other risks described under the caption "Risk Factors" in Item 1A of Part II of
? this Quarterly Report on Form 10-Q and in Item 1A of the Trust's 2019 Annual
Report on Form 10-K.
All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or the Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Overview and Trust Termination
The Trust does not conduct any operations or activities. The Trust's purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives pursuant to the NPI, and to perform certain administrative functions with respect to the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties. Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated throughJune 30, 2020 . TheMay 2020 11
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distribution was mainly affected by
2018 2019 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Crude oil$ 62.89 $ 67.90 $ 69.50 $ 58.83 $ 54.90 $ 59.83 $ 56.45 $ 56.96 $ 46.08 $ 27.85 Natural gas$ 3.13 $ 2.77 $ 2.88 $ 3.62 $ 3.00 $ 2.58 $ 2.29 $ 2.44 $ 1.88 $ 1.66 Oil prices declined sharply during the first half of 2020, dropping below$21.00 per Bbl inMarch 2020 and further dropping below negative$37.00 per Bbl inApril 2020 . This dramatic decline in pricing was primarily attributable toSaudi Arabia's announcement inMarch 2020 of plans to abandon previously agreed upon output restraints and the economic effects of the COVID-19 pandemic on the demand for oil and natural gas. Continued low oil and gas prices could cause (i) a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders, as was the case for theMay 2020 distribution, (ii) a reduction in the amount of oil, natural gas and natural gas liquids that are economic to produce from the underlying properties, which could extend the length of time required to produce 11.79 MMBOE (10.61 MMBOE at the 90% NPI) and (iii) the recognition of additional impairment charges on the NPI. All costless collar hedge contracts terminated as ofDecember 31, 2014 and no additional hedges are allowed to be placed on the Trust assets. Consequently, there are no further cash settlement gains or losses on commodity derivatives for inclusion in the Trust's computation of net proceeds (or net losses, as the case may be), and the Trust therefore has increased exposure to oil and natural gas price volatility. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in actual and anticipated operating and capital expenditures, as was the case for the first quarter of 2019 and the second quarter of 2020 where Whiting established a reserve for future development, maintenance or operating expenses. Trust termination. The Trust will wind up its affairs and terminate shortly after the earlier of (a) the NPI termination date, which is the later to occur of (1)December 31, 2021 , or (2) the time when 11.79 MMBOE (10.61 MMBOE to the 90% net profits interest) have been produced from the underlying properties and sold, which is estimated to beDecember 31, 2021 based on the Trust's year-end 2019 reserve report or (b) the sale of the net profits interest. After the termination of the Trust, it will pay no further distributions. Impairment of net profits interest. As ofMarch 31, 2020 , the Trust's investment in the NPI with a carrying value of$6.8 million was written down to its fair value of$1.0 million , resulting in a$5.8 million impairment charged directly to Trust corpus during the first quarter of 2020. The write-down of the net profits interest was due to a reduction in anticipated future cash flows primarily driven by an expectation of sustained depressed oil prices atMarch 31, 2020 . Since the assets of the Trust are depleting assets, a portion of each cash distribution paid, if any, on the Trust units is a return of capital to investors, with the remainder being considered as a return on investment or yield. As a result, the market price of the Trust units will decline to zero at the termination of the Trust. As ofJune 30, 2020 on a cumulative accrual basis, 10.37 MMBOE (98%) of the 10.61 MMBOE attributable to the NPI have been produced and sold or divested (of which 204 MBOE, which is 90% of 227 MBOE, are included as gross proceeds in the Trust'sAugust 2020 net loss). The remaining minimum reserve quantities are projected to be produced prior toDecember 31, 2021 , based on the Trust's reserve report as ofDecember 31, 2019 . However, the Trust's 2019 reserve report was derived from NYMEX oil and gas prices of$55.69 per Bbl and$2.58 per MMBtu pursuant to currentSEC and FASB guidelines, whereas the average NYMEX oil and gas prices for the month ofJuly 2020 were$40.77 per Bbl and$1.69 per MMBtu, respectively. Lower oil and gas prices are likely to further reduce the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties, which may cause operators of the underlying properties to voluntarily curtail production and in turn could extend the length of time required to produce the Trust's 10.61 MMBOE. The Trust's 2019 Annual Report on Form 10-K includes additional information on the Trust's reserves, including the underlying assumptions, as ofDecember 31, 2019 .
Capital Expenditure Activities
The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in commercially paying amounts, if any, or that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator's historical drilling success rate. The underlying properties have a capital expenditure budget per theDecember 31, 2019 reserve report of$3.8 million estimated to be spent betweenJanuary 1, 2020 andDecember 31, 2021 , the estimated termination date of the NPI. In addition, no assurance can be given that the actual level of capital expenditures on the underlying properties will meet this$3.8 million amount of budgeted capital expenditures over such time frame. With respect to fields for which Whiting is not the operator, Whiting has limited control over the timing and amount of capital expenditures relative to such fields. Please read the Trust's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , 12
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