WHITING USA TRUST II 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 2020 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 novel
strain of coronavirus ("COVID-19") pandemic;
? 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 and other forms of energy;
? inflation or deflation; and
? other risks described under the caption "Risk Factors" in Item 1A of the
Trust's 2020 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 until the NPI terminates onDecember 31, 2021 . 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 throughMarch 31, 2021 . TheFebruary 2021 net loss was mainly affected byOctober 2020 throughDecember 2020 oil prices andSeptember 2020 throughNovember 2020 natural gas prices. 2019 2020 2021 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Crude oil
Natural gas
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Uncertainties related to demand for oil and natural gas products have continued into 2021 as the COVID-19 pandemic continues to impact the world economy and may affect oil and natural gas prices in 2021. Continued low oil and gas prices realized with respect to production from the underlying properties 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, (ii) a reduction in the amount of oil, natural gas and natural gas liquids that are economic to produce from the underlying properties, and (iii) the recognition of 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 operating and capital expenditures, which contributed to the lack of distributions to Trust unitholders for the second, third and fourth quarters of 2020. Trust termination. After the NPI termination date ofDecember 31, 2021 , it is anticipated that the Trustee will make a final quarterly cash distribution, if any, no later thanMay 30, 2022 , to the Trust unitholders of record on the 50th day followingDecember 31, 2021 , and the Trust will wind up its affairs and terminate. After the termination of the Trust, it will pay no further distributions.
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, 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, or result in production from the underlying properties prior to the termination of the NPI. Per the reserve report, the underlying properties do not have any planned capital expenditures through the trust termination date ofDecember 31, 2021 , based upon the economic inputs utilized to prepare the reserves report. However, 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 and it is possible that capital expenditures will be incurred during 2021. The possibility for capital expenditures is increased on properties subject to enhanced oil recovery techniques where expenditures may be incurred for CO2 that is injected into the field to recover hydrocarbons. An operator may conclude it is more costly or infeasible to temporarily shut-in the field as compared to operating the properties at a loss, or may conclude such losses will be offset by future income from such properties, including periods after the termination of the NPI. Substantially all of the capital expenditures incurred as part of theFebruary 2021 net loss were related to non-operated properties. Please refer to the risk factor "Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust unitholders" included in Item 1A, Risk Factors, in the Trust's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . The following table presents the underlying properties' aggregate capital expenditures attributable to theFebruary 2021 net loss (in thousands): 2021 Capital Region Expenditures Rocky Mountains $ 218 Permian Basin 15 Gulf Coast (2) Mid-Continent - Total $ 231 Annual capital expenditure limitation. The capital expenditures included in the net proceeds attributable to the underlying properties are subject to an annual limitation which became effectiveJanuary 1, 2018 . As a result, the sum of the capital expenditures and amounts reserved for development, maintenance or operating costs of the underlying properties or related activities for each year beginning in 2018 may not exceed the average annual capital expenditure amount. The "average annual capital expenditure amount" means the quotient of (x) the sum of the capital expenditures and amounts reserved for approved capital expenditure projects with respect to the three years endedDecember 31, 2017 , divided by (y) three, which amount equaled$3.9 million and is increased annually by 2.5% to account for expected increased costs due to inflation. Therefore, the capital expenditures included in the net proceeds attributable to the underlying properties and amounts reserved for expenditures cannot exceed$4.3 million during the year endingDecember 31, 2021 .
Farm-out agreements. In an effort to develop the underlying properties while
limiting additional capital expenditures for the Trust,
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leasehold sections within the Keystone South field inWinkler, Texas inApril 2016 , as amended inJuly 2020 (the "Keystone South farm-out"), (ii) 9,740 gross acres in approximately 15 units (which unit size is determined by the lateral well length) within the Signal Peak field inHoward County, Texas inFebruary 2017 , as amended inMay 2018 ,September 2019 andFebruary 2020 (the "Signal Peak farm-out") and (iii) 640 gross acres in one leasehold section within the Flying W, SE field inWinkler County, Texas inMarch 2017 (the "Flying W farm-out"). These farm-out agreements provide the third-party partner with the option, but not the obligation, to drill one well in each of the leasehold sections or units, as the case may be, subject to the applicable farm-out agreement, whereby the partner will pay 100% of the related drilling and well completion costs to earn a 75% working interest. As a result, the applicable underlying properties will consist of (i) 25% of the original working interest in these properties and (ii) an overriding royalty interest equal to the difference between 25% and the lease burdens of record. Upon completion of one well in each section or unit, as the case may be, pursuant to the terms of the applicable agreements, the partner has the option to drill (i) up to 15 additional wells under the Keystone South farm-out, (ii) up to 12 additional wells under the Signal Peak farm-out and (iii) one additional well under the Flying W farm-out. For each of these additional optional wells, the partner is required to pay 85% of the drilling and well completion costs otherwise ascribed to the underlying properties for a 75% working interest. Given the Trust's interest in the NPI, the Trust would be responsible for 13.5% of the underlying properties' remaining drilling and well completion costs at the 90% NPI, subject to the average annual capital expenditure amount limitation discussed above. The third-party partner drilled and completed the first three wells pursuant to the terms of the Keystone South farm-out agreement during 2017, a fourth well was drilled and completed during the second quarter of 2018, a fifth well was drilled and completed during the fourth quarter of 2019, and a sixth well was drilled in the first quarter of 2021, which is scheduled for completion before the second quarter of 2021, whereby the partner earned a 75% working interest in each of the underlying properties' respective leasehold sections. The partner has no obligation to drill and complete any additional wells, and the Keystone South farm-out agreement will terminate during the fourth quarter of 2021 if no additional drilling has commenced by that time. During the fourth quarter of 2019, the third-party partner drilled and completed the first well under the Signal Peak farm-out, whereby the partner earned a 75% working interest in the underlying properties' respective leasehold section. The partner has no obligation to drill and complete any additional wells, and the Signal Peak farm-out will terminate during the fourth quarter of 2021 if no additional drilling has commenced by that time. In addition, the partner drilled and completed the first well under the Flying W farm-out during the second quarter of 2018, whereby the partner earned a 75% working interest in the underlying properties' respective leasehold section. Additionally, inFebruary 2021 , Whiting entered into an additional farm-out agreement with a third-party partner, which agreement covers 1,091 gross acres within theAgua Dulce field inNueces County, Texas . The agreement provides the partner with the option, but not the obligation, to drill one well in each of the two leasehold sections subject to the farm-out agreement, whereby the partner will pay 100% of the related drilling and well completion costs to earn a 90% working interest, which results in the underlying properties retaining (i) a 10% working interest and (ii) an overriding royalty interest equal to the difference between 24% and the lease burdens of record, without incurring any capital costs for these wells. The third-party partner began drilling the first well pursuant to the agreement in the first quarter of 2021. Pursuant to the terms of the agreement, within 365 days after the completion of either well in either section, the partner has the option, but not the obligation, to drill a second well in the respective section where the underlying properties can elect to receive a 10% working interest or a 5% carried working interest. Upon completion of a second well in either section, the partner has the option, but not the obligation, to drill subsequent wells in either section where the underlying properties can retain a 10% working interest (if such option was elected for the respective second well) or can receive a 5% working interest or a 2.5% carried working interest. 13
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Table of Contents Results of Trust Operations
Comparison of results of the Trust for the three months ended
The following is a summary of income (loss) from net profits interest and distributable income received by the Trust for the three months endedMarch 31, 2021 and 2020 (dollars in thousands, except per Bbl, per Mcf and per BOE amounts): Three Months EndedMarch 31, 2021 2020 Sales volumes: Oil from underlying properties (Bbl)(1) 181,340 (2)
187,185 (3)
Natural gas from underlying properties (Mcf) 175,240 (2) 232,720 (3) Total production (BOE) 210,547 225,972 Average sales prices: Oil (per Bbl)(1)$ 36.36 $ 49.81 Natural gas (per Mcf)$ 1.93 $ 1.83 Cost metrics: Lease operating expenses (per BOE)$ 31.26 $
36.60
Production tax rate (percent of total revenues) 5.0 % 5.1 % Revenues: Oil sales(1)$ 6,594 (2)$ 9,323 (3) Natural gas sales 339 (2) 425 (3) Total revenues 6,933 9,748 Costs: Lease operating expenses 6,581 8,270 Production taxes 345 498 Development costs 231 456 Total costs 7,157 9,224 Net proceeds (losses) (224) 524 Net profits percentage 90 % 90 % Income (loss) from net profits interest (202) 472 Provision for estimated Trust expenses -
(200)
Montana state income tax withheld (1) (4) Current period net cash losses funded by Whiting 203 - Distributable income $ -$ 268 __________
(1) Oil includes natural gas liquids.
Oil and gas sales volumes and related revenues for the three months ended
(2)
oil production from October 2020 through December 2020 and natural gas
production from September 2020 through November 2020 .
Oil and gas sales volumes and related revenues for the three months ended
(3)
Trust generally represent oil production from
2019 and natural gas production from
Income (loss) from net profits interest. Income (loss) from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting or when NPI losses are generated by the underlying properties. NPI proceeds (or losses) are based on the oil and gas production for which Whiting has received payment within one month following the end of the most recent fiscal quarter. Whiting receives payment for its crude oil sales generally within 30 days following the month in which it is produced and sold, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced and sold. Income (loss) from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes and development costs as follows: Revenues. Oil and natural gas revenues decreased$2.8 million (or 29%) during the three months endedMarch 31, 2021 as compared to the same 2020 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decline in revenue between periods was primarily due to lower realized oil prices. The crude oil average realized sales price decreased by 27% primarily as a result of lower NYMEX oil prices, and the natural gas average realized sales price increased by 5% between periods primarily due to narrowing differentials in the current period. Crude oil production volumes decreased by 6 MBbl (or 3%) 14
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and natural gas production volumes decreased by 57 MMcf (or 25%) between periods. The slight oil volume decrease between periods was primarily related to normal field production decline slightly offset by increased collection of revenues for non-operated properties in the current period. The decline in gas volumes between periods was primarily related to normal field decline and wells down for mechanical issues. Based on theDecember 31, 2020 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 12.5% for oil and 12.0% for gas from 2020 through theDecember 31, 2021 NPI termination date. Lease operating expenses. Lease operating expenses decreased$1.7 million (or 20%) during the first quarter of 2021 compared to the same 2020 period primarily due to lower oilfield goods and services costs of$1.6 million , which includes a decrease of$0.7 million in workover costs between periods. The decrease in overall LOE coupled with the decline in overall production volumes resulted in a decrease in LOE on a per BOE basis of 15% between periods from$36.60 during the three months endedMarch 31, 2020 to$31.26 for the same period in 2021. Production taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues decreased from 5.1% for the three months endedMarch 31, 2020 to 5.0% for the same period in 2021. Overall production taxes for the first quarter of 2021 decreased$0.2 million (or 31%) as compared to the same 2020 period primarily due to lower oil and natural gas revenues between periods. Development costs. Development costs for the three months endedMarch 31, 2021 were$0.2 million (or 49%) lower as compared to the same 2020 period primarily due to reduced capital workover costs in the Rangeley field. Provision for estimated trust expenses. The provision for estimated Trust expenses decreased$0.2 as ofMarch 31, 2021 as compared toMarch 31, 2020 . Since the NPI generated a net loss during the three months endedMarch 31, 2021 , there were no cash proceeds available to the Trustee to provide for estimated trust expenses. Distributable income. There was no distribution made to unitholders during the first quarter of 2021 because the net profits interest generated net cash losses of$0.2 million during the period. Distributable income for the three months endedMarch 31, 2020 was$0.3 million , which was based on income from net profits interest of$0.5 million , reduced by Trust general and administrative expenses of$0.2 million and adjusted for changes in Trust cash reserves. Accumulated net losses and interest due to Whiting. During the three months endedMarch 31, 2021 , the net profits interest generated net losses of$0.2 million attributable to the Trust primarily due to continued depressed oil and natural gas prices and the continued decline of production from the underlying properties. Lower commodity prices and decreased production during the quarterly payment period caused operating and development costs to exceed the proceeds from production. The net loss of$0.2 million generated during the fourth quarterly payment period taken together with accumulated net losses generated in prior periods, resulted in$0.4 million of accumulated net losses funded by Whiting. All accumulated net losses, plus accrued interest at the prevailing money market rate, will be deducted from gross proceeds in future computation periods for purposes of determining net proceeds (or net losses as the case may be) until the negative net proceeds, including interest, have been recovered in full by Whiting. The NPI will not generate cash proceeds for the Trust, and the Trust will be unable to make distributions to unitholders, until that occurs. Refer to the "Distributions to Unitholders" footnote in the financial statements for more information on accumulated net losses and interest due to Whiting. There were no accumulated net losses during the three months endedMarch 31, 2020 .
Liquidity and Capital Resources
Overview. The Trust has no source of liquidity or capital resources other than
cash flows from the NPI. 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 and the Delaware Trustee, a quarterly fee paid
to Whiting pursuant to an administrative services agreement and expenses in
connection with the discharge of the Trustee's duties, including third-party
engineering, audit, accounting and legal fees. Each quarter, the Trustee
determines the amount of funds available for distribution to unitholders.
Available funds are the excess cash, if any, received by the Trust from the NPI
and other sources (such as interest earned on any amounts reserved by the
Trustee) that quarter, over the Trust's expenses for that quarter. Available
funds are reduced by (i) any accumulated net losses to be recovered by Whiting,
plus accrued interest and (ii) any cash the Trustee decides to hold as a reserve
against future liabilities. If the NPI generates net losses or limited net
proceeds (which was the case during each quarter of 2020 and the first quarter
of 2021), the net profits interest may not provide sufficient funds to the
Trustee to enable it to pay all of the Trust's administrative expenses. The
Trust may borrow the amount of funds required to pay its liabilities if the
Trustee determines that the cash on hand and
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the cash to be received, which is dependent on future net proceeds, are insufficient to cover the Trust's liabilities. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid. 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. As ofApril 30, 2021 , the Trust had cash reserves of$0.2 million remaining for the payment of its administrative expenses. The Trust is highly dependent on Whiting for multiple services, including the operation of wells, remittance of net proceeds generated by the NPI and administrative services performed on behalf of the Trust. Whiting's continued ability to operate wells, including those with interests held by the NPI, depends on its future financial condition, access to capital and other factors outside of its control. OnApril 1, 2020 , Whiting and certain of its direct and indirect subsidiaries, includingWhiting Oil and Gas (collectively, the "Debtors") commenced voluntary cases under chapter 11 ofthe United States Bankruptcy Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "). OnJune 30, 2020 , the Debtors filed the Joint Chapter 11 Plan of Reorganization ofWhiting Petroleum Corporation and its Debtor affiliates (as amended, modified and supplemented, the "Plan"). OnAugust 14, 2020 , theBankruptcy Court confirmed the Plan. OnSeptember 1, 2020 , the Debtors emerged from the Chapter 11 Cases and the Plan became effective in accordance with its terms. Letter of credit. InJune 2012 , Whiting established a$1.0 million letter of credit for the Trustee in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust in the event that Whiting should fail to lend funds to the Trust, if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and if the Trustee were to draw on the letter of credit or were to borrow funds from Whiting or other entities, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust. Such letter of credit will expireDecember 31, 2021 . As ofMarch 31, 2021 andDecember 31, 2020 , the Trust had no borrowings under the letter of credit. Reserve for expenditures. Whiting may reserve from the gross proceeds amounts up to a total of$2.0 million at any time for future development, maintenance or operating expenses on the underlying properties and related activities. Whiting did not fund such a reserve during the three months endedMarch 31, 2021 or 2020. Plugging and abandonment. Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the three months endedMarch 31, 2021 , Whiting incurred$0.3 million of plugging and abandonment charges on the underlying properties, and these costs were not charged to the unitholders of the Trust. Future Trust Payment Periods OnMay 6, 2021 , the Trustee announced the Trust's distribution of net profits for the first quarterly payment period in 2021. Unitholders of record onMay 20, 2021 are expected to receive a distribution of$0.082926 per Trust unit, which is payable on or beforeMay 28, 2021 . This aggregate distribution to all Trust unitholders is expected to consist of net cash proceeds of$2.2 million paid by Whiting to the Trust, less (i) a provision of$0.3 million for estimated Trust expenses, (ii)$0.4 million for the recovery of accumulated net cash losses generated by the net profits interest and previously funded by Whiting and (iii)$2,727 forMontana state income tax withholdings. The Trust is unable to predict future commodity prices or future performance and distributions to unitholders are significantly impacted by low oil and natural gas prices and may be reduced to zero, as was the case during the second, third and fourth quarters of 2020. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in operating and capital expenditures and commodity price differentials. If the NPI generates net losses or limited net proceeds, the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust's administrative expenses, which expenses may be in excess of the provision for Trust expenses.
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust's financial statements is included in Item 7 of the Trust's Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes to the critical accounting policies during the three months endedMarch 31, 2021 . 16
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