Company Quick10K Filing
Quick10K
VOC Energy Trust
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-18 Earnings, Exhibits
8-K 2019-04-18 Earnings, Exhibits
8-K 2019-01-17 Earnings, Exhibits
8-K 2018-10-18 Earnings, Exhibits
8-K 2018-07-19 Earnings, Exhibits
8-K 2018-04-19 Earnings, Exhibits
8-K 2018-03-14 Earnings, Exhibits
8-K 2018-01-18 Earnings, Exhibits
NBL Noble Energy 10,378
NFX Newfield Exploration 6,070
MGY Magnolia Oil & Gas 1,619
TELL Tellurian 1,612
QEP QEP Resources 869
BRY Berry Petroleum 692
ICD Independence Contract Drilling 82
PED Pedevco 69
LLEX Lilis Energy 28
CHKR Chesapeake Granite Wash Trust 0
VOC 2019-06-30
Part I-Financial Information
Item 1. Financial Statements.
Note 1. Organization of The Trust
Note 2. Basis of Presentation
Note 3. Trust Accounting Policies
Note 4. Investment in Net Profits Interest
Note 5. Income From Net Profits Interest
Note 6. Income Taxes
Note 7. Distributions To Unitholders
Note 8. Advance for Trust Expenses
Note 9. Subsequent Events
Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part Ii-Other Information
Item 1A. Risk Factors.
Item 6. Exhibits.
EX-31 a19-10353_1ex31.htm
EX-32 a19-10353_1ex32.htm

VOC Energy Trust Earnings 2019-06-30

VOC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-10353_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the quarterly period ended June 30, 2019

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the transition period from                       to             

 

Commission File Number: 001-35160

 


 

VOC ENERGY TRUST

(Exact name of registrant as specified in its charter)

 

Delaware

 

80-6183103

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

The Bank of New York Mellon Trust Company, N.A., Trustee

 

 

Global Corporate Trust

 

 

601 Travis Street, Floor 16

 

 

Houston, Texas

 

77002

(Address of principal executive offices)

 

(Zip Code)

 

1-512-236-6599

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Units of Beneficial Interest

 

VOC

 

The New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”  in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company x

 

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of August 9, 2019, 17,000,000 Units of Beneficial Interest in VOC Energy Trust were outstanding.

 

 

 


 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

VOC ENERGY TRUST

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME

(Unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Income from net profits interest

 

$

2,959,412

 

$

3,284,462

 

$

5,569,542

 

$

5,314,612

 

Cash on hand used (withheld) for Trust expenses

 

(81,438

)

(45,764

)

153,201

 

79,844

 

General and administrative expenses (1)

 

(157,974

)

(178,698

)

(537,743

)

(464,456

)

Distributable income

 

$

2,720,000

 

$

3,060,000

 

$

5,185,000

 

$

4,930,000

 

Distributions per Trust unit (17,000,000 Trust units issued and outstanding at June 30, 2019 and 2018)

 

$

0.16

 

$

0.18

 

$

0.305

 

$

0.29

 

 


(1)         Includes $0 and $24,675 paid to VOC Brazos Energy Partners, LP (“VOC Brazos”) during the three months ended June 30, 2019 and 2018, respectively, and $24,675 and $72,125 during the six months ended June 30, 2019 and 2018, respectively.  Also includes $37,500 paid to The Bank of New York Mellon Trust Company, N.A. during each of the three-month periods ended June 30, 2019 and 2018 and $75,000 during each of the six-month periods ended June 30, 2019 and 2018, respectively.

 

CONDENSED STATEMENTS OF ASSETS AND TRUST CORPUS

(Unaudited)

 

 

 

June 30,
2019

 

December 31,
2018

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

206,964

 

$

360,165

 

Investment in net profits interest

 

140,591,606

 

140,591,606

 

Accumulated amortization

 

(74,273,736

)

(70,938,616

)

Total assets

 

$

66,524,834

 

$

70,013,155

 

 

 

 

 

 

 

TRUST CORPUS

 

 

 

 

 

Trust corpus, 17,000,000 Trust units issued and outstanding at June 30, 2019 and December 31, 2018

 

$

66,524,834

 

$

70,013,155

 

 

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS

(Unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Trust corpus, beginning of period

 

$

68,193,841

 

$

75,508,537

 

$

70,013,155

 

$

77,711,186

 

Income from net profits interest

 

2,959,412

 

3,284,462

 

5,569,542

 

5,314,612

 

Cash distribution

 

(2,720,000

)

(3,060,000

)

(5,185,000

)

(4,930,000

)

Trust expenses

 

(157,974

)

(178,698

)

(537,743

)

(464,456

)

Amortization of net profits interest

 

(1,750,445

)

(1,974,979

)

(3,335,120

)

(4,052,020

)

Trust corpus, end of period

 

$

66,524,834

 

$

73,579,322

 

$

66,524,834

 

$

73,579,322

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

2


 

VOC ENERGY TRUST

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

(Unaudited)

 

Note 1.  Organization of the Trust

 

VOC Energy Trust (the “Trust”) is a statutory trust formed on November 3, 2010 (capitalized on December 17, 2010), under the Delaware Statutory Trust Act pursuant to a Trust Agreement dated November 3, 2010 (as amended and restated on May 10, 2011, the “Trust Agreement”) among VOC Brazos Energy Partners, L.P., a Texas limited partnership (“VOC Brazos”), as trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and Wilmington Trust Company, as Delaware Trustee (the “Delaware Trustee”).  The Trust was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders.

 

VOC Brazos is a privately held limited partnership engaged in the production and development of oil and natural gas from properties located in Texas. VOC Kansas Energy Partners, L.L.C., a Kansas limited liability company (“VOC Kansas”), is a privately held limited liability company engaged in the production and development of oil and natural gas from properties primarily located in Kansas along with a limited number of Texas properties. In connection with the closing of the initial public offering of units of beneficial interest in the Trust (“Trust Units”) in May 2011, VOC Brazos acquired all of the membership interests in VOC Kansas in exchange for newly issued limited partner interests in VOC Brazos pursuant to a Contribution and Exchange Agreement, dated August 30, 2010, as amended, by and between VOC Brazos and VOC Kansas.  This resulted in VOC Kansas becoming a wholly-owned subsidiary of VOC Brazos.

 

In connection with the May 2011 closing of the initial public offering and in exchange for 17,000,000 Trust Units, VOC Brazos and VOC Kansas conveyed a term net profits interest representing the right to receive 80% of the net proceeds (calculated as described below in Note 6) from production from the underlying properties (as defined below) (the “net profits interest”). The net profits interest consists of net interests in all of the oil and natural gas properties held by VOC Brazos and VOC Kansas in the states of Kansas and Texas as of the date of the conveyance of the net profits interest to the Trust.  We refer to the properties in which the Trust holds the net profits interest as the “underlying properties.”

 

The net profits interest is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The net profits interest entitles the Trust to receive 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of production from the underlying properties during the term of the Trust. The net profits interest will terminate on the later to occur of (1) December 31, 2030 or (2) the time when 10.6 million barrels of oil equivalent (“MMBoe”) (which is the equivalent of 8.5 MMBoe in respect of the net profits interest) have been produced from the underlying properties and sold, and the Trust will soon thereafter wind up its affairs and terminate.

 

The Trustee can authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee or the Delaware Trustee as a lender provided the terms of the loan are similar to the terms it would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself and make other short-term investments with the funds distributed to the Trust.

 

Note 2.  Basis of Presentation

 

The accompanying Condensed Statements of Assets and Trust Corpus as of December 31, 2018, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of June 30, 2019 and for the three and six month periods ended June 30, 2019 and June 30, 2018, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations.

 

The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Trustee believes such information includes all the disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments that are, in the opinion of the Trustee, necessary for a fair presentation of the results of the interim period presented. The financial information should be read in conjunction with the financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

3


 

Note 3.  Trust Accounting Policies

 

The Trust uses the modified cash basis of accounting to report receipts of the term net profits interest and payments of expenses incurred. The term net profits interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses, lease maintenance, lease overhead, and production and property taxes) and an adjustment for lease equipment costs 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%. Actual cash receipts may vary due to timing delays of actual cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices. The actual cash distributions of the Trust will be made based on the terms of the conveyance creating the Trust’s net profits interest.  Expenses of the Trust, which include accounting, engineering, legal and other professional fees, Trustee fees, an administrative fee paid to VOC Brazos and out-of-pocket expenses, are recognized when paid. Under U.S. GAAP, revenues and expenses would be recognized on an accrual basis. Amortization of the investment in net profits interest is recorded on a unit-of-production method in the period in which the cash is received with respect to such production. Such amortization does not reduce distributable income, rather it is charged directly to Trust corpus.

 

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.

 

Investment in the net profits interest was recorded initially at the historical cost of VOC Brazos and is periodically assessed 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, exceeds undiscounted future net revenues attributable to the proved oil and gas reserves of the underlying properties.

 

No new accounting pronouncements have been adopted or issued during the quarter ended June 30, 2019 that would impact the financial statements of the Trust.

 

Note 4.  Investment in Net Profits Interest

 

The net profits interest was recorded at the historical cost of VOC Brazos on May 10, 2011, the date of the conveyance of the net profits interest to the Trust, and was calculated as follows:

 

Oil and gas properties

 

$

197,270,173

 

Accumulated depreciation and depletion

 

(17,681,155

)

Hedge liability

 

(1,717,713

)

20-year asset retirement liability

 

(2,131,797

)

Net property to be conveyed

 

175,739,508

 

Times 80% net profits interest to Trust

 

$

140,591,606

 

 

Note 5.  Income from Net Profits Interest

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Excess of revenues over direct operating expenses  and lease equipment and development costs(1)

 

$

3,699,265

 

$

4,105,578

 

$

6,961,928

 

$

6,643,265

 

Times 80% net profits interest to Trust

 

80

%

80

%

80

%

80

%

Income from net profits interest before reserve adjustments

 

2,959,412

 

3,284,462

 

5,569,542

 

5,314,612

 

VOC Brazos reserve for future development, maintenance or operating expenditures(2)

 

0

 

0

 

0

 

0

 

Income from net profits interest(3)

 

$

2,959,412

 

$

3,284,462

 

$

5,569,542

 

$

5,314,612

 

 


(1)         Excess of revenues over direct operating expenses and lease equipment and development costs reflect expenses and costs incurred by VOC Brazos during each of the December through February production periods for the three months ended June 30 and during each of the September through February production periods for the six months ended June 30. Pursuant to the terms of the conveyance of the net profits interest, lease equipment and development costs are to be deducted when calculating the distributable income to the Trust.

 

4


 

(2)         Pursuant to the terms of the conveyance of the net profits interest, VOC Brazos can reserve up to $1.0 million for future development, maintenance or operating expenditures at any time.  During the three months ended June 30, 2019 and 2018, and the six months ended June 30, 2019 and 2018, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the reserve. The reserve balance was $1,000,000 at June 30, 2019 and 2018, respectively.

 

(3)         The income from net profits interest is based upon the cash receipts from VOC Brazos for the oil and gas production. The revenues from oil production are typically received by VOC Brazos one month after production; thus, the cash received by the Trust during the three months ended June 30, 2019 substantially represents production by VOC Brazos from December 2018 through February 2019 and the cash received by the Trust during the three months ended June 30, 2018 substantially represents production by VOC Brazos from December 2017 through February 2018.  The cash received by the Trust during the six months ended June 30, 2019 substantially represents production by VOC Brazos from September 2018 through February 2019 and the cash received by the Trust during the six months ended June 30, 2018 substantially represents production by VOC Brazos from September 2017 through February 2018.

 

For the three and six months ended June 30, 2019 and 2018, MV Purchasing, LLC, an affiliate of VOC Brazos, purchased a significant portion of the production of the underlying properties.  Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one to six months, using market sensitive pricing.

 

Note 6.  Income Taxes

 

The Trust is a Delaware statutory trust and is not required to pay federal or state income taxes. Accordingly, no provision for federal or state income taxes has been made.

 

Note 7.  Distributions to Unitholders

 

VOC Brazos makes quarterly payments of the net profits interest to the Trust. The Trustee determines for each quarter the amount available for distribution to the Trust unitholders. This distribution is expected to be made on or before the 45th day following the end of each quarter to the Trust unitholders of record on the 30th day of the month following the end of each quarter (or the next succeeding business day). Such amounts will be equal to the excess, if any, of the cash received by the Trust relating to the preceding quarter, over the expenses of the Trust paid for such quarter, subject to adjustments for changes made by the Trustee during such quarter in any cash reserves established for future expenses of the Trust.

 

The first quarterly distribution during 2019 was $2,465,000, or $0.145 per Trust Unit, and was made on February 14, 2019 to Trust unitholders owning Trust Units as of January 30, 2019. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2018 through December 31, 2018.

 

The second quarterly distribution during 2019 was $2,720,000, or $0.16 per Trust Unit, and was made on May 15, 2019 to Trust unitholders owning Trust Units as of April 30, 2019. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2019 through March 31, 2019.

 

The first quarterly distribution during 2018 was $1,870,000, or $0.11 per Trust Unit, and was made on February 14, 2018 to Trust unitholders owning Trust Units as of January 30, 2018. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2017 through December 31, 2017.

 

The second quarterly distribution during 2018 was $3,060,000, or $0.18 per Trust Unit, and was made on May 15, 2018 to Trust unitholders owning Trust Units as of April 30, 2018. Such distribution included the net proceeds of production collected by VOC Brazos from January 1, 2018 through March 31, 2018.

 

Note 8.  Advance for Trust Expenses

 

Under the terms of the Trust Agreement, the Trustee is allowed to borrow money to pay Trust expenses. During the three and six months ended June 30, 2019 and 2018, there were no borrowings or amounts owed for money borrowed in previous quarters. Under the terms of the Trust Agreement, VOC Brazos has provided a letter of credit in the amount of $1,700,000 to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses.

 

Note 9.  Subsequent Events

 

On July 18, 2019, the Trust announced a Trust distribution of net profits for the second quarterly payment period ended June 30, 2019. Unitholders of record on July 30, 2019 will receive a distribution amounting to $3,485,000, or $0.205 per Trust Unit, which will be paid on August 14, 2019.

 

5


 

Item 2.  Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 for the Quarters Ended June 30, 2019 and 2018

 

The following is a summary of income from net profits interest received by the Trust for the three months ended June 30, 2019 and 2018 consisting of the April distribution for each respective year:

 

 

 

Three months ended
June 30,

 

 

 

2019

 

2018

 

Sales volumes:

 

 

 

 

 

Oil (Bbl)

 

142,024

 

128,000

 

Natural gas (Mcf)

 

75,981

 

82,681

 

Total (BOE)

 

154,688

 

141,780

 

Average sales prices:

 

 

 

 

 

Oil (per Bbl)

 

$

49.40

 

$

58.46

 

Natural gas (per Mcf)

 

$

3.44

 

$

3.35

 

Gross proceeds:

 

 

 

 

 

Oil sales

 

$

7,016,237

 

$

7,482,816

 

Natural gas sales

 

261,259

 

276,685

 

Total oil and natural gas sales

 

7,277,496

 

7,759,501

 

Lawsuit settlement

 

0

 

0

 

Total gross proceeds

 

7,277,496

 

7,759,501

 

Costs:

 

 

 

 

 

Production and development costs:

 

 

 

 

 

Lease operating expenses

 

2,975,256

 

3,085,442

 

Production and property taxes

 

212,003

 

206,039

 

Development expenses

 

390,972

 

362,442

 

Total costs

 

3,578,231

 

3,653,923

 

 

 

 

 

 

 

Excess of revenues over direct operating expenses and lease equipment and development costs

 

3,699,265

 

4,105,578

 

Times net profits interest over the term of the Trust

 

80

%

80

%

Income from net profits interest before reserve adjustments

 

2,959,412

 

3,284,462

 

VOC Brazos reserve for future development, maintenance or operating expenditures

 

0

 

0

 

Income from net profits interest

 

$

2,959,412

 

$

3,284,462

 

 

The cash received by the Trust from VOC Brazos during the quarter ended June 30, 2019 substantially represents the production by VOC Brazos from December 2018 through February 2019.  The cash received by the Trust from VOC Brazos during the quarter ended June 30, 2018 substantially represents the production by VOC Brazos from December 2017 through February 2018.  The revenues from oil production are typically received by VOC Brazos one month after production.

 

Gross proceeds.  Oil and natural gas sales were $7,277,496 for the three months ended June 30, 2019, a decrease of $482,005 or 6.2% from $7,759,501 for the three months ended June 30, 2018.  Revenues are a function of oil and natural gas sales prices and volumes sold.  The decrease in gross proceeds was due to decreases in market prices for oil and partially offset by a small increase in market prices for natural gas sales prices during the second quarter of 2019.  This decrease was partially offset by an increase in oil sales volumes partially offset by natural gas sales volumes during the second quarter of 2019.  During the three months ended June 30, 2019, the average price for oil decreased 15.5% to $49.40 per Bbl and the average price for natural gas increased 2.7% to $3.44 per Mcf. Oil sales volumes were 142,024 Bbls for the three months ended June 30, 2019, an increase of 14,024 Bbls or 11.0% from 128,000 Bbls for the three months ended June 30, 2018, while natural gas sales volumes were 75,981 Mcf, a decrease of 6,700 Mcf or 8.1% from 82,681 Mcf for the same period in 2018.

 

6


 

Costs.   Lease operating expenses were $2,975,256 for the three months ended June 30, 2019, a decrease of $110,186 or 3.6% from $3,085,442 for the three months ended June 30, 2018. Production and property taxes were $212,003 for the three months ended June 30, 2019, an increase of $5,964 or 2.9% from $206,039 for the same period in 2018. Such increase is primarily due to an increase of $4,335 or 2.1% increase in production taxes due to higher sales volumes for oil.  This increase is also the result of a slight increase of $1,629 in property taxes. Development expenses were $390,972 for the three months ended June 30, 2019, an increase of $28,530 or 7.9% from $362,442 for the same period in 2018. Such increase was primarily due to increased drilling activity and development expenses during the three months ended June 30, 2019, compared to the three months ended June 30, 2018.

 

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 $3,699,265 for the three months ended June 30, 2019, a decrease of $406,313 or 9.9% from $4,105,578 for the three months ended June 30, 2018.  The Trust’s 80% net profits interest of these totals was $2,959,412 and $3,284,462, respectively. During the three months ended June 30, 2019 and 2018, 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 $2,959,412 and $3,284,462 for such periods, respectively.  These amounts were reduced by a Trust holdback for future expenses of $239,412 and $224,462 for the three months ended June 30, 2019 and 2018, respectively. The Trustee paid general and administrative expenses of $157,974 for the three months ended June 30, 2019, a decrease of $20,724 from $178,698 for the three months ended June 30, 2018.  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 June 30, 2019 of $2,720,000, a decrease of $340,000 from $3,060,000 for the three months ended June 30, 2018.

 

Results of Operations for the Six Months Ended June 30, 2019 and 2018

 

The following is a summary of income from net profits interest received by the Trust for the six months ended June 30, 2019 and 2018 consisting of the January and April distributions for each respective year:

 

 

 

Six months ended
June 30,

 

 

 

2019

 

2018

 

Sales volumes:

 

 

 

 

 

Oil (Bbl)

 

269,105

 

262,963

 

Natural gas (Mcf)

 

153,712

 

167,561

 

Total (BOE)

 

294,724

 

290,890

 

Average sales prices:

 

 

 

 

 

Oil (per Bbl)

 

$

55.91

 

$

54.06

 

Natural gas (per Mcf)

 

$

3.41

 

$

3.22

 

Gross proceeds:

 

 

 

 

 

Oil sales

 

$

15,044,608

 

$

14,216,194

 

Natural gas sales

 

523,442

 

539,929

 

Total oil and natural gas sales

 

15,568,050

 

14,756,123

 

Lawsuit settlement

 

0

 

0

 

Total gross proceeds

 

15,568,050

 

14,756,123

 

Costs:

 

 

 

 

 

Production and development costs:

 

 

 

 

 

Lease operating expenses

 

6,221,057

 

6,287,173

 

Production and property taxes

 

966,854

 

1,173,350

 

Development expenses

 

1,418,211

 

652,335

 

Total costs

 

8,606,122

 

8,112,858

 

 

 

 

 

 

 

Excess of revenues over direct operating expenses and lease equipment and development costs

 

6,961,928

 

6,643,265

 

Times net profits interest over the term of the Trust

 

80

%

80

%

Income from net profits interest before reserve adjustments

 

5,569,542

 

5,314,612

 

VOC Brazos reserve for future development, maintenance or operating expenditures

 

0

 

0

 

Income from net profits interest

 

$

5,569,542

 

$

5,314,612

 

 

7


 

The cash received by the Trust from VOC Brazos during the six months ended June 30, 2019 substantially represents the production by VOC Brazos from September 2018 through February 2019.  The cash received by the Trust from VOC Brazos during the six months ended June 30, 2018 substantially represents the production by VOC Brazos from September 2017 through February 2018.  The revenues from oil production are typically received by VOC Brazos one month after production.

 

Gross proceeds.  Oil and natural gas sales were $15,568,050 for the six months ended June 30, 2019, an increase of $811,927 or 5.5% from $14,756,123 for the six months ended June 30, 2018.  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 during the first six months of 2019 as well as an increase in oil sales volumes.  These increases were partially offset by a decrease in natural gas sales volumes during the first six months of 2019.  During the six months ended June 30, 2019, the average price for oil increased 3.4% to $55.91 per Bbl and the average price for natural gas increased 5.9% to $3.41 per Mcf. Oil sales volumes were 269,105 Bbls for the six months ended June 30, 2019, an increase of 6,142 Bbls or 2.3% from 262,963 Bbls for the six months ended June 30, 2018, while natural gas sales volumes were 153,712 Mcf, a decrease of 13,849 Mcf or 8.3% from 167,561 Mcf for the same period in 2018.

 

Costs.  Lease operating expenses were $6,221,057 for the six months ended June 30, 2019, a decrease of $66,116 or 1.1% from $6,287,173 for the six months ended June 30, 2018. Production and property taxes were $966,854 for the six months ended June 30, 2019, a decrease of $206,496 or 17.6% from $1,173,350 for the six months ended June 30, 2018. Such decrease is primarily due to a decrease of $240,394 or 30.5% in property taxes partially offset by an increase of $33,898 or 8.8% in production taxes due to higher prices for oil and gas. Development expenses were $1,418,211 for the six months ended June 30, 2019, an increase of $765,876 or 117.4% from $652,335 for the same period in 2018. Such increase was primarily due to increased drilling activity and corresponding increased development expenses during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.

 

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 $6,961,928 for the six months ended June 30, 2019, an increase of $318,663 or 4.8% from $6,643,265 for the six months ended June 30, 2018.  The Trust’s 80% net profits interest of these totals were $5,569,542 and $5,314,612, respectively. During the six months ended June 30, 2019 and 2018, 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 $5,569,542 and $5,314,612 for such periods, respectively.  These amounts were further reduced by a Trust holdback for future expenses of $384,542 and $384,612 for the six months ended June 30, 2019 and 2018, respectively. The Trustee paid general and administrative expenses of $537,743 for the six months ended June 30, 2019, an increase of $73,287 from $464,456 for the six months ended June 30, 2018.  This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income of $5,185,000 for the six months ended June 30, 2019 and $4,930,000 for the six months ended June 30, 2018.

 

8


 

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 June 30, 2019, $206,964 was held by the Trustee 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 expenses.  If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid.  During the three and six months ended June 30, 2019 and 2018, there were no such borrowings. VOC Brazos has provided a letter of credit in the amount of $1,700,000 to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future 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 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 June 30, 2019 and 2018, respectively.

 

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.

 

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. 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 this Form 10-Q and in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018 (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.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

The Trust is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended and is not required to provide the information under this Item.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.  The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and regulations promulgated by the SEC.  Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by VOC Brazos to the Trustee, as trustee of the Trust, and its employees who participate in the preparation of the Trust’s periodic reports as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, the Trustee carried out an evaluation of the Trust’s disclosure controls and procedures. A Trust Officer of the Trustee has concluded that the disclosure controls and procedures of the Trust are effective.

 

9


 

Due to the contractual arrangements of (i) the Trust Agreement and (ii) the conveyance of the net profits interest, the Trustee relies on (A) information provided by VOC Brazos, including historical operating data, plans for future operating and capital expenditures, reserve information and information relating to projected production and (B) conclusions and reports regarding reserves by the Trust’s independent reserve engineers.  See “Risk Factors—Neither the Trust nor the Trust’s unitholders have the ability to influence VOC Brazos or control the operations or development of the underlying properties” in the Form 10-K.

 

Changes in Internal Control over Financial Reporting.  During the quarter ended June 30, 2019, there was no change in the Trust’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.  The Trustee notes for purposes of clarification that it has no authority over, and makes no statement concerning, the internal control over financial reporting of VOC Brazos.

 

10


 

PART II—OTHER INFORMATION

 

Item 1A.  Risk Factors.

 

There have not been any material changes from the risk factors previously disclosed in the Trust’s response to Item 1A to Part 1 of the Form 10-K.

 

Item 6.  Exhibits.

 

The exhibits listed below are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

 

Description

 

 

 

31

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

11


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

VOC ENERGY TRUST

 

 

 

By:

The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

By:

/s/ Michael J. Ulrich

 

 

Michael J. Ulrich

 

 

Vice President

 

Date: August 9, 2019

 

The Registrant, VOC Energy Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available and none have been provided. In signing the report above, the Trustee does not imply that it has performed any such function or that such function exists pursuant to the terms of the Trust Agreement under which it serves.

 

12