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| WHX > SEC Filings for WHX > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
• the effects of global credit, financial and economic issues;
• uncertainty of estimates of oil and natural gas reserves and production;
• risks incident to the operation of oil and natural gas wells;
• future production costs;
• 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;
• risks arising out of the hedge contracts;
• inflation or deflation; and
• other risks described under the caption "Risk Factors" in the Trust's Annual Report filed 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 Trust assumes no
obligation, and disclaims any duty, to update these forward-looking statements.
Overview
The Trust does not conduct any operations or activities. The Trust's purpose is,
in general, to hold the NPI, to distribute to the Trust unitholders cash that
the Trust receives in respect of the NPI and to perform certain administrative
functions in respect of the NPI and the Trust units. The Trust derives
substantially all of its income and cash flows from the NPI, which is in turn
subject to commodity hedge contracts.
Oil and natural gas prices have fallen significantly since their third quarter
2008 levels. For example, the daily average NYMEX oil price was $118.13 per Bbl
for the third quarter of 2008, $58.75 per Bbl for the fourth quarter of 2008,
and $43.21 per Bbl for the first quarter of 2009. Similarly, daily average NYMEX
natural gas prices have declined from $10.27 per Mcf for the third quarter of
2008 to $6.96 per Mcf for the fourth quarter of 2008 and $4.92 for the first
quarter of 2009. In general, lower oil and gas prices on production from the
underlying properties could cause the following: (i) a reduction in the amount
of the net proceeds to which the Trust is entitled; (ii) an extension of the
length of time required to produce 9.11 MMBOE (8.20 MMBOE to the 90% NPI); and
(iii) a reduction in the amount of oil, natural gas and natural gas liquids that
is economic to produce from the underlying properties.
Results of Trust Operations
The Trust was formed in October 2007. The conveyance of the NPI, however, did
not occur until April 2008. As a result, the Trust did not recognize any income
or make any distributions during the quarter ended March 31, 2008. The following
is a summary of the results of income from net profits interest received by the
Trust for the three months ended March 31, 2009:
Three Months Ended
March 31, 2009
Sales Volumes:
Oil from underlying properties (Bbls) 215,417 (a)
Natural gas from underlying properties (Mcf) 943,201 (b)
Total production (BOE) 372,617
Average Sales Prices:
Oil (per Bbl) $ 54.08
Effect of oil hedges on average price (per Bbl) 16.67
Oil net of hedging (per Bbl) $ 70.75
Natural gas (per Mcf) $ 5.76
Effect of natural gas hedges on average price (per Mcf) 0.33
Natural gas net of hedging (per Mcf) $ 6.09
Costs (per BOE):
Lease operating expenses $ 20.03
Production taxes $ 3.04
Revenues:
Oil sales $ 11,650,041 (a)
Natural gas sales 5,436,645 (b)
Total revenues $ 17,086,686
Costs:
Lease operating expenses $ 7,461,774
Production taxes 1,133,723
Cash settlement gains received on commodity derivatives (3,895,132 )
Total costs $ 4,700,365
Net proceeds $ 12,386,321
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Three Months Ended
March 31, 2009
Net profits percentage 90 %
Income from net profits interest $ 11,147,689
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(a) Because of the one-month interval between the time crude oil volumes are produced and the receipt of oil sales proceeds by Whiting, oil volumes and sales for the three months ended March 31, 2009 (consisting of Whiting's February 2009 NPI remittance to the Trust) generally represent crude oil production from October through December 2008.
(b) Because of the two-month interval between the time natural gas volumes are produced and the receipt of gas sales proceeds by Whiting, natural gas volumes and sales for the three months ended March 31, 2009 (consisting of Whiting's February 2009 NPI remittance to the Trust) generally represent gas production from September through November 2008.
Income from Net Profits Interest. Income from net profits interest is recorded
on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI
proceeds that Whiting remits to the Trust are based on the oil and gas
production Whiting has received payment for 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
Whiting receives payment for its natural gas sales generally within 60 days
following the month in which it is produced. Accordingly, income from net
profits interest for the three months ended March 31, 2009 (consisting of
Whiting's February 2009 distribution to the Trust) generally represents crude
oil sales from October through December 2008 and natural gas sales from
September through November 2008. Income from net profits interest is generally
affected by three major factors:
• oil and gas sales volumes,
• oil and gas sales prices, and
• costs deducted in the calculation of income from net profits interest.
For the three months ended March 31, 2009, the Trust recognized income from net
profits interest of $11,147,689, which compares to income from net profits
interest included in the November 2008 distribution during the fourth quarter of
2008 of $21,956,419. The decrease of $10,808,730 or 49% from the prior quarter
was primarily due to the significant decline in market prices for oil and
natural gas. The average price for oil before the effects of hedging decreased
53%, while the average price for natural gas before the effects of hedging
decreased 44%. Partially offsetting the decline in commodity prices was an
increase in cash receipts from commodity hedges of $3,975,435. Production
volumes included in the net profit interest calculation for the three-month
periods ended March 31, 2009 and December 31, 2008, however, were consistent at
372.6 MBOE and 374.6 MBOE, respectively.
Distributable Income. For the three months ended March 31, 2009, the Trust's
distributable income was $10,915,263 and was based on income from net profits
interest of $11,147,689 less estimated Trust expenses of $175,000 and Montana
state income tax withholdings of $57,426. This compares to distributable income
of $21,440,701 in the November 2008 distribution during the fourth quarter of
2008, which was based on income from net profits interest of $21,956,419 less
$375,017 for estimated Trust expenses and $140,701 for Montana state income tax
withholdings.
Results of Underlying Property Operations
Because the Trust had not engaged in any activities during the three months
ended March 31, 2008 other than organizational activities, the Trust is
providing financial information with respect to the underlying properties for
the three months ended March 31, 2009 and 2008 so that investors can review
comparative results of operations for those periods. The underlying properties'
results of operations for the three months ended March 31, 2009 and 2008 are
presented on a cash basis of accounting in the table below and in the
"Comparison of Results of the Underlying Properties for the Three Months Ended
March 31, 2009 and 2008", and this cash basis presentation is consistent with
the Trust's financial statements, which
have been prepared on a modified cash basis. The table below sets forth revenues and direct operating expenses, as well as operating data, relating to the underlying properties for the three months ended March 31, 2009 and 2008.
March 31,
2009 2008
Revenues:
Oil sales $ 6,856,915 (a) $ 18,276,342 (c)
Natural gas sales 4,368,791 (b) 7,009,115 (d)
Total revenues 11,225,707 25,285,457
Direct operating expenses:
Lease operating expenses 6,223,182 6,162,616
Production taxes 749,536 1,812,325
Cash settlement gains received on commodity derivatives (6,323,384 ) -
Total direct operating expenses 649,334 7,974,941
Excess of revenues over direct operating expenses $ 10,576,373 $ 17,310,516
Operating data:
Oil (Bbls) 204,703 (a) 223,115 (c)
Natural gas (Mcf) 924,030 (b) 1,041,629 (d)
Total production (BOE) 358,708 396,720
Average Sales Prices:
Oil (per Bbl) $ 33.50 $ 81.91
Effect of oil hedges on average price (per Bbl) 24.18 -
Oil net of hedging (per Bbl) $ 57.68 $ 81.91
Natural gas (per Mcf) $ 4.73 $ 6.73
Effect of natural gas hedges on average price (per Mcf) 1.49 -
Natural gas net of hedging (per Mcf) $ 6.22 $ 6.73
Per BOE data:
Lease operating expenses $ 17.35 $ 15.53
Production taxes $ 2.09 $ 4.57
Drilling and development capital expenditures $ 735,629 $ 1,376,075
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(a) Because of the one-month interval between the time crude oil volumes are produced and the receipt of oil sales proceeds by Whiting, oil volumes and sales for the three months ended March 31, 2009, as presented on a cash basis, generally represent crude oil production from December 2008 through February 2009.
(b) Because of the two-month interval between the time natural gas volumes are produced and the receipt of gas sales proceeds by Whiting, natural gas volumes and sales for the three months ended March 31, 2009, as presented on a cash basis, generally represent gas production from November 2008 through January 2009.
(c) Because of the one-month interval between the time crude oil volumes are produced and the receipt of oil sales proceeds by Whiting, oil volumes and sales for the three months ended March 31, 2008, as presented on a cash basis, generally represent crude oil production from December 2007 through February 2008.
(d) Because of the two-month interval between the time natural gas volumes are produced and the receipt of gas sales proceeds by Whiting, natural gas volumes and sales for the three months ended March 31, 2008, as presented on a cash basis, generally represent gas production from November 2007 through January 2008.
Comparison of Results of the Underlying Properties for the Three Months Ended
March 31, 2009 and 2008
Revenues. Oil and natural gas revenues decreased $14.1 million or 56% for the
first quarter of 2009 compared to the first quarter of 2008. Sales are a
function of average sales prices and volumes sold. The average price realized
for oil before the effects of hedging decreased 59% between periods, and the
average price realized for natural gas before the effects of hedging decreased
30% between periods. In addition, oil sales volumes decreased 8% or 18.4 MBbls
compared to the same period in 2008, which consisted of a decrease of 29.3 MBbls
due to normal field production decline, partially offset by an increase of 10.9
MBbls from new wells drilled. Gas sales volumes also decreased 11% or 117.6 MMcf
between periods, which consisted of a decrease of 195.4 MMcf due to normal field
decline, partially offset by production from new wells drilled of 77.8 MMcf.
Based upon the reserve report at December 31, 2008, oil and gas production
attributable to the underlying properties is expected to decline at a year over
year rate of approximately 14.4% between 2009 and 2021.
Lease Operating Expenses. Lease operating expenses increased $60,566 or 1% from
the first quarter 2008 to the first quarter 2009, which was caused by higher
energy costs. Lease operating expenses per BOE increased from $15.53 during the
first quarter 2008 to $17.35 during the same period in 2009. The 12% increase on
a BOE basis was caused by lower production volumes combined with the increased
costs of energy.
Production Taxes. Production taxes are generally calculated as a percentage of
oil and gas revenues before the effects of hedging. All credits and exemptions
allowed in the various taxing jurisdictions are fully utilized. Production taxes
for the first quarter 2009 and 2008 were 6.7% and 7.2%, respectively, of oil and
gas sales.
Gain on Settlement of Commodity Hedges. Whiting entered into certain costless
collar hedge contracts in which the rights to any future hedge payments made or
received were conveyed to the Trust on April 30, 2008. Cash settlements relating
to the conveyed hedges resulted in a gain of $6.3 million for the quarter ended
March 31, 2009, which had the effect of increasing the average price of oil and
natural gas net of hedging by $24.18 per Bbl and $1.49 per Mcf, respectively.
There were no hedges in effect on the underlying properties during the first
quarter 2008.
Excess of Revenues Over Direct Operating Expenses. Excess of revenues over
direct operating expenses decreased $6.7 million from the first quarter 2008 to
the first quarter 2009. The reasons for this decrease included a 30% decrease in
oil prices net of hedging and an 8% decrease in gas prices net of hedging
between periods, in addition to a 10% decrease in equivalent volumes sold and
higher lease operating expenses. These factors were only minimally offset by the
decline in production taxes between periods.
Liquidity and Capital Resources
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 as well as a quarterly
administrative fee to Whiting 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 NPI, subject to the hedge contracts, and other sources (such as
interest earned on any amounts reserved by the Trustee) that quarter, over the
Trust's liabilities for that quarter. Available funds are reduced by any cash
the Trustee decides to hold as a reserve against future liabilities. The Trustee
may borrow funds required to pay liabilities if the Trustee determines that the
cash on hand and the cash to be received are insufficient to cover the Trust's
liability. If the Trustee borrows funds, the Trust unitholders will not receive
distributions until the borrowed funds are repaid.
Income to the Trust from the NPI is based on the calculation and definitions of
"gross proceeds" and "net proceeds" contained in the conveyance, which is filed
as an exhibit to this report, and reference is hereby made to the conveyance for
the actual definitions of "gross proceeds" and "net proceeds".
Although capital expenditures for the testing, drilling, completion, equipping,
plugging back or recompletion of any well that is a part of the underlying
properties cannot be deducted from gross proceeds pursuant to the terms of the
conveyance agreement, Whiting incurred capital expenditures of $735,629 on the
underlying properties that were not deducted from gross proceeds during the
first quarter of 2009, but which have the effect of ultimately increasing
current and future period NPI net proceeds and thereby benefiting Trust
unitholders.
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.
Future Trust Distributions to Unitholders
On May 8, 2009, the Trustee announced the Trust distribution of net profits for
the second quarterly payment period in 2009. Unitholders of record on May 20,
2009 are expected to receive a distribution amounting to $9,363,683 or $0.675401
per Trust unit, which is payable on or before May 29, 2009. This distribution is
expected to consist of net cash proceeds of $9,683,455 paid by Whiting to the
Trust, including cash receipts of $5,691,046 (90% of $6,323,384) for commodity
derivative contracts settled from January through March 2009 that offset lease
operating expenses, less a provision of $300,000 for estimated Trust expenses
and $19,772 for Montana state income tax withholdings.
Recent Accounting Pronouncements
On December 31, 2008, the SEC published the final rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in the existing oil and gas rules to make them consistent
with the petroleum resource management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include the ability to include
nontraditional resources in reserves, the use of new technology for determining
reserves, permitting disclosure of probable and possible reserves, and changes
to the pricing used to determine reserves in that companies must use a 12-month
average price. The average is calculated using the first-day-of-the-month price
for each of the 12 months that make up the reporting period. The SEC will
require companies to comply with the amended disclosure requirements for
registration statements filed after January 1, 2010, and for annual reports for
fiscal years ending on or after December 31, 2009. Early adoption is not
permitted. The Trust is currently assessing the impact that the adoption will
have on its disclosures, operating results, statement of financial position and
statement of cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Commodity Hedge Contracts
The only assets of and sources of income to the Trust are cash and the NPI,
which generally entitle the Trust to receive 90% of the net proceeds from oil
and gas production from the underlying properties. Consequently, the Trust is
exposed to market risk from fluctuations in oil and gas prices. However, the NPI
is subject to the commodity hedge contracts in the form of costless collars,
which reduce its exposure to commodity price volatility.
The revenues derived from the underlying properties depend substantially on
prevailing crude oil, natural gas and natural gas liquid prices. As a result,
commodity prices also affect the amount of cash flow available for distribution
to the Trust unitholders. Lower prices may also reduce the amount of oil,
natural gas and natural gas liquids that Whiting can economically produce.
Whiting sells the oil, natural gas and natural gas liquid production from the
underlying properties under floating market price contracts each
month. Whiting has entered into certain hedge contracts through December 31, 2012 to manage the exposure to crude oil and natural gas price volatility associated with revenues generated from the underlying properties and to achieve more predictable cash flow. However, these contracts limit the amount of cash available for distribution if prices increase above the fixed ceilings. The hedge contracts consist of costless collar arrangements placed with a single trading counterparty, JPMorgan Chase Bank National Association. Whiting cannot provide assurance that this trading counterparty will not become a credit risk in the future. No additional hedges are allowed to be placed on Trust assets. Crude oil costless collar arrangements settle based on the average of the closing settlement price for each commodity business day in the contract period. Natural gas costless collar arrangements settle based on the closing settlement price on the second to last scheduled trading day of the month prior to delivery. In a collar arrangement, the counterparty is required to make a payment to Whiting for the difference between the fixed floor price and the settlement price if the settlement price is below the fixed floor price. Whiting is required to make a payment to the counterparty for the difference between the fixed ceiling price and the settlement price if the settlement price is above the fixed ceiling price. Whiting's crude oil and natural gas price risk management positions in collar arrangements through December 31, 2012 (which collars have the potential to affect Whiting's future distributions to the Trust) are as follows:
Oil Collars Natural Gas Collars
Weighted Weighted
Average Price Average Price
Volumes (per Bbl) Volumes (per Mcf)
(Bbls) Floor / Ceiling (Mcf) Floor / Ceiling
Three Months Ending March 31, 2009 150,354 $ 76.00 / $139.85 648,999 $ 7.00 / $22.50
Three Months Ending June 30, 2009 146,382 $ 76.00 / $137.55 603,789 $ 6.00 / $14.85
Three Months Ending September 30, 2009 142,530 $ 76.00 / $136.41 578,610 $ 6.00 / $15.60
Three Months Ending December 31, 2009 138,720 $ 76.00 / $135.72 556,290 $ 7.00 / $14.85
Three Months Ending March 31, 2010 135,252 $ 76.00 / $135.09 536,709 $ 7.00 / $18.65
Three Months Ending June 30, 2010 131,934 $ 76.00 / $134.85 518,619 $ 6.00 / $13.20
Three Months Ending September 30, 2010 128,898 $ 76.00 / $134.89 502,749 $ 6.00 / $14.00
Three Months Ending December 31, 2010 125,772 $ 76.00 / $135.11 488,991 $ 7.00 / $14.20
Three Months Ending March 31, 2011 122,934 $ 74.00 / $139.68 472,800 $ 7.00 / $17.40
Three Months Ending June 30, 2011 120,198 $ 74.00 / $140.08 458,109 $ 6.00 / $13.05
Three Months Ending September 30, 2011 117,510 $ 74.00 / $140.15 444,489 $ 6.00 / $13.65
Three Months Ending December 31, 2011 114,726 $ 74.00 / $140.75 428,361 $ 7.00 / $14.25
Three Months Ending March 31, 2012 112,236 $ 74.00 / $141.27 413,820 $ 7.00 / $15.55
Three Months Ending June 30, 2012 109,716 $ 74.00 / $141.73 402,609 $ 6.00 / $13.60
Three Months Ending September 30, 2012 107,226 $ 74.00 / $141.70 390,519 $ 6.00 / $14.45
Three Months Ending December 31, 2012 105,084 $ 74.00 / $142.21 379,839 $ 7.00 / $13.40
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