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| TELOZ > SEC Filings for TELOZ > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Critical Accounting Policies
The financial statements of the Trust are prepared on the following basis:
º (a)
º Royalty income is recorded when received, including the effect of
overtaken or undertaken positions and negative or positive
adjustments, by the Corporate Trustee on the last business day of each
calendar quarter. In addition, Royalty income includes amounts related
to funds deposited or released from the Special Cost Escrow
account-see (c); and
º (b)
º Trust general and administrative expenses are recorded when paid,
except for the cash reserved for future general and administrative
expenses; and
º (c)
º The funds deposited or released from the Special Cost Escrow account
are recorded at the time of payment or receipt. The Special Cost
Escrow account is an account of the Working Interest Owners and is not
reflected in the financial statements of the Trust.
This manner of reporting income and expenses is considered to be the most meaningful because the quarterly distributions to Unit holders are based on net cash receipts received from the Working Interest Owners. The financial statements of the Trust differ from financial statements prepared in accordance with generally accepted accounting principles, because, under such principles, Royalty income and Trust general and administrative expenses for a quarter would be recognized on an accrual basis. In addition, amortization of the net overriding royalty interest, calculated on a units-of-production basis, is charged directly to Trust corpus since such amount does not affect distributable income.
The Trustees, including the Corporate Trustee, have no authority over, have not evaluated and make no statement concerning, the internal control over financial reporting of the Working Interest Owners.
Financial Review
In May 2007, the Trust engaged an independent oil and gas accounting firm for the purpose of reviewing the books and records of certain Working Interest Owners with respect to the Royalty Properties and the related payments to the Trust. As part of this ongoing audit review process, certain adjustments to revenues, production volumes, prices and capital expenditures have occurred, and references below to a prior period audit adjustment, or an audit of prior periods, refers to the audit described in this paragraph. The adjustments resulting from such audit review have now been completed. See "-Operational Review".
Three Months Ended June 30, 2009 and 2008
There were no distributions to the Unit holders for the three months ended June 30, 2009 as compared to distributions of $2,619,375 or $0.551272 per Unit to the Unit holders for the same period in 2008.
Crude oil and condensate revenues decreased $8,266,970, or 82%, to $1,813,293 in the second quarter of 2009 as compared to $10,080,263 in the second quarter of 2008, due primarily to decreases in production resulting from damages caused by Hurricane Ike. Oil volumes decreased 66% to 35,475 barrels in the second quarter of 2009 from 103,147 barrels in the second quarter of 2008. The revenues
for the second quarter of 2009 reflect a credit of $186,806 associated with an audit for prior periods. The revenues and volumes for the second quarter of 2008 reflect a net debit for $22,361 in revenues and a credit of 53 barrels associated with an audit for prior periods and certain other adjustments. The average price received for crude oil and condensate decreased 48%, or $46.62, to $51.11 per barrel in the second quarter of 2009 from $97.73 per barrel in the second quarter of 2008. Prior to taking into account such adjustments to revenues and volumes, the average price received for crude oil and condensate would have been $97.99 per barrel in the second quarter of 2008.
Gas revenues decreased $3,065,947, or 99%, to $8,701 in the second quarter of 2009 from $3,074,648 in the second quarter of 2008, due primarily to decreases in production resulting from damages caused by Hurricane Ike in September 2008. Gas volumes decreased 99% to 1,384 Mcf in the second quarter of 2009 from 353,503 Mcf in the second quarter of 2008. The revenues and volumes for the second quarter of 2009 reflect debits to correct an error in revenue allocation in August 2008 for $4,603 in revenues and 1,234 Mcf of gas; the revenues and volumes for the second quarter of 2008 reflect credits associated with an audit of prior periods for $534,253 in revenues and 66,577 Mcf of gas. The average price received for natural gas decreased 28%, or $2.41, to $6.29 per Mcf in the second quarter of 2009 from $8.70 per Mcf in the second quarter of 2008. Prior to taking into account such adjustments to revenues and volumes, the average price received for natural gas would have been $5.08 per Mcf in the second quarter of 2009 and $8.85 per Mcf in the second quarter of 2008. Gas products revenue decreased $605,693, or 98%, to $13,060 in the second quarter of 2009 from $618,753 in the second quarter of 2008, due primarily to a decrease in production volume of 488,231 gallons, or 99%, to 2,920 gallons in the second quarter of 2009 from 491,151 gallons in the second quarter of 2008.
Capital expenditures decreased $300,541, or 96%, from $311,505 in the second quarter of 2008 to $10,964 in the second quarter of 2009. The capital expenses were much lower in the second quarter of 2009 given the operational status of the Royalty Properties resulting from the damages caused by Hurricane Ike. The capital expenditures in 2008 primarily relate to field workovers at Ship Shoal 182/183 and Eugene Island 339 necessary to help improve production performance.
Operating expenses increased by $7,990,458, or 288%, from $2,773,442 in the second quarter of 2008 to $10,763,900 in the second quarter of 2009, primarily as a result of well and platform abandonment costs at Eugene Island 339 as a result of Hurricane Ike. Reflected within the operating expenses for the second quarter 2009 is a cost allocation refund of $78,260 for certain prior period audit adjustments. Reflected within the operating expenses are management fees to Chevron, as Managing General Partner of the Partnership, of $499,426 and $361,725 for the second quarter of 2008 and the second quarter of 2009, respectively.
The Royalty Properties had undistributed net loss of $8,936,312 in the second quarter of 2009.
In the second quarter of 2009, no funds were released or escrowed from the Special Cost Escrow account. As of June 30, 2009, $4,306,735 remained in the Special Cost Escrow account. In the second quarter of 2008, there was a net release of funds from the Special Cost Escrow account. The Trust's share of the funds released was $41,817. As of June 30, 2008, $5,353,559 remained in the Special Cost Escrow account. The funds held in the Special Cost Escrow account are not reflected in the financial statements of the Trust. The Special Cost Escrow account is set aside for estimated abandonment costs and future capital expenditures, as provided for in the Conveyance. For additional information relating to the Special Cost Escrow account, see "-Special Cost Escrow Account" below.
There were no distributions to the Unit holders for the six months ended June 30, 2009 as compared to distributions of $7,088,418 or $1.491824 per Unit to the Unit holders for the same period in 2008.
Crude oil and condensate revenues decreased $19,220,510, or 87%, to $2,822,575 in the first six months of 2009 as compared to $22,043,085 for the same period in 2008, due primarily to decreases in production resulting from damages caused by Hurricane Ike. Oil volumes decreased 77% to 53,985 barrels in the first six months of 2009 from 236,562 barrels in the first six months of 2008. The revenues and volumes for the first six months of 2009 reflect credits associated with an audit for prior periods for $224,511 in revenues and 311 barrels; the revenues and volumes for the first six months of 2008 reflect credits associated with an audit for prior periods for $150,787 in revenues and 1,002 barrels. The average price received for crude oil and condensate decreased 44%, or $40.90, to $52.28 per barrel in the first six months of 2009 from $93.18 per barrel in the first six months of 2008. Prior to taking into account such adjustments to revenues and volumes, the average price received for crude oil and condensate would have been $48.40 per barrel in the first six months of 2009 and $92.94 per barrel in the first six months of 2008.
Gas revenues decreased $5,471,464, or 87%, to $836,362 in the first six months of 2009 from $6,307,826 for the same period in 2008, due primarily to damages caused by Hurricane Ike in September 2008. Gas volumes decreased 84% to 132,370 Mcf in the first six months of 2009 from 807,263 Mcf for the same period in 2008. The revenues and volumes for the first six months of 2009 reflect net credits of $808,484 in revenues and 127,711 Mcf of gas for prior adjustments; the revenues and volumes for the first six months of 2008 reflect credits associated with an audit of prior periods for $661,117 in revenues and 86,975 Mcf of gas. The average price received for natural gas decreased 19%, or $1.49, to $6.32 per Mcf in the first six months of 2009 from $7.81 per Mcf in the same period of 2008. Prior to taking into account such adjustments to revenues and volumes, the average price received for natural gas would have been $5.98 per Mcf in the first six months of 2009 and $7.84 per Mcf in the first six months of 2008. Gas products revenue decreased $1,590,561, or 89%, to $195,626 in the first six months of 2009 from $1,786,187 in the same period of 2008, primarily due to an decrease in production volume of 1,176,611 gallons, or 87%, to 172,910 gallons in the first six months of 2009 from 1,349,521 gallons in the same period of 2008.
Capital expenditures increased $401,560, or 352%, from ($114,172) in the first six months of 2008 to $287,388 in the same period of 2009. The negative capital expenditures number for the first six months of 2008 resulted from a prior period audit adjustment. Reflected in the capital expenditures for the first six months of 2009 is a refund of $59,794 for certain prior period audit adjustments.
Operating expenses increased by $12,211,074, or 258%, from $4,736,015 in the first six months of 2008 to $16,947,089 in the first six months of 2009, primarily as a result of well abandonment costs at Eugene Island 339 as a result of Hurricane Ike. Reflected in the operating expenses for the first six months of 2009 are cost allocation refunds of an aggregate of $115,252 for certain prior period adjustments. Reflected within the operating expenses are management fees to Chevron, as Managing General Partner of the Partnership, of $1,030,241 and $607,249 for the first six months of 2008 and the first six months of 2009, respectively.
The Royalty Proprieties had undistributed net loss of $13,291,668 for the six months ended June 30, 2009.
Reserve for Future Trust Expenses
In accordance with the provisions of the Trust Agreement, generally all Royalty income received by the Trust, net of Trust general and administrative expenses and any cash reserves established for the payment of contingent or future obligations of the Trust, is distributed currently to the Unit holders. The Trust has previously determined that a cash reserve equal to approximately three times the average expenses of the Trust during each of the past three years was sufficient to provide for future administrative expenses in connection with the winding up of the Trust. During the second quarter of 2009, the Trust used $541,791 from the reserve for current expenses, leaving a reserve balance of $1,691,500 as of June 30, 2009.
Other
The amount of cash distributions by the Trust is dependent on, among other things, the quantities of oil and gas produced from the Royalty Properties and the sales prices therefor, as well as expenditures by the Working Interest Owners that may or may not be included in the Special Cost Escrow account. As described herein, production ceased at Eugene Island 339 and Ship Shoal 182 and 183 following damages inflicted by Hurricane Ike in September 2008, and substantial uncertainties exist with regard to future production from such Royalty Properties. It should be noted that substantial uncertainties exist with regard to future oil and gas prices, which are subject to material fluctuations due to changes in production levels and pricing and other actions taken by major petroleum producing nations, as well as the regional supply and demand for gas, weather, industrial growth, conservation measures, competition, economic conditions generally and other variables. The Trust does not enter into any hedging transactions on future production.
Operational Review
The platforms and wells on Eugene Island 339 were completely destroyed by Hurricane Ike in September 2008. Crude oil revenues from Eugene Island 339 represented approximately 48% of the crude oil and condensate revenues for the Royalty Properties in 2007 and approximately 47% of such revenues for the nine months ended September 30, 2008. Eugene Island 339 contributed approximately 12% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 41% of such revenues for the nine months ended September 30, 2008. Based on a prior year reserve study prepared by DeGolyer and MacNaughton, independent petroleum engineering consultants, Eugene Island 339 accounted for approximately 34% of the total future net revenues attributable to the Partnership's interest in the royalty as of October 31, 2007. Chevron is working on the plugging and abandonment of the existing wells, clearing debris and otherwise dealing with the remaining infrastructure. This will be a multi-year project. In order to restore production, Chevron would need to redevelop the facility, including a new platform with production processing equipment, and to drill new wells. Chevron is still assessing its alternatives and the economic feasibility of restoring production at Eugene Island 339. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Eugene Island 339. Generally, if production ceases from an outer continental shelf lease, like that for Eugene Island 339, production must be restored or drilling
operations must commence within 180 days of the cessation (which was in early March 2009), or the lease will be terminated. A lease operator may seek approval from the regional supervisor of the Mineral Management Service to allow additional time to restore production. Chevron submitted such a request with respect to Eugene Island 339 and, like other lessees dealing with the effects of Hurricane Ike, was granted an extension until September 6, 2009 to submit a commitment to restore production. If Chevron elects to pursue the restoration of production from Eugene Island 339, Chevron must submit a request for a Suspension of Operations ("SOP") prior to September 6, 2009. The SOP must include an estimated date for the restoration of production and must be approved by the Mineral Management Service. As stated above, Chevron is still assessing its alternatives, and Chevron has not made a decision whether to submit an SOP to commit to restore production.
Production at Ship Shoal 182/183 ceased following damage inflicted by Hurricane Ike in September 2008. While the hurricane caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. Crude oil revenues from Ship Shoal 182/183 represented approximately 50% of the crude oil and condensate revenues for the Royalty Properties in 2007 and approximately 51% of such revenues for the nine months ended September 30, 2008. Ship Shoal 182/183 contributed approximately 77% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 42% of such revenues for the nine months ended September 30, 2008. A limited volume of oil production was restored in November 2008. During the second quarter of 2009, net crude oil production was 34,065 barrels. The volume of oil production that can be produced is limited by the amount of gas that is also produced by the oil wells. The third-party transporter's natural gas pipeline repairs were completed and gas sales at Ship Shoal 182/183 were restored on June 26, 2009. Chevron has been informed by the gas transporter that an estimated 30 day shut-in of the gas line will be required to make further repairs. Once those repairs are completed, Chevron expects the oil and natural gas production and sales at Ship Shoal 182/183 to return to normal.
In addition, production from West Cameron 643 and East Cameron 371 ceased following damage inflicted by Hurricane Ike in September 2008 to third-party transporters' pipelines. The Managing General Partner of the Partnership understands that the pipelines are in the process of being restored. The pipeline for West Cameron 643 is not expected to be able to take production until at least the end of 2009; there is no available estimate for when the pipeline for East Cameron 371 will be able to take production. At this point in time, there can be no assurance as to when, or if at all, production may be restored at West Cameron 643 or East Cameron 371.
In May 2007, the Trust engaged an independent oil and gas accounting firm for the purpose of reviewing the books and records of certain Working Interest Owners with respect to the Royalty Properties and the related payments to the Trust. Based on the initial report of the accounting firm, the Trustees believed that certain errors in the books and records had occurred and have been involved in ongoing discussions with such Working Interest Owners to resolve these items. As part of this ongoing process, certain adjustments to revenues, production volumes, prices and capital expenditures have occurred, and references herein to an audit of prior periods refers to the audit described in this paragraph. Such audit resulted in an additional cash distribution to the Trust during the first quarter of 2008. These amounts are comprised of a one-time increase of approximately $31,716 in gas revenues, a one-time increase of approximately $43,287 in oil revenues, and a one-time credit of approximately $123,900 in capital expenditures. Additional amounts related to the audit were included in later distributions to the Trust during 2008. Additional credits were made for the benefit of the Trust in the
first quarter of 2009, consisting of approximately $203,272 in gas revenues, approximately $9,426 in oil revenues, approximately $14,948 in capital expenditures and approximately $9,248 in operating expenditures. All remaining audit adjustments were completed during the second quarter of 2009. The Trust's proportionate interest in the various audit adjustments for the second quarter of 2009 included a one-time credit of $1,151 in gas revenues, an increase of $46,702 in crude oil revenues related to Eugene Island 354 and a one-time credit adjustment of $19,625 in operating expenses.
Three Months Ended June 30, 2009 and 2008
The following operational information has been based on information provided to the Corporate Trustee by Chevron, as the Managing General Partner of the Partnership, who received operational information from the other Working Interest Owners. The Trustees have no control over these operations or internal controls relating to this information.
Volumes and dollar amounts discussed below represent amounts recorded by the Working Interest Owners unless otherwise specified.
Ship Shoal 182/183 crude oil revenues decreased from $5,197,061 in the second quarter of 2008 to $1,564,170 in the second quarter of 2009, primarily due to a decrease in net crude oil production from 52,448 barrels in the second quarter of 2008 to 34,065 barrels in the second quarter of 2009. The average crude oil price also decreased from $99.09 per barrel in the second quarter of 2008 to $45.92 per barrel for the same period in 2009. Gas revenues decreased from $941,566 in the second quarter of 2008 to $0 in the second quarter of 2009 due to cessation of gas production since September 2008 resulting from damages caused by Hurricane Ike compared to production of 101,823 Mcf in the second quarter of 2008. The average gas sales price realized during the second quarter of 2009 was $0 per Mcf compared to $9.25 during the second quarter of 2008. Capital expenditures increased from $1,727 in the second quarter of 2008 to $6,982 in the second quarter of 2009. Operating expenses increased from $945,438 in the second quarter of 2008 to $698,827 for the same period in 2009 due to an increase in operating and repair costs related to damages inflicted by Hurricane Ike, and after taking into account in the second quarter of 2009 a credit of $78,260 associated with an audit of a prior period.
Eugene Island 339 net crude oil revenues decreased from $4,755,226 in the second quarter of 2008 to $0 for the same period in 2009 due to a decrease in volumes from 49,114 barrels in the second quarter of 2008 to 0 barrels in the second quarter of 2009. The average crude oil price was $96.82 per barrel in the second quarter of 2008 and $0 per barrel in the second quarter of 2009. Gas revenues decreased from $1,469,332 in the second quarter of 2008 to $0 in the second quarter of 2009 due to a decrease in volumes from 174,483 Mcf in the second quarter of 2008 to 0 Mcf in the second quarter of 2009. The gas revenues and volumes for 2008 reflect credits of $324,129 and 43,623 Mcf associated with an audit of prior periods. Capital expenditures decreased from $284,321 in the second quarter of 2008 to $3,795 in the second quarter of 2009. There were limited capital expenditures during the second quarter of 2009 and the capital expenditures in the second quarter of 2008 primarily relate to repairs associated with a conversion to a water injector. Operating expenses increased from $1,070,845 in the second quarter of 2008 to $9,274,930 in the second quarter of 2009 due to well abandonment costs incurred as a result of Hurricane Ike.
West Cameron 643 gas revenues were $624,351 in the second quarter of 2008 and ($4,603) in the second quarter of 2009. Gas production was 79,244 Mcf in the second quarter of 2008 and (1,234) Mcf in the second quarter of 2009. There was no actual gas production during the second quarter of 2009
and the revenues and volumes for the second quarter 2009 reflect debits to correct an error in revenue allocation in August 2008. The revenues and volumes for the second quarter of 2008 reflect credits of $200,133 and 28,402 Mcf associated with an audit of prior periods. Operating expenses increased from $181,924 in the second quarter of 2008 to $417,432 for the same period in 2009 due primarily to repairs of damages caused by Hurricane Ike. Capital expenditures were $0 in the second quarter of 2008 and $231 for the same period in 2009.
East Cameron 371 crude oil revenues were $346 in the second quarter of 2008 and $0 in the second quarter of 2009 as a result of the field being shut-in following Hurricane Ike in September 2008. Gas revenues were $4,659 for the second quarter of 2008 and $0 for the second quarter of 2009, also due to the shut-in of the field. Capital expenditures were $0 for the second quarter 2008 and for the second quarter 2009. Operating expenses decreased from $12,792 in the second quarter of 2008 to $0 for the same period in 2009.
South Timbalier 37/27 crude oil revenues decreased from $115,325 in the second quarter of 2008 to $62,297 for the same period in 2009 due to a four-day field shut-in related to compressor problems. There was a decrease in crude oil production volumes to 1,409 barrels in the second quarter of 2009 from 1,445 barrels in the second quarter of 2008. Gas revenues decreased from $34,602 in the second quarter 2008 to $13,215 in the second quarter of 2009. There was an increase in natural gas volumes from (2,611) Mcf in the second quarter of 2008 to 2,604 Mcf in the second quarter of 2009. Gas volumes for the second quarter of 2008 reflect a debit of 5,464 Mcf related to revised volume allocations for the years 2004 through 2007. Capital expenditures decreased from $3,439 in the second quarter of 2008 to $(45) in the second quarter of 2009 after taking into account a $45 credit primarily related to workover cost adjustments for wells at South Timbalier 37. Operating expenses decreased from $62,988 in the second quarter of 2008 to $11,226 in the second quarter of 2009 after taking into account a $220 credit in 2009 for a prior period adjustment.
Six Months Ended June 30, 2009 and 2008
Volumes and dollar amounts discussed below represent amounts recorded by the Working Interest Owners unless otherwise specified.
Ship Shoal 182/183 crude oil revenues decreased from $11,367,638 in the first six months of 2008 to $2,473,541 in the same period in 2009, primarily due to a decrease in net crude oil production from 120,163 barrels in the first six months of 2008 to 51,189 in the same period of 2009. Included in the revenues and production for the first six months of 2008 was an upward adjustment of $46,630 associated with an additional 178 barrels that were included from 2007 production. There was also a decrease in the average crude oil price from $94.60 per barrel in the first six months of 2008 to $48.32 per barrel for the same period in 2009. Gas revenues decreased from $2,614,285 in the first six months of 2008 to $725,720 in the same period of 2009. Gas production decreased from 336,697 Mcf in the first six months of 2008, which included an upward adjustment of 19,999 Mcf relating to 2007 production, to 0 Mcf in the same period of 2009. However, there was an audit adjustment made in the first quarter of 2009, which resulted in the recognition of $725,720 in gas revenues associated with 107,416 Mcf of gas from a prior period. The inclusion of such adjustment for the 19,999 Mcf in 2008 resulted in an increase in revenues for 2008 of $123,946. The natural gas sales price was $7.76 per Mcf in the first six months of 2008 compared to $0 per Mcf in the first six months of 2009. Capital expenditures increased from ($466,499) in the first six months of 2008 to $27,443 in the same period of 2009 primarily due to a credit of $495,600 in the first six months of 2008 from an audit adjustment for
prior periods. Operating expenses decreased from $1,511,393 in the first six months of 2008 to $1,398,596 for the same period in 2009 due to a decrease in production, but offset by an increase in operating and repair costs related to damages inflicted by Hurricane Ike.
Eugene Island 339 net crude oil revenues decreased from $10,282,800 in the first six months of 2008 to $38,544 for the same period in 2009, due to a decrease in volumes from 111,572 barrels in the first six months of 2008 to 318 barrels in the first six months of 2009. However, there was no actual crude oil production during the first six months of 2009 and such crude oil revenues and production volumes are entirely from an audit adjustment made in the first quarter of 2009 and associated with a prior period. The oil revenues for the first six months of 2008 reflect a $81,750 credit relating to prior periods. The average crude oil price was $92.16 per barrel in the first six months of 2008. . . .
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