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VOC > SEC Filings for VOC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for VOC ENERGY TRUST


13-Nov-2012

Quarterly Report


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 the assigned interest in the hedge contracts 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.

Comparison of Results of the Underlying Properties for the Quarters Ended September 30, 2012 and 2011

The cash received by the Trust from VOC Brazos during the quarter ended September 30, 2012 substantially represents the production by VOC Brazos from March 2012 through May 2012 while the cash received by the Trust from VOC Brazos during the quarter ended September 30, 2011 substantially represents the production by VOC Brazos from January 2011 through May 2011, as the conveyance of the net profits interest took take place on May 10, 2011 and the first distribution was not received until August 2011. The revenues from oil production are typically received by VOC Brazos one month after production.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $6,403,427 to $13,760,948 for the period from April 1, 2012 through June 30, 2012, from $20,164,375 for the period from January 1, 2011 through June 30, 2011 (see preceding paragraph regarding period of initial distribution in August 2011). Such decrease was primarily attributable to the fact that quarter ended September 30, 2012 included three months of activity while the quarter ended September 30, 2011 included five months of activity. Included in these amounts are payments made to settle hedges of $69,344 and $475,971 for the quarters ended September 30, 2012 and 2011, respectively. Totals attributable to the net profits interest were $11,008,758 and $16,131,500, respectively, which were decreased by a cash reserve for future development, maintenance or operating expenditures of $400,000 and $1,000,000 and a Trust holdback for future expenses of $408,758 and $511,500 for the quarters ended September 30, 2012 and 2011, respectively, resulting in distributable income of $10,200,000 and $14,620,000 for the quarters ended September 30, 2012 and 2011, respectively.


The average price received for crude oil sold was $98.13 per Bbl and the average price received for natural gas sold was $3.50 per Mcf for the period from April 1, 2012 through June 30, 2012. The average price received for crude oil sold was $92.33 per Bbl and the average price received for natural gas sold was $4.85 per Mcf for the period from January 1, 2011 through June 30, 2011.

The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from April 1, 2012 through June 30, 2012 were 161,125 Bbls of oil and 106,498 Mcf of natural gas for a total of 178,875 barrels of oil equivalent. The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected for the period from January 1, 2011 through June 30, 2011were 244,978 Bbls of oil and 159,239 Mcf of natural gas for a total of 271,517 barrels of oil equivalent.

The Trustee paid general and administrative expenses of $188,675 and $269,974 for the quarter ended September 30, 2012 and 2011, respectively. The distributable income for the quarter ended September 30, 2012 was $10,200,000, a decrease of $4,420,000 from distributable income of $14,620,000 for the quarter ended September 30, 2011.

As noted above, the amounts included in the accompanying financial statements for the Trust's quarter ended September 30, 2012 reflect cash received by the Trust from production by VOC Brazos from March 2012 through May 2012. VOC Brazos distributed cash to the Trust in October 2012 that will be reflected in the Trust's financial statements for the year ending December 31, 2012. The cash distributed to the Trust in October 2012 was primarily derived from production by VOC Brazos from June 2012 through August 2012. The discussion below relates to cash received by VOC Brazos during the quarters ended September 30, 2012 and 2011 and distributed to the Trust in October 2012 and 2011. Such distribution to the Trust in October 2012 will be reflected in the Trust's financial statements for the year ending December 31, 2012.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $3,082,829 to $9,068,593 for the period from July 1, 2012 through September 30, 2012, from $12,151,422 for the period from July 1, 2011 through September 30, 2011. Such decrease was primarily attributable to a small decrease in the number of barrels of crude oil sold and a $2.31 per barrel decrease in the price per barrel sold and an increase in lease equipment and development costs. Included in these amounts are payments received to settle hedges of $1,406,621 and $827,600 for the quarters ended September 30, 2012 and 2011, respectively. Totals attributable to the net profits interest were $7,254,874 and $9,721,138, respectively, which were increased by a cash reserve release for future development, maintenance or operating expenditures of $750,000 and $0 and decreased by a Trust holdback for future expenses of $184,874 and $201,138 for the quarters ending December 31, 2012 and 2011, respectively, resulting in distributable income of $7,820,000 and $9,520,000 for the quarters ending December 31, 2012 and 2011, respectively.

The average price received for crude oil sold was $84.87 per Bbl and the average price received for natural gas sold was $3.14 per Mcf for the quarter ended September 30, 2012. The average price received for crude oil sold was $87.18 per Bbl and the average price received for natural gas sold was $5.11 per Mcf for the quarter ended September 30, 2011.

The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from July 1, 2012 through September 30, 2012 were 151,302 Bbls of oil and 107,591 Mcf of natural gas for a total of 169,233 barrels of oil equivalent. The overall production sales volumes collected during the quarter ended September 30, 2011 were 152,585 Bbls of oil and 112,892 Mcf of natural gas for total equivalent barrels of oil of 171,400.

For the quarters ended September 30, 2012 and 2011, MV Purchasing, LLC, an affiliate of VOC Brazos, purchased a significant portion of the production from the underlying properties. Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one to six months, using market sensitive pricing.

Results of Operations for the Nine Months Ended September 30, 2012 and 2011

As noted above, the revenues from oil production are typically received by VOC Brazos one month after production thus, the cash received by the Trust from VOC Brazos during the nine months ended September 30, 2012 substantially represents the production by VOC Brazos from September 2011 through May 2012 while the cash received by the Trust from VOC Brazos during the nine months ended September 30, 2011 substantially represents the production by VOC Brazos from January 2011 through May 2011 as the conveyance of the net profits interest did not take place until May 10, 2011, and was effective January 1, 2011.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties increased $17,470,254 to $37,634,629 for the nine months ended September 30, 2012 from $20,164,375 for the nine months ended September 30, 2011. Such increase is primarily attributable to the fact that the nine months ended September 30, 2012 included nine months of activity while the nine months ended September 30, 2011 only included five months of activity. Included in these amounts


are payments received to settle hedges totaling $1,190,595 for the nine months ended September 30, 2012 and payments made to settle hedges totaling $475,971 for the nine months ended September 30, 2011.

Totals attributable to the net profits interest were $30,107,703 and $16,131,500 for the nine months ended September 30, 2012 and 2011, respectively, which were decreased by a cash reserve holdback for future development, maintenance or operating expenditures of $0 and $1,000,000, respectively, which resulted in a total cash proceeds received by the Trust of $30,107,703 and $15,131,500, respectively.

The Trustee paid general and administrative expenses of $553,292 and $269,974 for the nine months ended September 30, 2012 and 2011, respectively. The distributable income for the nine months ended September 30, 2012 was $29,410,000, an increase of $14,790,000 from distributable income of $14,620,000 for the nine months ended September 30, 2011.

The average price received for crude oil sold was $93.71 per Bbl and the average price received for natural gas sold was $4.17 per Mcf for the nine months ended September 30, 2012. The average price received for crude oil sold was $92.33 per Bbl and the average price received for natural gas sold was $4.85 per Mcf for the nine months ended September 30, 2011.

The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from January 1, 2012 through September 30, 2012 were 485,551 Bbls of oil and 336,028 Mcf of natural gas for a total of 541,556 barrels of oil equivalent.

The overall production sales volumes collected attributable to the net profits interest that is for the oil and gas production collected during the period from January 1, 2011 through September 30, 2011 were 244,978 Bbls of oil and 159,239 Mcf of natural gas for a total of 271,517 barrels of oil equivalent.

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 hold as a reserve against future expenses.

The Trustee can authorize the Trust to borrow money to pay Trust administrative or incidental expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee as lender provided the terms of the loan are fair to the Trust unitholders. The Trustee may also deposit funds awaiting distribution in an account with itself, if the interest paid to the Trust at least equals amounts paid by the Trustee on similar deposits, and the Trustee makes no other short-term investments with the funds distributed to the Trust. The Trustee has no current plans to authorize the Trust to borrow money. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid. During the three and nine months ended September 30, 2012 and 2011, there were no such borrowings. VOC Brazos has posted a letter of credit in the amount of $1 million in favor of the Trustee to protect the Trustee against the risk that the Trust does not have sufficient cash to pay its expenses.

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. VOC Brazos released $1.0 million in January 2012, withheld $600,000 in April 2012, withheld $400,000 in July 2012 and released $750,000 in October 2012 in accordance with this cash reserve. The reserve balance was $1,000,000 at September 30, 2012 and 2011.

The amounts received by VOC Brazos from the hedge contract counterparty upon settlement of the hedge contracts will reduce the operating expenses related to the underlying properties in calculating the net proceeds. However, if the hedge payments received by VOC Brazos under the hedge contracts and other non-production revenue exceed operating expenses during a quarterly period, the ability to use such excess amounts to offset operating expenses will be deferred, with interest accruing on such amounts at the prevailing prime rate, until the next quarterly period where the hedge payments and the other non-production revenue are less than such expenses. In addition, the aggregate amounts paid by VOC Brazos on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.

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.


Hedge Contracts

The revenues derived from the underlying properties depend substantially on prevailing crude oil prices and, to a lesser extent, natural gas 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 and natural gas that VOC Brazos can economically produce. VOC Brazos sells the oil and natural gas production from the underlying properties under floating market price contracts each month. VOC Brazos has entered into hedge contracts for 2012 and 2013 and for the six months ending June 30, 2014, to reduce the exposure of the revenues from oil production from the underlying properties to fluctuations in crude oil prices and to achieve more predictable cash flow. However, these contracts limit the amount of cash available for distribution if prices increase above the fixed hedge price. The hedge contracts consist of fixed price swap contracts that have been placed with major trading counterparties whom VOC Brazos believes represent minimal credit risk. The Trust cannot provide assurance, however, that these trading counterparties will not become credit risks in the future.

The crude oil swap contracts will settle based on the average of the settlement price for each commodity business day in the contract month. In a swap transaction, the counterparty is required to make a payment to VOC Brazos for the difference between the fixed price and the settlement price if the settlement price is below the fixed price. VOC Brazos is required to make a payment to the counterparty for the difference between the fixed price and the settlement price if the settlement price is above the fixed price. From October 1, 2012 through June 30, 2014, VOC Brazos' crude oil price risk management positions in swap contracts are as follows:

Fixed Price Swaps

                                Weighted
                  Volumes     Average Price
Month            (Barrels)    (Per Barrel)
October 2012        35,883   $        100.86
November 2012       35,562   $        100.87
December 2012       35,268   $        100.87
January 2013        34,975   $         99.01
February 2013       34,686   $         99.01
March 2013          34,406   $         99.01
April 2013          34,166   $         99.01
May 2013            33,959   $         99.01
June 2013           33,727   $         99.01
July 2013           33,526   $         99.01
August 2013         33,317   $         99.01
September 2013      33,122   $         99.01
October 2013        32,929   $         99.01
November 2013       32,741   $         99.01
December 2013       32,554   $         99.01
January 2014        13,220   $        102.15
February 2014       13,149   $        102.15
March 2014          13,078   $        102.15
April 2014          13,008   $        102.15
May 2014            12,939   $        102.15
June 2014           12,870   $        102.15

The amounts received by VOC Brazos from the hedge contract counterparty upon settlement of the hedge contracts will reduce the operating expenses related to the underlying properties in calculating the net proceeds. However, if the hedge payments received by VOC Brazos under the hedge contracts and other non-production revenue exceed operating expenses during a quarterly period, the ability to use such excess amounts to offset operating expenses will be deferred, with interest accruing on such amounts at the prevailing prime rate, until the next quarterly period where the hedge payments and the other non-production revenue are less than such expenses. In addition, the aggregate amounts paid by VOC Brazos on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.

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 "Management'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, 2011, 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.

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