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

Show all filings for WHITING USA TRUST II

Form 10-Q for WHITING USA TRUST II


13-Nov-2012

Quarterly Report


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

References to the "Trust" in this document refer to Whiting USA Trust II. References to "Whiting" in this document refer to Whiting Petroleum Corporation and its subsidiaries. References to "Whiting Oil and Gas" in this document refer to Whiting Oil and Gas Corporation, a 100%-owned subsidiary of Whiting Petroleum Corporation.

The following review of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as the financial statements and notes thereto included in the Prospectus dated March 22, 2012, available on the SEC's website www.sec.gov.

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation the statements under "Trustee's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words "believes," "expects," "anticipates," "projects," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:

the effect of changes in commodity prices and conditions in the capital markets;

uncertainty of estimates of oil and natural gas reserves and production;

risks incident to the operation and drilling of oil and natural gas wells;

future production and development 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 Item 1A. of this Quarterly Report on Form 10-Q.

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 and Trust Termination

The Trust was formed on December 5, 2011. The conveyance of the NPI, however, did not occur until March 28, 2012. As a result, the Trust did not recognize any income or make any distributions during 2011 or during the first quarter of 2012. The net profits interest was conveyed effective for production from the underlying properties starting from January 1, 2012. Therefore, the Trust's first quarterly distribution paid on May 30, 2012 consisted of an amount in cash paid by Whiting for net proceeds generated from the underlying properties since the January 1, 2012 effective date through March 31, 2012.


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The Trust does not conduct any operations or activities. The Trust's purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives 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 through December 31, 2014. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties.

Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated through June 30, 2012. The August 2012 distribution is mainly affected, however, by April 2012 through June 2012 oil prices and by March 2012 through May 2012 natural gas prices.

                                                2010                                             2011                                 2012
                               Q1          Q2          Q3          Q4          Q1           Q2          Q3          Q4           Q1          Q2
Crude Oil (per Bbl)          $ 78.79     $ 77.99     $ 76.21     $ 85.18     $ 94.25     $ 102.55     $ 89.81     $ 94.02     $ 102.94     $ 93.51
Natural Gas (per MMBtu)      $  5.30     $  4.09     $  4.39     $  3.81     $  4.10     $   4.32     $  4.20     $  3.54     $   2.72     $  2.21

Although oil prices fell significantly after reaching highs in the third quarter of 2008, they experienced a rebound in 2010, 2011 and the first half of 2012. Natural gas prices have likewise fallen significantly since their peak in the third quarter of 2008 but remained low throughout 2009, 2010 and 2011. In addition, natural gas prices declined during the first half of 2012, but have begun to improve in recent months. The following table highlights the settled NYMEX prices for natural gas for January through November 2012:

2012 Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Natural Gas (per MMBtu) $ 3.08 $ 2.68 $ 2.41 $ 2.19 $ 2.03 $ 2.42 $ 2.77 $ 3.01 $ 2.63 $ 3.06 $ 3.47

Lower oil and gas prices on production from the underlying properties could cause the following: (i) a reduction in the amount of net proceeds to which the Trust is entitled; (ii) a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties; and (iii) an extension of the length of time required to produce 11.79 MMBOE (10.61 MMBOE at the 90% NPI) due to some wells thereby reaching their economic limits sooner. Alternatively, higher oil and natural gas prices may potentially result in the following: (i) an increase in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties, and (ii) cash settlement losses on commodity derivatives.

Trust termination. The NPI will terminate on the later to occur of
(i) December 31, 2021, or (ii) the time when 11.79 MMBOE have been produced from the underlying properties and sold (which is the equivalent of 10.61 MMBOE in respect of the Trust's right to receive 90% of the net proceeds from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. Since the assets of the Trust are depleting assets, a portion of each cash distribution paid on the Trust units should be considered by investors as a return of capital, with the remainder being considered as a return on investment. As a result, the market price of the Trust units will decline to zero at termination of the Trust. As of September 30, 2012 on a cumulative accrual basis, 1.23 MMBOE (12%) of the Trust's total 10.61 MMBOE have been produced and sold (of which proceeds from the sale of 415 MBOE, which is 90% of 461 MBOE, will be distributed to the unitholders in the Trust's forthcoming November 29, 2012 distribution).


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Results of Trust Operations

Three and Nine Months Ended September 30, 2012

The NPI was conveyed to the Trust on March 28, 2012. As such, the Trust did not
have any results of operations for the quarter ended March 31, 2012. The
following is a summary of income from net profits interest received by the Trust
for the three and nine months ended September 30, 2012:



                                               Three Months Ended             Nine Months  Ended
                                               September 30, 2012             September 30, 2012
Sales volumes:
Oil from underlying properties (Bbl)                       356,599 (a)                    657,924 (b)
Natural gas from underlying properties
(Mcf)                                                      655,398 (a)                  1,112,260 (b)

Total production (BOE)                                     465,832                        843,301
Average sales prices:
Oil (per Bbl)                                 $              84.06           $              88.16
Natural gas (per Mcf)                         $               4.48 (c)       $               4.81 (c)
Costs (per BOE):
Lease operating expenses                      $              24.57           $              22.19
Production taxes                              $               3.66           $               3.95
Revenues:
Oil sales                                     $         29,976,437 (a)       $         57,999,988 (b)
Natural gas sales                                        2,936,249 (a)                  5,353,829 (b)

Total revenues                                $         32,912,686           $         63,353,817

Costs:
Lease operating expenses                      $         11,447,340           $         18,716,265
Production taxes                                         1,706,238                      3,334,731
Development costs                                        1,321,279                      2,778,115
Cash settlement (gains) losses on
commodity derivatives (d)                                        -                              -

Total costs                                   $         14,474,857           $         24,829,111

Net proceeds                                  $         18,437,829           $         38,524,706
Net profits percentage                                          90 %                           90 %

Income from net profits interest              $         16,594,046           $         34,672,235

(a) Oil and gas sales volumes and related revenues for the three months ended September 30, 2012 (consisting of Whiting's August 2012 NPI distribution to the Trust) generally represent crude oil production from April 2012 through June 2012 and natural gas production from March 2012 through May 2012.

(b) Oil and gas sales volumes and related revenues for the nine months ended September 30, 2012 (consisting of Whiting's May 2012 and August 2012 NPI distributions to the Trust) generally represent crude oil production from January 2012 through June 2012 and natural gas production from January 2012 through May 2012.

(c) The average sales price of natural gas for the gas production months within the distribution period exceeded the average NYMEX gas prices for those same months within the period due to the "liquids rich" content of a portion of the natural gas volumes produced by the underlying properties.

(d) As discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q, all hedges terminate as of December 31, 2014.

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. Income from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes, development costs and cash settlements on commodity derivatives.

Nine months ended September 30, 2012. For the nine months ended September 30, 2012, the Trust recognized income from net profits interest of $34,672,235. The net profits interest was conveyed effective for production from the underlying properties starting from January 1, 2012. Therefore, the Trust's income from net profits interest for the nine months ended September 30, 2012 (which included Whiting's May 2012 and August 2012 NPI remittances to the Trust) consisted of an amount in cash paid by Whiting for net proceeds generated from the underlying properties since the January 1, 2012 effective date through July 31, 2012.


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Three months ended September 30, 2012. For the three months ended September 30, 2012, the Trust recognized income from net profits interest of $16,594,046. The net profits interest was conveyed effective for production from the underlying properties starting from January 1, 2012. Therefore, the Trust's income from net profits interest for the three months ended September 30, 2012 (which included Whiting's August 2012 NPI remittance to the Trust) consisted of an amount in cash paid by Whiting for net proceeds generated from the underlying properties from May 1, 2012 through July 31, 2012.

General and Administrative Expenses. The Trust's general and administrative expenses typically fluctuate between reporting periods due to differences in timing as to when administrative invoices are received and then paid by the Trustee. For the three and nine months ended September 30, 2012, the Trust's general and administrative costs were $239,504 and $570,017, respectively.

Distributable Income. For the nine months ended September 30, 2012, the Trust's distributable income was $34,019,393 and was based on income from net profits interest of $34,672,235, which was reduced by Trust general and administrative expenses of $570,017, an increase in cash reserves for Trust expenses of $54,983, and Montana state income tax withholdings of $27,842. For the three months ended September 30, 2012, the Trust's distributable income was $16,455,602 and was based on income from net profits interest of $16,594,046, which was reduced by Trust general and administrative expenses of $239,504 and Montana state income tax withholdings of $13,444, which reductions were partially offset by a decrease in cash reserves for Trust expenses of $114,504.

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, a quarterly fee to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustee's duties, including third party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines the amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust's expenses for that quarter. Available funds are reduced by 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 liabilities. 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 agreement, which is listed as an exhibit to this report, and reference is hereby made to such conveyance agreement for the actual definitions of "gross proceeds" and "net proceeds".

Whiting may reserve from the gross proceeds amounts up to a total of $2.0 million at any time for future development, maintenance or operating expenses. However, Whiting did not fund such a reserve in the nine months ended September 30, 2012 and does not anticipate doing so during the balance of 2012. Instead, Whiting deducts and plans to deduct from the gross proceeds only actual costs paid for development, maintenance and operating expenses.

Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. Whiting therefore incurred $468,725 and $800,659 of plugging and abandonment charges on the underlying properties during the three and nine months ended September 30, 2012, respectively, that were not passed on to the unitholders of the Trust.

On June 7, 2012, Whiting established a letter of credit in the amount of $1.0 million in favor of the Trustee to provide a mechanism for the Trustee to pay the operating expenses of the Trust, in the event that Whiting should fail to lend funds to the Trust if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and Whiting has no obligation to lend funds 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.


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Future Trust Distributions to Unitholders

On November 9, 2012, the Trustee announced the Trust distribution of net profits for the third quarterly payment period in 2012. Unitholders of record on November 19, 2012 are expected to receive a distribution amounting to $13,995,405 or $0.760620 per Trust unit, which is payable on or before November 29, 2012. This distribution is expected to consist of net cash proceeds of $14,350,918 paid by Whiting to the Trust, less a provision of $350,000 for estimated Trust expenses and $5,513 for Montana state income tax withholdings. There were no commodity derivative settlements in the third quarterly payment period of 2012.

New Accounting Pronouncements

There were no accounting pronouncements issued during the nine months ended September 30, 2012 applicable to the Trust or its financial statements.

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