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MVO > SEC Filings for MVO > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for MV OIL TRUST


15-Mar-2013

Annual Report


Item 7. Trustee's Discussion and Analysis of Financial Condition and Results of Operations.

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. The trust's purpose is, in general, to hold the net profits interest and assigned interest in hedge contracts, to distribute to the trust unitholders cash that the trust receives in respect of the net profits interest and assigned interest in the hedge contracts (through 2010 when they expired) 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.

Critical Accounting Policies

The trust's financial statements are prepared on the following basis:

(a)
Net profits are recorded when received, including the effect of negative or positive adjustments, by the trustee on the last business day of each calendar quarter;

(b)
Trust general and administrative expenses are recorded when paid;

(c)
The investment in net profits interest is amortized over the life of the trust based on units of production using the total estimated proved reserves; and

(d)
The trustee reviews the carrying value of the net profits interest annually for impairment based on the projected income as estimated within the current reserve report.

This manner of reporting income and expenses is considered to be the most meaningful because the quarterly distributions to trust unitholders are based on net cash receipts received from MV Partners. The financial statements of the trust differ from financial statements prepared in accordance with generally accepted accounting principles, because, under such principles, net profits and general and administrative expenses of the trust for a quarter would be recognized on an accrual basis.

Comparison of Results of the Trust for the Years Ended December 31, 2012 and 2011

Income for the trust from the net profits interest and hedge activities was $41.5 million for the year ended December 31, 2012 compared to $40.6 million for the year ended December 31, 2011. General and administrative expense for the trust was $0.9 million for 2012 and $0.7 million for 2011. The trust paid administration fees of $0.1 million to MV Partners for each of 2012 and 2011. In addition, the trustee used $158,000 of cash on hand for future trust expenses for the year ended December 31, 2012 and reserved $184,000 for future trust expenses for the year ended December 31,


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2011 which resulted in distributable income of $40.8 million or $3.550 per unit in 2012 compared to $39.7 million or $3.450 per unit in 2011.

The revenues from oil production are typically received by MV Partners one month after production; thus, the cash received by the trust during the year ended December 31, 2012 substantially represented the production by MV Partners from September 2011 through August 2012, and the cash received by the trust during the year ended December 31, 2011 substantially represented the production by MV Partners from September 2010 through August 2011. MV Partners computes net proceeds quarterly on a calendar basis and distributes to the trust 80% of the aggregate of such net proceeds attributable to a computation period on or before the 25th day of the month following the computation period. As a result, for the year ended December 31, 2012, the trust's net profits interest represented the cash proceeds received by the trust, which was based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2011 through September 30, 2012. For the year ended December 31, 2011, the trust's net profits interest represented the cash proceeds received by the trust, which was based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2010 through September 30, 2011.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $51.5 million for the period from October 1, 2011 through September 30, 2012. The trust's net profits interest (80%) of this total was $41.2 million for the year ended December 31, 2012. In addition, during 2012, MV Partners released and paid to the trust a net of $350,000 of the reserve for future capital expenditures, which resulted in total cash proceeds received by the trust of $41.5 million for the year ended December 31, 2012.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $50.4 million for the period from October 1, 2010 through September 30, 2011. Included in this amount are payments to settle hedges totaling $3.8 million. In addition, amounts received to settle hedges was $0 for the period from October 1, 2010 through September 30, 2011, which resulted in total cash receipts over cash disbursements of $50.4 million. The trust's net profits interest (80%) of this total was $40.3 million for the year ended December 31, 2011. In addition, during 2011, MV Partners released and paid to the trust a net of $250,000 of the reserve for future capital expenditures, which resulted in total cash proceeds received by the trust of $40.6 million for the year ended December 31, 2011.

The average price received for crude oil sold during 2012 was $88.30 per Bbl, while the average price received for crude oil sold during 2011 was $86.46 per Bbl. The average price received for natural gas sold during 2012 was $3.21 per Mcf, while the average price received for natural gas sold during 2011 was $3.33 per Mcf. The average prices for 2012 related to production by MV Partners from September 2011 through August 2012, and the average prices for 2011 related to production by MV Partners from September 2010 through August 2011.

The overall production volumes sold and delivered to purchasers attributable to the 80% net profits interest that was for the oil and gas production sold and delivered during the period from October 1, 2011 to September 30, 2012 were 721,869 Bbls of oil, 51,044 Mcf of natural gas and 2,976 Bbls of natural gas liquids for a total equivalent barrels of oil of 732,311. The overall production volumes sold and delivered to purchasers attributable to the 80% net profits interest that was for the oil and gas production sold and delivered during the period from October 1, 2010 to September 30, 2011 were 736,473 Bbls of oil, 62,610 Mcf of natural gas and 3,442 Bbls of natural gas liquids for a total equivalent barrels of oil of 749,145.

As noted above, the amounts reflected in the accompanying financial statements for the trust's year ended December 31, 2012 reflect cash received by the trust during the year. Such cash is primarily derived from production by MV Partners from September 2011 through August 2012. The amounts reflected in the accompanying financial statements for the trust's year ended December 31, 2011 reflect


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cash received by the trust during the year. Such cash is primarily derived from production by MV Partners from September 2010 through August 2011.

Comparison of Results of the Trust for the Years Ended December 31, 2011 and 2010

Income for the trust from the net profits interest and hedge activities was $40.6 million for the year ended December 31, 2011 compared to $32.5 million for the year ended December 31, 2010. General and administrative expense for the trust was $0.7 million for 2011 and $0.8 million for 2010. The trust paid administration fees of $0.1 million to MV Partners for each of 2011 and 2010. In addition, the trustee reserved $184,000 of cash on hand for future trust expenses for the year ended December 31, 2011 and $25,000 for future trust expenses for the year ended December 31, 2010 which resulted in distributable income of $39.7 million or $3.450 per unit in 2011 compared to $31.7 million or $2.755 per unit in 2010.

The revenues from oil production are typically received by MV Partners one month after production; thus, the cash received by the trust during the year ended December 31, 2011 substantially represented the production by MV Partners from September 2010 through August 2011, and the cash received by the trust during the year ended December 31, 2010 substantially represented the production by MV Partners from September 2009 through August 2010. MV Partners computes net proceeds quarterly on a calendar basis and distributes to the trust 80% of the aggregate of such net proceeds attributable to a computation period on or before the 25th day of the month following the computation period. As a result, for the year ended December 31, 2011, the trust's net profits interest represented the cash proceeds received by the trust, which was based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2010 through September 30, 2011. For the year ended December 31, 2010, the trust's net profits interest represented the cash proceeds received by the trust, which was based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2009 through September 30, 2010.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $50.4 million for the period from October 1, 2010 through September 30, 2011. Included in this amount are payments to settle hedges totaling $3.8 million. In addition, amounts received to settle hedges was $0 for the period from October 1, 2010 through September 30, 2011, which resulted in total cash receipts over cash disbursements of $50.4 million. The trust's net profits interest (80%) of this total was $40.3 million for the year ended December 31, 2011. In addition, during 2011, MV Partners released and paid to the trust a net of $250,000 of the reserve for future capital expenditures, which resulted in total cash proceeds received by the trust of $40.6 million for the year ended December 31, 2011.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $40.6 million for the period from October 1, 2009 through September 30, 2010. Included in this amount are payments to settle hedges totaling $7.4 million. In addition, amounts received to settle hedges was $18,000 for the period from October 1, 2009 through September 30, 2010, which resulted in total cash receipts over cash disbursements of $40.7 million. The trust's net profits interest (80%) of this total was $32.5 million for the year ended December 31, 2010. In April 2010, MV Partners received payment of $5.6 million in connection with the SemGroup bankruptcy discussed in Note I of the Notes to Financial Statements, representing 100% of its claims for oil and gas sold to Eaglwing on and between July 2, 2008 and July 22, 2008. Such amount was included in the calculation of net proceeds attributable to the net profits interest of the trust for the year ended December 31, 2010.

The average price received for crude oil sold during 2011 was $86.46 per Bbl, while the average price received for crude oil sold during 2010 was $75.61 per Bbl. The average price received for natural gas sold during 2011 was $3.33 per Mcf, while the average price received for natural gas sold during


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2010 was $3.46 per Mcf. The average prices for 2011 related to production by MV Partners from September 2010 through August 2011, and the average prices for 2010 related to production by MV Partners from September 2009 through August 2010.

The overall production volumes sold and delivered to purchasers attributable to the 80% net profits interest that was for the oil and gas production sold and delivered during the period from October 1, 2010 to September 30, 2011 were 736,473 Bbls of oil, 62,610 Mcf of natural gas and 3,442 Bbls of natural gas liquids for a total equivalent barrels of oil of 749,145. The overall production volumes sold and delivered to purchasers attributable to the 80% net profits interest that was for the oil and gas production sold and delivered during the period from October 1, 2009 to September 30, 2010 were 757,887 Bbls of oil, 64,115 Mcf of natural gas and 3,464 Bbls of natural gas liquids for a total equivalent barrels of oil of 770,825.

As noted above, the amounts reflected in the accompanying financial statements for the trust's year ended December 31, 2011 reflect cash received by the trust during the year. Such cash is primarily derived from production by MV Partners from September 2010 through August 2011. The amounts reflected in the accompanying financial statements for the trust's year ended December 31, 2010 reflect cash received by the trust during the year. Such cash is primarily derived from production by MV Partners from September 2009 through August 2010.

Historical Results of the Underlying Properties

    The following table sets forth revenues, direct operating expenses and the
excess of revenues over direct operating expenses relating to the underlying
properties for the three years in the period ended December 31, 2012. The
historical results of the underlying properties are not indicative of the future
distributions of the trust.

                                                        (unaudited) (in thousands)
                                                          Year ended December 31,
                                                        2010         2011       2012
 Revenues:
 Oil sales                                            $  68,516    $ 80,458   $ 77,894
 Natural gas sales                                          281         251        178
 Natural gas liquid sales                                   180         214        157
 Hedge                                                   (9,249 )         -          -

 Total                                                   59,728      80,923     78,229
 Bad debt expense (Recovery)                               (406 )         -          -
 Direct operating expenses:
 Lease operating expenses                                14,652      15,564     15,976
 Lease maintenance                                        1,651       1,943      2,408
 Lease overhead                                           2,857       2,859      2,979
 Production and property tax                              2,968       3,293      3,546

 Total                                                   22,128      23,659     24,909

 Excess of revenues over direct operating expenses    $  38,006    $ 57,264   $ 53,320

The above table sets forth information as it relates to the underlying properties on the accrual basis, which is the way the books and records are kept. These numbers do not relate to the trust as the trust reports on a modified cash basis. For the year ended December 31, 2010, the trust's net profits interest represents the cash proceeds received by the trust, which is based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2009 through September 30, 2010. For the year ended December 31, 2011, the trust's net profits interest represents the cash proceeds received by


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the trust, which is based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2010 through September 30, 2011. For the year ended December 31, 2012, the trust's net profits interest represents the cash proceeds received by the trust, which is based upon the cash receipts for the oil and gas production collected by MV Partners from October 1, 2011 through September 30, 2012.

MV Partners has historically entered into certain hedging arrangements to reduce the exposure of the revenues from oil production for the underlying properties to fluctuations in crude oil prices. In addition, MV Partners was required under the terms of its original agreement of limited partnership to hedge approximately 80% of its expected annual proved producing reserves. This requirement is no longer in effect. For the year ended December 31, 2010, approximately 68% of the actual oil production volumes were subject to these hedging arrangements, with settlement prices ranging from $63.40 to $68.65 per barrel. During that same period, the NYMEX price per barrel of crude oil was between $68.01 and $91.51. MV Partners has not entered into any hedge contracts relating to oil volumes expected to be produced after 2010, and the terms of the conveyance of the net profits interest prohibit MV Partners from entering into new hedging arrangements for the benefit of the trust.

The following table provides oil and natural gas sales volumes, average sales prices and capital expenditures relating to the underlying properties for the three years in the period ended December 31, 2012. Sales volumes for natural gas liquids during the periods presented were not significant. Average prices do not include the effect of hedge activity.

                                                         (unaudited)
                                                   Year ended December 31,
                                                  2010        2011      2012
         Operating data:
         Sales volumes:
         Oil (MBbls)                                  944        911       888
         Natural gas (MMcf)                            76         70        70
         Average Prices:
         Oil (per Bbl)                           $  72.61    $ 88.31   $ 87.68
         Natural gas (per Mcf)                   $   3.72    $  3.56   $  2.55
         Capital expenditures (in thousands):
         Property acquisition                    $  1,813    $ 1,506   $ 2,377
         Well development                           1,354      1,006     2,259

         Total                                   $  3,167    $ 2,512   $ 4,636

Discussion and Analysis of Historical Results of the Underlying Properties

Comparison of Results of the Underlying Properties for the Years Ended December 31, 2012 and 2011

Excess of revenues over direct operating expenses for the underlying properties was $53.3 million for the year ended December 31, 2012, compared to $57.3 million for the year ended December 31, 2011. The decrease was primarily a result of a decrease in total revenue as a result of a decrease in the average price received for the oil sold in 2012 combined with a small decrease in production volumes. An increase in direct operating expenses also contributed to the decrease in excess of revenues over direct operating expenses.

Revenues. Revenues from oil, natural gas and natural gas liquid sales decreased $2.7 million to $78.2 million for the year ended December 31, 2012 compared to $80.9 million for the year ended December 31, 2011. This decrease in revenues was primarily the result of a decrease in the average price received for crude oil sold from $88.31 per Bbl for the year ended December 31, 2011 to $87.68


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per Bbl for the year ended December 31, 2012. This decrease in revenues reflects a decrease in the average price received for natural gas sold from $3.56 per Mcf for the year ended December 31, 2011 to $2.55 per Mcf for the year ended December 31, 2012.

Prices. The average price received for crude oil sold increased from $88.31 per Bbl for the year ended December 31, 2011 to $87.68 per Bbl for the year ended December 31, 2012. The average price received for the crude oil sold decreased primarily as a result of a decrease in the oil price index on which the sales prices for a majority of the oil production were based. The average price received for natural gas sold decreased from $3.56 per Mcf for the year ended December 31, 2011 to $2.55 per Mcf for the year ended December 31, 2012. The average price received for natural gas sold decreased as a result of a decrease in the natural gas price index on which the sales prices for a majority of the natural gas production were based.

Volumes. Sales volumes for crude oil decreased from 911 MBbls for the year ended December 31, 2011 to 888 MBbls for the year ended December 31, 2012. Sales volumes for natural gas remained steady at 70 MMcf for the year ended December 31, 2011 and 70 MMcf for the year ended December 31, 2012. The small decrease in overall production sales volumes was less than the natural decline of the underlying properties.

Direct operating expenses. Direct operating expenses increased from $23.7 million for the year ended December 31, 2011 to $24.9 million for the year ended December 31, 2012. This increase was primarily a result of an increase in lease operating and lease maintenance expenses.

Lease operating expense increased from $15.6 million for the year ended December 31, 2011 to $16.0 million for the year ended December 31, 2012. This increase was primarily the result of an increase in the general cost of oilfield services.

Lease maintenance expense increased from $1.9 million for the year ended December 31, 2011 to $2.4 million for the year ended December 31, 2012. This increase in lease maintenance expense was primarily the result of the timing of scheduled projects.

Comparison of Results of the Underlying Properties for the Years Ended December 31, 2011 and 2010

Excess of revenues over direct operating expenses for the underlying properties was $57.3 million for the year ended December 31, 2011, compared to $38.0 million for the year ended December 31, 2010. The increase was primarily a result of an increase in total revenue as a result of an increase in the average price received for the oil sold in 2011 and a decrease in hedge expense. A small increase in direct operating expenses partially offset the increase in excess of revenues over direct operating expenses.

Revenues. Revenues from oil, natural gas and natural gas liquid sales increased $11.9 million to $80.9 million for the year ended December 31, 2011 compared to $69.0 million for the year ended December 31, 2010. This increase in revenues was primarily the result of an increase in the average price received for crude oil sold from $72.61 per Bbl for the year ended December 31, 2010 to $88.31 per Bbl for the year ended December 31, 2011. This increase in revenues reflects a decrease in the average price received for natural gas sold from $3.72 per Mcf for the year ended December 31, 2010 to $3.56 per Mcf for the year ended December 31, 2011. Total revenues were also increased by a $9.2 million decrease in hedge activity expense.

Prices. The average price received for crude oil sold increased from $72.61 per Bbl for the year ended December 31, 2010 to $88.31 per Bbl for the year ended December 31, 2011. The average price received for the crude oil sold increased primarily as a result of an increase in the oil price index on which the sales prices for a majority of the oil production were based. The average price received for natural gas sold decreased from $3.72 per Mcf for the year ended December 31, 2010 to $3.56 per Mcf


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for the year ended December 31, 2011. The average price received for natural gas sold decreased as a result of a decrease in the natural gas price index on which the sales prices for a majority of the natural gas production were based.

Volumes. Sales volumes for crude oil decreased from 944 MBbls for the year ended December 31, 2010 to 911 MBbls for the year ended December 31, 2011. Sales volumes for natural gas decreased from 76 MMcf for the year ended December 31, 2010 to 70 MMcf for the year ended December 31, 2011. The small decrease in overall production sales volumes was less than the natural decline of the underlying properties.

Hedge activity. Hedge activity expense decreased from $9.2 million for the year ended December 31, 2010 to $0 for the year ended December 31, 2011. MV Partners entered into certain hedge contracts related to the oil production from the underlying properties for the year ended December 31, 2010. The weighted average settlement price of hedges for 2010 was $65.03 per Bbl. MV Partners has not entered into any hedge contracts relating to oil volumes to be produced after 2010, and the terms of the conveyance of the net profits interest prohibit MV Partners from entering into new hedging arrangements for the benefit of the trust.

Bad debt expense. During the year ended December 31, 2010, recovery was made from the Eaglwing bankruptcy for some of the 2008 sales previously written off as bad debts. MV Partners recognized bad debt recovery of $0.4 million for the year ended December 31, 2010. There were no bad debt expense or recoveries during the year ended December 31, 2011.

Direct operating expenses. Direct operating expenses increased from $22.1 million for the year ended December 31, 2010 to $23.7 million for the year ended December 31, 2011. This increase was primarily a result of an increase in lease operating expenses and property tax expense.

Lease operating expense increased from $14.7 million for the year ended December 31, 2010 to $15.6 million for the year ended December 31, 2011. This increase was primarily the result of an increase in the general cost of oilfield services.

Production and property tax expense was $3.0 million for the year ended December 31, 2010 compared to $3.3 million for the year ended December 31, 2011. The increase was a result of higher property tax valuations and the increased revenue on which the production tax was calculated.

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 an annual administrative fee to MV Partners pursuant to the 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 payments from 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 the trustee decides to hold as a reserve against future expenses. As of December 31, 2012, $118,000 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 liabilities. If the trust borrows funds, the trust unitholders will not receive distributions until the borrowed funds are repaid. During each of 2011 and 2012, MV Partners made no advances to the trust for trust 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.


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As further discussed below, MV Partners' development and workover program will require MV Partners to make future capital expenditures in connection with the development, exploration and production of oil and gas. Substantially all of the underlying properties are located in mature fields and MV Partners does not expect future costs for the underlying properties to change significantly as compared to recent historical costs other than increases due to increases in the general cost of oilfield services. . . .

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