Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WHZ > SEC Filings for WHZ > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for WHITING USA TRUST II | Request a Trial to NEW EDGAR Online Pro

Form 10-K for WHITING USA TRUST II


28-Mar-2013

Annual Report


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

This document contains forward-looking statements, which give our current expectations or forecasts of future events. Please refer to "Forward-Looking Statements" which follows the Table of Contents of this Form 10-K for an explanation of these types of 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 NPI 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.

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 September 30, 2012. The 2012 NPI distributions are mainly affected, however, by January 2012 through September 2012 oil prices and January 2012 through August 2012 natural gas prices.

                                                2010                                             2011                                       2012
                               Q1          Q2          Q3          Q4          Q1           Q2          Q3          Q4           Q1          Q2          Q3
Crude oil (per Bbl)          $ 78.79     $ 77.99     $ 76.21     $ 85.18     $ 94.25     $ 102.55     $ 89.81     $ 94.02     $ 102.94     $ 93.51     $ 92.19
Natural gas (per MMBtu)      $  5.30     $  4.09     $  4.39     $  3.81     $  4.10     $   4.32     $  4.20     $  3.54     $   2.72     $  2.21     $  2.81


Table of Contents

Although oil prices fell significantly after reaching highs in the third quarter of 2008, they have experienced a rebound in 2010, 2011 and 2012. Natural gas prices have likewise fallen significantly since their peak in the third quarter of 2008 but have 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 monthly average NYMEX prices for natural gas for January 2012 through March 2013:

                                                                                                   2012                                                                               2013
                                       Jan.       Feb.       Mar.       Apr.       May        June       July       Aug.      Sept.       Oct.       Nov.       Dec.       Jan.       Feb.       Mar.
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     $ 3.71     $ 3.35     $ 3.23     $ 3.43

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
(1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold (which amount 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 December 31, 2012, on a cumulative accrual basis, 1.65 MMBOE (16%) of the Trust's total 10.61 MMBOE have been produced and sold. For additional discussion relating to, and of the assumptions underlying, the estimated date when 11.79 MMBOE (10.61 MMBOE at the 90% NPI) will be produced and sold from the underlying properties, after which the Trust will soon thereafter wind up its affairs and terminate, see "Description of the Underlying Properties" in Item 2 of this Annual Report on Form 10-K.

For a discussion of material changes to proved reserves, see "Reserves" in Item 2 of this Annual Report on Form 10-K. Additionally, for a discussion of the need to use enhanced recovery techniques, see "Oil and Natural Gas Production" in Item 2 of this Annual Report on Form 10-K.

Capital Expenditure Activities

The primary goals of the planned capital expenditures relative to the underlying properties are to convert proved undeveloped reserves and developed non-producing properties to producing properties and to make the capital expenditures with a goal of mitigating the natural decline in


Table of Contents

production from producing properties. The underlying properties have a capital expenditure budget per the reserve report of $26.3 million estimated to be spent over 9 years. No assurance can be given, however, that any such expenditures will result in production in commercially paying amounts, if any, or that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator's historical drilling success rate. With respect to the underlying properties, Whiting expects, but is not obligated, to implement the development strategies described below relative to each of the following regions. With respect to fields for which Whiting is not the operator, Whiting will have no control over the timing or amount of capital expenditures relative to such fields. Please read "Risk factors-Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust unitholders." Information relating to planned capital expenditures and development activities relating to fields for which Whiting is not the operator represent Whiting's most recent understanding of the planned expenditures and activities of the operator thereof.

During each twelve-month period beginning on the later to occur of
(1) December 31, 2017 and (2) the time when 8.24 MMBOE have been produced from the underlying properties and sold (which is the equivalent of 7.41 MMBOE in respect of the net profits interest) (in either case, the "capital expenditure limitation date"), the sum of the capital expenditures and amounts reserved for approved capital expenditure projects for such twelve-month period may not exceed the average annual capital expenditure amount. The "average annual capital expenditure amount" means the quotient of (x) the sum of the capital expenditures and amounts reserved for approved capital expenditure projects with respect to the three twelve-month periods ending on the capital expenditure limitation date, divided by (y) three. Commencing on the capital expenditure limitation date, and each anniversary of the capital expenditure limitation date thereafter, the average annual capital expenditure amount will be increased by 2.5% to account for expected increased costs due to inflation.

                                            2013 -2021 Planned
                                           Capital Expenditures                               Net
Region/Field/Description                      (in millions)             Gross Wells          Wells
Rocky Mountains
Rangely - CO2 and maintenance capital                    22.6                   -               -
Rangely - drill wells                                     0.8                   6             0.3

Rocky Mountains Total                                    23.4                   6             0.3
Permian Basin
Keystone South - recompletions                            1.7                   3             3.0
Santo Nino - drill well                                   0.9                   1             0.2

Permian Basin Total                                       2.6                   4             3.2
Gulf Coast
Agua Dulce - recompletions                                0.3                   1             1.0
Mid-Continent                                               -                   -               -

Total                                                    26.3                  11             4.5


Table of Contents

Rocky Mountains Region. The Rangely field, operated by Chevron Corporation, is located in Rio Blanco County, Colorado. This field was discovered in 1931 with development drilling commencing in 1943. The field is currently producing under the tertiary recovery process of CO2 injection. The underlying properties include a 4.6% working interest in the Rangely Weber Sand Unit. Capital is expended each year to purchase CO2 for injection in the field, and capital is also expended for the drilling of additional wells to optimize field recovery. According to information provided by the operator, the 2013 estimated capital expenditures are $3.3 million allocated to the underlying properties' interest and are comprised of development drilling activities, plant and equipment expenditures and CO2 purchases. These capital expenditures scheduled for 2013 include the drilling of five development wells and one injector well. After 2013, Whiting estimates that this level of drilling and facility expenditures as well as CO2 purchases will continue through 2021 and will total approximately $20.1 million as allocated to the underlying properties' interest. Although Whiting is not aware of any other development plans by Chevron or other operators of the underlying properties in this region, these operators may propose capital expenditures in the future. Additionally, although Whiting has not identified any future capital expenditures for the Whiting operated fields in the Rocky Mountains region at this time, further study or offsetting drilling activity may result in capital expenditures in the future.

Permian Basin Region. Whiting operates the Keystone South field in Winkler County, Texas, which produces from several different zones including the Clear Fork, Wichita Albany and Ellenberger zones at depths from 6,500 to 9,200 feet. Whiting plans to recomplete three wells from the currently completed zone to another zone expected to be productive in the wellbore. These three recompletions are scheduled to be performed in 2013 and 2014 when the currently producing zones reach their economic limit. The capital expenditures necessary to perform these recompletions are estimated at approximately $1.7 million allocated to the underlying properties' interest. Although Whiting has not identified future capital expenditures for any other operated fields in the Permian Basin at this time, further study or offsetting development activity may result in substantial additional capital expenditures in the future.

Whiting owns non-operated working interests in the Parkway, Sand Hills and Santo Nino fields located in Eddy County, New Mexico. Mewbourne Oil Company, the operator, is developing these fields with horizontal wellbores in the Bone Spring formation at a depth of 8,000 feet. Mewbourne has proposed one well to be spud in 2013. This well is in the proved undeveloped reserve category in the reserve report with an estimated capital expenditure of approximately $0.9 million allocated to the underlying properties' interest. Although Whiting is not aware of any other development plans by Mewbourne or other operators of the underlying properties in this region, these operators may propose capital expenditures in the future.

Gulf Coast Region. Whiting operates the Agua Dulce field in Nueces County, Texas, which produces from several different Vicksburg zones at depths from 9,000 to 10,000 feet. Whiting plans to recomplete one well from the currently depleted zone to another zone expected to be productive in the wellbore. This recompletion is scheduled to be performed in 2013 at an


Table of Contents

estimated capital expenditure of approximately $0.3 million allocated to the underlying properties' interest. Although Whiting has not identified any future capital expenditures for any other operated fields in the Gulf Coast region at this time, further study or offsetting development activity may result in additional capital expenditures in the future. Additionally, although Whiting is not aware of any development plans by other operators of the underlying properties in this region, these operators may propose capital expenditures in the future.

Mid-Continent Region. Although Whiting has not identified any future capital expenditures for the Whiting operated fields in this region at this time, further study or offsetting development activity may result in additional capital expenditures in the future. Additionally, although Whiting is not aware of any development plans by other operators of the underlying properties in the Mid-Continent region, these operators may propose capital expenditures in the future.

Results of Trust Operations

Presented below is a summary of the Trust's income from net profits interest and distributable income for the year ended December 31, 2012, consisting of the May, August and November 2012 distributions received by the Trust. In addition, because the Trust had not engaged in any activities during 2011 other than organizational activities, pro forma income from net profit interest and distributable income for the Trust for the year ended December 31, 2011 has been presented, so that investors can review comparative results of operations for the Trust for the 2012 and 2011 periods. The Trust's pro forma results of operations for the year ended December 31, 2011 have been presented on a modified cash basis of accounting in the table below and in the "Results of the Trust for the Year Ended December 31, 2012 Compared to the Pro Forma Results of the Trust for the Year Ended December 31, 2011", and this basis of presentation is consistent with the Trust's financial statements, which have also been prepared on a modified cash basis as described in Note 2 to the Trust's Financial Statements included in this Annual Report on Form 10-K.

The pro forma income from net profits interest, distributable income, and related financial data presented below give effect to the Trust formation and the conveyance of the NPI in the underlying properties to the Trust by Whiting, as if they occurred on January 1, 2011. Accordingly, the 2011 pro forma results include four complete quarterly NPI distributions from Whiting to the Trust (consisting of the pro forma February, May, August and November 2011 distributions), whereas the 2012 actual results only include three quarterly distributions (consisting of the Trust's actual May, August and November 2012 distributions). The pro forma financial information below has been derived from the unaudited pro forma financial statements, as included in the prospectus dated March 22, 2012 for the initial public offering of the Trust's units. The Trust believes that the assumptions used to prepare this pro forma data provide a reasonable basis for presenting the effects directly attributable to these transactions. However, the pro forma amounts set forth in the table below are for informational purposes only and do not purport to present the results that would have actually occurred had the Trust formation and net profits interest conveyance been completed on January 1, 2011 or for the period presented or which may be realized in the future.


Table of Contents
                                         Trust Results
                                             Year Ended                 Pro Forma Year  Ended
                                          December 31, 2012            December 31, 2011(e)(f)
Sales volumes:
Oil from underlying properties
(Bbl)(a)                                       1,004,848(c)                       1,409,056(g)
Natural gas from underlying
properties (Mcf)                               1,796,628(c)                       2,885,493(g)

Total production (BOE)                          1,304,286                          1,889,972
Average sales prices:
Oil (per Bbl) (a)                        $          85.67             $                83.96
Natural gas (per Mcf)                    $          4.55(d)           $                 5.94
Costs (per BOE):
Lease operating expenses                 $          23.48             $                20.31
Production taxes                         $           3.85             $                 3.80
Revenues:
Oil sales(a)                             $    86,089,470(c)           $         118,302,940(g)
Natural gas sales                              8,177,660(c)                      17,138,142(g)

Total revenues                           $     94,267,130             $          135,441,082

Costs:
Lease operating expenses                 $     30,624,146             $           38,376,358
Production taxes                                5,017,008                          7,176,627
Development Costs                               4,155,806                         17,292,910
Cash settlement (gains) losses on
commodity derivatives(b)                                -                                  -

Total costs                              $     39,796,960             $           62,845,895

Net proceeds                             $     54,470,170             $           72,595,187
Net profits percentage                                  90%                                90%

Income from net profits interest         $     49,023,153             $           65,335,668

Provision for estimated Trust
expenses                                          975,000                           375,000(h)
Montana state income tax withheld                  33,355                            94,454(i)

Distributable income                     $     48,014,798             $           64,866,214

(a) Oil includes natural gas liquids.

(b) As discussed in "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of this Annual Report on Form 10-K all hedges terminate as of December 31, 2014.

(c) Oil and gas sales volumes and related revenues for the year ended December 31, 2012 (consisting of Whiting's May, August and November 2012 NPI distributions to the Trust) generally represent crude oil production from January 2012 through September 2012 and natural gas production from January 2012 through August 2012.

(d) 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.

(e) Pro forma amounts set forth below for the 2011 period give effect to the Trust formation and the conveyance of the NPI in the underlying properties to the Trust by Whiting, as if these transactions occurred on January 1, 2011.


Table of Contents
(f) Pro forma sales volumes, average sales prices, costs and revenue data have been derived from the historical accounting records of the underlying properties. Such amounts were prepared by adjusting the accrual basis information from the historical revenue and direct operating expenses of the underlying properties to a modified cash basis of accounting.

(g) Oil and gas sales volumes and related revenues for the pro forma year ended December 31, 2011 (consisting of Whiting's pro forma February, May, August and November 2011 NPI distributions to the Trust) generally represent crude oil production from October 2010 through September 2011 and natural gas production from September 2010 through August 2011.

(h) Pro forma provision for estimated Trust expenses assumes an administrative fee paid to Whiting of $200,000 and an annual administrative fee paid to the Trustee of $175,000. Going forward, the Trust's aggregate general and administrative costs will encompass legal fees, accounting fees, engineering fees, printing costs and other expenses properly chargeable to the Trust, which have been estimated to be approximately $625,000. If the estimated general and administrative expenses were included in the unaudited pro forma statement of distributable income, the distributable income would be $64,241,214 for the year ended December 31, 2011. Due to the omission of general and administrative expenses other than the $375,000 administrative fee from the unaudited pro forma statement of distributable income, this pro forma financial statement may not be indicative of the results to be realized going forward.

(i) Pro forma Montana state income tax withheld assumes that for Montana state income tax purposes, Whiting must withhold from its NPI payments to the Trust, an amount equal to 6% of the net amount payable to the Trust from the sale of oil and gas in Montana.

Results of the Trust for the Year Ended December 31, 2012 Compared to the Pro Forma Results of the Trust for the Year Ended December 31, 2011

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 and development costs as follows:

Revenues. The 2012 actual oil and natural gas revenues were $41.2 million (or 30%) lower as compared to 2011 pro forma oil and gas revenues. Sales revenue is a function of oil and gas volumes sold and average commodity prices realized. Gas volumes declined by 1,088,865 Mcf (or 38%) and oil volumes declined by 404,208 Bbl (or 29%) when comparing 2012 actual production to 2011 pro forma production volumes. Both of these volume decreases between periods are mainly due to the actual 2012 results including only three quarterly NPI distributions from Whiting to the Trust (the May, August, and November 2012 distributions), whereas the pro forma 2011 results included four complete quarterly periods of NPI distributions to the Trust. It should also be noted, however, that based on the December 31, 2012 reserve report, overall production for both oil and gas attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 9.0% from 2013 through the estimated December 31, 2021 NPI termination date.


Table of Contents

Also contributing to the 30% decrease in actual 2012 oil and gas revenues as compared to the 2011 pro forma revenues was a decline in the average sales price realized for natural gas of 23% between periods. Partially offsetting the above production-related and gas price-related decreases in net revenues, however, was an increase in the average sales price realized for crude oil of 2% between the 2012 actual and 2011 pro forma periods.

Lease Operating Expenses. Lease operating expenses ("LOE") in 2012 decreased $7.8 million (or 20%) as compared to 2011 pro forma LOE amounts. This decrease in LOE between periods was due to the 2012 actual results including only three quarterly NPI distributions from Whiting to the Trust (the May, August, and November 2012 distributions), whereas the pro forma 2011 results included four complete quarterly periods of NPI distributions to the Trust. Despite the overall decrease in LOE between periods, LOE on a per BOE basis was 16% higher in 2012 compared to pro forma 2011 results. LOE per BOE amounted to $23.48 for 2012, which was up from $20.31 per BOE for the 2011 pro forma period. This increase on a per BOE basis was mainly due to $2.3 million in higher costs of oil field goods and services, a $0.7 million increase in labor and overhead costs on Whiting-operated properties, and $0.7 million in higher electricity costs between periods.

Production Taxes. Production taxes are typically calculated as a percentage of oil and gas revenues, and tax credits and exemptions allowed in the various taxing jurisdictions are generally utilized to their potential. The 2012 production taxes decreased $2.2 million (or 30%) as compared to the 2011 pro forma amounts. This decrease between periods is due to the 2012 actual results including only three quarterly NPI distributions from Whiting to the Trust (the May, August, and November 2012 distributions), whereas the pro forma 2011 results included four complete quarterly periods of NPI distributions to the Trust. Production taxes as a percent of oil and gas revenues, however, remained constant at 5.3% between the 2012 actual and 2011 pro forma periods.

Development Costs. Actual development costs in 2012 were $13.1 million (or 76%) lower as compared to 2011 pro forma development costs. This decrease was primarily driven by the Keystone South field's capital expenditures declining by $8.2 million between periods as a result of significant drilling projects that were carried out on this field during 2011 and which did not continue into 2012. Also contributing to the 76% decline in development costs between periods was a reduction in capital projects at the North Vacuum and Rangely Weber fields, which resulted in development cost decreases of $2.2 million and $1.2 million, respectively, from 2011 to 2012.

Provision for Estimated Trust Expenses. The provision for estimated Trust expenses in 2012 was $600,000 higher than this same provision included in the . . .

  Add WHZ to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WHZ - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.