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NDRO > SEC Filings for NDRO > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for ENDURO ROYALTY TRUST | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ENDURO ROYALTY TRUST


3-May-2013

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 Enduro Royalty Trust while references to "Enduro" in this document refer to Enduro Resource Partners LLC.

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 Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Trust's 2012 Annual Report on Form 10-K. The Trust's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other filings with the SEC are available on the SEC's website at www.sec.gov.

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 "Trustee's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. Such statements may be influenced by factors that could cause actual outcomes and results to differ materially from those projected. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words "believes," "expects," "anticipates," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Form 10-Q, could affect the future results of the energy industry in general, and Enduro and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:

risks associated with the drilling and operation of oil and natural gas wells;

the amount of future direct operating expenses and development expenses;

the effect of existing and future laws and regulatory actions;

the effect of changes in commodity prices or alternative fuel prices;

the impact of hedge contracts;

conditions in the capital markets;

competition in the energy industry;

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

cost inflation.

You should not place undue reliance on these forward-looking statements. All forward-looking statements speak only as of the date of this Form 10-Q. The Trust does not undertake any obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events, unless the securities laws require us to do so.

This Form 10-Q describes other important factors that could cause actual results to differ materially from expectations of Enduro and the Trust, including under the caption "Risk Factors." All subsequent written and oral forward-looking statements attributable to Enduro or the Trust or persons acting on behalf of Enduro or the Trust are expressly qualified in their entirety by such factors. The Trust assumes no obligation, and disclaims any duty, to update these forward-looking statements.

Overview

The Trust is a statutory trust created under the Delaware Statutory Trust Act in May 2011. The business and affairs of the Trust are administered by the Trustee. The Trustee has no authority over or responsibility for, and no involvement with, any aspect of the oil and gas operations or other activities on the Underlying Properties. The Delaware Trustee has only minimal rights and duties that are necessary to satisfy the requirements of the Delaware Statutory Trust Act.

In connection with the closing of the initial public offering, on November 8, 2011, Enduro contributed the Net Profits Interest to the Trust in exchange for 33,000,000 newly issued Trust Units. The Net Profits Interest entitles the Trust to receive 80% of the net profits from the sale and production of oil and natural gas attributable to the Underlying Properties that are produced during the term of the Conveyance, which commenced on July 1, 2011.

The Trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time. The Trust will dissolve upon the earliest to occur of the following: (1) the Trust, upon approval of the holders of at least 75% of the outstanding Trust Units, sells the Net Profits Interest, (2) the annual cash proceeds received by the Trust attributable to the Net Profits Interest are less than $2 million for each of any two consecutive years, (3) the holders of at least 75% of the outstanding Trust Units vote in favor of dissolution or (4) the Trust is judicially dissolved.


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The Trust is required to make monthly cash distributions of substantially all of its monthly cash receipts, after deducting the Trust's administrative expenses, to holders of record (generally the last business day of each calendar month) on or before the 10th business day after the record date.

The amount of Trust revenues and cash distributions to Trust unitholders depends on, among other things:

oil and natural gas sales prices;

volumes of oil and natural gas produced and sold attributable to the Underlying Properties;

production and development costs;

price differentials;

potential reductions or suspensions of production; and

the amount and timing of Trust administrative expenses.

Generally, cash payment is received by Enduro for oil production 30 to 60 days after it is produced and for natural gas production 60 to 90 days after it is produced.

Results of Operations

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

The Trust's net profits income consists of monthly net profits attributable to
the Net Profits Interest, which was determined as shown in the following table:



                                                Three Months Ended March 31,
                                                                                          Increase
                                                  2013                  2012             (Decrease)
Gross profits:
Oil sales                                    $    19,705,888        $ 22,999,135                 (14 %)
Natural gas sales                                  7,589,007          10,674,896                 (29 %)

Total                                             27,294,895          33,674,031                 (19 %)
Costs:
Direct operating expenses:
Lease operating expenses                           7,900,000           8,450,000                  (7 %)
Compression, gathering and
transportation                                     1,050,000           1,160,000                  (9 %)
Production, ad valorem and other taxes             1,925,000           2,345,000                 (18 %)
Development expenses                               5,100,000           5,594,020                  (9 %)

Total                                             15,975,000          17,549,020                  (9 %)
Settlement of hedge contracts                      2,696,050           1,961,514                  37 %

Net profits                                  $    14,015,945        $ 18,086,525                 (23 %)
Percentage allocable to Net Profits
Interest                                                  80 %                80 %

Income from Net Profits Interest             $    11,212,756        $ 14,469,220                 (23 %)
Trust general and administrative
expenses and cash withheld for expenses              150,034             250,015                 (40 %)

Distributable income                         $    11,062,722        $ 14,219,205                 (22 %)


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                                                   Three Months Ended March 31,
                                                                                              Increase
                                                     2013                  2012              (Decrease)
Underlying Properties Production Volumes:
Oil (Bbls)                                             229,272              265,992                  (14 %)
Natural Gas (Mcf)                                    2,513,630            2,524,131                   (0 %)
Combined (BOE)                                         648,210              686,681                   (6 %)

Average Prices:
Oil-NYMEX (September-November) ($/Bbl)          $        90.38          $     89.63                    1 %
Oil Differential                                $        (4.43 )        $     (3.16 )                 40 %

Oil prices realized ($/Bbl)                     $        85.95          $     86.47                   (1 %)

Natural gas-NYMEX (August-October) ($/Mcf)      $         2.89          $      4.00                  (28 %)
Differential                                    $         0.13          $      0.23                  (43 %)

Natural gas prices realized ($/Mcf)             $         3.02          $      4.23                  (29 %)

Net profits income received by the Trust amounted to $11.2 million for the quarter ended March 31, 2013, a decrease of $3.3 million, or 23%, from the $14.5 million for the first quarter of 2012. The decrease was primarily due to a reduction in oil volumes for the first quarter of 2013 as compared to the first quarter of 2012 as well as a significant decline in NYMEX natural gas prices, which caused a 29% reduction in the average price received for sales of natural gas.

Oil sales included in the first quarter 2013 net profits interest calculation primarily relate to oil produced from the Underlying Properties from September to November of 2012. As compared to the first quarter of 2012, oil sales decreased 14% as a result of a decline in oil volumes and an increase in the oil differential, thereby reducing the price received for oil volumes. Oil volumes were lower due to the timing of payments received from third parties for the Underlying Properties. During the first quarter of 2012, Enduro was continuing to receive payments for oil production from the effective date of the Trust of June 1, 2011, resulting in higher oil volumes reported in that period. Oil volumes decreased 36.7 MBbls from 266.0 MBbls for the quarter ended March 31, 2012. Of these volumes reported in the first quarter of 2012, 24.0 MBbls related to June to August 2011 oil produced, for which payments generally would have been received in the fourth quarter 2011. In addition to reduced volumes, the wellhead price received for oil volumes declined for the first quarter of 2013 as compared to the first quarter of 2012. During the months represented by the first quarter of 2013 net profits interest calculation, average oil prices decreased by $0.52 per Bbl as a result of wider than historical basis differentials in the Permian Basin. Basis differentials were wider than normal through February 2013.

Natural gas sales included in the first quarter 2013 net profits interest calculation primarily related to natural gas produced from the Underlying Properties from August to October of 2012. Natural gas sales decreased 29% from the net profits interest calculation for the quarter ended March 31, 2012 to the quarter ended March 31, 2013 due to a $1.21 per Mcf decrease in realized prices.

Direct operating expenses decreased 9% from the first quarter of 2012 net profits interest distribution calculation to the first quarter of 2013 primarily due to lower sales volumes, which decreased lease operating and transportation expenses incurred. Production, ad valorem and other taxes decreased 18% from the quarter ended March 31, 2012 to the quarter ended March 31, 2013 mainly due to lower sales prices received. Capital development expenses decreased $0.5 million to $5.1 million in the first quarter of 2013 as compared to the first quarter of 2012 due to fewer drilling projects. The net profits interest calculation for the three months ended March 31, 2012 included capital for several wells being drilled in the Haynesville Shale. Capital development expenses for the three months ended March 31, 2013 primarily relate to two Permian oil wells being drilled in the Lost Tank field in southeastern New Mexico.

General and administrative expenses and cash withheld for expenses decreased $0.1 million from the first quarter 2012 net profits interest calculation to the first quarter 2013 calculation. General and administrative expenses for the three months ended March 31, 2012 were higher primarily due to initial listing fees for the Trust on the NYSE.

Liquidity and Capital Resources

The Trust's principal sources of liquidity are cash flow generated from the Net Profits Interest and borrowing capacity under the letter of credit described below. 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. 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 month, over the Trust's expenses paid for that month. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future expenses.


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The Trustee may create a cash reserve to pay for future liabilities of the Trust. If the Trustee determines that the cash on hand and the cash to be received are, or will be, insufficient to cover the Trust's liabilities, the Trustee may authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from any person, including the Trustee or the Delaware Trustee or an affiliate thereof, although none of the Trustee, the Delaware Trustee or any affiliate of either of them intends to lend funds to the Trust. The Trustee may also cause the Trust to mortgage its assets to secure payment of the indebtedness. The terms of such indebtedness and security interest, if funds were loaned by the entity serving as Trustee or Delaware Trustee or an affiliate thereof, would be similar to the terms which such entity would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. In addition, Enduro provided the Trust with a $1 million letter of credit to be used by the Trust in the event that its cash on hand (including available cash reserves) is not sufficient to pay ordinary course administrative expenses. Further, if the Trust requires more than the $1 million under the letter of credit to pay administrative expenses, Enduro has agreed to loan funds to the Trust necessary to pay such expenses. If the Trust borrows funds, draws on the letter of credit or Enduro loans funds to the Trust, no further distributions will be made to Trust unitholders until such amounts borrowed or drawn are repaid. Except for the foregoing, the Trust has no source of liquidity or capital resources. The Trustee has no current plans to authorize the Trust to borrow money. Since the Trust's formation, it has not borrowed any funds and no amounts have been drawn on the letter of credit.

Any amounts received by Enduro 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 profits. However, if the hedge payments received by Enduro under the hedge contracts and other non-production revenue exceed operating expenses during a 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 period where the hedge payments and the other non-production revenue are less than such expenses. Any amounts paid by Enduro on settlement of the hedge contracts will reduce the amount of net profits paid to the Trust.

The Trust pays the Trustee an administrative fee of $200,000 per year. The Trust pays the Delaware Trustee a fee of $2,000 per year. The Trust also incurs, either directly or as a reimbursement to the Trustee, legal, accounting, tax and engineering fees, printing costs and other expenses that are deducted by the Trust before distributions are made to Trust unitholders. The Trust also is responsible for paying other expenses incurred as a result of being a publicly traded entity, including costs associated with annual and quarterly reports to Trust unitholders, tax return and Form 1099 preparation and distribution, NYSE listing fees, independent auditor fees and registrar and transfer agent fees.

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.

Distributions Declared After Quarter End

On April 19, 2013, the Trust declared a distribution of $0.124518 per unit to unitholders of record as of April 30, 2013. The distribution is expected to be paid to unitholders on May 14, 2013.

Off-Balance Sheet Arrangements

The Trust has no off-balance sheet arrangements. The Trust has not guaranteed the debt of any other party, nor does the Trust have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt, losses or contingent obligations other than the commodity hedge contracts disclosed in the section "Quantitative and Qualitative Disclosures About Market Risk."

New Accounting Pronouncements

As the Trust's financial statements are prepared on the modified cash basis, most accounting pronouncements are not applicable to the Trust's financial statements. No new accounting pronouncements have been adopted or issued that would impact the financial statements of the Trust.

Critical Accounting Policies and Estimates

Please read "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" of the Trust's 2012 Annual Report on Form 10-K for additional information regarding the Trust's critical accounting policies and estimates. There were no material changes to the Trust's critical accounting policies or estimates during the quarter ended March 31, 2013.


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