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

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Form 10-Q for MARINE PETROLEUM TRUST


10-May-2013

Quarterly Report


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

Organization

Marine Petroleum Trust (the "Trust") is a royalty trust that was created in 1956 under the laws of the State of Texas. U.S. Trust, Bank of America Private Wealth Management serves as corporate trustee (the "Trustee"). The Trust's Indenture (the "Indenture") provides that the term of the Trust will expire on June 1, 2021, unless extended by the vote of the holders of a majority of the outstanding units of beneficial interest. The Trust is not permitted to engage in any business activity because it was organized for the sole purpose of providing an efficient, orderly and practical means for the administration and liquidation of rights to payments from certain oil and natural gas leases in the Gulf of Mexico, pursuant to license agreements and amendments between the Trust's predecessors and Gulf Oil Corporation ("Gulf"). As a result of various transactions that have occurred since 1956, these interests now are held by Chevron Corporation ("Chevron") and its assignees. The Trust holds title to interests in properties that are situated offshore of Texas.

The Trust's wholly-owned subsidiary, MPC, holds title to interests in properties that are situated offshore of Louisiana because at the time the Trust was created, trusts could not hold these interests under Louisiana law. MPC is prohibited from engaging in a trade or business and only takes those actions that are necessary for the administration and liquidation of its properties.

Marine's rights are generally referred to as overriding royalty interests in the oil and natural gas industry. An overriding royalty interest is created by an assignment by the owner of a working interest in an oil or natural gas lease. The royalty rights associated with an overriding royalty interest terminate when the underlying lease terminates. All production and marketing functions are conducted by the working interest owners of the leases. Income from overriding royalties is paid to Marine either (i) on the basis of the selling price of oil, natural gas and other minerals produced, saved or sold, or (ii) at the value at the wellhead as determined by industry standards, when the selling price does not reflect the value at the wellhead.

The Trustee assumes that some units of beneficial interest are held by middlemen, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint owners and brokers holding an interest for a customer in street name). Therefore, the Trustee considers the Trust to be a widely held fixed investment trust ("WHFIT") for U.S. federal income tax purposes. Accordingly, the Trust will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT. The Trustee will provide the required information and the contact information for the Trustee:

U.S. Trust, Bank of America Private Wealth Management

P.O. Box 830650

Dallas, Texas 75283-0650

Telephone number: (800) 985-0794

Each unitholder should consult its own tax advisor for compliance with U.S. federal income tax laws and regulations.

Liquidity and Capital Resources

As stated in the Indenture, there is no requirement for capital due to the limited purpose of the Trust. The Trust's only obligation is to distribute to unitholders the distributable income that is actually collected. As an administrator of oil and natural gas royalty properties, the Trust collects royalties monthly, pays administrative expenses and disburses all net royalties that are collected to its unitholders each quarter.

The Indenture (and MPC's charter and by-laws) expressly prohibits the operation of any kind of trade or business. The Trust's oil and natural gas properties are depleting assets that are not being replaced due to the prohibition against investments. These restrictions, along with other factors, allow the Trust to be treated as a grantor trust. As a grantor trust, all income and deductions for state and U.S. federal income taxes generally flow through to each individual unitholder. The State of Texas has a franchise or "margin" tax, but the Trust does not


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believe that it is subject to the franchise tax because at least 90% of its income comes from passive sources. Please see Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2012 for further information. MPC is a taxable entity that pays state and U.S. federal income taxes and state franchise taxes. However, MPC's income specifically excludes 98% of the oil and natural gas royalties collected by MPC, which are retained by and delivered to the Trust because of the Trust's net profits interest.

The Leases

Marine relies on public records for information regarding drilling and workover operations. The public records available up to the date of this report indicate that there were seven new well completions made during the nine months ended March 31, 2013 on leases in which Marine has an interest. As of May 6, 2013, public records also indicated that there were eight wells in the process of being drilled or recompleted on other leases in which Marine has an interest and that operators have designated activity on two additional locations which may include drilling, permits to workover or recomplete a well or other types of operations. There is no assurance that such wells will be drilled or recompleted, and if they are drilled or recompleted, that they will be successful.

Marine holds an overriding royalty interest that is equal to three-fourths of one percent of the working interest and is calculated on the value at the well of any oil, natural gas or other minerals produced and sold from 55 leases covering 199,868 gross acres located in the Gulf of Mexico. Marine's overriding royalty interest applies only to existing leases and does not apply to any new leases that Chevron may acquire. The Trust also owns a 32.6% interest in Tidelands. Tidelands has an overriding royalty interest in four oil and natural gas leases covering 17,188 gross acres in the Gulf of Mexico. As a result of this ownership, the Trust receives periodic distributions from Tidelands.

Critical Accounting Policies and Estimates

In accordance with SAB 12:E, Marine uses the modified cash basis method of accounting. Under this accounting method, royalty income is recorded when received, and distributions to unitholders are recorded when declared by the Trustee of the Trust. Expenses of Marine (including accounting, legal, other professional fees, trustees' fees and out-of-pocket expenses) are recorded on an actual paid basis. Marine also reports distributable income instead of net income under the modified cash basis method of accounting. Cash reserves are permitted to be established by the Trustee for certain contingencies that would not be recorded under GAAP.

Marine did not have any changes in its critical accounting policies and estimates during the nine months ended March 31, 2013. Please see Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2012 for a detailed discussion of its critical accounting policies.

New Accounting Pronouncements

There are no new pronouncements that are expected to have a significant impact on Marine's financial statements.

General

Marine's royalty income is derived from the oil and natural gas production activities of third parties. Marine's royalty income fluctuates from period to period based upon factors beyond Marine's control, including, without limitation, the number of productive wells drilled and maintained on leases that are subject to Marine's interest, the level of production over time from such wells and the prices at which the oil and natural gas from such wells are sold.

Important aspects of Marine's operations are conducted by third parties. Marine's royalty income is dependent on the operations of the working interest owners of the leases on which Marine has an overriding royalty interest. The oil and natural gas companies that lease tracts subject to Marine's interests are responsible for the production and sale of oil and natural gas and the calculation of royalty payments to Marine. The only obligation of the working interest owners to Marine is to make monthly overriding royalty payments that reflect Marine's interest in the oil and natural gas sold. Marine's distributions are processed and paid by its transfer agent, American Stock Transfer & Trust Company, LLC.


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The volume of oil and natural gas produced and the selling prices of such oil and natural gas are the primary factors in calculating overriding royalty payments. Production is affected by the natural production decline of the producing wells, the number of new wells drilled and the number of existing wells that are re-worked and placed back in production on the leases. Production from existing wells is anticipated to decrease in the future due to normal well depletion. Marine has no input with the operators regarding future drilling or re-working operations that could impact the oil and natural gas production from the leases in which Marine has an overriding royalty interest.

Summary of Operating Results

During the nine months ended March 31, 2013, royalty income from the sale of oil represented 85% of Marine's total royalty income and royalty income from the sale of natural gas represented 15% of Marine's total royalty income, excluding its interest in Tidelands. During the nine months ended March 31, 2012, royalty income from the sale of oil represented 82% of Marine's total royalty income and royalty income from the sale of natural gas represented 18% of Marine's total royalty income, excluding its interest in Tidelands. Royalty income includes oil and natural gas royalties that Marine receives from producers. During the nine months ended March 31, 2013, distributions received from Tidelands accounted for 9% of Marine's total income. During the nine months ended March 31, 2012, distributions received from Tidelands accounted for 9% of Marine's total income.

Distributable income per unit for the nine months ended March 31, 2013 decreased to $1.00 as compared to $1.52 for the comparable period in 2012. Distributions per unit amounted to $1.01 per unit for the nine months ended March 31, 2013, a decrease from distributions of $1.56 per unit for the comparable period in 2012. During the nine months ended March 31, 2013, the difference between distributable income per unit and distributions per unit resulted from timing differences between the closing of the financial statements and the determination date of the distribution amount to unitholders.

For the nine months ended March 31, 2013, excluding the Trust's interest in Tidelands, oil production decreased by 5,542 barrels (bbls) and natural gas production decreased by 30,937 thousand cubic feet (mcf) from the levels realized for the comparable period in 2012. For the nine months ended March 31, 2013, excluding the Trust's interest in Tidelands, the average price realized for oil decreased $5.35 per bbl to $108.45 per bbl from the average price realized for the comparable period in 2012 and the average price realized for natural gas decreased $1.16 per mcf to $3.79 per mcf from the average price realized for the comparable period in 2012.

The following table presents the net production quantities of oil and natural gas and distributable income and distributions per unit for the last six quarters.

                                       Net Production  Quantities (1)           Distributable
                                                             Natural               Income             Distributions
Quarter Ended                        Oil (bbls)             Gas (mcf)             Per Unit              Per Unit
December 31, 2011                           6,920                 38,698       $          0.49       $          0.52
March 31, 2012                              7,126                 28,676       $          0.49       $          0.50
June 30, 2012                               5,562                 29,072       $          0.39       $          0.43
September 30, 2012                          4,878                 26,091       $          0.33       $          0.38
December 31, 2012                           4,998                 23,924       $          0.30       $          0.30
March 31, 2013                              5,916                 29,304       $          0.37       $          0.33

(1) Excludes the Trust's interest in Tidelands.


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Results of Operations-Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Income from oil and natural gas royalties decreased $213,401 to $754,599 during the three months ended March 31, 2013 from $968,000 realized for the comparable period in 2012. Marine believes that royalties decreased for the three months ended March 31, 2013 primarily due to a 17% decrease in the production of oil, a 3% decrease in the average realized price for oil, a 24% decrease in the production of natural gas and a 12% decrease in the average realized price for natural gas as compared to the comparable period in 2012.

Distributable income decreased to $733,007 for the three months ended March 31, 2013 from $973,205 realized for the comparable period in 2012.

Income from oil royalties, excluding the Trust's interest in Tidelands, for the three months ended March 31, 2013 decreased to $642,336 from $798,948 realized for the comparable period in 2012. The volume of oil sold in the three months ended March 31, 2013 decreased by 1,210 bbls, and the average price realized for oil decreased $3.54 per bbl to $108.58 per bbl for the three months ended March 31, 2013 from $112.12 per bbl realized for the comparable period in 2012.

Income from natural gas royalties, excluding the Trust's interest in Tidelands, for the three months ended March 31, 2013 decreased to $112,263 from $169,052 for the comparable period in 2012. The volume of natural gas sold in the three months ended March 31, 2013 decreased by 9,372 mcf, and the average price realized for natural gas decreased $0.54 per mcf to $3.83 per mcf for the three months ended March 31, 2013 from $4.37 per mcf realized for the comparable period in 2012.

Income from distributions received from Tidelands for the three months ended March 31, 2013 decreased to $57,127 from $91,551 for the comparable period in 2012.

The following table presents the quantities of oil and natural gas sold and the average price realized for the three months ended March 31, 2013, and those realized for the comparable period in 2012, excluding the Trust's interest in Tidelands.

                              Three Months Ended March 31,
                                2013                 2012          % Change
                                       (unaudited)
           Oil
           Bbls sold                5,916                7,126           (17 )%
           Average price   $       108.58       $       112.12            (3 )%
           Natural gas
           Mcf sold                29,304               38,676           (24 )%
           Average price   $         3.83       $         4.37           (12 )%

General and administrative expenses decreased to $78,735 for the three months ended March 31, 2013 from $86,359 for the comparable period of 2012, primarily due to decreased professional fees and expenses.

Results of Operations-Nine Months Ended March 31, 2013 Compared to the Nine Months Ended March 31, 2012

Income from oil and natural gas royalties decreased $960,496 to $2,013,137 during the nine months ended March 31, 2012 from $2,973,633 realized for the comparable period in 2012. Marine believes that royalties decreased for the nine months ended March 31, 2013 primarily due to a 26% decrease in the production of oil, a 5% decrease in the average realized price for oil, a 28% decrease in the production of natural gas and a 23% decrease in the average realized price for natural gas as compared to the comparable period in 2012.


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Distributable income decreased to $1,996,646 for the nine months ended March 31, 2013 from $3,043,275 realized for the comparable period in 2012.

Income from oil royalties, excluding the Trust's interest in Tidelands, for the nine months ended March 31, 2013 decreased to $1,712,596 from $2,427,898 realized for the comparable period in 2012. The volume of oil sold in the nine months ended March 31, 2013 decreased by 5,542 bbls, and the average price realized for oil decreased $5.35 per bbl to $108.45 per bbl for the nine months ended March 31, 2013 from $113.80 per bbl realized for the comparable period in 2012.

Income from natural gas royalties, excluding the Trust's interest in Tidelands, for the nine months ended March 31, 2012 decreased to $300,541 from $545,735 for the comparable period in 2012. The volume of natural gas sold in the nine months ended March 31, 2013 decreased by 30,937 mcf, and the average price for natural gas decreased $1.16 per mcf to $3.79 per mcf for the nine months ended March 31, 2013 from $4.95 per mcf realized for the comparable period in 2012.

Income from distributions received from Tidelands for the nine months ended March 31, 2013 decreased to $202,471 from $304,657 for the comparable period in 2012.

The following table presents the quantities of oil and natural gas sold and the average price realized for the nine months ended March 31, 2013, and those realized for the comparable period in 2012, excluding the Trust's interest in Tidelands.

                               Nine Months Ended March 31,
                               2013                 2012           % Change
                                       (Unaudited)
           Oil
           Bbls sold              15,792                21,334           (26 )%
           Average price   $      108.45       $        113.80            (5 )%
           Natural gas
           Mcf sold               79,319               110,256           (28 )%
           Average price   $        3.79       $          4.95           (23 )%

General and administrative expenses decreased to $219,011 for the nine months ended March 31, 2013 from $232,228 for the comparable period in 2012, primarily due to decreased professional fees and expenses.

Forward-Looking Statements

The statements discussed in this Quarterly Report on Form 10-Q regarding Marine's future financial performance and results, and other statements that are not historical facts, are forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This report uses words such as "anticipate," "believe," "budget," "continue," "estimate," "expect," "intend," "may," "plan," or other similar words to identify forward-looking statements in this report. You should read statements that contain these words carefully because they discuss future expectations, contain projections of Marine's financial condition, and/or state other "forward-looking" information. Actual results may differ from expected results because of: reductions in price or demand for oil and natural gas, which might then lead to decreased production; reductions in production due to the depletion of existing wells or disruptions in service, which may be caused by storm damage to production facilities, blowouts or other production accidents, or geological changes such as cratering of productive formations; changes in regulations; general economic conditions; actions and policies of petroleum-producing nations; other changes in domestic and international energy markets; and the expiration, termination or release of leases subject to Marine's interests. Additional risks are set forth in Marine's Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Events may occur in the future that Marine is unable to accurately predict or over which it has no control. If one or more of these uncertainties materialize, or if underlying assumptions prove incorrect, actual outcomes may vary materially from those forward-looking statements included in this Quarterly Report on Form 10-Q.


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Website

Marine makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports at its website at www.marps-marinepetroleumtrust.com. Each of these reports will be posted on this website as soon as reasonably practicable after such report is electronically filed with, or furnished, to the SEC.

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