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MVO > SEC Filings for MVO > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for MV OIL TRUST

Form 10-K for MV OIL TRUST


13-Mar-2014

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 to distribute to the trust unitholders cash that the trust receives in respect of the net profits interest 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 uses the modified cash basis of accounting to report receipts by the trust of the net profits interest and payments of expenses incurred. The net profits interest represents the right to receive revenues (oil, gas and natural liquid gas sales) less direct operating expenses (lease operating, maintenance and overhead expenses and production and property taxes) and an adjustment for lease equipment cost and lease development expenses (which are capitalized in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP")) of the underlying properties times 80%. Cash distributions of the trust will be made based on the amount of cash received by the trust pursuant to terms of the conveyance creating the net profits interest.

The financial statements of the trust, as prepared on a modified cash basis, reflect the trust's assets, trust corpus, earnings and distributions as follows:

(a)
Income from the net profits interest is recorded when distributions are received by the trust;

(b)
Distributions to trust unitholders are recorded when paid by the trust;

(c)
Trust general and administrative expenses (which include the trustee's fees as well as accounting, engineering, legal and other professional fees) are recorded when paid;

(d)
Cash reserves for trust expenses may be established by the trustee for certain expenditures that would not be recorded as contingent liabilities under U.S. GAAP;

(e)
Amortization of the investment in net profits interest, calculated using the units-of-production method based upon total estimated proved reserves, is charged directly to trust corpus and does not affect distributable income; and

(f)
The trust evaluates its investment in the net profits interest periodically to determine whether its aggregate value has been impaired below its total capitalized cost based on the underlying properties. The trust will provide a write-down to its investment in the net profits interest if and when total capitalized costs, less accumulated amortization, exceed undiscounted future net cash flows attributable to the trust's interests in the proved oil and gas reserves of the underlying properties.


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While these statements differ from financial statements prepared in accordance with U.S. GAAP, the modified cash basis of reporting revenues and distributions is considered most meaningful because quarterly distributions to the trust unitholders are based on net cash receipts received from MV Partners. This comprehensive basis of accounting other than U.S. GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Comparison of Results of the Trust for the Years Ended December 31, 2013 and 2012

Income for the trust from the net profits interest was $37.9 million for the year ended December 31, 2013 compared to $41.5 million for the year ended December 31, 2012. General and administrative expense for the trust was $0.8 million for 2013 and $0.9 million for 2012. The trust paid administration fees of $0.1 million to MV Partners for each of 2013 and 2012. In addition, the trustee withheld $2,000 and used $158,000 of cash on hand for future trust expenses for the year ended December 31, 2013 and 2012, respectively, which resulted in distributable income of $37.0 million, or $3.220 per unit, in 2012 compared to $40.8 million, or $3.550, per unit in 2012.

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, 2013 substantially represented the production by MV Partners from September 2012 through August 2013, and 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. 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, 2013, 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, 2012 through September 30, 2013. 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.

Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $47.3 million for the period from October 1, 2012 through September 30, 2013. The trust's net profits interest (80%) of this total was $37.9 million for the year ended December 31, 2013. In addition, during 2013, MV Partners released and paid to the trust a net of $0 of the reserve for future capital expenditures, which resulted in total cash proceeds received by the trust of $37.9 million for the year ended December 31, 2013.

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.

The average price received for crude oil sold during 2013 was $88.10 per Bbl, while the average price received for crude oil sold during 2012 was $88.30 per Bbl. The average price received for natural gas sold during 2013 was $3.29 per Mcf, while the average price received for natural gas sold during 2012 was $3.21 per Mcf. The average prices for 2013 related to production by MV Partners from September 2012 through August 2013, and the average prices for 2012 related to production by MV Partners from September 2011 through August 2012.

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


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October 1, 2012 to September 30, 2013 were 688,759 Bbls of oil, 54,662 Mcf of natural gas and 2,155 Bbls of natural gas liquids for a total equivalent barrels of oil of 699,270. 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.

As noted above, the amounts reflected in the accompanying financial statements for the trust's year ended December 31, 2013 reflect cash received by the trust during the year. Such cash is primarily derived from production by MV Partners from September 2012 through August 2013. 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.

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

Income for the trust from the net profits interest 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, 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


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

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, 2013. The
historical results of the underlying properties are not indicative of the future
distributions of the trust.

                                                        (unaudited) (in thousands)
                                                          Year ended December 31,
                                                        2011         2012       2013
 Revenues:
 Oil sales                                            $  80,458    $ 77,894   $ 78,295
 Natural gas sales                                          251         178        227
 Natural gas liquid sales                                   214         157         94


 Total                                                   80,923      78,229     78,616
 Direct operating expenses:
 Lease operating expenses                                15,564      15,976     15,797
 Lease maintenance                                        1,943       2,408      2,440
 Lease overhead                                           2,859       2,979      3,199
 Production and property tax                              3,293       3,546      3,105


 Total                                                   23,659      24,909     24,541


 Excess of revenues over direct operating expenses    $  57,264    $ 53,320   $ 54,075

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, 2011, the trust's net profits


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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, 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. For the year ended December 31, 2013, 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, 2012 through September 30, 2013.

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, 2013. Sales volumes for natural gas liquids during the periods presented were not significant.

                                                         (unaudited)
                                                   Year ended December 31,
                                                  2011        2012      2013
         Operating data:
         Sales volumes:
         Oil (MBbls)                                  911        888       854
         Natural gas (MMcf)                            70         70        66
         Average Prices:
         Oil (per Bbl)                           $  88.31    $ 87.68   $ 91.65
         Natural gas (per Mcf)                   $   3.56    $  2.55   $  3.44
         Capital expenditures (in thousands):
         Property acquisition                    $  1,506    $ 2,377   $ 1,956
         Well development                           1,006      2,259     1,636


         Total                                   $  2,512    $ 4,636   $ 3,592

Discussion and Analysis of Historical Results of the Underlying Properties

Comparison of Results of the Underlying Properties for the Years Ended December 31, 2013 and 2012

Excess of revenues over direct operating expenses for the underlying properties was $54.1 million for the year ended December 31, 2013, compared to $53.3 million for the year ended December 31, 2012. 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 2013 offset by a small decrease in production volumes. A decrease in direct operating expenses also contributed to the increase in excess of revenues over direct operating expenses.

Revenues. Revenues from oil, natural gas and natural gas liquid sales increased $0.4 million to $78.6 million for the year ended December 31, 2013 compared to $78.2 million for the year ended December 31, 2012. This increase in revenues was primarily the result of an increase in the average price received for crude oil sold from $87.68 per Bbl for the year ended December 31, 2012 to $91.65 per Bbl for the year ended December 31, 2013. This increase in revenues reflects an increase in the average price received for natural gas sold from $2.55 per Mcf for the year ended December 31, 2012 to $3.44 per Mcf for the year ended December 31, 2013.

Prices. The average price received for crude oil sold increased from $87.68 per Bbl for the year ended December 31, 2012 to $91.65 per Bbl for the year ended December 31, 2013. 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 increased from $2.55 per Mcf for the year ended December 31, 2012 to $3.44 per Mcf


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for the year ended December 31, 2013. The average price received for natural gas sold increased as a result of an increase 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 888 MBbls for the year ended December 31, 2012 to 854 MBbls for the year ended December 31, 2013. Sales volumes for natural gas decreased from 70 MMcf for the year ended December 31, 2012 to 66 MMcf for the year ended December 31, 2013. The small decrease in overall production sales volumes was less than the natural decline of the underlying properties.

Direct operating expenses. Direct operating expenses decreased from $24.9 million for the year ended December 31, 2012 to $24.5 million for the year ended December 31, 2013. This decrease was primarily a result of a decrease in lease operating and production and property tax.

Lease operating expense decreased from $16.0 million for the year ended December 31, 2012 to $15.8 million for the year ended December 31, 2013. This decrease was primarily the result of a decrease in production quantities due to the natural decline of the properties.

Production and property tax decreased from $3.5 million for the year ended December 31, 2012 to $3.1 million for the year ended December 31, 2013. This decrease was primarily the result of reduced property tax values due to recent declines in the price of oil at the end of 2012.

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 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.


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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.

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, 2013, $119,000 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 2012 and 2013, 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.

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.

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.

Planned Development and Workover Program

Since acquiring the underlying properties in 1998 and 1999, MV Partners has implemented a development program on the underlying properties to develop further proved undeveloped reserves and to help offset the natural decline in production. These activities included recompletion of certain existing wells into new producing horizons, workovers of existing wells, and the drilling of infill development wells.

The development program that MV Partners currently intends to implement over the five years ending December 31, 2018 with respect to the underlying properties categorized as proved undeveloped reserves consists of drilling development wells, recompletion and workover projects, and polymer workovers. The development program that MV Partners currently intends to implement over the next five years with respect to the underlying properties categorized as proved developed non-producing


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reserves consists of well-reactivation projects, injection well-workover projects, recompletion projects, and well-workover projects.

MV Partners has undertaken 3-D seismic surveys covering several leases constituting a part of the underlying properties. These leases have over 31 . . .

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