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VOC > SEC Filings for VOC > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for VOC ENERGY TRUST

Form 10-Q for VOC ENERGY TRUST


8-May-2014

Quarterly Report


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

The following discussion 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 the assigned interest in the hedge contracts 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 and the hedge contracts.

Results of Operations for the Quarters Ended March 31, 2014 and 2013



The following is a summary of income from net profits interest received by the
Trust for the three months ended March 31, 2014 and 2013 consisting of the
January distribution for each respective year:



                                                                Three months ended
                                                                    March 31,
                                                               2014            2013
Sales volumes:
Oil (Bbl)                                                       194,014         192,173
Natural gas (Mcf)                                               148,073         148,688
Total (BOE)                                                     218,693         216,954
Average sales prices:
Oil (per Bbl)                                              $      95.98    $      87.17
Natural gas (per Mcf)                                      $       4.52    $       3.68
Gross proceeds:
Oil sales                                                  $ 18,621,433    $ 16,751,083
Natural gas sales                                               669,851         547,902
Total gross proceeds                                         19,291,284      17,298,985
Costs:
Production and development costs:
Lease operating expenses                                      3,685,711       3,703,773
Production and property taxes                                 2,335,396       2,551,450
Development expenses                                            796,133       6,933,045
Total                                                         6,817,240      13,188,268
Settlement of hedge contracts - payments made(received)         123,630      (1,136,009 )
Total costs                                                   6,940,870      12,052,259

Excess of revenues over direct operating expenses and
lease equipment and development costs                        12,350,414       5,246,726
Times net profits interest over the term of the Trust                80 %            80 %
Income from net profits interest before reserve
adjustments                                                   9,880,331       4,197,381
Cash reserve                                                          0         250,000
Income from net profits interest                           $  9,880,331    $  4,447,381

The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2014 substantially represents the production and settlement of hedge contracts by VOC Brazos from September 2013 through November 2013. The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2013 substantially represents the production by VOC Brazos from September 2012 through November 2012. The revenues from oil production are typically received by VOC Brazos one month after production.

Gross proceeds. Oil and natural gas sales were $19,291,284 for the three months ended March 31, 2014, an increase of $1,992,299 or 11.5% from $17,298,985 for the three months ended March 31, 2013. Revenues are a function of oil and natural gas sales prices and volumes sold. The increase in gross proceeds was due to higher market prices for oil and natural gas and an increase


in oil sales volumes during the first quarter of 2014. These increases were slightly offset by a decrease in natural gas sales during the first quarter of 2014. During the three months ended March 31, 2014, the average price for oil increased 10.1% to $95.98 per Bbl and the average price for natural gas increased 22.8% to $4.52 per Mcf. Oil sales volumes were 194,014 Bbls for the three months ended March 31, 2014, an increase of 1,841 Bbls or 1.0% from 192,173 Bbls, while natural gas sales volumes were 148,073 Mcf, a decrease of 615 Mcf or 0.4%.

Costs. Lease operating expenses were $3,685,711 for the three months ended March 31, 2014, a decrease of $18,062 or 0.5% from $3,703,773 for the three months ended March 31, 2013. Production and property taxes were $2,335,396 for the three months ended March 31, 2014, a decrease of $216,054 or 8.5% from $2,551,450 for the same period in 2013. Such decrease is primarily due to a 13.7% decrease in ad valorem taxes. Development expenses were $796,133 for the three months ended March 31, 2014, a decrease of $6,136,912 or 88.5% from $6,933,045 for the same period in 2013. The decrease was primarily due to the timing of when the costs were incurred as well as costs associated with a horizontal well that was abandoned in 2013 due to mechanical issues with the wellbore.

Settlement of hedge contracts. Cash settlements relating to hedge contracts resulted in losses of $123,630 for the three months ended March 31, 2014, a decrease of $1,259,639 from gains of $1,136,009 for the three months ended March 31, 2013. The decrease was due primarily to lower hedge volumes, offset by higher market prices for oil and lower hedge strike prices.

Excess of revenues over direct operating expenses and lease equipment and development costs. The excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $12,350,414 for the three months ended March 31, 2014, an increase of $7,103,688 or 135.4% from $5,246,726 for the three months ended March 31, 2013. The Trust's 80% net profits interest of these totals were $9,880,331 and $4,197,381, respectively. During the three months ended March 31, 2014 and 2013, VOC Brazos released $0 and $250,000, respectively, from the cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $9,880,331 and $4,447,381 for such periods, respectively. These amounts were further reduced by a Trust holdback for future expenses of $190,331 and $27,381 for the three months ended March 31, 2014 and 2013, respectively. The Trustee paid general and administrative expenses of $375,659 for the three months ended March 31, 2014, an increase of $116,875 from $258,784 for the three months ended March 31, 2013. These factors resulted in distributable income for the three months ended March 31, 2014 of $9,690,000, an increase of $5,270,000 from $4,420,000 for the three months ended March 31, 2013.

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 a quarterly administrative fee to VOC Brazos pursuant to an 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 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 that the Trustee decides to hold as a reserve against future expenses. As of March 31, 2014, $265,942 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 expenses. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid. During the three months ended March 31, 2014 and 2013, there were no such borrowings. VOC Brazos has provided a letter of credit in the amount of $1 million to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future 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 substantially all of the underlying properties are located in mature fields, VOC Brazos does not expect future costs for the underlying properties to change significantly compared to recent historical costs other than changes due to fluctuations in the general cost of oilfield services. VOC Brazos may establish a cash reserve of up to $1.0 million in the aggregate at any given time from the dollar amount otherwise distributable to the Trust to reduce the impact on distributions of uneven capital expenditure timing. VOC Brazos released $0 and $250,000 in January 2014 and 2013, respectively, in accordance with this cash reserve. The reserve balance was $1,000,000 and $0 at March 31, 2014 and 2013, respectively.

The amounts received by VOC Brazos 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 proceeds. However, if the hedge payments received by VOC Brazos under the hedge contracts and other non-production revenue exceed operating expenses during a quarterly 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 quarterly period where the hedge payments and the other non-production revenue are less than such expenses. In addition, the aggregate amounts paid by VOC Brazos on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.

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.

Hedge Contracts

The revenues derived from the underlying properties depend substantially on prevailing crude oil prices and, to a lesser extent, natural gas prices. As a result, commodity prices also affect the amount of cash flow available for distribution to the Trust unitholders. Lower prices may also reduce the amount of oil and natural gas that VOC Brazos can economically produce. VOC Brazos sells the oil and natural gas production from the underlying properties under floating market price contracts each month. VOC Brazos has entered into hedge contracts for the six months ending June 30, 2014, to reduce the exposure of the revenues from oil production from the underlying properties to fluctuations in crude oil prices and to achieve more predictable cash flow. However, these contracts limit the amount of cash available for distribution if prices increase above the fixed hedge price. The hedge contracts consist of fixed price swap contracts that have been placed with major trading counterparties whom VOC Brazos believes represent minimal credit risk. The Trust cannot provide assurance, however, that these trading counterparties will not become credit risks in the future.

The crude oil swap contracts will settle based on the average of the settlement price for each commodity business day in the contract month. In a swap transaction, the counterparty is required to make a payment to VOC Brazos for the difference between the fixed price and the settlement price if the settlement price is below the fixed price. VOC Brazos is required to make a payment to the counterparty for the difference between the fixed price and the settlement price if the settlement price is above the fixed price. From April 1, 2014 through June 30, 2014, VOC Brazos' crude oil price risk management positions in swap contracts are as follows:

Fixed Price Swaps

                            Weighted
              Volumes     Average Price
Month        (Barrels)    (Per Barrel)
April 2014      13,008   $        102.15
May 2014        12,939   $        102.15
June 2014       12,870   $        102.15

The amounts received by VOC Brazos 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 proceeds. However, if the hedge payments received by VOC Brazos under the hedge contracts and other non-production revenue exceed operating expenses during a quarterly 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 quarterly period where the hedge payments and the other non-production revenue are less than such expenses. In addition, the aggregate amounts paid by VOC Brazos on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.

Note Regarding 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. Although VOC Brazos advised the Trust that it believes that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are disclosed in this Form 10-Q and in the Trust's Annual Report on Form 10-K for the year ended December 31, 2013 (the "Form 10-K"), including under the section "Item 1A. Risk Factors". All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.


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