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WHZ > SEC Filings for WHZ > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for WHITING USA TRUST II

Form 10-Q for WHITING USA TRUST II


9-May-2014

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 Whiting USA Trust II. References to "Whiting" in this document refer to Whiting Petroleum Corporation and its subsidiaries. References to "Whiting Oil and Gas" in this document refer to Whiting Oil and Gas Corporation, a 100%-owned subsidiary of Whiting Petroleum Corporation.

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 the Trustee's discussion and analysis contained in the Trust's 2013 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 amendments to those reports are available on the SEC's website www.sec.gov.

Note Regarding Forward-Looking Statements

This Quarterly Report on 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 facts included in this Quarterly Report on 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. 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 Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:

the effect of changes in commodity prices and conditions in the capital markets;

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

risks incident to the operation and drilling of oil and natural gas wells;

future production and development costs;

the inability to access oil and natural gas markets due to market conditions or operational impediments;

failure of the underlying properties to yield oil or natural gas in commercially viable quantities;

the effect of existing and future laws and regulatory actions;

competition from others in the energy industry;

risks arising out of the hedge contracts;

inflation or deflation; and

other risks described under the caption "Risk Factors" in the Trust's 2013 Annual Report on Form 10-K.

All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or the Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.

Overview and Trust Termination

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.


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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 March 31, 2014. The February 2014 distribution in the first quarter of 2014 was mainly affected, however, by October 2013 through December 2013 oil prices and September 2013 through November 2013 natural gas prices.

                                                 2012                                             2013                          2014
                                Q1          Q2          Q3          Q4          Q1          Q2           Q3          Q4          Q1
Crude Oil (per Bbl)          $ 102.94     $ 93.51     $ 92.19     $ 88.20     $ 94.34     $ 94.23     $ 105.82     $ 97.50     $ 98.62
Natural Gas (per MMBtu)      $   2.72     $  2.21     $  2.81     $  3.41     $  3.34     $  4.10     $   3.58     $  3.60     $  4.93

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; and (ii) a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties causing an extension of the length of time required to produce 11.79 MMBOE (10.61 MMBOE at the 90% NPI). 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 (10.61 MMBOE at the 90% NPI) have been produced from the underlying properties and sold, 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 or yield. As a result, the market price of the Trust units will decline to zero at termination of the Trust. As of March 31, 2014 on a cumulative accrual basis, 3.55 MMBOE (33%) of the Trust's total 10.61 MMBOE have been produced and sold (of which proceeds from the sale of 347 MBOE, which is 90% of 385 MBOE, will be distributed to the unitholders in the Trust's forthcoming May 2014 distribution). The remaining minimum reserve quantities are projected to be produced prior to December 31, 2021, based on the Trust's reserve report as of December 31, 2013. Since the Trust is not currently expected to contractually terminate until December 31, 2021, additional reserves and production attributable to the NPI may be available for distribution to unitholders (also based on the year-end reserve report) between the time that the Trust's minimum 10.61 MMBOE have been produced and sold and the expected December 31, 2021 termination date of the Trust occurs. Accordingly, the Trust's remaining reserves attributable to the 90% NPI were estimated to be 8.15 MMBOE as of December 31, 2013, which is more than the minimum and there is no assurance that the Trust will receive more than the minimum amount of reserves. The Trust's Annual Report on Form 10-K includes additional information on the Trust's reserves as of December 31, 2013.

Capital Expenditure Activities

The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. The underlying properties have a capital expenditure budget per the December 31, 2013 reserve report of $31.5 million estimated to be spent over eight years. No assurance can be given, however, that any such expenditures will result in the production of 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 fields for which Whiting is not the operator, Whiting will have limited control over the timing and amount of capital expenditures relative to such fields. Please read the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, Item 1A. 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."

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 attributable to the 90% NPI) (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.


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The following table presents the underlying properties' aggregate capital expenditures attributable to the February 2014 distribution (in thousands):

                                           2014 Capital
                         Region            Expenditures
                         Rocky Mountains   $       1,531
                         Permian Basin               925
                         Gulf Coast                  523

                         Total             $       2,979

Results of Trust Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

The following is a summary of income from net profits interest and distributable
income received by the Trust for the three months ended March 31, 2014 and 2013,
consisting of the February distributions for each respective period (dollars in
thousands, except per Bbl, per Mcf and per BOE amounts):



                                                               Three Months Ended
                                                                   March 31,
                                                           2014                 2013
Sales volumes:
Oil from underlying properties (Bbl) (a)                   321,610  (c)         340,079  (e)
Natural gas from underlying properties (Mcf)               632,054  (c)         596,479  (e)

Total production (BOE)                                     426,952              439,492
Average sales prices:
Oil (per Bbl) (a)                                        $   84.94            $   79.63
Natural gas (per Mcf)                                    $    5.03  (d)       $    4.67  (d)
Costs (per BOE):
Lease operating expenses                                 $   28.92            $   27.68
Production taxes                                         $    3.81            $    3.50
Revenues:
Oil sales (a)                                            $  27,317  (c)       $  27,081  (e)
Natural gas sales                                            3,179  (c)           2,788  (e)

Total revenues                                           $  30,496            $  29,869

Costs:
Lease operating expenses                                 $  12,345            $  12,165
Production taxes                                             1,626                1,540
Development costs                                            2,979                2,630
Cash settlement (gains) losses on commodity
derivatives (b)                                                 -                    -

Total costs                                              $  16,950            $  16,335


Net proceeds                                             $  13,546            $  13,534
Net profits percentage                                          90 %                 90 %


Income from net profits interest                         $  12,191            $  12,181

Provision for estimated Trust expenses                        (200 )               (200 )
Montana state income tax withheld                               (5 )                 (6 )

Distributable income                                     $  11,986            $  11,975

(a) Oil includes natural gas liquids.

(b) As discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q, all costless collar hedge contracts terminate as of December 31, 2014. Consequently, for all distributions after the February 2015 distribution, there will be no further cash settlement gains or losses on commodity hedges, and the Trust will have increased exposure to oil and natural gas price volatility.


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(c) Oil and gas sales volumes and related revenues for the three months ended March 31, 2014 (consisting of Whiting's February 2014 distribution to the Trust) generally represent crude oil production from October 2013 through December 2013 and natural gas production from September 2013 through November 2013.

(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) Oil and gas sales volumes and related revenues for the three months ended March 31, 2013 (consisting of the February 2013 distribution) generally represent crude oil production from October 2012 through December 2012 and natural gas production from September 2012 through November 2012.

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. Oil and natural gas revenues were $0.6 million (or 2%) higher for the three months ended March 31, 2014 as compared to the same 2013 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The increase in revenue between periods was due to higher realized oil and natural gas prices and increased natural gas production, which were partially offset, however, by a decrease in oil production volumes. The average sales price realized increased for crude oil by 7% and for natural gas by 8% between periods. Gas production volumes increased by 36 MMcf (or 6%) between periods primarily due to one well that was recompleted within the last twelve months in the Keystone South field. Conversely, oil production volumes decreased by 18 MBbls (or 5%) when comparing the first quarter of 2014 to the same period in 2013 primarily due to normal field production decline. The decline in oil production between periods was partially offset, however, by i) one newly drilled well and three workover wells that came online during the last twelve months and ii) differences in timing associated with revenues received from non-operated properties. Based on the December 31, 2013 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 8.4% from 2014 through the estimated December 31, 2021 Trust termination date.

Lease Operating Expenses. Lease operating expenses ("LOE") increased $0.2 million (or 1%) during the first three months of 2014 compared to the same 2013 period primarily due to the increased cost of oilfield goods and services (including workover activity) caused by higher demand in the oil and gas industry. These increases also resulted in higher LOE of 4% on a per BOE basis, from $27.68 during the first quarter of 2013 to $28.92 for the same period in 2014.

Production Taxes. Production taxes are typically calculated as a percentage of oil and gas revenues, and production taxes as a percent of revenues remained relatively consistent for the three months ended March 31, 2014 and 2013 at 5.3% and 5.2%, respectively. Overall production taxes for the first quarter of 2014, however, increased $0.1 million (or 6%) as compared to the same period in 2013, primarily due to higher oil and natural gas sales revenue between periods.

Development Costs. Development costs for the three months ended March 31, 2014 were $0.3 million (or 13%) higher as compared to 2013 development costs for the same period. This increase was primarily related to i) one well recompletion in the Deb field of $0.5 million, ii) two well recompletions in the Agua Dulce field of $0.4 million and iii) drilling and facility expansion costs in the Rangely Weber field of $0.2 million. These development cost increases were partially offset by a $0.7 million decrease in the Keystone South field as a result of recompletion activity that occurred during the first quarter of 2013 that did not continue during the same period in 2014.


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Liquidity and Capital Resources

The Trust has no source of liquidity or capital resources other than cash flows from the NPI. 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 and the Delaware Trustee, a quarterly fee paid to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustee's duties, including third party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines the amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust's expenses for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities. The Trustee may borrow funds required to pay liabilities 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 Trustee borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid.

Income to the Trust from the NPI is based on the calculation and definitions of "gross proceeds" and "net proceeds" contained in the conveyance agreement, which is filed as an exhibit to this report, and reference is hereby made to such conveyance agreement for the actual definitions of "gross proceeds" and "net proceeds".

Whiting may reserve from the gross proceeds amounts up to a total of $2.0 million at any time for future development, maintenance or operating expenses. However, Whiting has not funded such a reserve since the inception of the Trust, including during the three months ended March 31, 2014 and 2013. Instead, Whiting deducted from the gross proceeds only actual costs paid for development, maintenance and operating expenses.

Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the three months ended March 31, 2014, Whiting incurred $0.1 million of plugging and abandonment charges on the underlying properties that were not passed on to the unitholders of the Trust.

In June 2012, Whiting established a letter of credit in the amount of $1.0 million in favor of the Trustee to provide a mechanism for the Trustee to pay the operating expenses of the Trust, in the event that Whiting should fail to lend funds to the Trust if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and Whiting has no obligation to lend funds to the Trust. If the Trustee were to draw on the letter of credit or borrow funds from Whiting or otherwise, no further distributions would be made to unitholders until all such amounts have been repaid by 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.

Future Trust Distributions to Unitholders

On May 7, 2014, the Trustee announced the Trust distribution of net profits for the first quarterly payment period in 2014. Unitholders of record on May 20, 2014 are expected to receive a distribution of $0.670762 per Trust unit, which is payable on or before May 30, 2014. This aggregate distribution to all Trust unitholders is expected to consist of net cash proceeds of $12.6 million paid by Whiting to the Trust, less a provision of $250,000 for estimated Trust expenses and $3,157 for Montana state income tax withholdings. There were no realized gains or losses on hedge settlements during the first quarterly payment period of 2014.

New Accounting Pronouncements

There were no accounting pronouncements issued during the three months ended March 31, 2014 applicable to the Trust or its financial statements.


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Critical Accounting Policies and Estimates

A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust's financial statements is included in Item 7 of the Trust's Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to the critical accounting policies during the three months ended March 31, 2014.

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