VOC Energy Trust(VOC) - 2020 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements VOC Energy Trust reported a Q1 2020 distributable income of $1.87 million and a $41.3 million asset impairment charge due to a sharp decline in oil markets Condensed Statements of Distributable Income (Unaudited) | | Three months ended March 31, | | | :--- | :--- | :--- | | | 2020 | 2019 | | Income from net profits interest | $2,073,260 | $2,610,130 | | General and administrative expenses | $(290,458) | $(379,769) | | Distributable income | $1,870,000 | $2,465,000 | | Distributions per Trust unit | $0.110 | $0.145 | Condensed Statements of Assets and Trust Corpus (Unaudited) | | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $238,934 | $326,132 | | Investment in net profits interest (net) | $20,290,684 | $63,019,768 | | Total assets / Trust corpus | $20,529,618 | $63,345,900 | - The Trust recorded a significant impairment expense of $41,261,354 during the quarter ended March 31, 2020, due to a substantial decline in oil future markets[12][22] - A subsequent distribution of $510,000, or $0.03 per Trust Unit, was announced on April 17, 2020, for the first quarter, reflecting the sharp drop in crude oil prices[33][34] Notes to Condensed Financial Statements The notes clarify the Trust's passive structure, its modified cash basis accounting, and a material $41.3 million impairment charge due to market declines - The Trust holds an 80% term net profits interest in oil and natural gas properties, which terminates on the later of December 31, 2030, or when 10.6 million barrels of oil equivalent (MMBoe) have been produced and sold[16] - The Trust uses the modified cash basis of accounting, where revenues are recognized upon receipt and expenses upon payment[20][21] - The first quarterly distribution in 2020 of $0.11 per unit was paid on February 14, 2020, based on net proceeds from Q4 2019[30] - VOC Brazos has provided a letter of credit for $1.7 million to the Trustee to cover potential future Trust expenses[32][45] Trustee's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The discussion highlights a sharp drop in crude prices due to COVID-19, leading to a $41.3 million impairment and a 20.6% decrease in operational income - The West Texas Intermediate spot price for crude oil dropped sharply from $61.18 per barrel on January 2, 2020, to $12.34 on April 28, 2020, due to the COVID-19 pandemic and an oil production dispute[36] Operational Results Comparison (for distributions paid in Q1) | | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Sales Volume (BOE) | 168,856 | 140,036 | +20.6% | | Average Oil Price ($/Bbl) | $53.22 | $63.18 | -15.8% | | Total Gross Proceeds | $8,370,257 | $8,290,554 | +1.0% | | Total Costs | $5,778,682 | $5,027,891 | +15.0% | | Excess of Revenues over Costs | $2,591,575 | $3,262,663 | -20.6% | | Income from Net Profits Interest | $2,073,260 | $2,610,130 | -20.6% | - The increase in total costs was driven by a 7.8% rise in lease operating expenses, an 18.5% increase in production and property taxes, and a 35.0% surge in development expenses[42] - The Trustee is withholding an amount from the second quarterly distribution estimated to be sufficient to pay Trust expenses for the next twelve months due to the uncertain economic environment[34] Quantitative and Qualitative Disclosures About Market Risk The Trust is exempt from these disclosures as it qualifies as a smaller reporting company - As a smaller reporting company defined by Rule 12b-2 of the Exchange Act, the Trust is not required to provide information under this item[50] Controls and Procedures The Trustee concluded that disclosure controls were effective, while noting reliance on operational information provided by VOC Brazos - A Trust Officer of the Trustee concluded that the disclosure controls and procedures of the Trust are effective[52] - The Trustee relies on information provided by VOC Brazos, including operating data, future plans, and reserve information[53] - There were no changes in the Trust's internal control over financial reporting during the quarter ended March 31, 2020, that materially affected, or are reasonably likely to materially affect, its internal controls[54] PART II—OTHER INFORMATION Risk Factors This section highlights significant new risks from the COVID-19 pandemic and OPEC actions, which have caused a severe oil price collapse - The COVID-19 pandemic is negatively impacting worldwide economic activity and global demand for crude oil, leading to a sharp drop in prices[57] - A prolonged period of low crude oil prices will adversely affect the operators of the underlying properties and will result in substantially lower or potentially no quarterly cash distributions to unitholders[57] - The failure of OPEC and Russia to agree on production cuts in March 2020 led to an immediate and steep decrease in oil prices, highlighting the risk of price volatility from geopolitical actions[59] Exhibits This section lists the Sarbanes-Oxley Act certifications filed as exhibits with the Form 10-Q Filed Exhibits | Exhibit Number | Description | | :--- | :--- | | 31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Signatures - The report was signed on May 11, 2020, by Michael J. Ulrich, Vice President of The Bank of New York Mellon Trust Company, N.A., acting as Trustee for VOC Energy Trust[64][66] - The filing notes that VOC Energy Trust has no principal executive officer, principal financial officer, or board of directors, as these functions are performed by the Trustee[64]