VOC Energy Trust(VOC) - 2020 Q3 - Quarterly Report

Report Overview This Quarterly Report on Form 10-Q for the period ended September 30, 2020, is filed by VOC Energy Trust, a Delaware statutory trust with 17 million units outstanding - This is a Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, filed by VOC Energy Trust[2] - The registrant is VOC Energy Trust, a Delaware statutory trust, with its units of beneficial interest traded on the New York Stock Exchange under the symbol 'VOC'[2][3] - As of November 9, 2020, there were 17,000,000 Units of Beneficial Interest outstanding[4] PART I—FINANCIAL INFORMATION Financial Statements For the third quarter of 2020, VOC Energy Trust reported zero distributable income, a stark contrast to the $3.5 million distributed in the same period of 2019, driven by a collapse in income from its net profits interest due to low oil prices Condensed Financial Statements This section presents the unaudited condensed statements of distributable income, assets, and trust corpus for the periods ended September 30, 2020 Condensed Statements of Distributable Income (Unaudited) | | Three months ended Sep 30, | | Nine months ended Sep 30, | | | :--- | :--- | :--- | :--- | :--- | | | 2020 | 2019 | 2020 | 2019 | | Income from net profits interest | $ — | $ 3,751,554 | $ 3,510,895 | $ 9,321,096 | | General and administrative expenses | $ (139,230) | $ (200,922) | $ (661,579) | $ (738,665) | | Distributable income | $ — | $ 3,485,000 | $ 2,380,000 | $ 8,670,000 | | Distributions per Trust unit | $ — | $ 0.205 | $ 0.14 | $ 0.51 | Condensed Statements of Assets and Trust Corpus (Unaudited) | | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $ 795,448 | $ 326,132 | | Investment in net profits interest (net) | $ 19,120,301 | $ 63,019,768 | | Total assets / Trust corpus | $ 19,915,749 | $ 63,345,900 | - For the nine months ended September 30, 2020, the Trust recorded an amortization and impairment expense of $43.9 million, which included a significant impairment charge of $41,261,354, compared to an amortization expense of $5.2 million in the same period of 2019[11] Notes to Condensed Financial Statements The notes clarify that the Trust is a passive entity holding an 80% net profits interest in oil and gas properties from VOC Brazos, which terminates by 2030 or after 10.6 MMBoe are produced - The Trust was formed to acquire and hold an 80% term net profits interest from oil and natural gas properties held by VOC Brazos and VOC Kansas, terminating on the later of December 31, 2030, or when 10.6 million barrels of oil equivalent (MMBoe) have been produced and sold[13][15] - The Trust uses a modified cash basis of accounting, a comprehensive basis of accounting other than U.S. GAAP, as permitted for royalty trusts by the SEC[19][20] - Due to a substantial decline in oil future markets, the Trust recorded an impairment expense of $41,261,354 during the quarter ended March 31, 2020, which was charged directly to Trust corpus and did not affect distributable income, with no additional impairment recorded in Q3 2020[21] - There was no third quarterly distribution in 2020 because revenue collected by VOC Brazos from April to June 2020 was insufficient to cover costs, a direct result of the decline in oil prices from $63.27/barrel in January 2020 to a monthly average low of $16.70 in April 2020[28][31] - On October 20, 2020, the Trust announced a fourth-quarter distribution of $1,445,000, or $0.085 per Trust Unit, to be paid on November 13, 2020[35] Trustee's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The Trustee's analysis attributes the Trust's poor performance to the COVID-19 pandemic and the oil price war, which caused a collapse in crude oil prices, resulting in a $41.3 million impairment charge in Q1 2020 and zero distributable income for Q3 2020 Overview The overview emphasizes the severe negative impact of the COVID-19 pandemic and the dispute between Russia and OPEC on oil prices, leading to a significant impairment charge and no distribution for Q3 2020 - The COVID-19 pandemic and the dispute over production levels between Russia and OPEC led to a significant decline in oil prices, with the WTI spot price falling from $63.27/barrel on Jan 6, 2020, to $38.79/barrel on Nov 5, 2020[38] - A substantial decline in oil future markets led to an impairment expense of $41,261,354 during the quarter ended March 31, 2020, which was charged to Trust corpus and did not affect distributable income[39] Results of Operations In Q3 2020, the Trust generated no income from its net profits interest, down from $3.75 million in Q3 2019, caused by a 67.6% plunge in gross proceeds driven by a 61.6% decrease in average oil price and a 17.4% drop in oil sales volume Quarterly Operating Results Comparison (For the three months ended Sep 30) | | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Average Oil Price (per Bbl) | $22.53 | $58.63 | -61.6% | | Oil Sales Volume (Bbl) | 122,672 | 148,496 | -17.4% | | Total Gross Proceeds | $2,889,592 | $8,929,192 | -67.6% | | Total Costs | $2,898,398 | $4,239,750 | -31.6% | | Income from net profits interest | $0 | $3,751,554 | -100% | Nine-Month Operating Results Comparison (For the nine months ended Sep 30) | | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Average Oil Price (per Bbl) | $45.08 | $56.87 | -20.7% | | Total Gross Proceeds | $20,734,685 | $24,497,242 | -15.4% | | Development Expenses | $5,937,342 | $1,936,834 | +206.5% | | Income from net profits interest | $3,510,895 | $9,321,096 | -62.3% | - The significant increase in nine-month development expenses was primarily due to payments totaling $4,940,967 made to the operator from net revenue received from the Hawkwood Development wells[46] Liquidity and Capital Resources The Trust's primary use of cash is for distributions to unitholders, after covering administrative expenses, with liquidity supported by a cash reserve held by the Trustee and a $1.7 million letter of credit from VOC Brazos - The Trust's main use of cash is for distributions to unitholders, and as of September 30, 2020, the Trustee held a cash reserve of $795,448 for future liabilities[48] - To mitigate liquidity risk, VOC Brazos has provided a $1.7 million letter of credit to the Trustee to cover future expenses if cash on hand is insufficient, and the Trust had no borrowings during the period[49] - VOC Brazos can maintain a cash reserve of up to $1.0 million from funds otherwise distributable to the Trust, with the balance of this reserve at $992,955 as of September 30, 2020[51] Controls and Procedures The Trustee evaluated the Trust's disclosure controls and procedures, concluding they were effective as of September 30, 2020, with no material changes in internal control over financial reporting during the quarter - The Trustee evaluated the Trust's disclosure controls and procedures and concluded that they are effective[56] - There were no changes in the Trust's internal control over financial reporting during the quarter ended September 30, 2020, that materially affected or are likely to materially affect financial reporting[58] - The Trustee relies on information provided by VOC Brazos, including operating data, expenditure plans, and reserve information, for its disclosures[57] PART II—OTHER INFORMATION Risk Factors This section emphasizes that the COVID-19 pandemic and the volatility in oil prices, driven by actions of OPEC and other nations, pose material risks to the Trust, potentially leading to reduced or eliminated distributions - The COVID-19 pandemic is identified as a primary risk factor, causing negative impacts on global economic activity, oil demand, and prices, which could materially and adversely affect proceeds and distributions to unitholders[62] - The actions and lack of agreement among OPEC and other oil-exporting nations, such as the price war in March 2020, create significant price volatility and could materially reduce or eliminate cash available for distribution[64] - A prolonged period of low crude oil prices could lead the operator to shut in or curtail production, or plug and abandon marginal wells, which would reduce the amount of oil produced and the ultimate proceeds received by the Trust[62] Exhibits This section lists the exhibits filed with the Form 10-Q, which consist of the CEO and CFO certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 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 is signed on November 9, 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 - The report was duly signed on November 9, 2020, on behalf of VOC Energy Trust by its Trustee, The Bank of New York Mellon Trust Company, N.A[68][70] - It is explicitly stated that the Registrant, VOC Energy Trust, does not have a principal executive officer, principal financial officer, board of directors, or similar functions[69]