Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the Trusts financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The Trusts 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.
Results of Operations for the Quarters Ended September 30, 2018 and 2017
The cash received by the Trust from MV Partners during the quarter ended September 30, 2018 substantially represents the production by MV Partners from March 2018 through May 2018. The cash received by the Trust from MV Partners during the quarter ended September 30, 2017 substantially represents the production by MV Partners from March 2017 through May 2017. The revenues from oil production are typically received by MV Partners one month after production. The Trusts income from net profits interest increased $2,251,248 to $5,060,067 for the quarter ended September 30, 2018 from $2,808,819 for the quarter ended September 30, 2017. The increase was primarily due to a $2,814,060 increase in excess of revenues over direct operating expenses and lease equipment and development costs for the underlying properties to $6,325,084 from $3,511,024 for the same period in the prior year. These amounts were reduced by a Trust holdback for future expenses of $230,067 and $221,319 for the quarters ended September 30, 2018 and 2017, respectively. The Trustee paid general and administrative expenses of $178,263 and $264,298 for the quarters ended September 30, 2018 and 2017, respectively. During the quarter ended September 30, 2018,
MV Partners did not withhold or release any dollar amounts due to the Trust from the previously established reserve for future capital expenditures. These factors resulted in distributable income for the quarter ended September 30, 2018 of $4,830,000, an increase of $2,242,500 from $2,587,500 for the quarter ended September 30, 2017.
The average price received for crude oil sold was $61.30 per Bbl and the average price received for natural gas sold was $2.31 per Mcf for the period from April 1, 2018 through June 30, 2018. The average price received for crude oil sold was $44.74 per Bbl and the average price received for natural gas sold was $2.77 per Mcf for the period from April 1, 2017 through June 30, 2017.
The overall production sales volumes attributable to the net profits interest for the oil and gas production collected during the period from April 1, 2018 through June 30, 2018 were 152,598 Bbls of oil, 12,023 Mcf of natural gas and 100 Bbls of natural gas liquids for total barrels of oil equivalent of 154,667. The overall production sales volumes attributable to the net profits interest for the oil and gas production collected during the period from April 1, 2017 through June 30, 2017 were 152,206 Bbls of oil, 7,672 Mcf of natural gas and 140 Bbls of natural gas liquids for total barrels of oil equivalent of 153,575.
Results of Operations for the Nine Months Ended September 30, 2018 and 2017
The cash received by the Trust from MV Partners during the nine months ended September 30, 2018 substantially represents the production by MV Partners from September 2017 through May 2018. The cash received by the Trust during the nine months ended September 30, 2017 substantially represents the production by MV Partners from September 2016 through May 2017. The revenues from oil production are typically received by MV Partners one month after production. The Trusts income from net profits interest increased $4,471,360 to $12,204,908 for the nine months ended September 30, 2018 from $7,733,548 for the nine months ended September 30, 2017. The increase was primarily due to a $5,589,199 increase in excess of revenues over direct operating expenses and lease equipment and development costs for the underlying properties to $15,256,135 from $9,666,936 for the same period in the prior year. Additionally, the Trustee held back $647,408 for future expenses for the nine months ended September 30, 2018 and $641,048 for the nine months ended September 30, 2017. The Trustee paid general and administrative expenses of $521,085 and $556,577 for the nine months ended September 30, 2018 and 2017, respectively.
MV Partners did not withhold or release any dollar amounts due to the Trust from the previously established reserve for future capital expenditures during the nine months ended September 30, 2018. MV Partners withheld $250,000 for future capital expenditures during the nine months ended September 30, 2017. These factors resulted in distributable income for the nine months ended September 30, 2018 of $11,557,500, an increase of $4,715,000 from $6,842,500 for the nine months ended September 30, 2017.
The average price received for crude oil sold was $55.18 per Bbl and the average price received for natural gas sold was $2.32 per Mcf for the period from October 1, 2017 through June 30, 2018. The average price received for crude oil sold was $44.80 per Bbl and the average price received for natural gas sold was $2.57 per Mcf for the period from October 1, 2016 through June 30, 2017.
The overall production sales volumes attributable to the net profits interest for the oil and gas production collected during the period from October 1, 2017 through June 30, 2018 were 450,143 Bbls of oil, 30,151 Mcf of natural gas and 252 Bbls of natural gas liquids for a total barrels of oil equivalent of 455,332. The overall production sales volumes attributable to the net profits interest for the oil and gas production collected during the period from October 1, 2016 through June 30, 2017 were 454,356 Bbls of oil, 27,698 Mcf of natural gas and 506 Bbls of natural gas liquids for a total barrels of oil equivalent of 459,301.
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Liquidity and Capital Resources
Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trusts 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 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 payments from other sources (such as interest earned on any amounts reserved by the Trustee) in that quarter, over the Trusts 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 September 30, 2018, $275,000 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 Trusts expenses. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid. During the three and nine months ended September 30, 2018 and 2017, there were no such borrowings. MV Partners has provided a letter of credit in the amount of $1,000,000 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, MV Partners does not expect future costs for the underlying properties to change significantly as compared to recent historical costs other than changes due to fluctuations in the general cost of oilfield services. MV Partners may establish a capital reserve of up to $1,000,000 in the aggregate at any given time to reduce the impact on distributions of uneven capital expenditure timing. As of September 30, 2018, $1,000,000 was held by MV Partners as a capital reserve.
The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trusts liquidity or the availability of capital resources.
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 Trustees Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Although MV Partners 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 Trusts Annual Report on Form 10-K for the year ended December 31, 2017 (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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and regulations promulgated by the SEC. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by MV Partners to The Bank of New York Mellon Trust Company, N.A., as Trustee of the Trust, and its employees who participate in the preparation of the Trusts periodic reports as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Trustee carried out an evaluation of the Trusts disclosure controls and procedures. A Trust Officer of the Trustee has concluded that the disclosure controls and procedures of the Trust are effective.
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