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
March 31, 2019 and 2018
The following is a summary of income from net profits interest received by the Trust for the three months ended March 31, 2019 and 2018 consisting of the January distribution for each respective year:
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Three months ended
March 31,
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2019
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2018
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Sales volumes:
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Oil (Bbl)
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127,081
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134,963
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Natural gas (Mcf)
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77,731
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84,880
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Total (BOE)
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140,036
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149,110
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Average sales prices:
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Oil (per Bbl)
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$
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63.18
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$
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49.89
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Natural gas (per Mcf)
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$
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3.37
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$
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3.10
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Gross proceeds:
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Oil sales
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$
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8,028,371
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$
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6,733,378
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Natural gas sales
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262,183
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263,244
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Total gross proceeds
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8,290,554
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6,996,622
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Costs:
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Production and development costs:
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Lease operating expenses
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3,245,801
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3,201,731
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Production and property taxes
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754,851
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967,311
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Development expenses
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1,027,239
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289,893
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Total costs
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5,027,891
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4,458,935
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Excess of revenues over direct operating expenses and lease equipment and development costs
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3,262,663
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2,537,687
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Times net profits interest over the term of the Trust
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80
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%
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80
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%
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Income from net profits interest before reserve adjustments
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2,610,130
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2,030,150
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VOC Brazos reserve for future development, maintenance or operating expenditures
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0
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0
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Income from net profits interest
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$
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2,610,130
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$
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2,030,150
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The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2019 substantially represents the production by VOC Brazos from September 2018 through November 2018. The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2018 substantially represents the production by VOC Brazos from September 2017 through November 2017. The revenues from oil production are typically received by VOC Brazos one month after production.
Gross proceeds
. Oil and natural gas sales were $8,290,554 for the three months ended March 31, 2019, an increase of $1,293,932 or 18.5% from $6,996,622 for the three months ended March 31, 2018. Revenues are a function of oil and natural gas sales prices and volumes sold. The increase in gross proceeds was due to increases in market prices for oil and natural gas during the first quarter of 2019. These increases were partially offset by decreases in oil and natural gas sales volumes during the first quarter of 2019. During the three months ended March 31, 2019, the average price for oil increased 26.6% to $63.18 per Bbl and the average price for natural gas increased 8.7% to $3.37 per Mcf. Oil sales volumes were 127,081 Bbls for the three months ended March 31, 2019, a decrease of 7,882 Bbls or 5.8% from 134,963 Bbls, while natural gas sales volumes were 77,731 Mcf, a decrease of 7,149 Mcf or 8.4% from 84,880 Mcf.
Costs
. Lease operating expenses were $3,245,801 for the three months ended March 31, 2019, an increase of $44,070 or 1.4% from $3,201,731 for the three months ended March 31, 2018. Production and property taxes were $754,851 for the three months ended March 31, 2019, an decrease of $212,460 or 22.0% from $967,311 for the same period in 2018. Such decrease is primarily due to a 30.7% decrease in property taxes. In addition, production taxes increased 16.6% due to higher prices for oil and gas. Development expenses were $1,027,239 for the three months ended March 31, 2019, an increase of $737,346 or 254.4% from $289,893 for the same
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period in 2018. Such increase was primarily due to increased drilling activity and corresponding increased development expenses during the three months ended March 31, 2019, compared to the three months ended March 31, 2018.
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 $3,262,663 for the three months ended March 31, 2019, an increase of $724,976 or 28.6% from $2,537,687 for the three months ended March 31, 2018. The Trusts 80% net profits interest of these totals were $2,610,130 and $2,030,150, respectively. During the three months ended March 31, 2019 and 2018, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the previously established cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $2,610,130 and $2,030,150 for such periods, respectively. These amounts were reduced by a Trust holdback for future expenses of $145,130 and $160,150 for the three months ended March 31, 2019 and 2018, respectively. The Trustee paid general and administrative expenses of $379,769 for the three months ended March 31, 2019, an increase of $94,011 from $285,758 for the three months ended March 31, 2018. This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income for the three months ended March 31, 2019 of $2,465,000, an increase of $595,000 from $1,870,000 for the three months ended March 31, 2018.
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 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 Trusts expenses paid for that quarter. Available funds are reduced by any cash that the Trustee decides to reserve for future development, maintenance or operating expenses. As of March 31, 2019, $125,526 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 months ended March 31, 2019 and 2018, there were no such borrowings. VOC Brazos has provided a letter of credit in the amount of $1,700,000 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, 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. The cash reserve balance was $1,000,000 at March 31, 2019 and 2018, respectively.
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 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 Trusts Annual Report on Form 10-K for the year ended December 31, 2018 (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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