The accompanying notes are an integral part of
these condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
| Note
1. | Organization
of the Trust |
VOC Energy Trust (the “Trust”) is a
statutory trust formed on November 3, 2010 (capitalized on December 17, 2010), under the Delaware Statutory Trust Act pursuant
to a Trust Agreement dated November 3, 2010 (as amended and restated on May 10, 2011, the “Trust Agreement”) among
VOC Brazos Energy Partners, L.P., a Texas limited partnership (“VOC Brazos”), as trustor, The Bank of New York Mellon Trust
Company, N.A., as Trustee (the “Trustee”), and Wilmington Trust Company, as Delaware Trustee (the “Delaware Trustee”).
The Trust was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders.
VOC Brazos is a privately held limited partnership
engaged in the production and development of oil and natural gas from properties located in Texas. VOC Kansas Energy Partners, L.L.C.,
a Kansas limited liability company (“VOC Kansas”), is a privately held limited liability company engaged in the production
and development of oil and natural gas from properties primarily located in Kansas along with a limited number of Texas properties. In
connection with the closing of the initial public offering of units of beneficial interest in the Trust (“Trust Units”) in
May 2011, VOC Brazos acquired all of the membership interests in VOC Kansas in exchange for newly issued limited partner interests
in VOC Brazos pursuant to a Contribution and Exchange Agreement, dated August 30, 2010, as amended, by and between VOC Brazos and
VOC Kansas. This resulted in VOC Kansas becoming a wholly-owned subsidiary of VOC Brazos.
The Trust was created to acquire and hold a term
net profits interest representing the right to receive 80% of the net proceeds (calculated as described below in Note 5) from production
from the underlying properties (as defined below). The net profits interest consists of working interests in substantially all of the
oil and natural gas properties held by VOC Brazos and VOC Kansas in the States of Kansas and Texas as of the date of the conveyance of
the net profits interest to the Trust. We refer to the properties in which the Trust holds the net profits interest as the “underlying
properties.”
The net profits interest is passive in nature,
and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The net profits
interest entitles the Trust to receive 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of production
from the underlying properties during the term of the Trust. The net profits interest will terminate on the later to occur of (1) December 31,
2030 or (2) the time when 10.6 million barrels of oil equivalent (“MMBoe”) (which is the equivalent of 8.5 MMBoe
in respect of the net profits interest) have been produced from the underlying properties and sold, and the Trust will soon thereafter
wind up its affairs and terminate.
As of March 31, 2022, cumulatively, since
inception, the Trust has received payment for 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of 7.7 MMBoe
of production from the underlying properties (which is the equivalent of 6.2 MMBoe (unaudited) in respect of the net profits interest).
The Trustee can authorize the Trust to borrow money
to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow
from the Trustee or the Delaware Trustee as a lender provided the terms of the loan are similar to the terms it would grant to a similarly
situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution
in an account with itself and make other short-term investments with the funds distributed to the Trust.
| Note
2. | Basis
of Presentation |
The accompanying Condensed Statements of Assets
and Trust Corpus as of December 31, 2021, which has been derived from audited financial statements, and the unaudited interim condensed
financial statements as of March 31, 2022 and for the three-month periods ended March 31, 2022 and 2021, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information
and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and
regulations.
The preparation of financial statements requires
the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Trustee believes such information includes all the disclosures necessary to make
the information presented not misleading. The information furnished reflects all adjustments that are, in the opinion of the Trustee,
necessary for a fair presentation of the results of the interim period presented. The financial information should be read in conjunction
with the financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31,
2021.
| Note 3. | Trust
Accounting Policies |
The Trust uses the modified cash basis of accounting
to report receipts of the net profits interest and payments of expenses incurred. The net profits interest represents the right to receive
revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses, lease maintenance, lease overhead, and
production and property taxes) and an adjustment for lease equipment costs and lease development expenses (which are capitalized in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”))
of the underlying properties, times 80%. Actual cash receipts may vary due to timing delays of actual cash receipts from the property
operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices. The actual cash distributions of the
Trust will be made based on the terms of the conveyance creating the Trust’s net profits interest. Expenses of the Trust, which
include accounting, engineering, legal and other professional fees, Trustee fees, an administrative fee paid to VOC Brazos and out-of-pocket
expenses, are recognized when paid. Under U.S. GAAP, revenues and expenses would be recognized on an accrual basis. Amortization of the
investment in net profits interest is recorded on a unit-of-production method in the period in which the cash is received with respect
to such production. Such amortization does not reduce distributable income, rather it is charged directly to Trust corpus.
This comprehensive basis of accounting other than
U.S. GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E,
Financial Statements of Royalty Trusts.
Investment in the net profits interest was recorded
initially at the historical cost of VOC Brazos and is periodically assessed to determine whether its aggregate value has been impaired
below its total capitalized cost based on the underlying properties. The Trust will provide a write-down to its investment in the net
profits interest if and when total capitalized costs, less accumulated amortization, exceeds undiscounted future net revenues attributable
to the proved oil and gas reserves of the underlying properties. There was no impairment of the investment in the net profits interest
during the quarters ended March 31, 2022 or 2021.
No new accounting pronouncements were adopted or
issued during the quarter ended March 31, 2022 that would impact the financial statements of the Trust.
| Note 4. | Investment
in Net Profits Interest |
The net profits interest was recorded at the historical
cost of VOC Brazos on May 10, 2011, the date of the conveyance of the net profits interest to the Trust, and was calculated as follows:
| Oil and gas properties | |
$ | 197,270,173 | |
| Accumulated depreciation and depletion | |
| (17,681,155 | ) |
| Hedge liability | |
| (1,717,713 | ) |
| 20-year asset retirement liability | |
| (2,131,797 | ) |
| Net property to be conveyed | |
| 175,739,508 | |
| Times 80% net profits interest to Trust | |
$ | 140,591,606 | |
| Note
5. | Income from Net Profits
Interest |
| | |
Three months ended
March 31, | |
| | |
2022 | | |
2021 | |
| Excess of revenues over direct operating expenses and lease equipment and development costs(1) | |
$ | 5,890,233 | | |
$ | 694,616 | |
| Times 80% net profits interest to Trust | |
| 80 | % | |
| 80 | % |
| Income from net profits interest before reserve adjustments | |
| 4,712,186 | | |
| 555,693 | |
| VOC Brazos reserve for future development, maintenance or operating expenditures(2) | |
| – | | |
| – | |
| Income from net profits interest(3) | |
$ | 4,712,186 | | |
$ | 555,693 | |
| |
(1) |
Excess of revenues over direct operating expenses and lease equipment and development costs reflect expenses and costs incurred by VOC Brazos during the September through November production period. Pursuant to the terms of the conveyance of the net profits interest, lease equipment and development costs are to be deducted when calculating the distributable income to the Trust. |
| |
(2) |
Pursuant to the terms of the conveyance of the net profits interest, VOC Brazos can reserve up to $1.0 million for future development, maintenance or operating expenditures at any time. During the three months ended March 31, 2022 and 2021, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the reserve. The reserve balance was $1,000,000 at March 31, 2022 and 2021, respectively. |
| |
(3) |
The income from net profits interest is based upon the cash receipts from VOC Brazos for the oil and gas production. The revenues from oil production are typically received by VOC Brazos one month after production; thus, the cash received by the Trust during the three months ended March 31, 2022 substantially represents production by VOC Brazos from September 2021 through November 2021. The cash received by the Trust during the three months ended March 31, 2021 substantially represents production by VOC Brazos from September 2020 through November 2020. |
For the three months ended March 31, 2022
and 2021, MV Purchasing, LLC, an affiliate of VOC Brazos, purchased a significant portion of the production of the underlying properties.
Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one to six months, using market sensitive pricing.
The Trust is a Delaware statutory trust and is
not required to pay federal or state income taxes. Accordingly, no provision for federal or state income taxes has been made.
| Note
7. | Distributions
to Unitholders |
VOC Brazos makes quarterly payments of the net
profits interest to the Trust. The Trustee determines for each quarter the amount available for distribution to the Trust unitholders.
This distribution is expected to be made on or before the 45th day following the end of each quarter to the Trust unitholders of record
on the 30th day of the month following the end of each quarter (or the next succeeding business day). Such amounts will be equal to the
excess, if any, of the cash received by the Trust relating to the preceding quarter, over the expenses of the Trust paid for such quarter,
subject to adjustments for changes made by the Trustee during such quarter in any cash reserves established for future expenses of the
Trust. The Trustee intends to build a reserve of approximately $1.175 million for the payment of future known, anticipated or contingent
expenses or liabilities, commencing with the distribution payable in the first quarter of 2022. The Trustee may increase or decrease the
targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time,
without advance notice to the unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved
in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities
eventually will be distributed to unitholders, together with interest earned on the funds.
The first quarterly distribution during 2022 was
$4,250,000, or $0.25 per Trust Unit, and was made on February 14, 2022 to Trust unitholders owning Trust Units as of February 1,
2022. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2021 through December 31,
2021 and was net of $182,917 withheld by the Trustee towards the building of the cash reserve described above.
The first quarterly distribution during 2021 was
$510,000, or $0.03 per Trust Unit, and was made on February 12, 2021 to Trust unitholders owning Trust Units as of February 1,
2021. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2020 through December 31,
2020.
| Note
8. | Advance
for Trust Expenses |
Under the terms of the Trust Agreement, the Trustee
is allowed to borrow money to pay Trust expenses. During the three months ended March 31, 2022 and 2021, there were no borrowings
or amounts owed for money borrowed in previous quarters. Under the terms of the Trust Agreement, 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.
On April 20, 2022, the Trust announced a Trust
distribution of net profits for the first quarterly payment period ended March 31, 2022. Unitholders of record on May 2, 2022
will receive a distribution amounting to $4,760,000, or $0.28 per Trust Unit, which will be paid on May 13, 2022. Such distribution
is net of $182,917 withheld by the Trustee towards the building of the cash reserve described in Note 7.
