Item 1.
Financial Statements.
WHITING USA TRUST II
Statements of Assets, Liabilities and Trust Corpus (Unaudited)
(In thousands, except unit data)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
120
|
|
|
$
|
221
|
|
Investment in net profits interest, net
|
|
|
138,461
|
|
|
|
144,990
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
138,581
|
|
|
$
|
145,211
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND TRUST CORPUS
|
|
|
|
|
|
|
|
|
Reserve for Trust expenses
|
|
$
|
120
|
|
|
$
|
221
|
|
Trust corpus (18,400,000 Trust units issued and outstanding at March 31, 2014 and December 31, 2013)
|
|
|
138,461
|
|
|
|
144,990
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and Trust corpus
|
|
$
|
138,581
|
|
|
$
|
145,211
|
|
|
|
|
|
|
|
|
|
|
Statements of Distributable Income (Unaudited)
(In thousands, except distributable income per unit data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Income from net profits interest
|
|
$
|
12,191
|
|
|
$
|
12,181
|
|
General and administrative expenses
|
|
|
(301
|
)
|
|
|
(153
|
)
|
Cash reserves used (withheld) for current Trust expenses
|
|
|
101
|
|
|
|
(47
|
)
|
State income tax withholding
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Distributable income
|
|
$
|
11,986
|
|
|
$
|
11,975
|
|
|
|
|
|
|
|
|
|
|
Distributable income per unit
|
|
$
|
0.651431
|
|
|
$
|
0.650819
|
|
|
|
|
|
|
|
|
|
|
Statements of Changes in Trust Corpus (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Trust corpus, beginning of period
|
|
$
|
144,990
|
|
|
$
|
171,355
|
|
Distributable income
|
|
|
11,986
|
|
|
|
11,975
|
|
Distributions to unitholders
|
|
|
(11,986
|
)
|
|
|
(11,975
|
)
|
Amortization of investment in net profits interest
|
|
|
(6,529
|
)
|
|
|
(6,874
|
)
|
|
|
|
|
|
|
|
|
|
Trust corpus, end of period
|
|
$
|
138,461
|
|
|
$
|
164,481
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these modified cash basis financial statements.
5
WHITING USA TRUST II
NOTES TO MODIFIED CASH BASIS FINANCIAL STATEMENTS
(Unaudited)
1.
|
ORGANIZATION OF THE TRUST
|
Formation of the Trust
Whiting USA Trust II (the Trust) is a statutory trust formed on December 5, 2011
under the Delaware Statutory Trust Act, pursuant to a trust agreement (the Trust agreement) among Whiting Oil and Gas Corporation (Whiting Oil and Gas), as trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee
(the Trustee) and Wilmington Trust, National Association, as Delaware trustee (the Delaware Trustee). The initial capitalization of the Trust estate was funded by Whiting Petroleum Corporation (Whiting) on
December 8, 2011.
The Trust was created to acquire and hold a term net profits interest (NPI) for the benefit of the
Trust unitholders pursuant to a conveyance from Whiting Oil and Gas, a 100%-owned subsidiary of Whiting, to the Trust. The term NPI is an interest in certain of Whiting Oil and Gas properties located in the Rocky Mountains, Permian Basin, Gulf
Coast and Mid-Continent regions (the underlying properties). The NPI is the only asset of the Trust, other than cash reserves held for future Trust expenses. As of December 31, 2013, these oil and gas properties included interests
in approximately 1,308 gross (388.5 net) producing oil and gas wells.
The NPI is passive in nature, and the Trustee has no management
control over and no responsibility relating to the operation of the underlying properties. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties. The NPI will terminate on the later
to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold (which amount is the equivalent of 10.61 MMBOE in respect of the Trusts right to receive 90% of the net
proceeds from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. As of March 31, 2014 on a cumulative accrual basis, 3.55 MMBOE
(33%) of the Trusts total 10.61 MMBOE have been produced and sold, and the remaining minimum reserve quantities of 7.06 MMBOE (at the 90% NPI) are projected to be produced prior to December 31, 2021, based on the Trusts reserve
report as of December 31, 2013. Since the Trust is not currently expected to contractually terminate until December 31, 2021, additional reserves and production attributable to the NPI may be available for distribution to unitholders (also
based on the year-end reserve report) between the time that the Trusts minimum 10.61 MMBOE have been produced and sold and the expected December 31, 2021 termination date of the Trust occurs. The Trusts Annual Report on Form 10-K
includes additional information on the Trusts reserves as of December 31, 2013.
The Trustee can authorize the Trust to borrow
money for the purpose of paying Trust administrative or incidental expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee, Whiting or the Delaware Trustee as a lender, provided that 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, which may be a
non-interest bearing account, and make other short term investments with the funds distributable to the Trust.
Initial Issuance of
Trust Units and Net Profits Interest Conveyance
On March 21, 2012, the registration statement on Form S-1/S-3 (Registration No. 333-178586) filed by Whiting and the Trust in connection with the initial public offering of the
Trusts units was declared effective by the SEC. On March 28, 2012, the Trust issued 18,400,000 Trust units to Whiting in exchange for the conveyance of the term NPI, which is described above, from Whiting Oil and Gas. Immediately
thereafter, Whiting completed an initial public offering of units of beneficial interest in the Trust, selling 18,400,000 Trust units to the public at $20.00 per unit.
Interim Financial Statements
The accompanying unaudited financial information has been prepared by the Trustee in
accordance with the instructions to the Quarterly Report on Form 10-Q. The accompanying financial information is prepared on a comprehensive basis of accounting other than GAAP. The Trustee believes that the information furnished reflects all
adjustments (consisting of normal and recurring adjustments) which are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim periods presented. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the full year. The Trusts 2013 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this
Quarterly Report on Form 10-Q.
6
Term Net Profits Interest
The Trust uses the modified cash basis of
accounting to report Trust receipts from the term NPI and payments of expenses incurred. Actual cash distributions to the Trust are made based on the terms of the conveyance that created the Trusts NPI. The term NPI entitles the Trust to
receive revenues (oil, gas and natural gas liquid sales) less expenses (the amount by which all royalties; lease operating expenses including well workover costs; development costs; production and property taxes; payments made by Whiting to the
hedge counterparty upon settlements of hedge contracts; maintenance expenses; producing overhead; and amounts that may be reserved for future development, maintenance or operating expenses, which reserve amounts may not exceed $2.0 million, exceed
hedge payments received by Whiting under hedge contracts and other non-production revenue) of the underlying properties multiplied by 90% (term NPI percentage). Actual cash receipts may vary due to timing delays of cash receipts from the property
operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices.
Modified Cash Basis of
Accounting
The financial statements of the Trust, as prepared on a modified cash basis, reflect the Trusts assets, liabilities, Trust corpus, earnings and distributions, as follows:
|
a)
|
Income from net profits interest is recorded when NPI distributions are received by the Trust;
|
|
b)
|
Distributions to Trust unitholders are recorded when paid by the Trust;
|
|
c)
|
Trust general and administrative expenses (which include the Trustees fees as well as accounting, engineering, legal, and other professional
fees) are recorded when paid;
|
|
d)
|
Cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities
under GAAP;
|
|
e)
|
Amortization of the investment in net profits interest is calculated based on the units-of-production method. Such amortization is charged directly
to Trust corpus and does not affect cash earnings; and
|
|
f)
|
The Trust evaluates impairment of the investment in net profits interest by comparing the undiscounted cash flows expected to be realized from the
investment in net profits interest to the NPI carrying value. If the expected future undiscounted cash flows are less than the carrying value, the Trust recognizes an impairment loss for the difference between the carrying value and the estimated
fair value of the investment in net profits interest. The determination of whether the NPI is impaired requires a significant amount of judgment by the Trustee and is based on the best information available to the Trustee at the time of the
evaluation. If market or oil and natural gas production conditions deteriorate, write-downs could be required in the future.
|
While these statements differ from financial statements prepared in accordance with GAAP, the modified cash basis of reporting revenues and
distributions is considered to be the most meaningful for the Trusts activities and results because quarterly distributions to the Trust unitholders are based on net cash receipts. This comprehensive basis of accounting other than GAAP
corresponds to the accounting permitted for royalty trusts by the SEC as specified by FASB ASC Topic 932,
Extractive Activities Oil and Gas: Financial Statements of Royalty Trusts
.
Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to
accrue or defer revenues and expenses in a period other than when such revenues are received or expenses are paid. Because the Trusts financial statements are prepared on the modified cash basis as described above, however, most accounting
pronouncements are not applicable to the Trusts financial statements.
Recent Accounting Pronouncements
There were no accounting pronouncements issued during the three months ended March 31, 2014 applicable to the Trust or its financial statements.
7
3.
|
INVESTMENT IN NET PROFITS INTEREST
|
Whiting Oil and Gas conveyed the NPI to the Trust in exchange for 18,400,000 Trust units. The investment in net profits interest was recorded
at the historical cost basis of Whiting on March 28, 2012, the date of conveyance (except for the derivatives which are reflected at their fair value as of March 31, 2012), and was calculated as follows (in thousands):
|
|
|
|
|
Oil and gas properties
|
|
$
|
368,786
|
|
Accumulated depletion
|
|
|
(174,626
|
)
|
|
|
|
|
|
Oil and gas properties, net
|
|
|
194,160
|
|
Derivative liability
|
|
|
(128
|
)
|
|
|
|
|
|
Net predecessor cost of net profits interest conveyed to the Trust
|
|
$
|
194,032
|
|
|
|
|
|
|
As of March 31, 2014 and December 31, 2013, accumulated amortization of the investment in net
profits interest was $55.6 million and $49.0 million, respectively.
The Trust is a grantor trust and therefore is not subject to federal income taxes. Accordingly, no recognition is given to federal income taxes
in the Trusts financial statements. The Trust unitholders are treated as the owners of Trust income and corpus, and the entire taxable income of the Trust is reported by the Trust unitholders on their respective tax returns.
For Montana state income tax purposes, Whiting must withhold from its NPI payments to the Trust, an amount equal to 6% of the net amount
payable to the Trust from the sale of oil and gas in Montana. For Arkansas, Colorado, Michigan, Mississippi, New Mexico, North Dakota and Oklahoma, neither the Trust nor Whiting is withholding the income tax due such states on distributions made to
an individual resident or nonresident Trust unitholder, as long as the Trust is taxed as a grantor trust under the Internal Revenue Code.
5.
|
DISTRIBUTION TO UNITHOLDERS
|
Actual cash distributions to the Trust unitholders depend on the volumes of and prices received for oil, natural gas and natural gas liquids
produced from the underlying properties, among other factors. Quarterly cash distributions during the term of the Trust are made by the Trustee no later than 60 days following the end of each quarter (or the next succeeding business day) to the
Trust unitholders of record on the 50th day following the end of each quarter. Such amounts equal the excess, if any, of the cash received by the Trust during the quarter, over the expenses of the Trust paid during such quarter, subject to any
adjustments for changes made by the Trustee during such quarter in any cash reserves established for future expenses of the Trust.
6.
|
RELATED PARTY TRANSACTIONS
|
Plugging and Abandonment
During the three months ended March 31, 2014, Whiting incurred $0.1 million of
plugging and abandonment costs on the underlying properties. Pursuant to the terms of the conveyance agreement, plugging and abandonment charges relating to the underlying properties, net of any proceeds received from the salvage of equipment, are
funded entirely by Whiting and are not therefore included as a deduction in the calculation of net proceeds or otherwise deducted from Trust unitholders over the term of the Trust.
Operating Overhead
Pursuant to the terms of its applicable joint operating agreements, Whiting deducts from the
gross oil and gas sales proceeds an overhead fee to operate those underlying properties for which Whiting has been designated as the operator. Additionally, with respect to those underlying properties for which Whiting is the operator but where
there is no operating agreement in place, Whiting deducts from the gross proceeds an overhead fee calculated in the same manner that Whiting allocates overhead to other similarly owned properties, which is customary practice in the oil and gas
industry. Operating overhead activities include various engineering, legal, and administrative functions. The fee is adjusted annually pursuant to COPAS guidelines and will increase or decrease each year based on changes in the year-end index of
average weekly earnings of crude petroleum and natural gas workers. The following table presents the Trusts portion of these overhead charges for the distribution made during the three months ended March 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Total overhead charges
|
|
$
|
439,478
|
|
|
$
|
402,225
|
|
Overhead charge per month per active operated well
|
|
$
|
449
|
|
|
$
|
410
|
|
Administrative Services Fee
Under the terms of the administrative services
agreement, the Trust is obligated to pay a quarterly administration fee of $50,000 to Whiting 60 days following the end of each calendar quarter. General and administrative expenses in the Trusts statements of distributable income for the
three months ended March 31, 2014 and 2013 each include $50,000 for quarterly administrative fees paid to Whiting.
Trustee
Administrative Fee
Under the terms of the Trust agreement, the Trust pays an annual administrative fee to the Trustee of $175,000, which is paid in four quarterly installments of $43,750 each and is billed in arrears. Starting
in 2017, such fee escalates by 2.5% each year. General and administrative expenses in the Trusts statements of distributable income for the three months ended March 31, 2014 and 2013 each include $43,750 for quarterly administrative fees
paid to the Trustee.
Letter of Credit
In June 2012, Whiting established a $1.0 million letter of credit for
the Trustee in order to provide it with a mechanism to pay the operating expenses of the Trust, in the event that Whiting should fail to lend funds to the Trust if requested to do so by the Trustee. This letter of credit will not be used to fund NPI
distributions to unitholders, and Whiting has no obligation to lend funds to the Trust. If the Trustee were to draw on the letter of credit or borrow funds from Whiting or otherwise, no further distributions would be made to unitholders until all
such amounts have been repaid by the Trust.
On May 7, 2014, the Trustee announced the Trust distribution of net profits for the first quarterly payment period in 2014. Unitholders of
record on May 20, 2014 are expected to receive a distribution of $0.670762 per Trust unit, which is payable on or before May 30, 2014. This aggregate distribution to all Trust unitholders is expected to consist of net cash proceeds of
$12.6 million paid by Whiting to the Trust, less a provision of $250,000 for estimated Trust expenses and $3,157 for Montana state income tax withholdings. There were no realized gains or losses on hedge settlements during the first quarterly
payment period of 2014.
8
Item 2.
Trustees Discussion and Analysis of Financial Condition and
Results of Operations
References to the Trust in this document refer to Whiting USA Trust II. References to
Whiting in this document refer to Whiting Petroleum Corporation and its subsidiaries. References to Whiting Oil and Gas in this document refer to Whiting Oil and Gas Corporation, a 100%-owned subsidiary of Whiting Petroleum
Corporation.
The following review of the Trusts financial condition and results of operations should be read in conjunction with
the financial statements and notes thereto, as well as the Trustees discussion and analysis contained in the Trusts 2013 Annual Report on Form 10-K. The Trusts Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all amendments to those reports are available on the SECs website
www.sec.gov
.
Note Regarding Forward-Looking
Statements
This Quarterly Report on 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 facts included in this Quarterly Report on Form 10-Q, including without limitation
the statements under Trustees Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. No assurance can be given that such expectations will prove to have been correct. When used in
this document, the words believes, expects, anticipates, intends or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those
discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such
forward-looking statements:
|
|
|
the effect of changes in commodity prices and conditions in the capital markets;
|
|
|
|
uncertainty of estimates of oil and natural gas reserves and production;
|
|
|
|
risks incident to the operation and drilling of oil and natural gas wells;
|
|
|
|
future production and development costs;
|
|
|
|
the inability to access oil and natural gas markets due to market conditions or operational impediments;
|
|
|
|
failure of the underlying properties to yield oil or natural gas in commercially viable quantities;
|
|
|
|
the effect of existing and future laws and regulatory actions;
|
|
|
|
competition from others in the energy industry;
|
|
|
|
risks arising out of the hedge contracts;
|
|
|
|
inflation or deflation; and
|
|
|
|
other risks described under the caption Risk Factors in the Trusts 2013 Annual Report on Form 10-K.
|
All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or the
Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Overview and Trust Termination
The Trust
does not conduct any operations or activities. The Trusts purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives in respect of the NPI, and to perform certain administrative functions in respect of
the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI, which is in turn subject to commodity hedge contracts through December 31, 2014. The NPI entitles the Trust to receive 90% of the net
proceeds from the sale of production from the underlying properties.
9
Oil and gas prices historically have been volatile and may fluctuate widely in the future. The
table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated through March 31, 2014. The February 2014 distribution in the first quarter of 2014 was mainly affected,
however, by October 2013 through December 2013 oil prices and September 2013 through November 2013 natural gas prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
Crude Oil (per Bbl)
|
|
$
|
102.94
|
|
|
$
|
93.51
|
|
|
$
|
92.19
|
|
|
$
|
88.20
|
|
|
$
|
94.34
|
|
|
$
|
94.23
|
|
|
$
|
105.82
|
|
|
$
|
97.50
|
|
|
$
|
98.62
|
|
Natural Gas (per MMBtu)
|
|
$
|
2.72
|
|
|
$
|
2.21
|
|
|
$
|
2.81
|
|
|
$
|
3.41
|
|
|
$
|
3.34
|
|
|
$
|
4.10
|
|
|
$
|
3.58
|
|
|
$
|
3.60
|
|
|
$
|
4.93
|
|
Lower oil and gas prices on production from the underlying properties could cause the following: (i) a
reduction in the amount of net proceeds to which the Trust is entitled; and (ii) a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties causing an extension of the length
of time required to produce 11.79 MMBOE (10.61 MMBOE at the 90% NPI). Alternatively, higher oil and natural gas prices may potentially result in the following: (i) an increase in the amount of oil, natural gas and natural gas liquids that is
economic to produce from the underlying properties, and (ii) cash settlement losses on commodity derivatives.
Trust Termination.
The NPI will terminate on the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE (10.61 MMBOE at the 90% NPI) have been produced from the underlying properties and sold, and the Trust will soon thereafter
wind up its affairs and terminate, after which it will pay no further distributions. Since the assets of the Trust are depleting assets, a portion of each cash distribution paid on the Trust units should be considered by investors as a return of
capital, with the remainder being considered as a return on investment or yield. As a result, the market price of the Trust units will decline to zero at termination of the Trust. As of March 31, 2014 on a cumulative accrual basis, 3.55 MMBOE
(33%) of the Trusts total 10.61 MMBOE have been produced and sold (of which proceeds from the sale of 347 MBOE, which is 90% of 385 MBOE, will be distributed to the unitholders in the Trusts forthcoming May 2014 distribution). The
remaining minimum reserve quantities are projected to be produced prior to December 31, 2021, based on the Trusts reserve report as of December 31, 2013. Since the Trust is not currently expected to contractually terminate until
December 31, 2021, additional reserves and production attributable to the NPI may be available for distribution to unitholders (also based on the year-end reserve report) between the time that the Trusts minimum 10.61 MMBOE have been
produced and sold and the expected December 31, 2021 termination date of the Trust occurs. Accordingly, the Trusts remaining reserves attributable to the 90% NPI were estimated to be 8.15 MMBOE as of December 31, 2013, which is more
than the minimum and there is no assurance that the Trust will receive more than the minimum amount of reserves. The Trusts Annual Report on Form 10-K includes additional information on the Trusts reserves as of December 31, 2013.
Capital Expenditure Activities
The
primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. The underlying properties have a capital expenditure budget per the
December 31, 2013 reserve report of $31.5 million estimated to be spent over eight years. No assurance can be given, however, that any such expenditures will result in the production of commercially paying amounts, if any, or that the
characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operators historical drilling success rate. With respect to fields for which Whiting is not the operator, Whiting
will have limited control over the timing and amount of capital expenditures relative to such fields. Please read the Trusts Annual Report on Form 10-K for the fiscal year ended December 31, 2013, Item 1A. Risk Factors Whiting
has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust
unitholders.
During each twelve-month period beginning on the later to occur of (1) December 31, 2017 and (2) the
time when 8.24 MMBOE have been produced from the underlying properties and sold (which is the equivalent of 7.41 MMBOE attributable to the 90% NPI) (in either case, the capital expenditure limitation date), the sum of the capital
expenditures and amounts reserved for approved capital expenditure projects for such twelve-month period may not exceed the average annual capital expenditure amount. The average annual capital expenditure amount means the quotient of
(x) the sum of the capital expenditures and amounts reserved for approved capital expenditure projects with respect to the three twelve-month periods ending on the capital expenditure limitation date, divided by (y) three. Commencing on
the capital expenditure limitation date, and each anniversary of the capital expenditure limitation date thereafter, the average annual capital expenditure amount will be increased by 2.5% to account for expected increased costs due to inflation.
10
The following table presents the underlying properties aggregate capital expenditures
attributable to the February 2014 distribution (in thousands):
|
|
|
|
|
Region
|
|
2014 Capital
Expenditures
|
|
Rocky Mountains
|
|
$
|
1,531
|
|
Permian Basin
|
|
|
925
|
|
Gulf Coast
|
|
|
523
|
|
|
|
|
|
|
Total
|
|
$
|
2,979
|
|
|
|
|
|
|
Results of Trust Operations
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
The following is a summary of income from net profits interest and distributable income received by the Trust for the three months ended
March 31, 2014 and 2013, consisting of the February distributions for each respective period (dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(a)
|
|
|
321,610
|
(c)
|
|
|
340,079
|
(e)
|
Natural gas from underlying properties (Mcf)
|
|
|
632,054
|
(c)
|
|
|
596,479
|
(e)
|
|
|
|
|
|
|
|
|
|
Total production (BOE)
|
|
|
426,952
|
|
|
|
439,492
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(a)
|
|
$
|
84.94
|
|
|
$
|
79.63
|
|
Natural gas (per Mcf)
|
|
$
|
5.03
|
(d)
|
|
$
|
4.67
|
(d)
|
Costs (per BOE):
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
28.92
|
|
|
$
|
27.68
|
|
Production taxes
|
|
$
|
3.81
|
|
|
$
|
3.50
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(a)
|
|
$
|
27,317
|
(c)
|
|
$
|
27,081
|
(e)
|
Natural gas sales
|
|
|
3,179
|
(c)
|
|
|
2,788
|
(e)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
30,496
|
|
|
$
|
29,869
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
12,345
|
|
|
$
|
12,165
|
|
Production taxes
|
|
|
1,626
|
|
|
|
1,540
|
|
Development costs
|
|
|
2,979
|
|
|
|
2,630
|
|
Cash settlement (gains) losses on commodity derivatives
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
$
|
16,950
|
|
|
$
|
16,335
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
$
|
13,546
|
|
|
$
|
13,534
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
Income from net profits
interest
|
|
$
|
12,191
|
|
|
$
|
12,181
|
|
|
|
|
|
|
|
|
|
|
Provision for estimated Trust expenses
|
|
|
(200
|
)
|
|
|
(200
|
)
|
Montana state income tax withheld
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Distributable income
|
|
$
|
11,986
|
|
|
$
|
11,975
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Oil includes natural gas liquids.
|
(b)
|
As discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q, all costless collar
hedge contracts terminate as of December 31, 2014. Consequently, for all distributions after the February 2015 distribution, there will be no further cash settlement gains or losses on commodity hedges, and the Trust will have increased
exposure to oil and natural gas price volatility.
|
11
(c)
|
Oil and gas sales volumes and related revenues for the three months ended March 31, 2014 (consisting of Whitings February 2014
distribution to the Trust) generally represent crude oil production from October 2013 through December 2013 and natural gas production from September 2013 through November 2013.
|
(d)
|
The average sales price of natural gas for the gas production months within the distribution period exceeded the average NYMEX gas prices for those
same months within the period due to the liquids rich content of a portion of the natural gas volumes produced by the underlying properties.
|
(e)
|
Oil and gas sales volumes and related revenues for the three months ended March 31, 2013 (consisting of the February 2013 distribution)
generally represent crude oil production from October 2012 through December 2012 and natural gas production from September 2012 through November 2012.
|
Income from Net Profits Interest.
Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the
Trust from Whiting. NPI proceeds that Whiting remits to the Trust are based on the oil and gas production Whiting has received payment for within one month following the end of the most recent fiscal quarter. Whiting receives payment for its crude
oil sales generally within 30 days following the month in which it is produced, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced. Income from net profits interest is
generally a function of oil and gas revenues, lease operating expenses, production taxes and development costs as follows:
Revenues.
Oil and natural gas revenues were $0.6 million (or 2%) higher for the three months ended March 31, 2014
as compared to the same 2013 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The increase in revenue between periods was due to higher realized oil and natural gas prices and increased natural
gas production, which were partially offset, however, by a decrease in oil production volumes. The average sales price realized increased for crude oil by 7% and for natural gas by 8% between periods. Gas production volumes increased by 36 MMcf (or
6%) between periods primarily due to one well that was recompleted within the last twelve months in the Keystone South field. Conversely, oil production volumes decreased by 18 MBbls (or 5%) when comparing the first quarter of 2014 to the same
period in 2013 primarily due to normal field production decline. The decline in oil production between periods was partially offset, however, by i) one newly drilled well and three workover wells that came online during the last twelve months and
ii) differences in timing associated with revenues received from non-operated properties. Based on the December 31, 2013 reserve report, overall production attributable to the underlying properties is expected to decline at an average
year-over-year rate of approximately 8.4% from 2014 through the estimated December 31, 2021 Trust termination date.
Lease Operating Expenses.
Lease operating expenses (LOE) increased $0.2 million (or 1%) during the first
three months of 2014 compared to the same 2013 period primarily due to the increased cost of oilfield goods and services (including workover activity) caused by higher demand in the oil and gas industry. These increases also resulted in higher LOE
of 4% on a per BOE basis, from $27.68 during the first quarter of 2013 to $28.92 for the same period in 2014.
Production Taxes.
Production taxes are typically calculated as a percentage of oil and gas revenues, and production
taxes as a percent of revenues remained relatively consistent for the three months ended March 31, 2014 and 2013 at 5.3% and 5.2%, respectively. Overall production taxes for the first quarter of 2014, however, increased $0.1 million (or 6%) as
compared to the same period in 2013, primarily due to higher oil and natural gas sales revenue between periods.
Development Costs.
Development costs for the three months ended March 31, 2014 were $0.3 million (or 13%) higher as
compared to 2013 development costs for the same period. This increase was primarily related to i) one well recompletion in the Deb field of $0.5 million, ii) two well recompletions in the Agua Dulce field of $0.4 million and iii) drilling and
facility expansion costs in the Rangely Weber field of $0.2 million. These development cost increases were partially offset by a $0.7 million decrease in the Keystone South field as a result of recompletion activity that occurred during the first
quarter of 2013 that did not continue during the same period in 2014.
12
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other than cash flows from the NPI. 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 and the Delaware Trustee, a quarterly fee
paid to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustees duties, including third party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines
the amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the
Trusts expenses for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities. The Trustee may borrow funds required to pay liabilities if the Trustee determines that the cash on
hand and the cash to be received are insufficient to cover the Trusts liabilities. If the Trustee borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid.
Income to the Trust from the NPI is based on the calculation and definitions of gross proceeds and net proceeds
contained in the conveyance agreement, which is filed as an exhibit to this report, and reference is hereby made to such conveyance agreement for the actual definitions of gross proceeds and net proceeds.
Whiting may reserve from the gross proceeds amounts up to a total of $2.0 million at any time for future development, maintenance or operating
expenses. However, Whiting has not funded such a reserve since the inception of the Trust, including during the three months ended March 31, 2014 and 2013. Instead, Whiting deducted from the gross proceeds only actual costs paid for
development, maintenance and operating expenses.
Plugging and abandonment costs related to the underlying properties, net of any proceeds
received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the three months ended March 31, 2014, Whiting incurred $0.1 million of
plugging and abandonment charges on the underlying properties that were not passed on to the unitholders of the Trust.
In June 2012,
Whiting established a letter of credit in the amount of $1.0 million in favor of the Trustee to provide a mechanism for the Trustee to pay the operating expenses of the Trust, in the event that Whiting should fail to lend funds to the Trust if
requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and Whiting has no obligation to lend funds to the Trust. If the Trustee were to draw on the letter of credit or borrow funds from
Whiting or otherwise, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust.
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.
Future Trust Distributions to Unitholders
On May 7, 2014, the Trustee announced the Trust distribution of net profits for the first quarterly payment period in 2014. Unitholders of
record on May 20, 2014 are expected to receive a distribution of $0.670762 per Trust unit, which is payable on or before May 30, 2014. This aggregate distribution to all Trust unitholders is expected to consist of net cash proceeds of
$12.6 million paid by Whiting to the Trust, less a provision of $250,000 for estimated Trust expenses and $3,157 for Montana state income tax withholdings. There were no realized gains or losses on hedge settlements during the first quarterly
payment period of 2014.
New Accounting Pronouncements
There were no accounting pronouncements issued during the three months ended March 31, 2014 applicable to the Trust or its financial
statements.
13
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trusts
financial statements is included in Item 7 of the Trusts Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to the critical accounting policies during the three months ended
March 31, 2014.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Commodity Hedge Contracts
The primary
asset of and source of income to the Trust is the term NPI, which generally entitles the Trust to receive 90% of the net proceeds from oil and gas production from the underlying properties. Consequently, the Trust is exposed to market risk from
fluctuations in oil and gas prices. Through 2014, however, the NPI is subject to commodity hedge contracts in the form of costless collars entered into by Whiting, which are intended to reduce, but not eliminate, the NPIs exposure to crude oil
price volatility. No additional hedges are allowed to be placed on Trust assets, and the Trust cannot therefore enter into derivative contracts for speculative or trading purposes.
The revenues derived from the underlying properties depend substantially on prevailing crude oil, natural gas and natural gas liquids prices.
As a result, commodity prices also affect the amount of cash flow available for distribution to the Trust unitholders. Lower prices may also reduce the amount of oil, natural gas and natural gas liquids that Whiting can economically produce. Whiting
sells the oil, natural gas and natural gas liquid production from the underlying properties under floating market price contracts each month. Whiting entered into certain hedge contracts through December 31, 2014 to manage the exposure to crude
oil price volatility associated with revenues generated from the underlying properties, and to achieve more predictable cash flows. However, these contracts also limit the amount of cash available for distribution if prices increase above the fixed
ceilings of the hedges. The hedge contracts consist of costless collar arrangements placed with a single trading counterparty, JPMorgan Chase Bank National Association. Whiting cannot provide assurance that this trading counterparty will not become
a credit risk in the future.
Crude oil costless collar arrangements settle based on the average of the closing settlement price for each
commodity business day in the contract period. In a collar arrangement, the counterparty is required to make a payment to Whiting for the difference between the fixed floor price and the settlement price if the settlement price is below the fixed
floor price. Whiting is required to make a payment to the hedge counterparty for the difference between the fixed ceiling price and the settlement price if the settlement price is above the fixed ceiling price.
In connection with Whitings conveyance on March 28, 2012 of the term NPI to the Trust, the rights to any future hedge payments
Whiting makes or receives on certain of its derivative contracts (representing 365 MBbl of crude oil from April through December 2014) were also conveyed to the Trust. As a result, such hedge payments will be included in the Trusts calculation
of net proceeds, and Trust unitholders thereby receive 90% of the future economic results of such hedges.
The table below summarizes all
of the outstanding costless collars that Whiting entered into and then in turn conveyed, as described in the preceding paragraph, to the Trust (of which Trust unitholders receive 90% of the future economic results). This quantity of hedged oil
volumes represents approximately 37% of the underlying properties projected oil production from April through December 2014, based on the estimated production of proved reserves in the Trusts December 31, 2013 reserve report.
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Collars
|
|
|
|
Volumes (Bbl)
|
|
|
Price (per Bbl)
Floor / Ceiling
|
|
Three months ending June 30, 2014
|
|
|
124,500
|
|
|
$
|
80.00/$122.50
|
|
Three months ending September 30, 2014
|
|
|
121,800
|
|
|
$
|
80.00/$122.50
|
|
Three months ending December 31, 2014
|
|
|
119,100
|
|
|
$
|
80.00/$122.50
|
|
The collared hedges shown above have the effect of providing a protective floor while allowing Trust
unitholders to share in upward price movements up to the ceiling. Consequently, while these hedges are designed to decrease exposure to price decreases, they also have the effect of limiting the benefit of price increases beyond the ceiling. For the
crude oil contracts listed above, a hypothetical $10.00 change in the NYMEX price above the ceiling price or below the floor price applied to the notional amounts would cause an aggregate change in the estimated future cash settlement (gains) losses
on all oil commodity derivatives of $3.7 million to Whiting, of which 90% would be transferred to the Trust. These hypothetical cash settlement (gains) losses would be recognized as contracts expire in future periods through 2014.
14
The cash amounts received by Whiting from the counterparty upon settlements of these hedge
contracts will reduce the production and development costs related to the underlying properties when calculating net proceeds. However, if the hedge payments received by Whiting under the hedge contracts and other non-production revenue exceed
production and development costs during a quarterly period, the ability to use such excess amounts to offset such costs may be deferred, with interest accruing on such amounts at the prevailing money market rate, until the next quarterly period
where the hedge payments and the other non-production revenue are less than such costs. In addition, the aggregate amounts paid by Whiting on settlement of the hedge contracts will reduce the amount of net proceeds paid to the Trust.