It
em 1.
Financial Statements.
WH
ITING USA TRUST II
Statements of Assets, Liabilities and Trust Corpus (Unaudited)
(In thousands, except unit data)
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March 31,
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December 31,
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2016
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2015
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ASSETS
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Cash and short-term investments
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$
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224
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$
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279
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Investment in net profits interest, net
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29,038
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30,966
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Total assets
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$
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29,262
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$
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31,245
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LIABILITIES AND TRUST CORPUS
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Reserve for Trust expenses
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$
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224
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$
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279
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Trust corpus (18,400,000 Trust units issued and outstanding
at March 31, 2016 and December 31, 2015)
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29,038
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30,966
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Total liabilities and Trust corpus
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$
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29,262
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$
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31,245
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Sta
tements of Distributable Income (Unaudited)
(In thousands, except distributable income per unit data)
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Three Months Ended
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March 31,
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2016
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2015
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Income (loss) from net profits interest
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$
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(92)
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$
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6,177
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General and administrative expenses
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(293)
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(251)
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Proceeds from sale of oil and gas properties
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331
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-
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Cash reserves used for current Trust expenses
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55
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101
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State income tax withholding
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(1)
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(5)
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Distributable income
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$
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-
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$
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6,022
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Distributable income per unit
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$
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0.000000
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$
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0.327255
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State
ments of Changes in Trust Corpus (Unaudited)
(In thousands)
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Three Months Ended
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March 31,
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2016
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2015
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Trust corpus, beginning of period
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$
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30,966
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$
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57,789
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Distributable income
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-
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6,022
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Distributions to unitholders
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-
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(6,022)
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Amortization of investment in net profits interest
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(1,928)
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(2,803)
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Trust corpus, end of period
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$
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29,038
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$
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54,986
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The accompanying notes are an integral part of these modified cash basis financial statements.
WHI
TING USA TRUST II
NOTES TO MODIFIED CASH BASIS FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE TRUST
Trust
Overview
— 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 Permian Basin, Rocky Mountains, 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, 2015
, these oil and gas properties included interests in approximately
1,310
gross (
383.3
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 Trust’s 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.
Additionally,
the Trust is required to sell the NPI and terminate if cash proceeds to the Trust from the net profits interest are less than $2.0 million for each of any two consecutive years.
As of
March 31, 2016
on a cumulative accrual basis,
6.08
MMBOE (
57%
) of the Trust’s total 10.61 MMBOE have been produced and sold
or
divested
. The portion of Trust reserves divested to date
include
s
0
.01 MMBOE of
proved reserves from
certain producing oil and gas wells
located within
the
Cooks Peak field in North Dakota
that were sold
for a purchase price of $0.4 million ($0.3 million to the 90% net profits interest)
during the first quarter of 2016
.
T
he remaining minimum reserve quantities are projected to be produced
by June 30, 2022
, based on the Trust’s reserve report as of December 31,
2015
. The Trust’s
2015
Annual Report on Form 10-K includes additional information on the Trust’s reserves as of
December 31, 2015
.
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 distributed to the Trust. As of
March 31, 2016
and
December 31, 2015
, the Trust had no outstanding borrowings.
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 Trust’s 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.
Delisting of the Trust
—
The Trust was informed by the New York Stock Exchange (the “NYSE”) on January 4, 2016 that the Trust was not in compliance with the NYSE’s continued listing standards, which require that the average closing price of the Trust units cannot be less than $1.00 per unit over a period of 30 consecutive trading days. Under the NYSE delisting procedures, the Trust had the right to certain cure periods if it could demonstrate its intent to cure the deficiency. However, in order to save the Trust administrative costs (including ongoing NYSE listing fees, expenses associated with reverse split votes
,
or other actions necessary to remedy the deficiency) the Trust determined it would not cure the deficiency. As a result, the Trust units ceased trading on the NYSE on January 6, 2016. The Trust units transitioned to OTC, operated by OTC Markets Group, effective with the opening of trading on January 7, 2016 u
nder the trading symbol “WHZT.”
2. BASIS OF ACCOUNTING
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.
In the opinion of the Trustee, the accompanying financial statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly, in all material respects, the results of the Trust for the interim periods presented. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The modified cash basis financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the Trust’s financial statements and related notes included in the Trust’s 2015 Annual Report on Form 10-K
.
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 Trust’s NPI. The term NPI entitles the Trust to receive revenues (crude oil, natural 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 Trust’s assets, liabilities, Trust corpus, earnings and distributions, as follows:
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a)
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Income from net profits interest is recorded when NPI distributions are received by the Trust;
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b)
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Distributions to Trust unitholders are recorded when paid by the Trust;
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c)
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Trust general and administrative expenses (which include the Trustees’ fees as well as accounting, engineering, legal, and other professional fees) are recorded when paid;
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d)
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Cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities under GAAP;
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e)
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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 distributable income; and
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f)
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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 fair value of the NPI is determined using the expected net discounted future cash flows from the underlying properties that are attributable to the net profi
ts interest. The determination as to
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.
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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 Trust’s 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 Trust’s financial statements are prepared on the modified cash basis as described above, however, most accounting pronouncements are not applicable to the Trust’s financial statements.
Recent Accounting Pronouncements
—
There were no accounting pronouncements issued during the
three months ended March 31, 2016
applicable to the Tru
st or its financial statem
ents.
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 were reflected at their fair value as of March 31, 2012), and was determined to be $194.0 million. As of December 31, 201
5
, the investment in net profits interest with a
previous
carrying value of $
46.8
million was written down to its fair value of $
31.0
million, resulting in a $
15
.8 million impairment charged directly to Trust corpus. Accumulated amortization of the investment in net profits interest as of
March 31, 2016
and
December 31, 2015
was
$1.9
million and
zero
,
respectively.
4. INCOME TAXES
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 Trust’s 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
to
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 to any cash reserves established fo
r future expenses of the Trust.
If the NPI generates net losses during the quarter or if the Trust expenses exceed the income generated by the net profits interest during such quarter, then there will be no distribution to Trust unitholders for the quarterly payment period
,
as was the case for the
fourth quarterly payment period of 2015
and first quarterly payment period of 2016
.
Neither t
he Trust
nor the unitholders are liable
for any net losses
that
are
generated by the net profits interest
;
however, any such net losses, plus accrued interest, will be recovered from future NPI net profits before any further distributions will be made to Trust unitholders.
Additionally, if the Trust borrows funds in order to pay
its
liabilities,
the
Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid.
6. RELATED PARTY TRANSACTIONS
Plugging and Abandonment
—
During the
three months ended March 31, 2016
, Whiting incurred
$116,680
of plugging and abandonment costs on the underlying properties. Pursuant to the terms of the conveyance agreement, plugging and abandonment charges relating to the underlying properties, net of any proceeds received from the salvage of equipment, are funded entirely by Whiting and are not therefore included as a deduction in the calculation of net proceeds or otherwise deducted from Trust unitholders over the term of the Trust.
Operating Overhead
—
Pursuant to the terms of its applicable joint operating agreements, Whiting deducts from the gross oil and gas sales proceeds an overhead fee to operate those underlying properties for which Whiting has been designated as the operator. Additionally, with respect to those underlying properties for which Whiting is the operator but where there is no operating agreement in place, Whiting deducts from the gross proceeds an overhead fee calculated in the same manner that Whiting allocates overhead to other similarly owned properties, which is customary practice in the oil and gas industry. Operating overhead activities include various engineering, legal, and administrative functions. The fee is adjusted annually pursuant to COPAS guidelines and will increase or decrease each year based on changes in the year-end index of average weekly earnings of crude petroleum and natural gas workers. The following table presents the Trust’s portion of these overhead charges for the distributions made during the
three months ended March 31, 2016 and 2015
(dollars in thousands, except monthly amounts per well):
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Three Months Ended
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March 31,
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2016
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2015
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Total overhead charges (in thousands)
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$
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420
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$
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423
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Overhead charge per month per active operated well
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$
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433
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$
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433
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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 Trust’s statements of distributable income for the
three months ended March 31, 2016 and 2015
include
s
$50,000
in each period
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 Trust’s statements of distributable income for the
three months ended March 31, 2016 and 2015
include
s
$43,750
in each period
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
i
f 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.
7. SUBSEQUENT EVENT
On May
10
, 201
6
, the Trust
announced that no distribution would be made to unitholders in the second quarter of
2016
. This is due to the
net profits interest generating a net loss of $1.2 million during the first quarterly payment period of 2016 primarily due to the decline in oil and natural gas prices, which lower commodity prices caused production and development costs on the unde
rlying properties to exceed the
gross
proceeds from production.
Due to the Trust’s limited cash
resources when the NPI is generating net losses (or generating minimal proceeds)
, Whiting
has
agreed to allow
t
he Trust to defer payment of Whiting’s
administrative fee
of
$
50,000
per quarter, until such time that the net proceeds generated by the NPI are sufficient
to fund the
payment of such fee.
Whiting has, at its discretion, agreed to initiate t
his payment deferral arrangement
beginning with it
s
administrative service fee for the
second quarter of 2016, which
would normally be due and payable by the Trust during July 2016.
Ite
m 2.
Trustee’s 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 Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as the Trustee’s discussion and analysis contained in the Trust’s
2015
Annual Report on Form 10-K. The Trust’s 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 SEC’s 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
(the “Exchange Act”)
. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation the statements under “Trustee’s 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:
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the effect of changes in commodity prices and conditions in the capital markets;
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·
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uncertainty of estimates of oil and natural gas reserves and production;
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·
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risks incident to the operation and drilling of oil and natural gas wells;
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·
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future production and development costs;
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·
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the inability to access oil and natural gas markets due to market conditions or operational impediments;
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·
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failure of the underlying properties to yield oil or natural gas in commercially viable quantities;
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·
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the effect of existing and future laws and regulatory actions;
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·
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competition from others in the energy industry;
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·
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inflation or deflation; and
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·
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other risks described under the caption “Risk Factors” in the Trust’s
2015
Annual Report on Form 10-K.
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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 Trust’s purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives pursuant to the NPI, and to perform certain administrative functions with respect to the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI, which was in turn subject to commodity hedge contracts through December 31, 2014 (which
hedging
effects impacted the February 2015 distribution and ceased thereafter). The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties.
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, 2016
. The
February 2016 net loss
was mainly affected, however,
by October 2015
through December 201
5 oil prices and September 2015
through November 201
5
natural gas prices.
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2014
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2015
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2016
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Q1
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Q2
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Q3
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Q4
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Q1
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Q2
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Q3
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Q4
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Q1
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Crude oil
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$
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98.62
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$
|
102.98
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$
|
97.21
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$
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73.12
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$
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48.57
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$
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57.96
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$
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46.44
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$
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42.17
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$
|
33.51
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Natural gas
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$
|
4.93
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$
|
4.68
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$
|
4.07
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$
|
4.04
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$
|
2.99
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$
|
2.61
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$
|
2.74
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$
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2.17
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$
|
2.06
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Oil prices have fallen significantly since reaching highs of over $105.00 per Bbl in June 2014, dropping below $
27
.00 per Bbl in
February 2016
. Natural gas prices have also declined from over $4.80 per MMBtu in April 2014 to below $
1.70
per MMBtu in
March
201
6
.
Although oil prices have recently begun to recover from the lows experienced during the first quarter
of 2016
, forecasted prices for both oil and gas for the remainder of 2016 remain low
. 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). If prices remain at current levels, the amount of net proceeds to which the Trust is entitled is likely to be substantially lower than the net proceeds the Trust has received and distributed to Trust unitholders in the past. Alternatively, higher oil and natural gas prices may potentially result in an increase in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties. All costless collar hedge contracts that Whiting entered into, and in turn conveyed to the Trust, terminated as of December 31, 2014 (which hedging effects extended through the February 2015 distribution to unitholders) and no additional hedges are allowed to be placed on the Trust assets. Consequently,
there
are
no
further
cash settlement gains or losses on commodity derivatives
for inclusion in the Trust’s computation of net proceeds (or net losses, as the case may be)
, and the Trust therefore has increased exposure to oil and natural gas price volatility
.
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 and sold from the underlying properties, and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. Additionally,
the Trust is required to sell the NPI and terminate if cash proceeds to the Trust from the
net profits interest
are less than $2.0 million for each of any two consecutive years.
T
he market price of the Trust units will decline to zero at termination of the Trust
, which will occur around or shortly after the earlier of (i) the sale of the NPI or (ii) the net profits interest termination date, which is estimated to be June 30, 2022 based on the Trust’s year-end 2015 reserve report
.
Since the assets of the Trust are depleting assets, a portion of each cash distribution paid on the Trust units is to be considered by investors as a return of capital, with the remainder being considered as a return on investment or yield.
As of
March 31, 2016
on a cumulative accrual basis,
6.08
MMBOE (
57%
) of the Trust’s total 10.61 MMBOE have been produced and sold or divested
(of which 363 MBOE, which is 90% of 327 MBOE,
were included as gross proceeds in
the Trust’s May 2016 net loss)
. The remaining minimum reserve quantities are projected to be produced by June 30, 2022, based on the Trust’s reserve report as of
December 31, 2015
. However, the Trust’s 2015 reserve report was
derived from NYMEX oil and gas prices of $50.28 per Bbl and $2.58 per MMBtu pursuant to current SEC and FASB guidelines
, whereas
t
he average NYMEX oil and gas prices for the month of
March
2016 were $
37.96
per Bbl and $
1.62
per MMBtu, respectively
. Lower oil and gas prices are likely to cause a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties, which in turn is likely to extend the length of time required to produce the Trust’s 10.61 MMBOE.
The Trust’s
2015
Annual Report on Form 10-K includes additional information on the Trust’s reserves as of
December 31, 2015
.
Delisting of the Trust.
The Trust was informed by the New York Stock Exchange (the “NYSE”) on January 4, 2016 that the Trust was not in compliance with the NYSE’s continued listing standards, which require that the average closing price of the Trust units cannot be less than $1.00 per unit over a period of 30 consecutive trading days. Under the NYSE delisting procedures, the Trust had the right to certain cure periods if it could demonstrate its intent to cure the deficiency. However, in order to save the Trust administrative costs (including ongoing NYSE listing fees, expenses associated with reverse split votes or other actions necessary to remedy the deficiency) the Trust determined it would not cure the deficiency. As a result, the Trust units ceased trading on the NYSE on January 6, 2016. The Trust units transitioned to OTC, operated by OTC Markets Group, effective with the opening of trading on January 7, 2016 under the trading symbol “WHZT.”
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, 2015
reserve report of
$17.1
million estimated to be spent over
six and one-
half
years. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in 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 operator’s historical
drilling success rate. In addition, no assurance can be given that Whiting’s actual level of capital expenditures on the underlying properties will meet this
$17.1
million amount of budgeted capital expenditures over the next
six and one-
half
years. With respect to fields for which Whiting is not the operator, Whiting
has
limited control over the timing and amount of capital expenditures relative to such fields. Please read the Trust’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
, 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.
The following table presents the underlying properties’ aggregate capital expenditures attributable to the
February 2016 net loss
(in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Capital
|
Region
|
|
Expenditures
|
Rocky Mountains
|
|
$
|
1,056
|
Permian Basin
|
|
|
28
|
Gulf Coast
|
|
|
1
|
Mid-Continent
|
|
|
-
|
Total
|
|
$
|
1,085
|
Results of Trust Operations
Comparison of Results of the Trust for the
T
hree
M
onths
E
nded March 31, 2016 and 2015
The following is a summary of income
(loss)
from net profits interest and distributable income received by the Trust for the
three months ended March 31, 2016 and 2015
, consisting of the
February 2016 net loss
and
February
201
5
distribution
,
respective
ly
(dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(1)
|
|
|
267,038
|
(3)
|
|
|
289,980
|
(4)
|
Natural gas from underlying properties (Mcf)
|
|
|
424,575
|
(3)
|
|
|
501,484
|
(4)
|
Total production (BOE)
|
|
|
337,800
|
|
|
|
373,561
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(1)
|
|
$
|
35.18
|
|
|
$
|
64.64
|
|
Effect of oil hedges on average price (per Bbl)
|
|
|
-
|
|
|
|
3.41
|
|
Oil net of hedging (per Bbl)
|
|
$
|
35.18
|
|
|
$
|
68.05
|
|
Natural gas (per Mcf)
|
|
$
|
2.30
|
(5)
|
|
$
|
4.45
|
(5)
|
Cost metrics:
|
|
|
|
|
|
|
|
|
Lease operating expenses (per BOE)
|
|
$
|
26.25
|
|
|
$
|
33.80
|
|
Production tax rate (percent of total revenues)
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(1)
|
|
$
|
9,395
|
(3)
|
|
$
|
18,746
|
(4)
|
Natural gas sales
|
|
|
975
|
(3)
|
|
|
2,231
|
(4)
|
Total revenues
|
|
|
10,370
|
|
|
|
20,977
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
8,868
|
|
|
|
12,626
|
|
Production taxes
|
|
|
519
|
|
|
|
1,057
|
|
Development costs
|
|
|
1,085
|
|
|
|
1,420
|
|
Cash settlements on commodity derivatives
(2)
|
|
|
-
|
|
|
|
(989)
|
|
Total costs
|
|
|
10,472
|
|
|
|
14,114
|
|
Net proceeds (losses)
|
|
|
(102)
|
|
|
|
6,863
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
Income (loss) from net profits interest
|
|
|
(92)
|
|
|
|
6,177
|
|
Proceeds from sale of oil and gas properties
|
|
|
331
|
|
|
|
-
|
|
Provision for estimated Trust expenses
|
|
|
(238)
|
|
|
|
(150)
|
|
Montana state income tax withheld
|
|
|
(1)
|
|
|
|
(5)
|
|
Distributable income
|
|
$
|
-
|
|
|
$
|
6,022
|
|
__________
|
(1)
|
|
Oil includes natural gas liquids.
|
|
(2)
|
|
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 terminated as of December 31, 2014 (which hedging effects extended through the quarterly payment period covered by the February 2015 distribution to unitholders), and no additional hedges are allowed to be placed on Trust assets.
Consequently, there
are
no further cash settlements on commodity hedges, and the Trust
has
increased exposure to oil and natural gas price volatility
.
|
|
(3)
|
|
Oil and gas sales volumes and related revenues for the three months ended March 31, 201
6
(consisting of
the
February 2016 net loss
) generally represent crude
oil production from October 2015
through December 201
5
and natural gas production from September 201
5
through November 201
5
.
|
|
(4)
|
|
Oil and gas sales volumes and related revenues for the t
hree months ended March 31, 2015
(consi
sting of Whiting’s February 2015
distribution to the Trust) generally represent crude oil production from October 201
4
through December 201
4
and natural gas production from September 201
4
through November 201
4
.
|
|
(5)
|
|
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.
While the gas volumes produced by the underlying properties during the February 201
6
net loss period are still “liquids rich”, such liquids content did not result in a premium to the NYMEX natural gas price during the same period due to the decline in natural gas liquids prices relative to gas prices.
|
Income
(
L
oss)
from Net Profits Interest.
Income (loss) from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting or when NPI losses are generated by the underlying properties. NPI proceeds
(
or losses
)
are based on the oil and gas production for which Whiting has received payment 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 (loss) 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 decreased $10.6 million (or 51%) during the three months ended March 31, 2016 as compared to the same 2015 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decline in revenue between periods was due to significantly lower realized oil and natural gas prices, as well as lower oil and natural gas production volumes. The average sales price realized for crude oil (before the effects of hedging) and natural gas decreased by 46% and 48%, respectively, between periods as the result of lower NYMEX oil and natural gas prices.
Crude
o
il production volumes declined by 23 MBbls (or 8%) and natural gas volumes declined by 77
MMcf (or
15
%) in
the first quarter of 2016 compared to the same period in 2015.
The oil volume decrease was primarily related to normal field production decline and three wells that were shut-in during 2015.
Additionally, the
gas volume
decline
was primarily related to (i) differences in timing associated with revenues received from non-operated parties, (ii) normal field production decline and (iii) two wells that were shut in at the end of 2014.
These lower oil and gas volumes were partially offset, however, by one well workover performed at the end of 2015, which came back online with higher production volumes in the first quarter of 2016.
Based on the December 31, 2015 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of
approximately 14.0% for oil and 21.0% for gas
from 2016 through the estimated June 30, 2022 NPI termination date, which
reserve
estimates are derived from NYMEX oil and gas prices of $50.28 per Bbl and $2.58 per MMBtu pursuant to current SEC and FASB guidelines.
The average NYMEX oil and gas prices for the month of March 2016 were $37.96 per Bbl and $1.62 per MMBtu, respectively
, which lower commodity prices may have the effect of lengthening the time frame necessary to produce the Trust’s total 10.61 MMBOE
.
Lease Operating Expenses.
Lease operating expenses (“LOE”)
de
creased $
3.8
million (or
30
%) during the first quarter of 201
6
compared to the same 201
5
period primarily due to
(i)
$
2.
2
million in
lower
ad valorem taxes
,
(ii) a
$0.
9 million
decrease in oil
field goods and services and
(iii)
lower labor and other operating costs on Whiting-operated properties of $
0.7
million
.
LOE on a per BOE basis
declined
22% from $33.80 during the first three months of 2015 to $26.25 for the same period in 2016
mainly due to lower ad valorem taxes between periods, cost reduction measures implemented by Whiting
and other operators
and the general downturn in the oil and gas industry which has resulted in
declining costs for
oilfield goods and services
.
Production Taxes.
Production taxes are typically calculated as a percentage of oil and gas revenues, and production taxes as a percent of revenues remained consistent for the three months ended March 31, 201
6
and 201
5
at 5.0%
for both periods
. Overall production taxes for the first quarter of 201
6
, however, decreased $0.
5
million (or
51
%) as compared to the same 201
5
period, due to lower oil and natural gas sales revenue between periods.
Development Costs.
Development costs for the thre
e months ended March 31, 2016
were $
0.3
million (or
24
%) lower as compared to the same 201
5
period. This de
crease was primarily related to
reduced drilling and
workover costs of $0.5 million
in the
Sable, Deb, Cedar Hills, Lake Como and Garland fields
,
which
lower expenditures were
partially of
fset by
facility expansion in the Rangely Weber Sand field of $0.2 million
.
Cash Settlements on Commodity Derivatives.
In connection with Whiting’s conveyance of the net profits interest to the Trust, Whiting entered into certain costless collar hedge contracts in order to reduce the Trust’s exposure to oil price volatility. If current market prices
were
lower than a collar’s price floor wh
en the cash settlement amount was
calculated, Whiting receive
d
cash proceeds from the contract counterparty. Conversely, if current market prices
were
higher than a collar’s price ceiling when the cash settlement amount
was
calculated, Whiting
was
required to pay the contract counterparty.
There were no cash settlements for these hedges during the three months ended March 31, 2016.
Cash settlements relating to these hedges
, however,
resulted in a gain of $1.0 million for the three months ended March 31, 2015, which had the effect of increasing the average price of crude oil by $3.4
1
per Bbl for th
at
period. As a result, the total net crude oil price of $68.05 per Bbl included a premium of 5% related to the effects of hedging for the f
irst quarter of 2015. All hedge-
related pricing impacts ceased after the February 2015 distribution
,
while the Trust’s net profits interest is currently projected to terminate on June 30, 2022 based on the Trust’s December 31, 2015 reserve report. Therefore,
there
are
no further cash settlements on commodity
hedges
for inclusion in the Trust’s computation of net proceeds (or net losses, as the case may be)
, which has the effect of increasing the Trust’s exposure to oil and natural gas price volatility
.
Proceeds from Sale of Oil and Gas Properties.
In November 2015, Whiting completed the sale of certain producing oil and gas wells
(
effective for sales proceeds and costs beginning September 1, 2015
)
for a purchase price of $0.4 million ($0.3 million to the 90% net profits interest). The divested properties included nine wells located within Cooks Peak field in North Dakota, which had proved reserves of 18.14 MBOE (16.32 MBOE to the 90% net profits interest
).
The sales proceeds attributable to the NPI were included in the calculation of net cash proceeds available for distribution during the first quarter of 2016. There were no such sales during the three months ended March 31, 2015.
Distributable Income.
There was no distribution made to unitholders during the first quarter of 2016. This is due to the net profits interest generating
a
net loss of $0.1 million during the fourth quarterly payment period of 2015, and when such net loss
is
combined with this period’s provision for estimated Trust expenses, both of these amounts together offset the proceeds from
the
sale of oil and gas properties of $0.3 million in their entirety. Neither the Trust nor the Trust unitholders are
liable for
any net losses generated by the NPI. Distributable income for the three months ended March 31, 2015 was $6.0 million and was based on income from net profits interest of $6.
2
million, reduced by Trust general and administrative expenses of $251,440 and Montana state income tax withholdings of $5,010, and adjusted for changes in Trust cash reserves.
Liquidity and Capital Resources
Overview.
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 Trust’s 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 Trustee’s 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 Trust’s expenses for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities.
If
the NPI continue
s
to
generate
net losses, as
was the case for
the
February
and May
2016 net loss
es
, the net profits interest will not provide sufficient funds to the Trustee to
enable it to pay
all
of
the Trust’s administrative expenses. The Trust
may borrow
the amount of
funds
required to pay
its
liabilities if the Trustee determines that the cash on hand and the cash to be received, which is dependent on future
net proceeds
, are insufficient to cover the Trust’s liabilities. If the Trust
borrows funds, the Trust unitholders will not receive distributions until the
borrowed
funds
together with any accumulated net losses and accrued interest
are repaid.
As of April 30, 2016, the Trust had cash reserves of $0.1 million remaining for the payment of its administrative expenses.
If the Trustee determines that the Trust’s cash
reserves are
insufficient to cover the general and administrative expenses of the Trust
during periods when the NPI continues to generate net losses
, Whiting intends to loan
to the Trust the amount of
funds necessary to satisfy
payment of
its
liabilities
. Additionally, d
ue to t
he Trust’s limited cash resources when the NPI is generating net losses (or generating minimal net proceeds)
, Whiting
has
agreed to allow the Trust to defer payment of
Whiting’s
administrative fee
of
$
50,000
per quarter, until such time that the net proceeds generated by the NPI are sufficient
to fund the
payment of such fee
.
Whiting has, at its discretion, agreed to initiate t
his payment deferral arrangement
beginning
with
its
administrative service fee for the se
cond quarter of 2016, which
would normally be due and payable by the Trust during July 2016.
Additionally, the Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust’s liquidity or the availability of capital resources.
Letter of Credit.
In June 2012, Whiting established a $1.0 million letter of credit for the Trustee in order 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 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.
Reserve for
Expenditures
.
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, 2016 and 2015
. Instead, Whiting
has
deducted from the
Trust’s
gross proceeds only actual costs paid for development, maintenance and operating expenses.
Plugging and Abandonment.
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, 201
6
and 201
5
, Whiting incurred $
116,680
and $
36,757
, respectively, of plugging and abandonment charges on the underlying properties that were not charged to the unitholders of the Trust.
Future Trust
Payment Periods
On May
10
, 2016, the Trust announced that no distribution would be made to unitholders in the second quarter of 2016. This is due to the
net profits interest generating a net loss of $1.2 million during the first quarterly payment period of 2016 primarily due to the decline in oil and natural gas prices, which lower commodity prices caused production and development costs on the underlying properties to exceed the
gross
proceeds from production
.
There were no realized gains or losses on hedge settlements during the
first
quarterly payment period for 201
6
due to the termination of all costless collar hedge contracts as of December 31, 2014. No additional hedges are allowed to be placed on the Trust assets
.
Oil and natural gas prices have fallen significantly since reaching highs of $105.00 per Bbl and $4.80 per Mcf, respectively, during 2014. As a result of the decline in commodity prices, the net profits interest has not generated positive net proceeds since the third quarterly payment period of 2015. If the NPI continues to generate net losses, the net profits interest will not provide sufficient funds to the Trustee to enable it to pay
all
of the Trust’s administrative expenses. The Trust is unable to predict future commodity prices; however
,
it appears likely that distributions to Trust unitholders will continue to be significantly impacted by low oil and natural gas prices. Additionally, should the NPI’s annual cash proceeds to the Trust be less than $2.0 million for each of any two consecutive years, the Trust must sell the
net profits interest
and terminate pursuant to the terms of the Trust Agreement.
New Accounting Pronouncements
There were no accounting pronouncements issued during the
three months ended March 31, 2016
applicable to the Trust or its financial statements.
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust’s financial statements is included in Item 7 of the Trust’s Annual Report on Form 10-K for the year ended
December 31, 2015
. There have been no significant changes to the critical
accounting policies during the
three months ended March 31, 2016
.