It
em 1.
Condensed F
inancial Statements.
WH
ITING USA TRUST II
Condensed
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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2017
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2016
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ASSETS
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Cash and short-term investments
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$
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283
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$
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184
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Investment in net profits interest, net
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22,279
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23,929
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Total assets
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$
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22,562
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$
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24,113
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LIABILITIES AND TRUST CORPUS
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Reserve for Trust expenses
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$
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283
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$
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184
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Trust corpus (18,400,000 Trust units issued and outstanding
as of March 31, 2017 and December 31, 2016)
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22,279
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23,929
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Total liabilities and Trust corpus
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$
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22,562
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$
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24,113
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Condensed
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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2017
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2016
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Income from net profits interest
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$
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1,476
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$
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(92)
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General and administrative expenses
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(201)
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(293)
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Proceeds from sale of oil and gas properties
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-
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331
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Cash reserves used (withheld) for current Trust expenses
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(99)
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55
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State income tax withholding
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(2)
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(1)
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Distributable income
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$
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1,174
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$
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-
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Distributable income per unit
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$
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0.063784
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$
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-
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Condensed
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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2017
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2016
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Trust corpus, beginning of period
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$
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23,929
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$
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30,966
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Distributable income
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1,174
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-
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Distributions to unitholders
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(1,174)
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-
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Amortization of investment in net profits interest
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(1,650)
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(1,928)
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Trust corpus, end of period
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$
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22,279
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$
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29,038
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The accompanying notes are an integral part of these
condensed
modified cash basis financial statements.
WHI
TING USA TRUST II
NOTES TO
CONDENSED
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
T
rustor, 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, 2016
, these oil and gas properties included interests in approximately
1,314
gross (
379.4
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 Trust will wind up its affairs and terminate shortly after the earlier of (a) the NPI termination date, which is 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), or (b) the sale of the net profits interest. The Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. The Trust is required to sell the NPI and liquidate if cash proceeds to the Trust from the net profits
interest are less than $2.0 million for each of any two consecutive years.
During
the
three months ended March 31, 2017
and the year ended December 31, 2016,
t
he Trust
receive
d cash proceeds of
$1.
5
million and
$
1
.
9
million
, respectively,
from the net profits interest
.
As of
March 31, 2017,
on a cumulative accrual basis,
7.15
MMBOE (
67%
) of the 10.61 MMBOE
attributable to the NPI
have been produced and sold
or
divested
.
The portion of Trust reserves divested
through
March 31, 2017
includes 0.0
2
MMBOE of proved reserves from certain producing oi
l 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
July 31
, 202
3
, based on the Trust’s reserve report as of December 31,
2016
. The Trust’s
2016
Annual Report on Form 10-K includes additional information on the Trust’s reserves as of
December 31, 2016
.
2. BASIS OF ACCOUNTING
Interim Financial Statements
—
The accompanying unaudited
condensed
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
condensed
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
2016
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
, subject to adjustment for the recovery of accumulated net losses funded by Whiting and accrued interest
.
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, 2017
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
. However, such historical
cost basis has been subject to impairments taken in prior periods
. Accumulated amortization of the investment in net profits interest as of
March 31, 2017
and
December 31, 2016
was
$8.7
million and
$7.0
million,
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
or adjustments for the recovery of accumulated net losses and accrued interest
.
If the NPI generates net lo
sses during the quarter or if
Trust expenses exceed the income generated by t
he net profits interest during
the
quarter, then there
would
be no distribution to Trust unitholders for
that
quarterly payment period, as was the case for the
fourth
quarterly payment period of 201
5
, which resulted in no distribution being made to the Trust unitholders of record on February 19, 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
at the
prevailing
money market rate
, are to
be recovered
by Whiting
from future NPI
gross proceeds
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, 2017
, Whiting incurred
$0.1
million
of plugging and abandonment costs on the underlying properties. Pursuant to the terms of the conveyance agreement, plugging and abandonment charges relating to the underlying properties, net of any proceeds received from the salvage of equipment, are funded entirely by Whiting and are not therefore included as a deduction in the calculation of net proceeds or otherwise deducted from Trust unitholders over the term of the Trust.
Operating Overhead
—
Pursuant to the terms of its applicable joint operating agreements, Whiting deducts from the gross oil and gas sales proceeds an overhead fee to operate those underlying properties for which Whiting has been designated as the operator. Additionally, with respect to those underlying properties for which Whiting is the operator but where there is no operating agreement in place, Whiting deducts from the gross proceeds an overhead fee calculated in the same manner that Whiting allocates overhead to other similarly owned properties, which is customary practice in the oil and gas industry. Operating overhead activities include various engineering, legal, and administrative functions. The fee is adjusted annually pursuant to COPAS guidelines and will increase or decrease each year based on changes in the year-end index of average weekly earnings of crude petroleum and natural gas workers. The following table presents the Trust’s portion of these overhead charges for the distributions made during the
three months ended March 31, 2017 and 2016
(dollars in thousands, except monthly amounts per well):
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Three Months Ended
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March 31,
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2017
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2016
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Total overhead charges (in thousands)
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$
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340
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$
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420
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Overhead charge per month per active operated well
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$
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356
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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
condensed
statements of distributable income for the
three months ended March 31, 2017
and 2016
include
$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 and is billed in arrears. Starting in 2017, such fee escalate
s by 2.5% each year and therefore,
the annual administrative fee to be paid to the Trustee for 2017
services
is $179,375, which will be paid in four quarterly installments and billed in arrears.
Accordingly
,
the escalated
quarterly
administrative fee of $
44,84
4
will be paid
by the Trust
starting
in
the
second quarter of 2017
. Gen
eral and administrative expenses in the Trust’s
condensed
statements of distributable income for the
three months ended March 31, 2017
and 2016
include
$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
were to
borrow funds from Whiting or other
entities
, no further distributions would be made to unitholders until all such amounts
, including interest thereon
if applicable,
have been repaid
by the Trust.
Lending to the Trust
—
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, 2017
and
December 31, 2016
, the Trust had no borrowings outstanding.
7
. SUBSEQUENT EVENT
On
May
4, 201
7
, the Trustee announced the Trust
’s
distribution of net profits for the
first
quarterly payment period in 201
7
. Unitholders of record on
May 20
, 201
7
(which results in an effective record date of
May 19, 2017
due to the
20
th
of
May
falling on a non-trading day) are expected to receive a distribution of $
0.145591
per Trust unit, which is payable on or before
May 30, 2017
. This aggregate distribution to all Trust unitholders is expected to consi
st of net cash proceeds of $
2.9
million paid by Whiting to the
Trust, less a provision of
$
0.3
million
for es
timated Trust expenses and $
5,485
for Montana state income tax withholdings.
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 ea
ch of any two con
secutive years
(the “Annual Cash Proceeds Termination Clause”)
. During
the three months ended March 31, 2017
and the year ended December 31, 2016
, the
Trust received cash proceeds of
$1.
5
million and $1.
9
million, respectively. However,
during the first two calendar quarters of 2017
, the Trust
will
receive
$
4.4
million in cash proceeds from the NPI
and therefore, the
Trust will not be required to sell the NPI and terminate
pursuant to
the Annual Cash Proceeds Termination Clause
as of December 31, 2017
.
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
2016
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
2016
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. 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, 2017
. The
February
201
7
distribution
was
mainly affected
by
October
2016 through
December
2016
oil prices and
September
2016 through
November
2016
natural gas prices.
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2015
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2016
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2017
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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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$
|
48.57
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$
|
57.96
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$
|
46.44
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$
|
42.17
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$
|
33.51
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$
|
45.60
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$
|
44.94
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$
|
49.33
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$
|
51.86
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Natural gas
|
$
|
2.99
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$
|
2.61
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$
|
2.74
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$
|
2.17
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$
|
2.06
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$
|
1.98
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$
|
2.93
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$
|
2.98
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$
|
3.07
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Lower oil and gas prices on production from the underlying properties could cause (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 propertie
s, which could extend
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. All costless collar hedge contracts that Whiting entered into, and in turn conveyed to the Trust, terminated as of December 31, 2014 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 Trust will wind up its affairs and terminate shortly after the earlier of (a) the NPI termination date, which is the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE
(10.61 MMBOE to the 90% net profits interest)
have been produced from the underlying properties and sold
, which is estimated to be July 31, 2023 based on the Trust’s year-end 2016 reserve report
or (b) the sale of the net profits interest.
After the termination of the Trust, it will pay no further distributions.
The Trust is required to sell the NPI and liquidate if cash proceeds to the Trust from the net profits interest are less than $2.0 million for each of any two consecutive years
(the “Annual Cash Proceeds Termination Clause”)
.
During
the
three months ended March 31, 2017
and the year ended December 31, 2016,
the Trust received cash proceeds of
$1.5
million and
$1.
9
million
, respectively, from the net profits interest. However,
during the first two calendar quarters of 2017
, the Trust
will
receive
$
4.4
million in cash proceeds from the NPI
and therefore
,
the
Trust will not be required to sell the NPI and terminate
pursuant to
the Annual Cash Proceeds Termination Clause
as of December 31, 2017
.
Since the assets of the Trust are depleting assets, a portion of each cash distribution paid
, if any,
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 a result, the market price of the Trust units will decline to zero at the termination of the Trust.
As of
March 31, 2017
on a cumulative accrual basis,
7.15
MMBOE (
67%
) of
the 10.61 MMBOE attributable to the NPI
have been produced and sold or divested (of which
253
MBOE, which is 90% of
281
MBOE,
a
re included as gross proceeds in
the Trust’s
May 2017
distribution
). The remaining minimum reserve quantities are projected to be produced by
July 31
,
2023
based on the Trust’s reserve report as of
December 31, 2016
. However, the Trust’s
2016
reserve report was
derived from NYMEX oil and g
as prices of $42.75
per Bbl and $
2.49
per MMBtu pursuant to current SEC and FASB guidelines, whereas t
he
comparable reserve report
NYMEX oil and gas prices
as of
March 31, 2017
were $
47.61
per Bbl and $
2.74
per MMBtu, respectively. The Trust’s
2016
Annual Report on Form 10-K includes additional information on the Trust’s reserves
, including the underlying assumptions,
as of
December 31, 2016
.
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, 2016
reserve report of
$12.3
million estimated to be spent
between January 1, 2017
and
July 31, 2023
, the estimated termination date of the NPI
, which budget does not include any capital expenditures for the Trusts’ farm-out agreements
discussed below
. 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
$12.3
million amount of budgeted capital expenditures over
such time frame
. 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, 2016
, 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
.” The following table presents the underlying properties’ aggregate capital expenditures attributable to the
February 2017
distribution
(in thousands):
|
|
|
|
|
|
|
2017
|
|
Capital
|
Region
|
Expenditures
|
Rocky Mountains
|
$
|
380
|
Permian Basin
|
|
162
|
Gulf Coast
|
|
(3)
|
Mid-Continent
|
|
-
|
Total
|
$
|
539
|
A
nnual c
apital expenditure
limitation
.
During each twelve-month period beginning on the later to occur of (1) December 31, 2017 and (2) the last day of the payment period during which 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.
Farm-out agreements.
In an effort to develop the underlying properties while limiting additional capital expenditures for the Trust (other than those capital expenditures already contemplated in the December 31, 2016 reserve report), Whiting Oil and Gas entered into three farm-out agreements with a third-party partner covering (i) 5,127 gross acres
in eight leasehold sections
within the Keystone South field in Winkler, Texas in April 2016 (the “Keystone South farm-out”), (ii) 9,740 gross acres
in
approximately 15
units (which unit size is determined by the lateral well length)
within the Signal Peak field in Howard County, Texas in February 2017 (the “Signal Peak farm-out”) and (iii) 640 gross acres
in one leasehold section
within the Flying W
, S
E
field in Winkler County, Texas in March 2017 (the “Flying W farm-out”).
These farm-out agreements provide the third-party partner with the option, but not the obligation, to drill one well in each of the leasehold sections or units, as the case may be, subject to the farm-out agreement, whereby the partner will pay 100% of the underlying properties
’
drilling and well completion costs to earn 75% of the underlying properties
’
working interest in the leases, which results in the underlying properties retaining (i) 25% of its original working interest and (ii) an overriding royalty interest equal to the difference between 25% and the lease burdens of record. Upon completion of one well in each section or unit, as the case may be, pursuant to the terms of the agreements, the partner has the option to drill (i) an additional 15 wells under the Keystone South farm-out, (ii) an additional 12 wells under the Signal Peak farm-out and (iii) one additional well under the Flying W farm-out, all of which require the partner to pay 85% of the underlying properties
’
drilling and well completion costs for their 75% of the underlying properties
’
working interest, and
,
given its interest in the NPI,
the Trust would be responsible for 13.5% of the underlying properties
’
remaining drilling and well completion costs at the 90% NPI, subject to the average annual capital expenditure amount limitation.
The third-party partner commenced drilling operations under the Keystone South farm-out agreement in December 2016, and the first well was drilled and completed pursuant to the terms of the agreement in March 2017, whereby the partner earned 75% of the underlying properties working interest in the respective leasehold section. The partner drilled
two additional
wells in the Keystone South field
, each in separate leasehold sections,
during the first quarter of 2017, which wells are expected to be completed during the second quarter of 2017. However, the third-party partner has no obligation to
complete these two wells or to
drill and
complete any additional wells. No drilling operations have commenced under either the Signal Peak or Flying W farm-outs, and if no such drilling has commenced on or before November 30, 2017, the agreements will terminate
.
Results of Trust Operations
Comparison of Results of the Trust for the
Three Months Ended
March 31, 2017
and
2016
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, 2017 and 2016
, consisting of the
February
201
7
distribution
and
February
201
6 net loss
,
respective
ly
(dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(1)
|
|
|
247,126
|
(3)
|
|
|
267,038
|
(4)
|
Natural gas from underlying properties (Mcf)
|
|
|
352,462
|
(3)
|
|
|
424,575
|
(4)
|
Total production (BOE)
|
|
|
305,870
|
|
|
|
337,800
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(1)
|
|
$
|
40.76
|
|
|
$
|
35.18
|
|
Natural gas (per Mcf)
(2)
|
|
$
|
2.93
|
|
|
$
|
2.30
|
|
Cost metrics:
|
|
|
|
|
|
|
|
|
Lease operating expenses (per BOE)
|
|
$
|
27.26
|
|
|
$
|
26.25
|
|
Production tax rate (percent of total revenues)
|
|
|
5.3
|
%
|
|
|
5.0
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(1)
|
|
$
|
10,073
|
(3)
|
|
$
|
9,395
|
(4)
|
Natural gas sales
|
|
|
1,033
|
(3)
|
|
|
975
|
(4)
|
Total revenues
|
|
|
11,106
|
|
|
|
10,370
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
8,337
|
|
|
|
8,868
|
|
Production taxes
|
|
|
590
|
|
|
|
519
|
|
Development costs
|
|
|
539
|
|
|
|
1,085
|
|
Total costs
|
|
|
9,466
|
|
|
|
10,472
|
|
Net proceeds (losses)
|
|
|
1,640
|
|
|
|
(102)
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
Income (loss) from net profits interest
|
|
|
1,476
|
|
|
|
(92)
|
|
Proceeds from sale of oil and gas properties
|
|
|
-
|
|
|
|
331
|
|
Provision for estimated Trust expenses
|
|
|
(300)
|
|
|
|
(238)
|
|
Montana state income tax withheld
|
|
|
(2)
|
|
|
|
(1)
|
|
Distributable income
|
|
$
|
1,174
|
|
|
$
|
-
|
|
____________
|
(1)
|
|
Oil includes natural gas liquids.
|
|
(2)
|
|
The
average sales price of natural gas for the gas production months within the
February 2017
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 2016
net loss
period
were
still “liquids
-
rich”, such liquids content did
not
result in a premium to the NYMEX natural gas price
due to the decline in liquids realized sales prices.
|
|
(3)
|
|
Oil and gas sales volumes and related revenues for the three months ended
March 31, 2017
(consisting of
Whiting’s
February 2017
distribution
to the Trust
) generally represent crude
oil production from
October
2016
through
December
2016
and natural gas production from
September
2016
through
November
2016
.
|
|
(4)
|
|
Oil and gas sales volumes and related revenues for the t
hree months ended
March 31, 2016
(consi
sting of
the February 2016 net loss
) generally represent crude oil production from
October
2015
through
December
2015
and natural gas production from
September
201
5
through
November
201
5
.
|
Income
(Loss)
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
increased
$
0
.
7
million (or
7
%) during the three months ended
March 31, 2017
as compared to the same 201
6
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,
partially offset by
lower oil and natural gas production volumes. The average sales price realized for crude oil and natural gas
increased
by
16% and 27
%
, respectively,
between periods as
a
result of
higher
NYMEX oil and natural gas prices.
Crude
o
il production volumes
declined
by
2
0
MBbls (or
7
%) and natural gas volumes declined by
72
MMcf (or
1
7
%) in
the
first
quarter of 201
7
compared to the same period in 201
6
.
The oil volume decrease was primarily related to normal field production decline.
Additionally
, gas volumes
declined between periods
primarily
due
to
normal field production decline
and
gas being flared instead of produced from
twelve
wells in the Keystone South field
due to
a
gas plant
in Texas
being shut
down for a portion of 2016
,
which shut down continued
through
the first quarter of 2017
. These lower oil and gas volumes were partially offset by
differences in timing associated with revenues received from non-operated parties
.
Based on the December 31, 201
6
reserve report, overall production attributable to the underlying properties is expected to decline at an average
annual
rate of
approximately
12.1
% for oil and
15.4
% for gas
from 201
7
through the estimated
July 31, 2023
NPI termination date
.
Lease Operating Expenses.
Lease operating expenses (“LOE”)
de
creased $
0.5
million (or
6
%) during the
first
quarter of 201
7
compared to the same 201
6
period primarily due to
(i) a
$
0
.4
million
decrease in oil
field goods and services and
(ii)
$0.
1
million
of lower
ad valorem taxes
between periods
.
LOE on a per BOE basis
, however,
increased
4
% from $
26.2
5
during the three months
ended
March 31, 2016
to $
27.26
for the same period in 201
7
mainly due to
lower oil and natural gas production volumes and differences in timing associated with invoices received and paid for non-operated properties between periods.
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, 2017
and 201
6
at 5.
3
%
and 5.
0
%, respectively
. Overall production taxes for the
first
quarter of 201
7 in
creased $0.
1
million (or
14
%) as compared to the same 201
6
period,
primarily
due to
higher
oil and natural gas sales revenue between periods.
Development Costs.
Development costs for the thre
e months ended
March 31, 2017
were $
0.
5
million (or
5
0
%) lower as compared to the same 201
6
period. This de
crease was primarily related to
reduced drilling and
capital
workover costs of $0.
6
million
between periods
in the
Rangely, Garland and
Cedar Hills
fields
. These
lower expenditures were
partially of
fset
, however,
by
$0.1 million
of
differences in timing associated with invoices received and paid
between periods
for non-operated properties
in the Sand Tank field
.
Proceeds from Sale of Oil and Gas Properties
.
No sales of oil and gas properties occurred during the three months ended March 31, 2017.
I
n 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.
Distributable Income.
Distributable income for the three months ended March 31, 201
7
was $
1.2
million and was based on income from net profits interest of $
1.5
million, reduced by Trust general and administrative expenses of $
0.
2
million,
Montana state income tax withholdings of $
2,358
and changes in Trust cash reserves.
There was no distribution made to unitholders during the first quarter of 2016. This
was
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
wa
s combined with th
at
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 responsible for the repayment of any net losses generated by the NPI.
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 dutie
s, 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
(i)
any cash the Trustee decides to hold as a reserve against future liabilities
and
(ii)
any
accumulated net losses
to be
recovered by
Whiting
, plus
accrued interest
.
If the NPI generate
s
net losses or
limited
net proceeds
(which
was the case
during
2016
as well as
the first quarter
of 2017
)
, the net profits interest may 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
3
0
, 201
7
, the Trust had cash reserves of $
0.2
million
and a provision for estimated Trust expenses of
$
0.3
million from the
forthcoming
May 2017
distribution 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 generates net losses or minimal net proceeds, Whiting intends to loan to the Trust the amount of funds necessary to satisfy payment of its liabilities.
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
were to
borrow funds from Whiting or other
entities
, 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, 2017 and 2016
. 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, 2017
, Whiting incurred $
0.1
million
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 4, 2017
, the Trustee announced the Trust distribution of net profits for the
first
quarterly payment period in 201
7
. Unitholders of record on
May 20
, 201
7
(which results in an effective record date of
May 19, 2017
due to the
20
th
of
May
falling on a non-trading day) are expected to receive a distribution of $
0.145591
per Trust unit, which is payable on or before
May 30, 2017
. This aggregate distribution to all Trust unitholders is expected to consist of net cash proc
eeds of
$
2.9
million paid by Whiting to the
Trust, less a provision of $
0.3
million
for es
timated Trust expenses and
$
5,485
for Montana state income tax withholdings.
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. During the three months ended March 31, 2017
and the year ended December 31, 2016
, the
Trust received cash proceeds of
$1.5
million and $1.
9
million, respectively. However,
during the first two calendar quarters of 2017
, the Trust will receive $
4.4
million in cash proceeds from the NPI
and therefore
,
the
Trust will not be required to sell the NPI and terminate pursuant to
the Annual Cash Proceeds Termination Clause
as of December 31, 2017.
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
Trust did not have sufficient available funds to make any distributions to unitholders during the first three calendar quarters of 2016, and the NPI generated relatively low distributable income for the
fourth
quarter of 2016,
as well as the
first quarter of
2017
. If the NPI generate
s
net losses
or
limited
net proceeds
, the net profits interest
may
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
future
distributions
, if any,
to Trust unitholders will continue to be significantly impacted by low oil and natural gas prices.
New Accounting Pronouncements
There were no accounting pronouncements issued during the
three months ended March 31, 2017
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, 2016
. There have been no significant changes to the critical
accounting policies during the
three months ended March 31, 2017
.