Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The trust is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
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Item 8.
Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unitholders of VOC Energy Trust
and The Bank of New York Mellon Trust Company, N.A., as Trustee
Opinion on the financial statements
We have audited the accompanying statements of assets and trust corpus of VOC Energy Trust (the “Trust”) as of December 31, 2022 and 2021, the related statements of distributable income and changes in trust corpus for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the assets and trust corpus of the Trust as of December 31, 2022 and 2021, and the distributable income and changes in trust corpus for each of the three years in the period ended December 31, 2022, in conformity with the modified cash basis of accounting described in Note B to the financial statements.
Basis of accounting
As described in Note B to the financial statements, these financial statements have been prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Trustee. Our responsibility is to express an opinion on the Trust’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by the Trustee, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Trustee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Grant Thornton LLP
We have served as the Trust’s auditor since 2010.
Oklahoma City, Oklahoma
March 16, 2023
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VOC ENERGY TRUST
STATEMENTS OF ASSETS AND TRUST CORPUS
December 31,
2021
2022
ASSETS
Cash
$
287,204
$
1,248,877
Investment in net profits interest
140,591,606
140,591,606
Accumulated amortization and impairment
(124,873,620 )
(126,792,167 )
Total assets
$
16,005,190
$
15,048,316
TRUST CORPUS
Trust corpus, 17,000,000 Trust units issued and outstanding at December 31, 2021 and 2022, respectively
$
16,005,190
$
15,048,316
STATEMENTS OF DISTRIBUTABLE INCOME
Year Ended December 31,
2020
2021
2022
Income from net profits interest
$
5,006,227
$
9,302,296
$
23,594,050
Cash on hand used (withheld) for Trust expenses
(276,872 )
315,800
(961,673 )
General and administrative expenses (1)
(904,355 )
(948,096 )
(957,377 )
Distributable income
$
3,825,000
$
8,670,000
$
21,675,000
Distributions per Trust unit (17,000,000 Trust units issued and
outstanding at December 31, 2020, 2021 and 2022, respectively)
$
0.225
$
0.510
$
1.275
(1)
Includes $104,690, $136,620 and $114,330 paid to VOC Brazos and $150,000, $150,000 and $150,000 paid to The Bank of New York Mellon Trust Company, N.A. for the years ended December 31, 2020, 2021 and 2022, respectively.
STATEMENTS OF CHANGES IN TRUST CORPUS
Year Ended December 31,
2020
2021
2022
Trust corpus, beginning of year
$
63,345,900
$
19,012,202
$
16,005,190
Income from net profits interest
5,006,227
9,302,296
23,594,050
Cash distributions
(3,825,000 )
(8,670,000 )
(21,675,000 )
Trust expenses
(904,355 )
(948,096 )
(957,377 )
Amortization of net profits interest (includes impairment expense of $41,261,354 for the year ended December 31, 2020)
(44,610,570 )
(2,691,212 )
(1,918,547 )
Trust corpus, end of year
$
19,012,202
$
16,005,190
$
15,048,316
The accompanying notes are an integral part of these financial statements.
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VOC ENERGY TRUST
NOTES TO FINANCIAL STATEMENTS
NOTE A — ORGANIZATION OF THE TRUST
VOC Energy Trust (the “Trust”) is a statutory trust formed on November 3, 2010 (capitalized on December 17, 2010) under the Delaware Statutory Trust Act pursuant to a trust agreement dated November 3, 2010 (as amended and restated on May 10, 2011, the “Trust Agreement”) among VOC Brazos Energy Partners, L.P., a Texas limited partnership (“VOC Brazos”), as trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and Wilmington Trust Company, as Delaware Trustee (the “Delaware Trustee”). The Trust was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders.
VOC Brazos is a privately-held limited partnership engaged in the production and development of oil and natural gas from properties located in Texas. VOC Kansas Energy Partners, L.L.C., a Kansas limited liability company (“VOC Kansas”), is a privately-held limited liability company engaged in the production and development of oil and natural gas from properties primarily located in Kansas along with a limited number of Texas properties. In connection with the closing of the initial public offering of units of beneficial interest in the Trust (“Trust Units”) in May 2011, VOC Brazos acquired all of the membership interests in VOC Kansas in exchange for newly issued limited partner interests in VOC Brazos pursuant to a Contribution and Exchange Agreement, dated August 30, 2010, as amended, by and between VOC Brazos and VOC Kansas. This resulted in VOC Kansas becoming a wholly-owned subsidiary of VOC Brazos.
The Trust was created to acquire and hold a term net profits interest representing the right to receive 80% of the net proceeds (calculated as described below in Note C) from production from the Underlying Properties (as defined below). The net profits interest consists of working interests in substantially all of the oil and natural gas properties held by VOC Brazos and VOC Kansas in the States of Kansas and Texas as of the date of the conveyance of the net profits interest to the Trust. We refer to the properties in which the Trust holds the net profits interest as the “Underlying Properties.”
The net profits interest is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the Underlying Properties. The net profits interest entitles the Trust to receive 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of production from the underlying properties during the term of the Trust. The net profits interest will terminate on the liquidation date, which is the later to occur of (1) December 31, 2030 or (2) the time when 10.6 million barrels of oil equivalent (“MMBoe”) (which is the equivalent of 8.5 MMBoe in respect of the net profits interest) have been produced from the Underlying Properties and sold, and the Trust will soon thereafter wind up its affairs and terminate.
As of December 31, 2022, cumulatively, since inception, the Trust has received payment for 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of 8.1 MMBoe of production from the underlying properties (which is the equivalent of 6.5 MMBoe (unaudited) in respect of the net profits interest).
The trust will dissolve prior to the liquidation date if:
•
the trust sells the net profits interest;
•
annual cash proceeds received by the trust attributable to the net profits interest are less than $1.0 million for each of two consecutive years;
•
the holders of a majority of the outstanding trust units vote in favor of dissolution; or
•
there is a judicial dissolution of the trust.
Upon dissolution, the trustee would sell all of the trust’s assets, either by private sale or public auction, and distribute the net proceeds of the sale to the trust unitholders.
The Trustee can authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee
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or the Delaware Trustee as a lender provided the terms of the loan are similar to the terms it would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself and make other short-term investments with the funds distributed to the Trust.
NOTE B — TRUST ACCOUNTING POLICIES
A summary of the significant accounting policies of the Trust follows.
1.
Basis of accounting
The Trust uses the modified cash basis of accounting to report receipts by the Trust of the net profits interest and payments of expenses incurred. The net profits interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses and production and property taxes) and development expenses (which are capitalized in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)) of the Underlying Properties times 80%. Cash distributions of the Trust will be made based on the amount of cash received by the Trust pursuant to terms of the conveyance creating the net profits interest.
The financial statements of the Trust, as prepared on a modified cash basis, reflect the Trust’s assets, Trust corpus, and distributable income as follows:
(a)
Income from net profits interest is recorded when distributions are received by the Trust;
(b)
Distributions to Trust unitholders are recorded when paid by the Trust;
(c)
Trust general and administrative expenses (which includes the Trustee’s fees as well as accounting, engineering, legal and other professional fees) are recorded when paid;
(d)
Cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities under U.S. GAAP;
(e)
Amortization of the investment in net profits interest, calculated using the units-of-production method based upon total estimated proved reserves, is charged directly to Trust corpus and does not affect distributable income; and
(f)
The Trust evaluates its investment in the net profits interest periodically to determine whether its aggregate value has been impaired below its total capitalized cost based on the Underlying Properties. The Trust will provide a write-down to its investment in the net profits interest if and when total capitalized costs, less accumulated amortization, exceed undiscounted future net cash flows attributable to the Trust’s interests in the proved oil and gas reserves of the Underlying Properties.
While these statements differ from financial statements prepared in accordance with U.S. GAAP, the modified cash basis of reporting revenues and distributions is considered most meaningful because quarterly distributions to the Trust unitholders are based on net cash receipts.
This comprehensive basis of accounting other than U.S. GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission (the “SEC”) as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
No new accounting pronouncements have been adopted or issued during the year ended December 31, 2021 that would impact the financial statements of the Trust.
2.
Cash equivalents
For purposes of these statements, the Trust considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
3.
Use of estimates
The preparation of financial statements requires estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
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financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates affecting these financial statements include estimates of proved oil and gas reserves, which are used to compute the Trust’s amortization of net profits interest.
NOTE C — NET PROFITS INTEREST
Under the conveyance, 80% of the aggregate net proceeds attributable to the sale of oil and natural gas production from the Underlying Properties for each calendar quarter will be paid to the Trust on or before the 30 th day of the month following the end of each quarter. VOC Brazos will not pay to the Trust any interest on the net proceeds held by VOC Brazos prior to payment to the Trust. The Trustee will make distributions to Trust unitholders quarterly.
“ Gross proceeds ” means the aggregate amount received by VOC Brazos from sales of oil and natural gas produced from the Underlying Properties (other than amounts received for certain future non-consent operations). However, gross proceeds does not include consideration for the transfer or sale of any underlying property by VOC Brazos or any subsequent owner to any new owner. Gross proceeds also does not include any amount for oil or natural gas lost in production or marketing or used by the owner of the Underlying Properties in drilling, production and plant operations. Gross proceeds includes payments for future production if they are not subject to repayment in the event of insufficient subsequent production.
“ Net proceeds ” means gross proceeds less the following costs:
•
all payments to mineral or landowners, such as royalties, overriding royalties or other burdens against production, delay rentals, shut-in oil and natural gas payments, minimum royalty or other payments for drilling or deferring drilling;
•
any taxes paid by the owner of an Underlying Property to the extent not deducted in calculating gross proceeds, including estimated and accrued general property (ad valorem), production, severance, sales, gathering, excise and other taxes;
•
any extraordinary taxes or windfall profits taxes that may be assessed in the future that are based on profits realized or prices received for production from the Underlying Properties;
•
costs paid by an owner of a property comprising the Underlying Properties under any joint operating agreement pursuant to the terms of the conveyance;
•
all other costs and expenses, development costs and liabilities of drilling, recompleting, workovers, operating and producing oil and natural gas, including allocated expenses such as labor, vehicle and travel costs and materials and any plugging and abandonment liabilities (net of any development costs for which a reserve had already been made to the extent such development costs are incurred during the computation period) other than costs and expenses for certain future non-consent operations;
•
costs or charges associated with gathering, treating and processing oil and natural gas (provided, however, that any proceeds attributable to treatment or processing will offset such costs or changes, if any);
•
any overhead charge incurred pursuant to any operating agreement or other arrangement relating to an Underlying Property as permitted under the applicable conveyance, including the overhead fees payable by VOC Brazos to its affiliates Vess Oil Corporation (“Vess Oil”), L.D. Drilling Inc. and Davis Petroleum (Vess Oil, L.D. Drilling Inc. and Davis Petroleum are referred to collectively as the “VOC Operators”);
•
costs for recording the conveyance and costs estimated to record the termination and for release of the conveyance;
•
amounts previously included in gross proceeds but subsequently paid as a refund, interest or penalty;
•
costs and expenses for renewals or extensions of leases; and
•
at the option of VOC Brazos (or any subsequent owner of the Underlying Properties), amounts reserved for approved development, maintenance or operating expenditures, including well drilling,
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recompletion and workover costs, which amounts will at no time exceed $1.0 million in the aggregate, and will be subject to the limitations described below (provided that such costs shall not be debited from gross proceeds when actually incurred).
Certain other non-production revenues, including salvage value for equipment related to plugged and abandoned wells, as detailed in the conveyance, offset the costs outlined above in calculating the net proceeds.
If any excess amounts have not been used to offset costs at the time when the later to occur of (1) December 31, 2030, or (2) the time when 10.6 MMBoe (which is the equivalent of 8.5 MMBoe in respect of the net profits interest) have been produced from the Underlying Properties and sold, then Trust unitholders will not be entitled to receive the benefit of such excess amounts.
During each twelve-month period beginning on the later to occur of (1) December 31, 2027 and (2) the time when 9.8 MMBoe have been produced from the Underlying Properties and sold (which is the equivalent of 7.8 MMBoe in respect of the net profits interest) (in either case, the “Capital Expenditure Limitation Date”), the sum of the development expenditures and amounts reserved for approved development 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 development expenditures and amounts reserved for approved development 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.
In the event that the net proceeds for any computation period is a negative amount, the Trust will receive no payment for that period, and any such negative amount plus accrued interest will be deducted from gross proceeds in the following computation period for purposes of determining the net proceeds for that following computation period.
Gross proceeds and net proceeds are calculated on a cash basis, except that certain costs, primarily ad valorem taxes and expenditures of a material amount, may be determined on an accrual basis.
The net profits interest was recorded at the historical cost of VOC Brazos on May 10, 2011, the date of the conveyance, and was calculated as follows:
Oil and gas properties
$
197,270,173
Accumulated depreciation and depletion
(17,681,155 )
Hedge liability
(1,717,713 )
20-year asset retirement liability
(2,131,797 )
Net property value to be conveyed
175,739,508
Times 80% net profits interest to Trust
$
140,591,606
Based on the substantial decline of the oil future markets at March 31, 2020, the Trust determined that its aggregate value of the underlying properties was impaired, which resulted in an impairment expense of $41,261,354 during the quarter ended March 31, 2020. The impairment was charged directly to Trust corpus and did not affect distributable income. The Trust has determined that no additional impairment has been incurred since that date.
NOTE D — INCOME FROM NET PROFITS INTEREST
Year Ended December 31,
2020
2021
2022
Excess of revenues over direct operating expenses and lease equipment and development costs (1)
$
6,257,784
$
11,627,869
$
29,492,561
Times net profits interest over the term of the Trust
80 %
80 %
80 %
Income from net profits interest before reserve adjustments
5,006,227
9,302,296
23,594,050
Cash reserve (2)
0
0
0
Income from net profits interest
$
5,006,227 (3)
$
9,302,296 (4)
$
23,594,050 (5)
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(1)
Pursuant to the terms of the conveyance of the net profits interest, lease equipment and development costs are to be deducted when calculating the distributable income to the Trust.
(2)
Pursuant to the terms of the conveyance of the net profits interest, VOC Brazos can reserve up to $1,000,000 for future development, maintenance or operating expenditures at any time. The reserve balance was $1,000,000 at December 31, 2020, 2021 and 2022, respectively.
(3)
The income from the net profits interest for the year ended December 31, 2020 (consisting of VOC Brazos’ February, May, August and November 2020 net profits interest distributions to the Trust) generally represents the production by VOC Brazos from September 2019 through August 2020.
(4)
The income from the net profits interest for the year ended December 31, 2021 (consisting of VOC Brazos’ February, May, August and November 2021 net profits interest distributions to the Trust) generally represents the production by VOC Brazos from September 2020 through August 2021.
(5)
The income from the net profits interest for the year ended December 31, 2022 (consisting of VOC Brazos’ February, May, August and November 2022 net profits interest distributions to the Trust) generally represents the production by VOC Brazos from September 2021 through August 2022.
For the years ended December 31, 2020, 2021 and 2022, MV Purchasing, LLC, an affiliate of VOC Brazos and referred to as MV Purchasing, purchased 31%, 35% and 35%, respectively, of the production sold from the Underlying Properties. Sales to MV Purchasing are under short-term arrangements, ranging from one to six months, using market sensitive pricing.
NOTE E — INCOME TAXES
Tax counsel to the Trust advised the Trust at the time of formation that, under then current tax laws, in its opinion the net profits interest should be treated as a debt instrument for federal income tax purposes, and the Trust should be required to treat a portion of each payment it receives with respect to the net profits interest as interest income in accordance with the “noncontingent bond method” under the original issue discount rules contained in the Internal Revenue Code of 1986, as amended, and the corresponding regulations. Tax counsel to the Trust also advised the Trust at the time of formation that in its opinion the Trust will be treated as a grantor trust for federal income tax purposes. On the basis of this advice, Trust unitholders will be considered to own and receive the Trust’s assets and income and will be directly taxable thereon as if no trust were in existence. No provision for federal or state income taxes has been made in the accompanying statements.
NOTE F — DISTRIBUTIONS TO UNITHOLDERS
The Trustee determines for each quarter the amount available for distribution to the Trust unitholders. This distribution is expected to be made on or before the 45th day following the end of each quarter to the Trust unitholders of record on the 30th day of the month following the end of each quarter (or the next succeeding business day). Such amounts will be equal to the excess, if any, of the cash received by the Trust relating to the preceding quarter, over the expenses of the Trust paid for such quarter, subject to adjustments for changes made by the Trustee during such quarter in any cash reserves established for future expenses of the Trust. Beginning in the first quarter of 2022, the Trustee withheld a portion of the proceeds otherwise available for distribution each quarter to gradually build an approximately $1.175 million cash reserve for the payment of future known, anticipated or contingent expenses or liabilities of the Trust. The Trustee may increase or decrease the targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the trust unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to trust unitholders, together with interest earned on the funds. The targeted $1.175 million cash reserve was fully funded by February 2023.
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Date paid
Period covered
Distribution
per unit
Available
distribution
before reserve
change
Reserve
released
(established)
to (from)
distribution (1)
Total
distribution
February 14, 2020
October 1, 2019 through
December 31, 2019
$
0.11
$1.87 million
$0
$1.87 million
May 15, 2020
January 1, 2020 through
March 31, 2020
$
0.03
$0.51 million
$0
$0.51 million
August 14, 2020
April 1, 2020 through
June 30, 2020
$
0.00
$(0.007 million)
$0.007 million
$0.00 (2)
November 13, 2020
July 1, 2020 through
September 30, 2020
$
0.085
$1.452 million
$(0.007 million)
$1.445 million
February 12, 2021
October 1, 2020 through
December 31, 2020
$
0.03
$0.510 million
$0
$0.510 million
May 14, 2021
January 1, 2021 through
March 31, 2021
$
0.12
$2.040 million
$0
$2.040 million
August 13, 2021
April 1, 2021 through
June 30, 2021
$
0.16
$2.720 million
$0
$2.720 million
November 12, 2021
July 1, 2021 through
September 30, 2021
$
0.20
$3.400 million
$0
$3.400 million
February 14, 2022
October 1, 2021 through
December 31, 2021
$
0.25
$4.250 million
$0
$4.250 million
May 14, 2022
January 1, 2022 through
March 31, 2022
$
0.28
$4.760 million
$0
$4.760 million
August 12, 2022
April 1, 2022 through
June 30, 2022
$
0.38
$6.460 million
$0
$4.760 million
November 14, 2022
July 1, 2022 through
September 30, 2022
$
0.365
$6.205 million
$0
$6.205 million
(1)
Pursuant to the terms of the conveyance of the net profits interest, VOC Brazos can reserve up to $1,000,000 for future development, maintenance or operating expenditures at any time.
(2)
There was no third quarterly distribution paid as the revenue collected by VOC Brazos from April 1, 2020 through June 30, 2020 was not sufficient to cover the costs paid during the period. VOC Brazos applied $7,045 from the reserve for future expenditures to cover the deficit. The reserve was replenished by a like amount withheld from the fourth quarterly distribution.
NOTE G — RELATED PARTY TRANSACTIONS
Trustee Administrative Fee. Under the terms of the Trust Agreement, the Trust pays an annual administrative fee of $150,000 to the Trustee and paid $2,500, $2,500 and $2,510 to the Delaware Trustee for 2020, 2021 and 2022, respectively.
Agreement with VOC Brazos. In May 2011, the Trustee, not in its individual capacity but solely as Trustee of the Trust, entered into an administrative services agreement with VOC Brazos whereby, in connection with the conveyance of the net profits interest to the Trust, VOC Brazos agreed to provide the Trust with accounting, bookkeeping and informational services relating to the net profits interest in exchange for an administrative services fee of $18,750 that will be paid to VOC Brazos on a quarterly basis, The administrative services agreement will terminate on the earliest to occur of: (i) the date the Trust shall have dissolved and commenced winding up in accordance with the Trust Agreement, (ii) the date that all of the net profits interest has been terminated or is no longer held by the Trust and (iii) a date mutually agreed to by VOC Brazos and the Trustee. The quarterly fee increases by 4% each year. For 2020, 2021 and 2022, $104,690 (representing four quarters), $136,620 (representing five quarters) and $114,330 (representing four quarters) respectively, was paid to VOC Brazos as administrative fees.
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Joint Venture Agreement. In 2018, VOC Brazos entered into a joint venture agreement with Hawkwood Energy East Texas, LLC (“Hawkwood”). Under the terms of the joint venture agreement, Hawkwood carried VOC Brazos for its share of drilling and completion costs for four wells in the Lower Woodbine Organic Shale (the “Hawkwood Earning Wells”). In exchange, Hawkwood earned a working interest representing 50% of VOC Brazos’ interest in each Hawkwood Earning Well and up to a 50% interest in VOC Brazos’ acreage in the south half of the Kurten Woodbine Unit. After the Hawkwood Earning Wells were completed, Hawkwood had the right to propose and drill up to eight wells in the Lower Woodbine Organic Shale (“LWOS”) in 2019 and twelve LWOS wells in 2020, with no contractual limitation of the number of wells per year to propose and drill after 2020 (collectively, the “Hawkwood Development Wells”).
In 2019, Hawkwood drilled and completed four Hawkwood Development Wells. VOC Brazos was paying Vess Oil, as the operator, for its share of costs and related interest in the Hawkwood Development Wells, as net revenue from each of the wells is received, thereby having no current effect on Trust distributions.
On March 27, 2020, in addition to paying its costs from revenues received on these wells, VOC Brazos paid an additional $2.5 million of its share of costs to Vess Oil. The remaining balance was paid in full on December 31, 2020.
In 2022, Wildfire Energy Operating, LLC (“Wildfire”) acquired Hawkwood. As a result, Wildfire retained the rights of Hawkwood under the joint venture agreement.
VOC Brazos is evaluating the potential economic benefits associated with development of the LWOS. If these activities are pursued, such activities would result in increased development costs burdening the net profits interest of the trust relative to historical development costs. As a result of such increased development costs, cash available for distribution by the Trust would be temporarily reduced, and in certain periods there may be no distributions to trust unitholders, until anticipated production from the various development efforts in the Kurten Woodbine Unit can be brought on-line. If annual cash proceeds attributable to the net profits interest are less than $1 million for each of two consecutive years, then under the terms of the Trust Agreement, the Trust would be required to dissolve. To address these emerging opportunities, VOC Brazos will continue to evaluate the appropriate strategy and capital plan to fund development for the Trust.
NOTE H — ADVANCE FOR TRUST EXPENSES
Under the terms of the Trust Agreement, the Trustee is allowed to borrow money to pay Trust expenses. During 2020, 2021 and 2022, the Trust did not borrow any money. Any advances will be shown as additions to Trust Corpus when the borrowing is made, and any repayments will be shown as reductions to Trust Corpus when the borrowing is repaid. Under the terms of the Trust Agreement, VOC Brazos has provided a letter of credit in the amount of $1.7 million to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses.
Beginning in the first quarter of 2022, the Trustee withheld a portion of the proceeds otherwise available for distribution each quarter to gradually build an approximately $1.175 million cash reserve for the payment of future known, anticipated or contingent expenses or liabilities of the Trust. This amount is in addition to the letter of credit in the amount of $1.7 million discussed above. The Trustee may increase or decrease the targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the trust unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to trust unitholders, together with interest earned on the funds. As of December 31, 2022, the Trustee has withheld $943,970 from distributions towards the building of this cash reserve, which is included in cash on the accompanying Statements of Assets and Trust Corpus.
NOTE I — OTHER EVENTS
Subsequent event
On January 20, 2023, the Trust announced a Trust distribution to trust unitholders of record on January 30, 2023 of $3,910,000, or $0.23 per unit, which was paid on February 14, 2023. Such distribution
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consisted of the net proceeds of production collected by VOC Brazos from October 1, 2022 through December 31, 2022. The Trustee withheld $231,030 from the distribution towards the building of its $1.175 million cash reserve for the payment of future known, anticipated or contingent expenses or liabilities of the Trust, and with that amount fully funded the targeted reserve.
NOTE J — DISCLOSURES ABOUT OIL AND GAS ACTIVITIES (UNAUDITED)
The Trust is required to disclose proved reserves in accordance with the SEC’s reporting rules, which require that the average, first-day-of-the-month price during the 12-month period before the end of the year be used when estimating whether reserve quantities are economical to produce. This same 12-month average price is also used in calculating the aggregate amount of (and changes in) future cash inflows related to the standardized measure of discounted future net cash flows. The rules also allow for the use of reliable technology to estimate proved oil and gas reserves if those technologies have been demonstrated to result in reliable conclusions about reserve volumes. The unaudited supplemental information on oil and gas exploration and production activities for 2020, 2021 and 2022 has been presented in accordance with these rules.
Estimates of the proved oil and gas reserves attributable to the Trust as of December 31, 2020, 2021 and 2022 are based on reports of Cawley, Gillespie & Associates, Inc., independent petroleum and geological engineers, and the contract property management engineering staff of the manager of VOC Brazos who operates the Underlying Properties, in accordance with the SEC’s rules and definitions. Users of this information should be aware that the process of estimating quantities of “proved” and “proved developed” and “proved undeveloped” crude oil and natural gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors, including additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates occur from time to time.
The reserve data below represent estimates only and should not be construed as being exact. Moreover, the discounted values should not be construed as representative of the current market value of the net profits interest. A market value determination would include many additional factors including: (i) anticipated future oil and gas prices; (ii) the effect of federal income taxes, if any, on the Trust; (iii) an allowance for return on investment; (iv) the effect of governmental legislation; (v) the value of additional potential reserves, not considered proved at present, which may be recovered as a result of further exploration and development activities; and (vi) other business risks.
The following tables set forth (i) the estimated net quantities of proved, proved developed and proved undeveloped oil and natural gas reserves attributable to the Trust, and (ii) the standardized measure of the discounted future net profits interest income attributable to the Trust and the nature of changes in such standardized measure between years. These tables are prepared on the accrual basis, which is the basis on which VOC Brazos maintains its production records and is different from the basis on which the Trust is reporting.
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ESTIMATED QUANTITIES OF OIL AND GAS RESERVES
Oil (Bbls)
Gas (Mcf)
Oil
Equivalents
(Boe)
Proved reserves
Balance at December 31, 2019
4,162,673
1,951,287
4,487,886
Revisions of previous estimates
(1,310,389 )
363,950
(1,249,731 )
Production
(433,555 )
(290,246 )
(481,929 )
Balance at December 31, 2020
2,418,729
2,024,991
2,756,226
Revisions of previous estimates
1,253,176
439,848
1,326,484
Production
(423,320 )
(266,388 )
(467,718 )
Balance at December 31, 2021
3,248,585
2,198,451
3,614,992
Revisions of previous estimates
(14,586 )
37,575
(8,323 )
Production
(409,508 )
(250,304 )
(451,225 )
Balance at December 31, 2022
2,824,491
1,985,722
3,155,444
Proved developed reserves
December 31, 2019
3,178,009
1,561,446
3,438,250
December 31, 2020
1,948,646
1,557,190
2,208,178
December 31, 2021
2,421,006
1,427,988
2,659,004
December 31, 2022
2,226,219
1,711,724
2,511,506
Proved undeveloped reserves
December 31, 2019
984,664
389,841
1,049,636
Revisions of previous estimates
(514,581 )
77,960
(501,588 )
December 31, 2020
470,083
467,801
548,048
Additional proved undeveloped reserves added
142,948
67,971
154,277
Revisions of previous estimates
214,548
234,691
253,663
December 31, 2021
827,579
770,463
955,988
Proved undeveloped reserves converted to proved developed by drilling
(32,610 )
(15,504 )
(35,194 )
Additional proved undeveloped reserves added
22,971
0
22,971
Revisions of previous estimates
(219,668 )
(480,961 )
(299,827 )
December 31, 2022
598,272
273,998
643,938
The Trust recognized net decreases in reserves for its share of VOC Brazos’ total during 2020 associated with the production of properties of 481,929 Boe. In addition, the Trust recognized decreases of reserves of 16,053 Boe due to the removal of proved undeveloped locations in a previously adopted development plan. This decrease was also compounded by a net negative revision due to decreases in realized prices during 2020.
The Trust recognized net increases in reserves for its share of VOC Brazos’ total during 2021. This increase was primarily the result of net positive revisions due to increases in realized prices during 2021, including additional net proved undeveloped reserve locations of 127,130 Boe due to changes in a previously adopted development plan, offset by production of properties of 467,718 Boe.
The Trust recognized net decreases in reserves for its share of VOC Brazos’ total during 2022. Associated with the production of properties of 451,225 Boe. This decrease was also compounded by a negative revision due to increases in development costs and a net negative decrease of reserves of 1,496 Boe due to the removal of proved undeveloped locations in a previously adopted development plan.
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TABLE OF CONTENTS
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
FROM PROVED OIL AND GAS RESERVES
Estimates of future net cash flows from proved reserves of crude oil and natural gas are computed using the average, first-day-of-the-month price during the 12-month period for 2020, 2021 and 2022.
2020
2021
2022
Future cash inflows
$
91,076,687
$
212,513,400
$
269,711,309
Future costs
Production
(51,266,008 )
(89,189,706 )
(95,488,937 )
Development
(12,116,113 )
(24,548,756 )
(33,370,634 )
Future net cash flows
27,694,566
98,774,938
140,851,738
Less 10% discount factor
(10,214,536 )
(31,156,732 )
(42,470,509 )
Standardized measure of discounted future net cash
flows
$
17,480,030
$
67,618,206
$
98,381,229
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS FROM PROVED OIL AND GAS RESERVES
2020
2021
2022
Standardized measure at beginning of year
$
62,129,144
$
17,480,030
$
67,618,206
Net proceeds to the Trust
(5,006,227 )
(9,302,296 )
(23,594,049 )
Net changes in price and production costs
(32,370,351 )
35,189,711
53,018,239
Changes in estimated future development costs
7,551,718
(10,644,520 )
(8,340,638 )
Development costs incurred during the year
4,283,614
1,543,377
1,264,823
Revisions of quantity estimates
(15,274,648 )
32,683,902
(602,964 )
Accretion of discount
6,212,914
1,748,003
6,761,821
Changes in production rates, timing and other
(10,046,134 )
(1,080,001 )
2,255,791
Standardized measure at end of year
$
17,480,030
$
67,618,206
$
98,381,229
The average, first-day-of-the-month price during the 12-month period for 2020, 2021 and 2022 used in determining future net revenues related to the standardized measure calculation are as follows:
2020
2021
2022
Oil (per Bbl)
$
36.48
$
63.32
$
90.85
Gas (per Mcf)
$
0.97
$
2.56
$
5.59
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.