VOC Energy Trust 10-Q

Item 1. Financial Statements. VOC ENERGY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited) Three months ended March 31, 2024 2023 Income from net profits interest $ 3,604,114 $ 4,328,752 Cash on hand withheld for Trust expenses (17,655 ) (43,189 ) General and administrative expenses (1) (356,459 ) (375,563 ) Distributable income $ 3,230,000 $ 3,910,000 Distributions per Trust unit (17,000,000 Trust units issued and outstanding at March 31, 2024 and 2023) $ 0.19 $ 0.23 (1) Includes $30,014 and $28,860 paid to VOC Brazos Energy Partners, LP (“VOC Brazos”) during the three months ended March 31, 2024 and 2023, respectively, and $37,500 paid to The Bank of New York Mellon Trust Company, N.A. during each of the three-month periods ended March 31, 2024 and 2023. CONDENSED STATEMENTS OF ASSETS AND TRUST CORPUS March 31, 2024 December 31, 2023 (Unaudited) ASSETS Cash and cash equivalents $ 1,446,956 $ 1,429,301 Investment in net profits interest 140,591,606 140,591,606 Accumulated amortization and impairment (129,109,722 ) (128,648,342 ) Total assets $ 12,928,840 $ 13,372,565 TRUST CORPUS Trust corpus, 17,000,000 Trust units issued and outstanding at March 31, 2024 and December 31, 2023 $ 12,928,840 $ 13,372,565 CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited) Three months ended March 31, 2024 2023 Trust corpus, beginning of period $ 13,372,565 $ 15,048,316 Income from net profits interest 3,604,114 4,328,752 Cash distributions (3,230,000 ) (3,910,000 ) Trust expenses (356,459 ) (375,563 ) Amortization of net profits interest (461,380 ) (472,231 ) Trust corpus, end of period $ 12,928,840 $ 14,619,274 The accompanying notes are an integral part of these condensed financial statements. 2 VOC ENERGY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1. Organization of the Trust VOC Energy Trust (the “Trust”) is a statutory trust formed on November 3, 2010 (capitalized on December 17, 2010), under the Delaware Statutory Trust Act pursuant to a Trust Agreement dated November 3, 2010 (as amended and restated on May 10, 2011, the “Trust Agreement”) among VOC Brazos Energy Partners, L.P., a Texas limited partnership (“VOC Brazos”), as trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and Wilmington Trust Company, as Delaware Trustee (the “Delaware Trustee”). The Trust was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders. VOC Brazos is a privately held limited partnership engaged in the production and development of oil and natural gas from properties located in Texas. VOC Kansas Energy Partners, L.L.C., a Kansas limited liability company (“VOC Kansas”), is a privately held limited liability company engaged in the production and development of oil and natural gas from properties primarily located in Kansas along with a limited number of Texas properties. In connection with the closing of the initial public offering of units of beneficial interest in the Trust (“Trust Units”) in May 2011, VOC Brazos acquired all of the membership interests in VOC Kansas in exchange for newly issued limited partner interests in VOC Brazos pursuant to a Contribution and Exchange Agreement, dated August 30, 2010, as amended, by and between VOC Brazos and VOC Kansas. This resulted in VOC Kansas becoming a wholly-owned subsidiary of VOC Brazos. The Trust was created to acquire and hold a term net profits interest representing the right to receive 80% of the net proceeds (calculated as described below in Note 5) from production from the underlying properties (as defined below). The net profits interest consists of working interests in substantially all of the oil and natural gas properties held by VOC Brazos and VOC Kansas in the States of Kansas and Texas as of the date of the conveyance of the net profits interest to the Trust. We refer to the properties in which the Trust holds the net profits interest as the “underlying properties.” The net profits interest is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The net profits interest entitles the Trust to receive 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of production from the underlying properties during the term of the Trust. The net profits interest will terminate on the later to occur of (1) December 31, 2030 or (2) the time when 10.6 million barrels of oil equivalent (“MMBoe”) (which is the equivalent of 8.5 MMBoe in respect of the net profits interest) have been produced from the underlying properties and sold, and the Trust will soon thereafter wind up its affairs and terminate. As of March 31, 2024, cumulatively, since inception, the Trust has received payment for 80% of the net proceeds attributable to VOC Brazos’ interest from the sale of 8.8 MMBoe of production from the underlying properties (which is the equivalent of 7.0 MMBoe (unaudited) in respect of the net profits interest). The Trustee can authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee or the Delaware Trustee as a lender provided the terms of the loan are similar to the terms it would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself and make other short-term investments with the funds distributed to the Trust. Note 2. Basis of Presentation The accompanying Condensed Statement of Assets and Trust Corpus as of December 31, 2023, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of March 31, 2024 and for the three-month periods ended March 31, 2024 and 2023, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Trustee believes such information includes all the disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments that are, in the opinion of the Trustee, necessary for a fair presentation of the results of the interim period presented. The financial information should be read in conjunction with the financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023. 3 Note 3. Trust Accounting Policies The Trust uses the modified cash basis of accounting to report receipts of the net profits interest and payments of expenses incurred. The net profits interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses, lease maintenance, lease overhead, and production and property taxes) and an adjustment for lease equipment costs and lease development expenses (which are capitalized in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)) of the underlying properties, times 80%. Actual cash receipts may vary due to timing delays of actual cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices. The actual cash distributions of the Trust will be made based on the terms of the conveyance creating the Trust’s net profits interest. Expenses of the Trust, which include accounting, engineering, legal and other professional fees, Trustee fees, an administrative fee paid to VOC Brazos and out-of-pocket expenses, are recognized when paid. Under U.S. GAAP, revenues and expenses would be recognized on an accrual basis. Amortization of the investment in net profits interest is recorded on a unit-of-production method in the period in which the cash is received with respect to such production. Such amortization does not reduce distributable income, rather it is charged directly to Trust corpus. This comprehensive basis of accounting other than U.S. GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts. Investment in the net profits interest was recorded initially at the historical cost of VOC Brazos and is periodically assessed to determine whether its aggregate value has been impaired below its total capitalized cost based on the underlying properties. The Trust will provide a write-down to its investment in the net profits interest if and when total capitalized costs, less accumulated amortization, exceeds undiscounted future net revenues attributable to the proved oil and gas reserves of the underlying properties. There was no impairment of the investment in the net profits interest during the quarters ended March 31, 2024 or 2023. No new accounting pronouncements were adopted or issued during the quarter ended March 31, 2024 that would impact the financial statements of the Trust. Note 4. Investment in Net Profits Interest The net profits interest was recorded at the historical cost of VOC Brazos on May 10, 2011, the date of the conveyance of the net profits interest to the Trust, and was calculated as follows: Oil and gas properties $ 197,270,173 Accumulated depreciation and depletion (17,681,155 ) Hedge liability (1,717,713 ) 20-year asset retirement liability (2,131,797 ) Net property to be conveyed 175,739,508 Times 80% net profits interest to Trust $ 140,591,606 4 Note 5. Income from Net Profits Interest Three months ended March 31, 2024 2023 Excess of revenues over direct operating expenses and lease equipment and development costs (1) $ 4,505,142 $ 5,410,940 Times 80% net profits interest to Trust 80 % 80 % Income from net profits interest before reserve adjustments 3,604,114 4,328,752 VOC Brazos reserve for future development, maintenance or operating expenditures (2) – – Income from net profits interest (3) $ 3,604,114 $ 4,328,752 (1) Excess of revenues over direct operating expenses and lease equipment and development costs reflect expenses and costs incurred by VOC Brazos during the September through November production period. Pursuant to the terms of the conveyance of the net profits interest, lease equipment and development costs are to be deducted when calculating the distributable income to the Trust. (2) Pursuant to the terms of the conveyance of the net profits interest, VOC Brazos can reserve up to $1.0 million for future development, maintenance or operating expenditures at any time. During the three months ended March 31, 2024 and 2023, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the reserve. The reserve balance was $1.0 million at March 31, 2024 and 2023. (3) The income from net profits interest is based upon the cash receipts from VOC Brazos for the oil and gas production. The revenues from oil production are typically received by VOC Brazos one month after production; thus, the cash received by the Trust during the three months ended March 31, 2024 substantially represents production by VOC Brazos from September 2023 through November 2023. The cash received by the Trust during the three months ended March 31, 2023 substantially represents production by VOC Brazos from September 2022 through November 2022. For the three months ended March 31, 2024 and 2023, MV Purchasing, LLC, an affiliate of VOC Brazos, purchased a significant portion of the production of the underlying properties. Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one to six months, using market sensitive pricing. Note 6. Income Taxes The Trust is a Delaware statutory trust and is not required to pay federal or state income taxes. Accordingly, no provision for federal or state income taxes has been made. Note 7. Distributions to Unitholders VOC Brazos makes quarterly payments of the net profits interest to the Trust. The Trustee determines for each quarter the amount available for distribution to the Trust unitholders. This distribution is expected to be made on or before the 45th day following the end of each quarter to the Trust unitholders of record on the 30th day of the month following the end of each quarter (or the next succeeding business day). Such amounts will be equal to the excess, if any, of the cash received by the Trust relating to the preceding quarter, over the expenses of the Trust paid for such quarter, subject to adjustments for changes made by the Trustee during such quarter in any cash reserves established for future expenses of the Trust. Beginning in the first quarter of 2022, the Trustee withheld a portion of the proceeds otherwise available for distribution each quarter to build a reserve of $1.175 million for the payment of future known, anticipated or contingent expenses or liabilities of the Trust. The targeted $1.175 million cash reserve was fully funded by February 2023 and is included in cash and cash equivalents on the accompanying Condensed Statements of Assets and Trust Corpus. The Trustee may increase or decrease the targeted amount at any time and may increase or decrease the rate at which it withholds funds to build the cash reserve at any time, without advance notice to the unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders, together with interest earned on the funds. The first quarterly distribution during 2024 was $3,230,000, or $0.19 per Trust Unit, and was made on February 14, 2024 to Trust unitholders owning Trust Units as of January 30, 2024. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2023 through December 31, 2023. 5 The first quarterly distribution during 2023 was $3,910,000, or $0.23 per Trust Unit, and was made on February 14, 2023 to Trust unitholders owning Trust Units as of January 30, 2023. Such distribution included the net proceeds of production collected by VOC Brazos from October 1, 2022 through December 31, 2022 and was net of $231,030 withheld by the Trustee towards the building of the cash reserve described above and with that amount, the targeted reserve was fully funded. Note 8. Advance for Trust Expenses Under the terms of the Trust Agreement, the Trustee is allowed to borrow money to pay Trust expenses. During the three months ended March 31, 2024 and 2023, there were no borrowings or amounts owed for money borrowed in previous quarters. Under the terms of the Trust Agreement, VOC Brazos has provided a letter of credit in the amount of $1,700,000 to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses. Note 9. Subsequent Events On April 18, 2024, the Trust announced a Trust distribution of net profits for the first quarterly payment period ended March 31, 2024. Unitholders of record on April 30, 2024 will receive a distribution amounting to $3,060,000, or $0.18 per Trust Unit, which will be paid on May 15, 2024. 6 Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of the Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The Trust’s purpose is, in general, to hold the net profits interest, to distribute to the Trust unitholders cash that the Trust receives in respect of the net profits interest and to perform certain administrative functions in respect of the net profits interest and the Trust Units. The Trust derives substantially all of its income and cash flows from the net profits interest. All information regarding operations has been provided to the Trustee by VOC Brazos. Results of Operations Results of Operations for the Quarters Ended March 31, 2024 and 2023 The following is a summary of income from net profits interest received by the Trust for the three months ended March 31, 2024 and 2023 consisting of the January distribution for each respective year: Three months ended March 31, 2024 2023 Sales volumes: Oil (Bbl) 116,405 127,600 Natural gas (Mcf) 67,921 83,501 Total (BOE) 127,725 141,517 Average sales prices: Oil (per Bbl) $ 81.39 $ 82.73 Natural gas (per Mcf) $ 3.24 $ 7.65 Gross proceeds: Oil sales $ 9,474,489 $ 10,556,507 Natural gas sales 220,046 639,071 Total gross proceeds $ 9,694,535 11,195,578 Costs: Production and development costs: Lease operating expenses 3,907,650 4,022,303 Production and property taxes 834,484 893,958 Development expenses 447,259 868,377 Total costs $ 5,189,393 5,784,638 Excess of revenues over direct operating expenses and lease equipment and development costs 4,505,142 5,410,940 Times net profits interest over the term of the Trust 80 % 80 % Income from net profits interest before reserve adjustments 3,604,114 4,328,752 VOC Brazos reserve for future development, maintenance or operating expenditures – – Income from net profits interest $ 3,604,114 $ 4,328,752 The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2024 substantially represents the production by VOC Brazos from September 2023 through November 2023. The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2023 substantially represents the production by VOC Brazos from September 2022 through November 2022. The revenues from oil production are typically received by VOC Brazos one month after production. Gross proceeds . Oil and natural gas sales were $9,694,535 for the three months ended March 31, 2024, a decrease of $1,501,043 or 13.4% from $11,195,578 for the three months ended March 31, 2023. Revenues are a function of oil and natural gas sales prices and volumes sold. The decrease in gross proceeds was due to decreases in market prices for oil and natural gas and by decreases in oil and natural gas sales volumes during the first quarter of 2024. During the three months ended March 31, 2024, the average price for oil decreased 1.6% to $81.39 per Bbl and the average price for natural gas decreased 57.6% to $3.24 per Mcf. During the three months ended March 31, 2024, oil sales volumes were 116,405 Bbls, a decrease of 11,195 Bbls or 8.8% from 127,600 Bbls for the three months ended March 31, 2023, while natural gas sales volumes were 67,921 Mcf, a decrease of 15,580 Mcf or 18.7 % from 83,501 Mcf for the same period in 2023. 7 Costs . Lease operating expenses were $3,907,650 for the three months ended March 31, 2024, a decrease of $114,653 or 2.9% from $4,022,303 for the three months ended March 31, 2023. Production and property taxes were $834,484 for the three months ended March 31, 2024, a decrease of $59,474 or 6.7% from $893,958 for the same period in 2023. Such decrease is primarily due to a $65,743 or 20.7% decrease in production taxes due primarily to lower sales volumes and sales prices for oil and natural gas, partially offset by an increase of $6,269 or 1.1% in property taxes. Development expenses were $447,259 for the three months ended March 31, 2024, a decrease of $421,118 or 48.5% from $868,377 for the same period in 2023. Such decrease was primarily due to a decrease in drilling activity and development expenses, during the three months ended March 31, 2024, compared to the three months ended March 31, 2023, a period that included approximately $200,000 in costs associated with the completion costs of two horizontal wells in Texas. Excess of revenues over direct operating expenses and lease equipment and development costs . The excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties was $4,505,142 for the three months ended March 31, 2024, a decrease of $905,798 or 16.7% from $5,410,940 for the three months ended March 31, 2023. The Trust’s 80% net profits interest of these totals were $3,604,114 and $4,328,752, respectively. During the three months ended March 31, 2024 and 2023, VOC Brazos did not withhold or release any dollar amounts due to the Trust from the previously established cash reserve for future development, maintenance or operating expenditures, which resulted in income from the net profits interest of $3,604,114 and $4,328,752 for such periods, respectively. These amounts were reduced by a Trustee holdback for current estimated Trust expenses of $374,114 and $187,722 for the three months ended March 31, 2024 and 2023, respectively, and a Trustee holdback for future estimated Trust expenses of $231,030 for the three months ended March 31, 2023. The Trustee paid general and administrative expenses of $356,459 for the three months ended March 31, 2024, a decrease of $19,104 from $375,563 for the three months ended March 31, 2023. These factors resulted in distributable income for the three months ended March 31, 2024 of $3,230,000, a decrease of $680,000 from $3,910,000 for the three months ended March 31, 2023. Liquidity and Capital Resources 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 as well as a quarterly administrative fee to VOC Brazos pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the net profits interest and other sources (such as interest earned on any amounts reserved by the Trustee) in that quarter, over the Trust’s expenses paid for that quarter. Available funds are reduced by any cash that the Trustee decides to reserve for future development, maintenance or operating expenses. As of March 31, 2024, the Trustee held $1,446,956 as cash and cash equivalents on the accompanying Condensed Statements of Assets and Trust Corpus, which includes the $1.175 million cash reserve described below, as such a reserve. The Trustee may cause the Trust to borrow funds required to pay expenses if the Trustee determines that the cash on hand and the cash to be received are insufficient to cover the Trust’s expenses. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid. During the three months ended March 31, 2024 and 2023, there were no such borrowings. 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 a $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 $1.7 million letter of credit described above. The targeted $1.175 million cash reserve was fully funded as of January 30, 2023. The Trustee may increase or decrease the targeted amount at any time and may increase or decrease the rate at which it withholds funds to build the cash reserve at any time, without advance notice to the unitholders. Cash held in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders, together with interest earned on the funds. Income to the Trust from the net profits interest is based on the calculation and definitions of “gross proceeds” and “net proceeds” contained in the conveyance. As substantially all of the underlying properties are located in mature fields, VOC Brazos does not expect future costs for the underlying properties to change significantly compared to recent historical costs other than changes due to fluctuations in the general cost of oilfield services. VOC Brazos may establish a cash reserve of up to $1,000,000 in the aggregate at any given time from the dollar amount otherwise distributable to the Trust to reduce the impact on distributions of uneven capital expenditure timing. The cash reserve balance was $1,000,000 on March 31, 2024 and 2023, respectively. 8 Note Regarding Forward-Looking Statements This 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 fact included in this 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. Although VOC Brazos advised the Trust that it believes that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations (“Cautionary Statements”) are disclosed in this Form 10-Q and in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “Form 10-K”), including under the section “Item 1A. Risk Factors”. All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Item 3. 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.