# VOC Energy Trust: Form 10-Q for the period ended Mar 31, 2021

- Company: [VOC Energy Trust](/companies/voc.md) (CIK 1505413)
- Form: 10-Q
- Filed: 2021-05-14
- Accepted by EDGAR: May 14, 2021, 16:11 ET
- Period: 2021-03-31
- Accession: 0001104659-21-066865
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1505413/000110465921066865/tm2111674d1_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1505413/000110465921066865/

## Management's discussion and analysis

As filed, 12,873 characters.

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.

### Overview

*Impact of COVID-19.* The 2020 outbreak of the novel form of coronavirus known as COVID-19 and its development into a global pandemic negatively impacted worldwide economic and commercial activity and financial markets, as well as global demand for crude oil and natural gas. The West Texas Intermediate (“WTI”) spot price of crude oil dropped sharply in the beginning of 2020, from $61.18 per barrel on January 2, 2020 to $12.34 per barrel on April 28, 2020, primarily attributable to the economic effects of the COVID-19 pandemic and the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries (“OPEC”) which resulted in an oversupply of crude oil and exacerbated the decline in crude oil prices. The responses by federal, state and local governmental authorities to the pandemic have also resulted in significant business and operational disruptions, including business closures, supply chain disruptions, travel restrictions, stay-at-home orders and limitations on the availability of workforces. After April 28, 2020, the WTI price started increasing slowly and averaged $40.18 for the months of September 2020 through November 2020, which is the production period represented in the cash received by the Trust for the quarter ended March 31, 2021. As of April 2021, the WTI price has increased to pre-COVID levels. Nevertheless, prices could decline again, and the Trust’s quarterly cash distibutions could similarly decline, depending on future actions by OPEC or the future course of the ongoing COVID-19 pandemic.

*Impairment of Net Profits Interest.* 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. There was no impairment of the investment in the net profits interest during the quarter ended March 31, 2021.

### Results of Operations

#### Results of Operations for the Quarters Ended March 31, 2021 and 2020

The following is a summary of income from net profits interest received by the Trust for the three months ended March 31, 2021 and 2020 consisting of the January distribution for each respective year:

| Sales volumes: | Three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Oil (Bbl) | 136,583 | 153,775 |
| Natural gas (Mcf) | 95,986 | 90,485 |
| Total (BOE) | 152,581 | 168,856 |
| Average sales prices: |  |  |
| Oil (per Bbl) | $36.26 | $53.22 |
| Natural gas (per Mcf) | $2.07 | $2.07 |
| Gross proceeds: |  |  |
| Oil sales | $4,952,685 | $8,183,261 |
| Natural gas sales | 199,136 | 186,996 |
| Total gross proceeds | 5,151,821 | 8,370,257 |
| Costs: |  |  |
| Production and development costs: |  |  |
| Lease operating expenses | 2,691,487 | 3,497,526 |
| Production and property taxes | 751,557 | 894,451 |
| Development expenses | 1,014,161 | 1,386,705 |
| Total costs | 4,457,205 | 5,778,682 |
| Excess of revenues over direct operating expenses and lease equipment and development costs | 694,616 | 2,591,575 |
| Times net profits interest over the term of the Trust | 80% | 80% |
| Income from net profits interest before reserve adjustments | 555,693 | 2,073,260 |
| VOC Brazos reserve for future development, maintenance or operating expenditures | – | – |
| Income from net profits interest | $555.693 | $2,073,260 |

The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2021 substantially represents the production by VOC Brazos from September 2020 through November 2020. The cash received by the Trust from VOC Brazos during the quarter ended March 31, 2020 substantially represents the production by VOC Brazos from September 2019 through November 2019.The revenues from oil production are typically received by VOC Brazos one month after production.

*Gross proceeds*. Oil and natural gas sales were $5,151,821 for the three months ended March 31, 2021, a decrease of $3,218,436 or 38.5% from $8,370,257 for the three months ended March 31, 2020. Revenues are a function of oil and natural gas sales prices and volumes sold. The decrease in gross proceeds was due to a decrease in oil sales volumes, partially offset by an increase in natural gas sales volumes during the first quarter of 2021, compounded by a decrease in market prices for oil during the first quarter of 2021. During the three months ended March 31, 2021, oil sales volumes were 136,583 Bbls for the three months ended March 31, 2021, a decrease of 17,192 Bbls or 11.2% from 153,775 Bbls for the three months ended March 31, 2020, while natural gas sales volumes were 95,986 Mcf, an increase of 5,501 Mcf or 6.1% from 90,485 Mcf for the same period in 2020. During the three months ended March 31, 2021, the average price for oil decreased 31.9% to $36.26 per Bbl and the average price for natural gas remained the same at $2.07 per Mcf.

*Costs*. Lease operating expenses were $2,691,487 for the three months ended March 31, 2021, a decrease of $806,039 or 23.0% from $3,497,526 for the three months ended March 31, 2020. Production and property taxes were $751,557 for the three months ended March 31, 2021, a decrease of $142,894 or 16.0% from $894,451 for the same period in 2020. Such decrease is primarily due to a $98,007 or 40.7% decrease in production taxes due to lower sales volumes and sales prices and a decrease in property taxes of $44,887 or 6.9%. Development expenses were $1,014,161 for the three months ended March 31, 2021, a decrease of $372,544 or 26.9% from $1,386,705 for the same period in 2020. Such decrease was primarily due to decreased development expenses during the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

*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 $694,616 for the three months ended March 31, 2021, a decrease of $1,896,959 or 73.2% from $2,591,575 for the three months ended March 31, 2020. The Trust’s 80% net profits interest of these totals were $555,693 and $2,073,260, respectively. During the three months ended March 31, 2021 and 2020, 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 $555,693 and $2,073,260 for such periods, respectively. These amounts were reduced by a Trust holdback for future expenses of $45,693 and $203,260 for the three months ended March 31, 2021 and 2020, respectively. The Trustee paid general and administrative expenses of $396,399 for the three months ended March 31, 2021, an increase of $105,941 from $290,458 for the three months ended March 31, 2020. This increase was primarily due to the differences in timing of receipt and payment of recurring general and administrative expenses. These factors resulted in distributable income for the three months ended March 31, 2021 of $510,000, a decrease of $1,360,000 from $1,870,000 for the three months ended March 31, 2020.

### 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, 2021, $252,298 was held by the Trustee 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, 2021 and 2020, there were no such borrowings. 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.

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 $1.0 million 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 at March 31, 2021 and 2020, respectively.

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 is 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. The remaining balance was paid in full on December 31, 2020. No new Hawkwood Development Wells were drilled in 2020 or through the date of this Form 10-Q.

### 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 the Trust’s Annual Report on Form 10-K for the year ended December 31, 2020 (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.

## Market risk

As filed, 149 characters.

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.

## Controls and procedures

As filed, 2,134 characters.

*Evaluation of Disclosure Controls and Procedures.* The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and regulations promulgated by the SEC. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by VOC Brazos to the Trustee, as trustee of the Trust, and its employees who participate in the preparation of the Trust’s periodic reports as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Trustee carried out an evaluation of the Trust’s disclosure controls and procedures. A Trust Officer of the Trustee has concluded that the disclosure controls and procedures of the Trust are effective.

Due to the contractual arrangements of (i) the Trust Agreement and (ii) the conveyance of the net profits interest, the Trustee relies on (A) information provided by VOC Brazos, including historical operating data, plans for future operating and capital expenditures, reserve information and information relating to projected production and (B) conclusions and reports regarding reserves by the Trust’s independent reserve engineers. See “Risk Factors—Neither the Trust nor the Trust’s unitholders have the ability to influence VOC Brazos or control the operations or development of the underlying properties” in the Form 10-K.

*Changes in Internal Control over Financial Reporting.* During the quarter ended March 31, 2021, there was no change in the Trust’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, and makes no statement concerning, the internal control over financial reporting of VOC Brazos.

## Risk factors

As filed, 146 characters.

There have not been any material changes from the risk factors previously disclosed in the Trust’s response to Item 1A to Part I of the Form 10-K.

Filed May 14, 2021.
Source: SEC EDGAR, the filing index for accession 0001104659-21-066865. Last ingested by Listed: Nov 11, 2026, 00:28 ET. No prices; not investment advice.