It
em 1.
Financial Statements.
WH
ITING USA TRUST II
Statements of Assets, Liabilities and Trust Corpus (Unaudited)
(In thousands, except unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
|
|
|
|
|
|
$
|
176
|
|
$
|
279
|
Investment in net profits interest, net
|
|
|
|
|
|
|
|
|
25,583
|
|
|
30,966
|
Total assets
|
|
|
|
|
|
|
|
$
|
25,759
|
|
$
|
31,245
|
LIABILITIES AND TRUST CORPUS
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Trust expenses
|
|
|
|
|
|
|
|
$
|
176
|
|
$
|
279
|
Trust corpus (18,400,000 Trust units issued and outstanding
at September 30, 2016 and December 31, 2015)
|
|
|
|
|
|
|
|
|
25,583
|
|
|
30,966
|
Total liabilities and Trust corpus
|
|
|
|
|
|
|
|
$
|
25,759
|
|
$
|
31,245
|
Sta
tements of Distributable Income (Unaudited)
(In thousands, except distributable income per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income from net profits interest
|
|
$
|
1,445
|
|
$
|
3,172
|
|
$
|
155
|
|
$
|
9,884
|
General and administrative expenses
|
|
|
(147)
|
|
|
(162)
|
|
|
(581)
|
|
|
(625)
|
Proceeds from sale of oil and gas properties
|
|
|
-
|
|
|
-
|
|
|
331
|
|
|
-
|
Cash reserves used (withheld) for current Trust expenses
|
|
|
(93)
|
|
|
(88)
|
|
|
103
|
|
|
(75)
|
State income tax withholding
|
|
|
(4)
|
|
|
(3)
|
|
|
(8)
|
|
|
(8)
|
Accumulated net losses funded by (repaid to) Whiting
|
|
|
(1,201)
|
|
|
-
|
|
|
-
|
|
|
-
|
Distributable income
|
|
$
|
-
|
|
$
|
2,919
|
|
$
|
-
|
|
$
|
9,176
|
Distributable income per unit
|
|
$
|
-
|
|
$
|
0.158632
|
|
$
|
-
|
|
$
|
0.498690
|
State
ments of Changes in Trust Corpus (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Trust corpus, beginning of period
|
|
$
|
27,267
|
|
$
|
52,223
|
|
$
|
30,966
|
|
$
|
57,789
|
Distributable income
|
|
|
-
|
|
|
2,919
|
|
|
-
|
|
|
9,176
|
Distributions to unitholders
|
|
|
-
|
|
|
(2,919)
|
|
|
-
|
|
|
(9,176)
|
Amortization of investment in net profits interest
|
|
|
(1,684)
|
|
|
(2,659)
|
|
|
(5,383)
|
|
|
(8,225)
|
Trust corpus, end of period
|
|
$
|
25,583
|
|
$
|
49,564
|
|
$
|
25,583
|
|
$
|
49,564
|
The accompanying notes are an integral part of these modified cash basis financial statements.
WHI
TING USA TRUST II
NOTES TO MODIFIED CASH BASIS FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE TRUST
Trust
Overview
— Whiting USA Trust II (the “Trust”) is a statutory trust formed on December 5, 2011 under the Delaware Statutory Trust Act, pursuant to a trust agreement (the “Trust agreement”) among Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), as
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, 2015
, these oil and gas properties included interests in approximately
1,310
gross (
383.3
net) producing oil and gas wells.
The NPI is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties. The NPI will terminate on the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE have been produced from the underlying properties and sold (which amount is the equivalent of 10.61 MMBOE in respect of the Trust’s right to receive 90% of the net proceeds from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions.
Additionally, the Trust is required to sell the NPI and terminate if cash proceeds to the Trust from the net pro
fits interest are less than $2
.0
million for each of any two consecutive years.
During the nine months ended September 30, 2016
,
t
he Trust
receive
d cash proceeds of
$
0.5 million
from the net profits interest
.
As of
September 30, 2016
on a cumulative accrual basis,
6.63
MMBOE (
63%
) of the Trust’s total 10.61 MMBOE have been produced and sold
or
divested
.
The portion of Trust reserves divested
through September 30, 2016
includes 0.01 MMBOE of proved reserves from certain producing oil and gas wells located within the Cooks Peak field in North Dakota that were sold for a purchase price of $0.4 million ($0.3 million to the 90% net profits interest) during the first quarter of 2016.
T
he remaining minimum reserve quantities are projected to be produced
by June 30, 2022
, based on the Trust’s reserve report as of December 31,
2015
. The Trust’s
2015
Annual Report on Form 10-K includes additional information on the Trust’s reserves as of
December 31, 2015
.
The Trustee can authorize the Trust to borrow money for the purpose of paying Trust administrative or incidental expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee, Whiting or the Delaware Trustee as a lender, provided that the terms of the loan are similar to the terms it would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself, which may be a non-interest bearing account, and make other short term investments with the funds distributed to the Trust. As of
September 30, 2016
and
December 31, 2015
, the Trust had no borrowings
outstanding
.
Initial Issuance of Trust Units and Net Profits Interest Conveyance
— On March 21, 2012, the registration statement on Form S-1/S-3 (Registration No. 333-178586) filed by Whiting and the Trust in connection with the initial public offering of the Trust’s units was declared effective by the SEC. On March 28, 2012, the Trust issued 18,400,000 Trust units to Whiting in exchange for the conveyance of the term NPI, which is described above, from Whiting Oil and Gas. Immediately thereafter, Whiting completed an initial public offering of units of beneficial interest in the Trust, selling 18,400,000 Trust units to
the public at $20.00 per unit.
Delisting of the Trust
—
The Trust was informed by the New York Stock Exchange (the “NYSE”) on January 4, 2016 that the Trust was not in compliance with the NYSE’s continued listing standards, which require that the average closing price of the Trust units cannot be less than $1.00 per unit over a period of 30 consecutive trading days. Under the NYSE delisting procedures, the Trust had the right to certain cure periods if it could demonstrate its intent to cure the deficiency. However, in order to save the Trust administrative costs (including ongoing NYSE listing fees, expenses associated with reverse split votes
,
or other actions necessary to remedy the deficiency) the Trust determined it would not cure the deficiency. As a result, the Trust units ceased trading on the NYSE on January 6, 2016. The Trust units transitioned to OTC, operated by OTC Markets Group, effective with the opening of trading on January 7, 2016 u
nder the trading symbol “WHZT.”
2. BASIS OF ACCOUNTING
Interim Financial Statements
—
The accompanying unaudited financial information has been prepared by the Trustee in accordance with the instructions to the Quarterly Report on Form 10-Q. The accompanying financial information is prepared on a comprehensive basis of accounting other than GAAP.
In the opinion of the Trustee, the accompanying financial statements include all adjustments (consisting of normal and recurring adjustments) necessary to present fairly, in all material respects, the results of the Trust for the interim periods presented. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The modified cash basis financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the Trust’s financial statements and related notes included in the Trust’s
2015
Annual Report on Form 10-K
.
Term Net Profits Interest
—
The Trust uses the modified cash basis of accounting to report Trust receipts from the term NPI and payments of expenses incurred. Actual cash distributions to the Trust are made based on the terms of the conveyance that created the Trust’s NPI. The term NPI entitles the Trust to receive revenues (crude oil, natural gas and natural gas liquid sales) less expenses (the amount by which all royalties; lease operating expenses including well workover costs; development costs; production and property taxes; payments made by Whiting to the hedge counterparty upon settlements of hedge contracts; maintenance expenses; producing overhead;
and amounts that may be reserved for future development, maintenance or operating expenses, which reserve amounts may not exceed $2.0 million, exceed hedge payments received by Whiting under hedge contracts and other non-production revenue) of the underlying properties multiplied by 90% (term NPI percentage).
Actual cash receipts may vary due to timing delays of cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices
, 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:
|
a)
|
|
Income from net profits interest is recorded when NPI 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 include the Trustees’ 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 GAAP;
|
|
e)
|
|
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
|
|
f)
|
|
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.
|
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
nine months ended September 30, 2016
applicable to the Tru
st or its financial statem
ents.
3. INVESTMENT IN NET PROFITS INTEREST
Whiting Oil and Gas conveyed the NPI to the Trust in exchange for 18,400,000 Trust units. The investment in net profits interest was recorded at the historical cost basis of Whiting on March 28, 2012, the date of conveyance (except for the derivatives which were reflected at their fair value as of March 31, 2012), and was determined to be $194.0 million. As of December 31, 201
5
, the investment in net profits interest with a
previous
carrying value of $
46.8
million was written down to its fair value of $
31.0
million, resulting in a $
15
.8 million impairment charged directly to Trust corpus. Accumulated amortization of the investment in net profits interest as of
September 30, 2016
and
December 31, 2015
was
$5.4
million and
zero
,
respectively.
4. INCOME TAXES
The Trust is a grantor trust and therefore is not subject to federal income taxes. Accordingly, no recognition is given to federal income taxes in the Trust’s financial statements. The Trust unitholders are treated as the owners of Trust income and corpus, and the entire taxable income of the Trust is reported by the Trust unitholders on their respective tax returns.
For Montana state income tax purposes, Whiting must withhold from its NPI payments to the Trust, an amount equal to 6% of the net amount payable to the Trust from the sale of oil and gas in Montana. For Arkansas, Colorado, Michigan, Mississippi, New Mexico, North Dakota and Oklahoma, neither the Trust nor Whiting is withholding the income tax due
to
such states on distributions made to an individual resident or nonresident Trust unitholder, as long as the Trust is taxed as a grantor trust under the Internal Revenue Code
.
5
. DISTRIBUTION TO UNITHOLDERS
Actual cash distributions to the Trust unitholders depend on the volumes of and prices received for oil, natural gas and natural gas liquids produced from the underlying properties, among other factors. Quarterly cash distributions during the term of the Trust are made by the Trustee no later than 60 days following the end of each quarter (or the next succeeding business day) to the Trust unitholders of record on the 50th day following the end of each quarter. Such amounts equal the excess, if any, of the cash received by the Trust during the quarter, over the expenses of the Trust paid during such quarter, subject to any adjustments for changes made by the Trustee during such quarter to any cash reserves established fo
r future expenses of the Trust
or adjustments for the recovery of accumulated net losses and accrued interest
.
There were no distributions to the Trust unitholders during the three and nine months ended September 30, 2016 primarily due to the net profits interest generating net losses or limited net proceeds as the result of lower oil and natural gas prices during th
ose quarterly payment
period
s
.
T
he NPI generate
d
net proceeds
of $1.
4
million
during the
third
quarter
of 2016
,
h
owever, when this
income from the net profits interest
is reduced by (i) the repayme
nt to Whiting of $1.2 million for
prior period accumulated net losses and (ii) the
current period’s
provision for estimated Trust expenses, both of
these amounts together
offset
such net proceeds
in their entirety
.
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 interest rate
, are to
be recovered
by Whiting
from future NPI
gross proceeds
before any further distributions will be made to Trust unitholders
,
as occurred during the
third quarter of 2016
.
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.
The following table presents the net profits interest a
ccumulated
net
losse
s
for the
three and
nine
months
ended
September
30, 2016 and 2015
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Accumulated net losses, beginning of period
|
$
|
(1,201)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Net losses funded by Whiting
|
|
-
|
|
|
-
|
|
|
(1,201)
|
|
|
-
|
Repayment of accumulated net losses to Whiting
|
|
1,201
|
|
|
-
|
|
|
1,201
|
|
|
-
|
Accumulated net losses, end of period
(1)
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
________________________
|
(1)
|
|
In addition to the
repayment of
the
accumulated net losses
of $1.2 million
, accrued interest of $657
was
also repaid to Whiting
during the third quarter of 2016, which amount is included
in general and administrative expenses in the statement
s
of distributable income.
|
6
. RELATED PARTY TRANSACTIONS
Plugging and Abandonment
—
During the
three and nine months ended September 30, 2016
, Whiting incurred
$0.2
million
and
$0.5
million,
respectively,
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 and nine months ended September 30, 2016 and 2015
(dollars in thousands, except monthly amounts per well):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total overhead charges (in thousands)
|
|
$
|
375
|
|
$
|
429
|
|
$
|
1,208
|
|
$
|
1,266
|
Overhead charge per month per active operated well
|
|
$
|
387
|
|
$
|
438
|
|
$
|
416
|
|
$
|
432
|
Administrative Services Fee
—
Under the terms of the administrative services agreement, the Trust is obligated to pay a quarterly administration fee of $50,000 to Whiting 60 days following the end of each calendar quarter. General and administrative expenses in the Trust’s statements of distributable income for the
three and nine months ended September 30, 2016
include
$50,000
and
$150,000
, respectively,
for quarterly administrative fees paid to Whiting
, and g
eneral and administrative expenses in the Trust’s statements of distributable income for the
three and nine months ended September 30, 2015
also
include
$50,000
and
$150,000
, respectively,
for quarterly administrative fees paid to Whiting
.
Trustee Administrative Fee
—
Under the terms of the Trust agreement, the Trust pays an annual administrative fee to the Trustee of $175,000, which is paid in four quarterly
installments of $43,750 each and is billed in arrears. Starting in 2017, such fee escalates by 2.5% each year. General and administrative expenses in the Trust’s statements of distributable income for the
three and nine months ended September 30, 2016
include
$43,750
and
$131,250
, respectively,
for quarterly administrative fees paid to the Trustee
, and general and administrative expenses in the Trust’s statements of distributable income for the
three and nine months ended September 30, 2015
similarly include
$43,750
and
$131,250
, respectively, 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.
7
. SUBSEQUENT EVENT
On November 4, 2016, the Trustee announced the Trust
’s
distribution of net profits for the third quarterly payment period in 2016. Unitholders of record on November 19, 2016 (which results in an effective record date of November 18, 2016 due to the 19
th
of November falling on a non-trading day) are expected to receive a distribution of $
0.065170
per Trust unit, which is payable on or before November 29, 2016. This aggregate distribution to all Trust unitholders is expected to consi
st of net cash proceeds of $1.5
million paid by Whiting to the
Trust, less a provision of $250,000
for es
timated Trust expenses and $1,967
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, and, when giving effect to the November 2016 distribution, t
he Trust will only receive $1.9
million in cash proceeds
from the NPI for the year ending
December 31, 2016. Therefore, if the cash proceeds to the Trust from
the
net profits interest are less than
$2.0 million for the year ending
December 31, 2017, the Trust will be required to sell the NPI and terminate.
Ite
m 2.
Trustee’s Discussion and Analysis of Financial Condition and Results of Operations
References to the “Trust” in this document refer to Whiting USA Trust II. References to “Whiting” in this document refer to Whiting Petroleum Corporation and its subsidiaries. References to “Whiting Oil and Gas” in this document refer to Whiting Oil and Gas Corporation, a 100%-owned subsidiary of Whiting Petroleum Corporation.
The following review of the Trust’s financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as the Trustee’s discussion and analysis contained in the Trust’s
2015
Annual Report on Form 10-K. The Trust’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available on the SEC’s website
www.sec.gov
.
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)
. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation the statements under “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. No assurance can be given that such expectations will prove to have been correct. When used in this document, the words “believes,” “expects,” “anticipates,” “intends” or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results to differ materially from those expressed in such forward-looking statements:
|
·
|
|
the effect of changes in commodity prices and conditions in the capital markets;
|
|
·
|
|
uncertainty of estimates of oil and natural gas reserves and production;
|
|
·
|
|
risks incident to the operation and drilling of oil and natural gas wells;
|
|
·
|
|
future production and development costs;
|
|
·
|
|
the inability to access oil and natural gas markets due to market conditions or operational impediments;
|
|
·
|
|
failure of the underlying properties to yield oil or natural gas in commercially viable quantities;
|
|
·
|
|
the effect of existing and future laws and regulatory actions;
|
|
·
|
|
competition from others in the energy industry;
|
|
·
|
|
inflation or deflation; and
|
|
·
|
|
other risks described under the caption “Risk Factors” in the Trust’s
2015
Annual Report on Form 10-K.
|
All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or the Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Overview and Trust Termination
The Trust does not conduct any operations or activities. The Trust’s purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives pursuant to the NPI, and to perform certain administrative functions with respect to the NPI and the Trust units. The Trust derives substantially all of its income and cash flows from the NPI, which was in turn subject to commodity hedge contracts through December 31, 2014 (which
hedging
effects impacted the February 2015 distribution and ceased thereafter). The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties.
Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated through
September 30, 2016
. The
August 2016 distribution
was
mainly affected
by
April 2016 through June 2016
oil prices and
March 2016 through May 2016
natural gas prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Q3
|
Crude oil
|
$
|
98.62
|
|
$
|
102.98
|
|
$
|
97.21
|
|
$
|
73.12
|
|
$
|
48.57
|
|
$
|
57.96
|
|
$
|
46.44
|
|
$
|
42.17
|
|
$
|
33.51
|
|
$
|
45.60
|
|
$
|
44.94
|
Natural gas
|
$
|
4.93
|
|
$
|
4.68
|
|
$
|
4.07
|
|
$
|
4.04
|
|
$
|
2.99
|
|
$
|
2.61
|
|
$
|
2.74
|
|
$
|
2.17
|
|
$
|
2.06
|
|
$
|
1.98
|
|
$
|
2.93
|
Oil prices have fallen significantly since reaching highs of over $105.00 per Bbl in June 2014, dropping below $
27
.00 per Bbl in
February 2016
. Natural gas prices have also declined from over $4.80 per MMBtu in April 2014 to below $
1.70
per MMBtu in
March
201
6
.
Although oil prices have recently begun to recover from the lows experienced during the first quarter
of 2016
, forecasted prices for both oil and gas remain low
. Lower oil and gas prices on production from the underlying properties could cause the following: (i) a reduction in the amount of net proceeds to which the Trust is entitled; and (ii) a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties causing an extension of the length of time required to produce 11.79 MMBOE (10.61 MMBOE at the 90% NPI). If prices remain at current levels, the amount of net proceeds to which the Trust is entitled is likely to be substantially lower than the net proceeds the Trust has received and distributed to Trust unitholders in the past. All costless collar hedge contracts that Whiting entered into, and in turn conveyed to the Trust, terminated as of December 31, 2014 (which hedging effects extended through the February 2015 distribution to unitholders) and no additional hedges are allowed to be placed on the Trust assets. Consequently,
there
are
no
further
cash settlement gains or losses on commodity derivatives
for inclusion in the Trust’s computation of net proceeds (or net losses, as the case may be)
, and the Trust therefore has increased exposure to oil and natural gas price volatility
.
Trust Termination.
The NPI will terminate on the later to occur of (1) December 31, 2021, or (2) the time when 11.79 MMBOE (10.61 MMBOE at the 90% NPI) have been produced and sold from the underlying properties, and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. Additionally, the Trust is required to sell the NPI and terminate if cash proceeds to the Trust from the
net profits interest
are less than $2.0 million for each of any two consecutive years.
During the nine months ended September 30, 2016
,
the Trust has received cash proceeds of $
0.5 million
from the net profits interest and, when giving effect to the November 2016 distribution, the Trust will only receive
$1.9
million in cash proceeds from the NPI fo
r the year ending
December 31, 2016. Therefore, if the cash proceeds to the Trust from
the
net profits interest are less than
$2.0 million for the year ending
December 31, 2017, the Trust will be required to sell the NPI and terminate.
T
he market price of the Trust units will decline to zero at termination of the Trust
, which will occur around or shortly after the earlier of (i) the sale of the NPI or (ii) the net profits interest termination date, which is estimated to be June 30, 2022 based on the Trust’s year-end
2015
reserve report
.
Since the assets of the Trust are depleting assets, a portion of each cash distribution paid on the Trust units is to be considered by investors as a return of capital, with the remainder being considered as a return on investment or yield.
As of
September 30, 2016
on a cumulative accrual basis,
6.63
MMBOE (
63%
) of the Trust’s total 10.61 MMBOE have been produced and sold or divested
(of which
307
MBOE, which is 90% of
276
MBOE,
were included as gross proceeds in
the Trust’s
November
2016
distribution
). The remaining minimum reserve quantities are projected to be produced by June 30, 2022, based on the Trust’s reserve report as of
December 31, 2015
. However, the Trust’s
2015
reserve report was
derived from NYMEX oil and gas prices of $50.28 per Bbl and $2.58 per MMBtu pursuant to current SEC and FASB guidelines
, whereas
t
he
comparable reserve report
NYMEX oil and gas prices
as of
September
30, 2016
were $
41.68
per Bbl and $
2.28
per MMBtu, respectively
. Lower oil and gas prices are likely to cause a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties, which in turn is likely to extend the length of time required to produce the Trust’s 10.61 MMBOE. The Trust’s
2015
Annual Report on Form 10-K includes additional information on the Trust’s reserves as of
December 31, 2015
.
Delisting of the Trust.
The Trust was informed by the New York Stock Exchange (the “NYSE”) on January 4, 2016 that the Trust was not in compliance with the NYSE’s continued listing standards, which require that the average closing price of the Trust units cannot be less than $1.00 per unit over a period of 30 consecutive trading days. Under the NYSE delisting procedures, the Trust had the right to certain cure periods if it could demonstrate its intent to cure the deficiency. However, in order to save the Trust administrative costs (including ongoing NYSE listing fees, expenses associated with reverse split votes or other actions necessary to remedy the deficiency) the Trust determined it would not cure the deficiency. As a result, the Trust units ceased trading on the NYSE on January 6, 2016. The Trust units transitioned to OTC, operated by OTC Markets Group, effective with the opening of trading on January 7, 2016 under the trading symbol “WHZT.”
Capital Expenditure Activities
The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. The underlying properties have a capital expenditure budget per the
December 31, 2015
reserve report of
$17.1
million estimated to be spent
between January 1, 2016 and June 30, 2022, the estimated termination date of the
NPI
. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in commercially paying amounts, if any, or that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator’s historical drilling success rate. In addition, no assurance can be given that Whiting’s actual level of capital expenditures on the underlying properties will meet this
$17.1
million amount of budgeted capital expenditures over
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, 2015
, Item 1A. Risk Factors “
Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust unitholders
.”
In an effort to develop the underlying properties without incurring any additional capital expenditures for the Trust (other than those capital expenditures already contemplated in the December 31, 2015 reserve report), Whiting Oil and Gas entered into a farmout agreement during April 2016, which agreement covers 5,127 gross acres within the Keystone South field in Winkler, Texas. The agreement provides the third-party partner with the option, but no
t the
obligation, to drill one well in each of the eight leasehold sections subject to the farmout, whereby the partner will pay 100% of the capital costs for the well to earn a 75% working interest, which results in the underlying properties retaining (i) a 25% working interest and (ii) an overriding royalty interest equal to the difference between 25% and the lease burdens of record, without incurring any capital costs for these wells. Upon completion of one well in each section pursuant to the terms of the agreement, the partner has the option to drill an additional 15 wells where the partner is required to pay 85% of the capital costs to earn a 75% working interest, and the Trust would be responsible for 13.5% of the remaining capital costs at the 90% NPI. The partner is expected to commence drilling the first well in November 2016, however, this farmout agreement will terminate if no such drilling has commenced on or before December 31, 2016
.
During each twelve-month period beginning on the later to occur of (1) December 31, 2017 and (2) the time when 8.24 MMBOE have been produced from the underlying properties and sold (which is the equivalent of 7.41 MMBOE attributable to the 90% NPI) (in either case, the “capital expenditure limitation date”), the sum of the capital expenditures and amounts reserved for approved capital expenditure projects for such twelve-month period may not exceed the average annual capital expenditure amount. The “average annual capital expenditure amount” means the quotient of (x) the sum of the capital expenditures and amounts reserved for approved capital expenditure projects with respect to the three twelve-month periods ending on the capital expenditure limitation date, divided by (y) three. Commencing on the capital expenditure limitation date, and each anniversary of the capital expenditure limitation date thereafter, the average annual capital expenditure amount will be increased by 2.5% to account for expected increased costs due to inflation.
The following table presents the underlying properties’ aggregate capital expenditures attributable to the
February 2016 and
May
2016
net losses
and August 2016
distribution
(in thousands):
|
|
|
|
|
|
|
2016
|
|
Capital
|
Region
|
Expenditures
|
Rocky Mountains
|
$
|
2,417
|
Permian Basin
|
|
308
|
Gulf Coast
|
|
22
|
Mid-Continent
|
|
-
|
Total
|
$
|
2,747
|
Results of Trust Operations
Comparison of Results of the Trust
for the
Nine Months
Ended
September 30, 2016
and
2015
The following is a summary of income from net profits interest and distributable income received by the Trust for the
nine months ended September 30, 2016 and 2015
, consisting
of the February
2016
and May
2016
net losses
and August 2016
distribution
and February
2015
,
May
2015
and August 201
5
distribution
s
,
for each
respective
period
(dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(1)
|
|
|
779,003
|
(4)
|
|
|
848,406
|
(5)
|
Natural gas from underlying properties (Mcf)
|
|
|
1,178,080
|
(4)
|
|
|
1,486,983
|
(5)
|
Total production (BOE)
|
|
|
975,349
|
|
|
|
1,096,236
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(1)
|
|
$
|
32.60
|
|
|
$
|
52.03
|
|
Effect of oil hedges on average price (per Bbl)
(2)
|
|
|
-
|
|
|
|
1.16
|
|
Oil net of hedging (per Bbl)
|
|
$
|
32.60
|
|
|
$
|
53.19
|
|
Natural gas (per Mcf)
(3)
|
|
$
|
2.05
|
|
|
$
|
3.38
|
|
Cost metrics:
|
|
|
|
|
|
|
|
|
Lease operating expenses (per BOE)
|
|
$
|
24.09
|
|
|
$
|
29.50
|
|
Production tax rate (percent of total revenues)
|
|
|
5.0
|
%
|
|
|
5.1
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(1)
|
|
$
|
25,398
|
(4)
|
|
$
|
44,138
|
(5)
|
Natural gas sales
|
|
|
2,419
|
(4)
|
|
|
5,030
|
(5)
|
Total revenues
|
|
|
27,817
|
|
|
|
49,168
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
23,496
|
|
|
|
32,342
|
|
Production taxes
|
|
|
1,401
|
|
|
|
2,512
|
|
Development costs
|
|
|
2,747
|
|
|
|
4,321
|
|
Cash settlements on commodity derivatives
(2)
|
|
|
-
|
|
|
|
(989)
|
|
Total costs
|
|
|
27,644
|
|
|
|
38,186
|
|
Net proceeds
|
|
|
173
|
|
|
|
10,982
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
Income from net profits interest
|
|
|
155
|
|
|
|
9,884
|
|
Proceeds from sale of oil and gas properties
|
|
|
331
|
|
|
|
-
|
|
Provision for estimated Trust expenses
|
|
|
(478)
|
|
|
|
(700)
|
|
Montana state income tax withheld
|
|
|
(8)
|
|
|
|
(8)
|
|
Accumulated net losses funded by (repaid to) Whiting
|
|
|
-
|
|
|
|
-
|
|
Distributable income
|
|
$
|
-
|
|
|
$
|
9,176
|
|
_________
______________
_
|
(1)
|
|
Oil includes natural gas liquids.
|
|
(2)
|
|
As discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q, all costless collar hedge contracts terminated as of December 31, 2014 (which hedging effects extended through the quarterly payment period covered by the February 2015 distribution to unitholders), and no additional hedges are allowed to be placed on Trust assets.
Consequently, there
are
no further cash settlements on commodity hedges, and the Trust
has
increased exposure to oil and natural gas price volatility
.
|
|
(3)
|
|
The average sales price of natural gas for the gas production months within the
nine months ended September 30, 2015
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
nine months ended September 30, 2016
are 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.
|
|
(4)
|
|
Oil and gas sales volumes and related revenues for the
nine months ended September 30, 2016
(consisting of
the February
2016 and May
2016
net losses
and August 2016
distribution
) generally represent crude
oil production from October 2015
through
June
2016
and natural gas production from September 201
5
through
May
2016
.
|
|
(5)
|
|
Oil and gas sales volumes and related revenues for the
nine months ended September 30, 2015
(consi
sting of Whiting’s February
2015
,
May
2015
and August 2015
distribution
s
to the Trust) generally represent crude oil production from October 201
4
through
June
2015
and natural gas production from September 201
4
through
May
2015
.
|
Income from Net Profits Interest.
Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting
.
NPI proceeds 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 from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes and development costs as follows:
Revenues.
Oil and natural gas revenues decreased $
21.4
million (or
43
%) during the
nine
months ended
September
30, 201
6
as compared to the same 201
5
period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold.
The decline in revenue between periods was due to significantly lower realized oil and natural gas prices, as well as lower oil and natural gas production volumes.
The average sales price realized for crude oil (before the effects of hedging) and natural g
as decreased by
37
%
and
39
%
,
respectively,
between periods due to lower NYMEX oil and natural gas prices. Crude
o
il production volumes declined by
69
MBbls (or 8%) and
natural gas volumes declined by
309
MMcf (or
2
1
%),
when comparing the first
nine
months of 201
6
to the same period in 201
5
.
The oil volume decrease was primarily related to normal field production decline
and
three wells that were shut-in during 2015
.
The
decrease in
gas volume
s
was primarily related to
(i)
normal field production decline,
(
i
i)
s
ix
gas
wells that were shut-in during 2015
and 2016
,
(ii
i
) differences in timing associated with revenues rec
eived from non-operated parties and
(i
v
)
gas being flared instead of produced from
six
wells
in the Keystone South field
due to
a
gas plant
in Texas
being shut
down for a portion of 2016
. These lower oil and gas volumes were partially offset by
one
recompleted well
and one workover well both of which
came back online during December 2015.
Based on the December 31, 2015 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of
approximately 14.0% for oil and 21.0% for gas
from 2016 through the estimated June 30, 2022 NPI termination date
.
Lease Operating Expenses.
L
ease operating expenses decreased $
8
.8
million (or
27
%) during the first
nine
months of 201
6
compared to the same 201
5
period primarily due to
(i)
a
$4.9 million decrease in oilfield goods and services,
(ii) a
$2.7 million
decline
in ad valorem taxes
and (iii) lower labor and other operating costs on Whiting-operated properties of $1.
2
million
.
LOE on a per BOE basis declined
18
% from $
29.50
during the first
nine
months of 2015 to $
24.09
for the same period in 20
16 mainly due to the decrease in
ad valorem taxes between periods
as discussed above
, cost reduction measures implemented by Whiting and other operators
,
and the general downturn in the oil and gas industry which has resulted in declining costs for oilfield goods and services
.
Production Taxes.
Production taxes are typically calculated as a percentage of oil and gas revenues, and production taxes as a percent of revenues remained relatively consistent for the
nine
months ended
September
30, 201
6
and 201
5
at 5.
0
% and 5.
1
%, respectively. Overall production taxes for the first
nine
months of 201
6
, however, decreased $
1.1
million (or 4
4
%) as compared to the same 201
5
period, primarily due to lower oil and natural gas sales revenue between periods.
Development Costs.
Development costs for the
nine
months ended
September
30, 201
6
were $
1.6
million (or
36
%) lower as compared to the same 201
5
period. This decrease was primarily related to
reduced drilling and workover costs of $
2.1
million
between periods
in the
Garland,
Sable, Deb,
Cedar Hills, Lake Como, Martin
, Rangely
and
Keystone South fields.
These lower expenditures were partially offset by well
equipment
improvements
of $0.
5
million
incurred during 2016
in the Torchlight field
.
Cash Settlements on Commodity Derivatives.
In connection with Whiting’s conveyance of the net profits interest to the Trust, Whiting entered into certain costless collar hedge contracts in order to reduce the Trust’s exposure to oil price volatility. If current market prices were lower than a collar’s price floor when the cash settlement amount was calculated, Whiting received cash proceeds from the contract counterparty. Conversely, if current market prices were higher than a collar’s price ceiling when the cash settlement amount was calculated, Whiting was required to pay the contract counterparty.
There were no cash settlements for these hedges during the
nine
months ended
September
30, 2016. Cash settlements relating to these hedges, however, resulted in a gain of $1.0 million for the
nine
months ended
September
30, 2015, which had the effect of increasing the average price of crude oil by $1.
16
per Bbl for that period. As a result, the total net crude oil price of $5
3.19
per Bbl included a premium of
2
% related to the effects of hedging for the first
nine months
of 2015. All hedge-related pricing impacts ceased after the February 2015 distribution, while the Trust’s net profits interest is currently projected to terminate on June 30, 2022 based on the Trust’s December 31, 2015 reserve report. Therefore, there are no further cash settlements on
commodity hedges for inclusion in the Trust’s computation of net proceeds (or net losses, as the case may be), which has the effect of increasing the Trust’s exposure to oil and natural gas price volatility.
Proceeds from Sale of Oil and Gas Properties.
In November 2015, Whiting completed the sale of certain producing oil and gas wells
(
effective for sales proceeds and costs beginning September 1, 2015
)
for a purchase price of $0.4 million ($0.3 million to the 90% net profits interest). The divested properties included nine wells located within Cooks Peak field in North Dakota, which had proved reserves of 18.14 MBOE (16.32 MBOE to the 90% net profits interest
). The sales proceeds attributable to the NPI were included in the calculation of net cash proceeds available for distribution during the first quarter of 2016. There were no such sales during the
nine
months ended
September
30, 2015.
Accumulated Net Losses
Funded by (
Repaid to
)
Whiting
.
The net profits interest generated
accumulated net losses of $1.2 million
attributable to the Trust during the second quarter of 2016, which net losses were funded by Whiting at the time they were incurred.
Neither the Trust nor the unitholders are liable for any net losses that are generated by the net profits interest
.
A
ny
accumulated net losses
(
plus accrued interest at the money market interest rate
) funded by Whiting, however,
must be
repaid
from future NPI net profits
before any further distributions
can
be made to Trust unitholders
. All accumulated net losses, plus accrued interest,
were
repaid
in full
to Whiting
during the three months ended September 30, 2016
. There were no accumulated net losses during the
nine
months ended
September
30, 2015
.
Distributable Income.
There were no distributions made to unitholders during the
nine months ended September 30,
2016 due to the NPI
generating
net profits
of $0.2 million
,
which
net proceeds were fully
offset
by the provision for estimated
Trust expenses
. Distributable income for the
nine
months ended
September
30, 2015 was $
9.2
million, which was based on income from net profits interest of $
9.9
million, reduced by Trust general and administrative expenses of $0.
6
million
,
Montana state income tax withholdings of $
8
,
05
4
,
and
then
adjusted for changes in Trust cash reserves.
Comparison of Results of the Trust for the
Three Months Ended
September 30, 2016
and
2015
The following is a summary of income from net profits interest and distributable income received by the Trust for the
three months ended September 30, 2016 and 2015
, consisting of the
August
2016
and
August
201
5
distribution
s
,
respective
ly
(dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(1)
|
|
|
252,814
|
(4)
|
|
|
275,042
|
(5)
|
Natural gas from underlying properties (Mcf)
|
|
|
347,827
|
(4)
|
|
|
476,437
|
(5)
|
Total production (BOE)
|
|
|
310,785
|
|
|
|
354,448
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(1)
|
|
$
|
36.71
|
|
|
$
|
49.74
|
|
Natural gas (per Mcf)
(2)
|
|
$
|
1.93
|
|
|
$
|
2.62
|
|
Cost metrics:
|
|
|
|
|
|
|
|
|
Lease operating expenses (per BOE)
|
|
$
|
23.48
|
|
|
$
|
26.22
|
|
Production tax rate (percent of total revenues)
|
|
|
5.1
|
%
|
|
|
5.2
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(1)
|
|
$
|
9,282
|
(4)
|
|
$
|
13,681
|
(5)
|
Natural gas sales
|
|
|
671
|
(4)
|
|
|
1,250
|
(5)
|
Total revenues
|
|
|
9,953
|
|
|
|
14,931
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
7,298
|
|
|
|
9,294
|
|
Production taxes
|
|
|
506
|
|
|
|
775
|
|
Development costs
|
|
|
543
|
|
|
|
1,338
|
|
Cash settlements on commodity derivatives
(3)
|
|
|
-
|
|
|
|
-
|
|
Total costs
|
|
|
8,347
|
|
|
|
11,407
|
|
Net proceeds
|
|
|
1,606
|
|
|
|
3,524
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
Income from net profits interest
|
|
|
1,445
|
|
|
|
3,172
|
|
Provision for estimated Trust expenses
|
|
|
(240)
|
|
|
|
(250)
|
|
Montana state income tax withheld
|
|
|
(4)
|
|
|
|
(3)
|
|
Accumulated net losses repaid to Whiting
|
|
|
(1,201)
|
|
|
|
-
|
|
Distributable income
|
|
$
|
-
|
|
|
$
|
2,919
|
|
________________________
|
(1)
|
|
Oil includes natural gas liquids.
|
|
(2)
|
|
The
average sales price of natural gas for the gas production months within the
August 2016
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
August 2015
distribution
period are 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)
|
|
As discussed in Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q, all costless collar hedge contracts terminated as of December 31, 2014 (which hedging effects extended through the quarterly payment period covered by the February 2015 distribution to unitholders), and no additional hedges are allowed to be placed on Trust assets.
Consequently, there
are
no further cash settlements on commodity hedges, and the Trust
has
increased exposure to oil and natural gas price volatility
.
|
|
(4)
|
|
Oil and gas sales volumes and related revenues for the three months ended
September 30, 2016
(consisting of
the
August
2016
distribution
to the Trust
) generally represent crude
oil production from
April
2016
through
June
2016
and natural gas production from
March 2016
through
May
2016
.
|
|
(5)
|
|
Oil and gas sales volumes and related revenues for the t
hree months ended
September 30, 2015
(consi
sting of Whiting’s
August
2015
distribution to the Trust) generally represent crude oil production from
April
2015
through
June
2015
and natural gas production from
March
201
5
through
May
201
5
.
|
Income from Net Profits Interest.
Income from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting. NPI proceeds 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 from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes and development costs as follows
:
Revenues.
Oil and natural gas revenues decreased $
5
.0
million (or
33
%) during the three months ended
September
30
, 2016 as compared to the same 2015 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decline in revenue between periods was due to significantly lower realized oil and natural gas prices, as well as lower oil and natural gas production volumes. The average sales price realized for crude oil and natural gas
both
decreased by
26
% between periods as the result of lower NYMEX oil and natural gas prices.
Crude
o
il production volumes declined by
22
MBbls (or
8
%) and natural gas volumes declined by
129
MMcf (or
27
%) in
the
third
quarter of 2016 compared to the same period in 2015.
The oil volume decrease was primarily related to normal field production decline.
In addition, the decrease in gas volumes
was primarily related to
(i)
normal field production decline
,
(i
i
)
four
wells that were shut in
during 2015
or
early 2016
, all of which continue to be shut-in
,
(iii) gas being flared instead of produced from six wells in the Keystone South field
due to
a
gas plant
in Texas
being shut
down for a portion of 2016 and
(i
v
)
differences in timing associated with revenues received from non-operated parties
.
Based on the December 31, 2015 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of
approximately 14.0% for oil and 21.0% for gas
from 2016 through the estimated June 30, 2022 NPI termination date
.
Lease Operating Expenses.
Lease operating expenses (“LOE”)
de
creased $
2
.0
million (or
21
%) during the
third
quarter of 201
6
compared to the same 201
5
period primarily due to
(i) a
$
2.4
million
decrease in oil
field goods and services and
(ii)
lower labor and other operating costs on Whiting-operated properties of $
0.
2
million
,
which decreases were
partially
offset by $0.6 million in higher ad valorem taxes
between periods
.
LOE on a per BOE basis
declined
10
% from $
26.22
during the three months
ended
September
30, 2015
to $
23.48
for the same period in 2016
mainly due to cost reduction measures implemented by Whiting
and other operators
and the general downturn in the oil and gas industry which has resulted in
declining costs for
oilfield goods and services
.
Production Taxes.
Production taxes are typically calculated as a percentage of oil and gas revenues, and production taxes as a percent of revenues
remained relatively consistent
for the three months ended
September
30
, 201
6
and 201
5
at 5.
1
%
and 5.
2
%, respectively
. Overall production taxes for the
third
quarter of 201
6
, however, decreased $0.
3
million (or
35
%) as compared to the same 201
5
period,
primarily
due to lower oil and natural gas sales revenue between periods.
Development Costs.
Development costs for the thre
e months ended
September
30
, 2016
were $
0.
8
million (or
59
%) lower as compared to the same 201
5
period. This de
crease was primarily related to
reduced drilling and
capital
workover costs of $0.
9
million
between periods
in the
Garland,
Cedar Hills
and Rangely
fields
,
which
lower expenditures were
partially of
fset
by
well
equipment
improvements in the Torchlight field
of $0.
1
million
.
Accumulated Net Losses
Repaid to
Whiting
.
During the
three months ended
September
30, 2016
, the net profits interest generated
net profits
of $1.
4
million attributable to the Trust
,
which
net proceeds were
primarily
used
to
repay
the $1.2 million
of prior period accumulated net losses
that were funded by Whiting at the time they were incurred.
Neither the Trust nor the unitholders are liable for any net losses that are genera
ted by the net profits interest, however,
any accumulated net losses, plus accrued interest at the money m
arket interest rate, must be repaid to Whiting from future NPI net profits b
efore
any further distributions can
be made to Trust unitholders
. All
of the Trust’s
accumulated net losses
to date
, plus
accrued interest
,
were repaid in full during the third quarter of 2016
. There were no accumulated net losses during the
three months ended
September
30, 2015
.
Distributable Income.
There was no distribution made to unitholders during the
third
quarter of 2016 due to the
NPI
generating
net profits
of $1.4 million
,
which
net proceeds were fully
offset by the accumulated net losses repaid to Whiting of $1.2 million
and
the
current period’s
provision for estimated
Trust expenses
.
Distributable income for the three months ended
September
30
, 2015 was $
3
.0
million, which was
based on income from net profits interest of $
3.2
million
, reduced by Trust general and administrative expenses of $
0.2 million
,
Montana state income tax withholdings of $3,044
,
and
then
adjusted for changes in Trust cash reserves.
Liquidity and Capital Resources
Overview.
The Trust has no source of liquidity or capital resources other than cash flows from the NPI. Other than Trust administrative expenses, including any reserves established by the Trustee for future liabilities, the Trust’s only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee, a quarterly fee paid to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustee’s duties, including third party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines the amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other
sources (such as interest earned on
any
amounts reserved by the Trustee) that quarter, over the Trust’s expenses for that quarter. Available funds are reduced by
(i)
any cash the Trustee decides to hold as a reserve against future liabilities
and
(ii)
any
accumulated net losses
to be repaid
to
Whiting
, plus
accrued interest
.
If the NPI continues to generate net losses or
limited
net proceeds, as was the case for
all
four
of
the
2016 payment periods
, 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
October
3
1
, 2016, the Trust had cash reserves of $
0.
1
million
and a provision for estimated Trust expenses of
$0.3
million from the
forthcoming
November
2016 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 and nine months ended September 30, 2016 and 2015
. Instead, Whiting
has
deducted from the
Trust’s
gross proceeds only actual costs paid for development, maintenance and operating expenses.
Plugging and Abandonment.
Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the
three and nine months ended September 30, 2016
, Whiting incurred $
0.2
million
and $
0.5
million,
respectively, of plugging and abandonment charges on the underlying properties that were not charged to the unitholders of the Trust.
Future Trust
Payment Periods
On November 4,
2016, the Trustee announced the Trust distribution of net profits for the third quarterly payment period in 2016. Unitholders of record on November 19, 2016 (which results in an effective record date of November 18, 2016 due to the 19
th
of November falling on a non-trading day) are expected to receive a distribution of $
0.065170
per Trust unit, which is payable on or before November 29, 2016. This aggregate distribution to all Trust unitholders is expected to consist of net cash proc
eeds of $1.5
million paid by Whiting to the
Trust, less a provision of $250,000
for es
timated Trust expenses and $1,967
for Montana state income tax withholdings.
There were no realized gains or losses on hedge settlements during the
third
quarterly payment period for 201
6
due to the termination of all costless collar hedge contracts as of December 31, 2014. No additional hedges are allowed to be placed on the Trust assets
.
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 nine months ended September 30, 2016 the Trust has re
ceived cash proceeds of $0.5 million
from the net profits interest and, when giving effect to the November 2016 distribution, t
he Trust will only receive $1.9
million in cash proceeds
from the NPI for the year ending
December 31, 2016. Therefore, if the cash proceeds to the Trust from net profits interest are less than $2.0 million for the year end
ing
December 31, 2017, the Trust will be required
to sell the NPI and terminate.
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 nine m
onths ended September 30, 2016
,
and the NPI generated
relatively
minimal distributable income for the November 2016 distribution
. If the NPI continues to generate 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
nine months ended September 30, 2016
applicable to the Trust or its financial statements.
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust’s financial statements is included in Item 7 of the Trust’s Annual Report on Form 10-K for the year ended
December 31, 2015
. There have been no significant changes to the critical
accounting policies during the
nine months ended September 30, 2016
.