3-Aug-2009
Quarterly Report
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 and the assigned interest in the hedge contracts, to distribute to the Trust unitholders cash that the Trust receives in respect of the net profits interest and the assigned interest in the hedge contracts 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 and the hedge contracts.
Eaglwing, an affiliate of SemCrude, purchased substantially all of the oil produced from the underlying properties during June 2008 and the first 18 days of July 2008 and filed bankruptcy on July 22, 2008. Beginning July 18, 2008, substantially all of the production from the underlying properties subject to the net profits interest went into on-location storage tanks and a portion of the oil production was shut-in pending resolution of the marketing process for the production. From July 18, 2008 until July 31, 2008, only minor amounts of crude oil production from the underlying properties were sold. As of July 31, 2008, Vess Oil and Murfin Drilling recommenced general sales of production from the underlying properties, to several purchasers other than Eaglwing, including an affiliated purchaser, under short-term arrangements using market sensitive pricing. As of August 7, 2008, field operations at the underlying properties returned to substantially normal operations, although it took until mid-August before the marketing of crude oil production normalized to the sales process and volumes that existed prior to July 18, 2008. Because of the nonpayment by Eaglwing and decreased crude oil sales by MV Partners during July and August 2008, there were not sufficient net proceeds collected by MV Partners from July 1, 2008 through September 30, 2008 for MV Partners to distribute cash to the Trust with respect to the net profits interest relating thereto. See "-Other Events."
For the three months ended September 30, 2008, direct operating expenses and lease equipment and development costs from the underlying properties exceeded revenues from the underlying properties by an aggregate of $6,049,283 (with the Trust's 80% portion equal to $4,839,426). The deficiency is primarily attributable to the failure of Eaglwing to pay MV Partners the aggregate of approximately $15.5 million originally owed for Eaglwing's purchase of production during June 2008 and the first 18 days of July 2008 and a related decrease in sales of oil production in July and August 2008. Included in the amounts for the three-month period are payments to settle hedges totaling $12,758,898 for the three months ended September 30, 2008. No amounts were received to settle hedges for the three months ended September 30, 2008.
Results of Operations for the Quarters Ended June 30, 2009 and 2008
The cash received by the Trust during the quarter ended June 30, 2009 substantially represents the production by MV Partners from December 2008 through February 2009. The cash received by the Trust during the quarter ended June 30, 2008 substantially represents the production by MV Partners from December 2007 through February 2008. The revenues from oil production are typically received by MV Partners one month after production. Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $4,698,431 to $2,988,731 for the three months ended March 31, 2009 from $7,687,162 for the three months ended March 31, 2008. Included in these amounts are payments to settle hedges totaling $0 for the three months ended March 31, 2009 and $7,761,757 for the three months ended March 31, 2008. In addition, amounts received to settle hedges were $3,346,935 for the three months ended March 31, 2009 and $0
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for the three months ended March 31, 2008, which resulted in a total cash receipts over cash disbursements of $6,335,666 and $7,687,162, respectively. The Trust's net profits interest (80%) of these totals were $5,068,533 and $6,149,730, respectively, resulting in income from net profits interest and hedge activities of $5,068,533 and $6,149,730 for the quarters ended June 30, 2009 and June 30, 2008, respectively. The decrease in such income in 2009 from 2008 is primarily attributable to higher realized prices for unhedged volumes of oil for the 2008 period as compared to the 2009 period.
The Trustee paid general and administrative expenses of $235,196 and $400,143 for the quarters ended June 30, 2009 and 2008, respectively. The distributable income for the quarter ended June 30, 2009 was $4,818,534, a decrease of $1,181,205 from a distributable income of $5,999,739 for the quarter ended June 30, 2008.
The average price received for crude oil sold was $34.16 per Bbl while the average price received for natural gas sold was $3.53 per Mcf for the period from January 1, 2009 through March 31, 2009. The average price received for crude oil sold was $88.45 per Bbl while the average price received for natural gas sold was $5.47 per Mcf for the period from January 1, 2008 through March 31, 2008.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the period from January 1, 2009 through March 31, 2009 were 195,149 Bbls of oil, 18,535 Mcf of natural gas and 1,014 Bbls of natural gas liquids for a total equivalent barrels of oil of 198,897.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the period from January 1, 2008 through March 31, 2008 were 185,112 Bbls of oil, 21,084 Mcf of natural gas and 850 Bbls of natural gas liquids for a total equivalent barrels of oil of 189,178.
The April 2008 distribution of net profits was impacted by production curtailment affecting the underlying properties as the result of winter ice storms that impacted western Kansas. The ice associated with these storms disabled electrical power to the affected underlying properties for an extended period of time resulting in some curtailed production.
The April 2008 distribution of net profits was also impacted by the duplication of hedged volumes in January 2008. January crude oil swap contracts in the notional volume of 45,000 barrels at a price of $62.99 settled in the first quarter of 2008. This volume was in addition to the notional volume of 61,167 barrels that had been scheduled as the average monthly notional volume for 2008. Given the NYMEX price contracts for January crude oil, the incremental hedged volumes resulted in an additional expense of $1,347,255, which reduced the cash available for distribution for the first quarter of 2008 by $1,077,804. This duplication of hedged volumes for January 2008 is a one-time event in the hedge contracts program and will not occur again for the duration of the Trust.
As noted above, the amounts reflected in the accompanying financial statements for the Trust's quarter ended June 30, 2009 reflect cash received by the Trust during the quarter. Such cash is primarily derived from production by MV Partners from December 2008 through February 2009. MV Partners distributed cash to the Trust in July 2009 that will be reflected in the Trust's financial statements for the quarter ended September 30, 2009. The cash distributed to the Trust in July 2009 is primarily derived from production by MV Partners from March 2009 through May 2009. The discussion below relates to cash received by MV Partners during the quarter ended June 30, 2009 and distributed
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to the Trust in July 2009, which will be reflected in the Trust's financial statements for the quarter ending September 30, 2009.
Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $5,316,556 to $4,502,154 for the three months ended June 30, 2009 from $9,818,710 for the three months ended June 30, 2008. Included in these amounts are payments to settle hedges totaling $0 for the three months ended June 30, 2009 and $10,260,421 for the three months ended June 30, 2008. In addition, amounts received to settle hedges were $2,344,003 for the three months ended June 30, 2009 and $0 for the three months ended June 30, 2008, which resulted in a total cash receipts over cash disbursements of $6,846,157 and $9,818,710, respectively. The decrease in 2009 from 2008 is primarily attributable to higher realized prices for unhedged volumes of oil for the 2008 period compared to the 2009 period. The Trust's portion (80%) of these totals were $5,476,925 and $7,854,968, respectively, and were decreased by Trust holdback for future expenses of $175,000 for the quarter ending September 30, 2009 and a repayment of an advance of $400,000 for the quarter ended September 30, 2008, resulting in distributable income of $5,301,925 and $7,454,968 for the quarters ending September 30, 2009 and 2008, respectively.
The average price received for crude oil sold was $45.59 per Bbl while the average price received for natural gas sold was $2.22 per Mcf for the period from April 1, 2009 through June 30, 2009. The average price received for crude oil sold was $109.31 per Bbl while the average price received for natural gas sold was $6.76 per Mcf for the period from April 1, 2008 through June 30, 2008.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the quarter ended June 30, 2009 were 185,801 Bbls of oil, 17,810 Mcf of natural gas and 1,082 Bbls of natural gas liquids for a total equivalent barrels of oil of 189,473.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the quarter ended June 30, 2008 were 196,711 Bbls of oil, 21,686 Mcf of natural gas and 944 Bbls of natural gas liquids for a total equivalent barrels of oil of 200,939.
Results of Operations for the Six Months Ended June 30, 2009 and 2008
As noted above, the revenues from oil production are typically received by MV Partners one month after production, thus the cash received by the Trust during the six months ended June 30, 2009 substantially represents the production by MV Partners from September 2008 through February 2009 and the cash received by the Trust during the six months ended June 30, 2008 substantially represents the production by MV Partners from September 2007 through February 2008. Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $5,924,789 to $10,952,004 for the period from October 1, 2008 through March 31, 2009 from $16,876,793 for the period from October 1, 2007 through March 31, 2008. Included in these amounts are payments to settle hedges totaling $3,429,721 and $12,796,360, respectively. In addition, amounts received to settle hedges were $3,346,935 for the period from October 1, 2008 through March 31, 2009 and $0 for the period from October 1, 2007 through March 31, 2008, which resulted in a total cash receipts over cash disbursements of $14,298,939 and $16,876,793, respectively. The decrease for the period ended March 31, 2009 compared to the period ended March 31, 2008 is primarily attributable to higher realized prices for unhedged volumes of oil for the 2008 period compared to the 2009 period.
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The Trust's portion (80%) of these totals were $11,439,151 and $13,501,435, respectively, with the 2009 result reduced by a recovery of deficiency from the fourth quarter of 2008 in the amount of $4,889,179 which included applicable interest of $49,753 during the six months ended June 30, 2009, resulting in the income from net profits interest and hedge activities of $6,549,972 for that period.
The Trustee paid general and administrative expenses of $495,545 and $551,869 for the six months ended June 30, 2009 and 2008, respectively. The distributable income for the six months ended June 30, 2009 was $5,799,979, a decrease of $7,521,465 from a distributable income of $13,321,444 for the six months ended June 30, 2008.
The average price received for crude oil sold was $54.06 per Bbl while the average price received for natural gas sold was $4.42 per Mcf for the period from October 1, 2008 through March 31, 2009. The average price received for crude oil sold was $84.97 per Bbl while the average price received for natural gas sold was $5.00 per Mcf for the period from October 1, 2007 through March 31, 2008.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the six months ended June 30, 2009 were 390,280 Bbls of oil, 36,434 Mcf of natural gas and 2,130 Bbls of natural gas liquids for a total equivalent barrels of oil of 397,737.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the six months ended June 30, 2008 were 382,017 Bbls of oil, 42,773 Mcf of natural gas and 2,061 Bbls of natural gas liquids for a total equivalent barrels of oil of 390,485.
As noted above, the amounts reflected in the accompanying financial statements for the Trust's six month period ended June 30, 2009 reflect cash received by the Trust during such six month period. Such cash is primarily derived from production by MV Partners from September 2008 through February 2009. MV Partners distributed cash to the Trust in July 2009 that will be reflected in the Trust's financial statements for the nine months ending September 30, 2009. The cash distributed to the Trust in July 2009 is primarily derived from production of the underlying properties from March 2009 through May 2009. The discussion below relates to cash received by MV Partners during the six months ended June 30, 2009 and 2008 and distributed to the Trust in April and July 2009 and 2008, respectively.
Excess of revenues over direct operating expenses and lease equipment and development costs from the underlying properties decreased $10,014,987 to $7,490,885 for the six months ended June 30, 2009 from $17,505,872 for the six months ended June 30, 2008. Included in these amounts are payments to settle hedges totaling $0 and $18,022,179, respectively. In addition, amounts received to settle hedges increased $5,690,938 to $5,690,938 for the six months ended June 30, 2009 from $0 for the six months ended June 30, 2008, which resulted in total cash receipts over cash disbursements of $13,181,823 and $17,505,872, respectively. The Trust's portion (80%) of these totals were $10,545,458 and $14,004,698, respectively, which was decreased by a Trust holdback for future expenses of $425,000 for the six months ended June 30, 2009 and repayments of advances totaling $550,000 for the six months ended June 30, 2008, resulting in distributable income of $10,120,458 and $13,454,698 for the six months ended June 30, 2009 and 2008, respectively.
The average price received for crude oil sold was $39.73 per Bbl while the average price received for natural gas sold was $2.89 per Mcf for the six months ended June 30, 2009. The average price
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received for crude oil sold was $99.20 per Bbl while the average price received for natural gas sold was $6.13 per Mcf for the six months ended June 30, 2008.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the six months ended June 30, 2009 were 380,950 Bbls of oil, 36,345 Mcf of natural gas and 2,097 Bbls of natural gas liquids for a total equivalent barrels of oil of 388,370.
The overall production sales volumes collected attributable to the 80% net profits interest that is for the oil and gas production collected during the six months ended June 30, 2008 were 381,823 Bbls of oil, 42,770 Mcf of natural gas and 1,794 Bbls of natural gas liquids for a total equivalent barrels of oil of 390,117.
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 an annual administrative fee to MV Partners 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, payments from the hedge contracts and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust's liabilities for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities. 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 liabilities. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid.
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, MV Partners does not expect future costs for the underlying properties to change significantly as compared to recent historical costs other than increases due to increases in the general cost of oilfield services.
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