Item 1.
|
Financial Statements
|
WHITING USA TRUST I
Statements of Assets, Liabilities and Trust Corpus (Unaudited)
(In thousands, except unit data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
212
|
|
|
$
|
227
|
|
Investment in net profits interest, net
|
|
|
21,312
|
|
|
|
31,055
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,524
|
|
|
$
|
31,282
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND TRUST CORPUS
|
|
|
|
|
|
|
|
|
Reserve for Trust expenses
|
|
$
|
212
|
|
|
$
|
227
|
|
Trust corpus (13,863,889 Trust units issued and outstanding at September 30, 2013 and December 31, 2012)
|
|
|
21,312
|
|
|
|
31,055
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and Trust corpus
|
|
$
|
21,524
|
|
|
$
|
31,282
|
|
|
|
|
|
|
|
|
|
|
Statements of Distributable Income (Unaudited)
(In thousands, except distributable income per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Income from net profits interest
|
|
$
|
7,668
|
|
|
$
|
9,844
|
|
|
$
|
22,471
|
|
|
$
|
30,376
|
|
General and administrative expenses
|
|
|
(180
|
)
|
|
|
(186
|
)
|
|
|
(640
|
)
|
|
|
(662
|
)
|
Cash reserves used (withheld) for current Trust expenses
|
|
|
(45
|
)
|
|
|
(59
|
)
|
|
|
15
|
|
|
|
67
|
|
State income tax withholding
|
|
|
(46
|
)
|
|
|
(49
|
)
|
|
|
(157
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable income
|
|
$
|
7,397
|
|
|
$
|
9,550
|
|
|
$
|
21,689
|
|
|
$
|
29,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable income per unit
|
|
$
|
0.533550
|
|
|
$
|
0.688853
|
|
|
$
|
1.564458
|
|
|
$
|
2.133708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Changes in Trust Corpus (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Trust corpus, beginning of period
|
|
$
|
24,567
|
|
|
$
|
38,244
|
|
|
$
|
31,055
|
|
|
$
|
46,593
|
|
Distributable income
|
|
|
7,397
|
|
|
|
9,550
|
|
|
|
21,689
|
|
|
|
29,581
|
|
Distributions to unitholders
|
|
|
(7,397
|
)
|
|
|
(9,550
|
)
|
|
|
(21,689
|
)
|
|
|
(29,581
|
)
|
Amortization of investment in net profits interest
|
|
|
(3,255
|
)
|
|
|
(3,727
|
)
|
|
|
(9,743
|
)
|
|
|
(12,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust corpus, end of period
|
|
$
|
21,312
|
|
|
$
|
34,517
|
|
|
$
|
21,312
|
|
|
$
|
34,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these modified cash basis financial statements.
5
WHITING USA TRUST I
NOTES TO MODIFIED CASH BASIS FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE
TRUST
Formation of the Trust
Whiting USA Trust I (the Trust) is a statutory trust formed in October
2007 under the Delaware Statutory Trust Act, pursuant to a trust agreement (the Trust agreement) among Whiting Oil and Gas Corporation and Equity Oil Company, as trustors, The Bank of New York Trust Company, N.A., as trustee
(subsequently renamed The Bank of New York Mellon Trust Company, N.A., and hereinafter referred to as the Trustee) and Wilmington Trust Company as Delaware trustee (the Delaware Trustee). The initial capitalization of the
Trust estate was funded by Whiting Petroleum Corporation (Whiting) in November 2007. Effective September 30, 2009, Equity Oil Company merged into Whiting Oil and Gas Corporation (Whiting Oil and Gas) with Whiting Oil and
Gas as the surviving corporation. Whiting Oil and Gas, as referred to herein, is a subsidiary of Whiting and the successor to Equity Oil Company.
The Trust was created to acquire and hold a term NPI for the benefit of the Trust unitholders pursuant to a conveyance to the Trust from
Whiting Oil and Gas. The term NPI is an interest in certain of Whiting Oil and Gas properties located in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions (the underlying properties). The NPI is the only
asset of the Trust, other than cash reserves held for Trust expenses. As of December 31, 2012, these oil and gas properties included interests in 3,081 gross (368.0 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 when 9.11 MMBOE have been produced and sold from the underlying properties (which amount is
the equivalent of 8.20 MMBOE in respect of the Trusts 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. As of September 30, 2013 on a cumulative accrual basis, 6.86 MMBOE (84%) of the Trusts total 8.20 MMBOE have been produced and sold and a cumulative reserve quantity of 0.02 MMBOE have been sold in divestitures. The
remaining reserve quantities are projected to be produced by June 30, 2015, based on the reserve report for the underlying properties as of December 31, 2012. The Trusts Annual Report on Form 10-K includes additional information on
the Trusts reserves as of December 31, 2012.
The Trustee can authorize the Trust to borrow money to pay 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 distributable to the Trust.
Initial Issuance of Trust Units and Net Profits Interest Conveyance
In April 2008, the Trust issued 13,863,889 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 11,677,500 Trust units to the public. Whiting retained, and has continued to retain, an ownership in 2,186,389 Trust units, or 15.8% of the total Trust units issued and outstanding.
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. The Trustee believes that the information furnished reflects all adjustments (consisting of normal and recurring adjustments) which are, in the opinion of the Trustee,
necessary for a fair presentation of the results for the interim periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The Trusts 2012 Annual Report
on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q.
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. The actual cash distributions to the Trust are made based on the terms of the conveyance that created the Trusts NPI. The term NPI entitles the Trust to receive revenues (oil, gas and natural gas
liquid sales) less expenses (the amount by which all royalties, lease operating expenses including well workover costs, production and property taxes, payments made by
6
Whiting to the hedge counterparty upon settlements of hedge contracts, maintenance expenses, post-production costs including plugging and abandonment, and producing overhead, 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.
Modified Cash Basis of
Accounting
The financial statements of the Trust, as prepared on a modified cash basis, reflect the Trusts 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 cash earnings; 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 determination of 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. If market or oil and natural gas production conditions deteriorate, write-downs could be required in the future.
|
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 Trusts 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 Trusts financial statements are prepared on the modified cash basis as described above, however, most accounting
pronouncements are not applicable to the Trusts financial statements.
Recent Accounting Pronouncements
There
were no accounting pronouncements issued during the nine months ended September 30, 2013 applicable to the Trust or its financial statements.
3.
INVESTMENT IN NET PROFITS INTEREST
Whiting Oil and Gas conveyed the NPI to the Trust in exchange for 13,863,889 Trust units. The
investment in net profits interest was recorded at the historical cost basis of Whiting on April 30, 2008, the date of conveyance, and was determined to be $123.6 million, of which $111.2 million (90% of the NPI) was attributed to the Trust. As
of September 30, 2013 and December 31, 2012, accumulated amortization of the investment in net profits interest was $89.9 million and $80.2 million, respectively.
4. INCOME TAXES
The
Trust is a grantor trust and therefore is not subject to federal income taxes. Accordingly, no recognition has been given to federal income taxes in the Trusts 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.
7
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 Alabama, Arkansas, Colorado, Kansas, Louisiana, Michigan, Mississippi, New Mexico, North Dakota, Oklahoma and Utah, neither the Trust nor
Whiting is withholding the income tax due 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 in any cash reserves established for future expenses of the Trust.
6.
RELATED PARTY TRANSACTIONS
Capital Expenditures
During the three and nine months ended September 30,
2013, Whiting incurred $11.1 million and $13.4 million, respectively, of capital expenditures on the underlying properties. These capital expenditures are the costs net to Whitings interest in the wells and which are related to the drilling
and completing of oil and gas wells, capital workovers, facility upgrades and well recompletions that are performed to secure production from new horizons. Pursuant to the terms of the conveyance agreement, such expenditures were not deducted from
gross proceeds or the Trust distributions, but they may have the effect of ultimately accelerating the receipt of NPI net proceeds and thereby benefiting the Trust unitholders by accelerating their return on investment. The Trust cannot provide any
assurance that this will continue to occur or that future capital expenditures will be consistent with historical levels.
Operating
Overhead
Pursuant to the terms of the applicable joint operating agreements, Whiting deducts from the gross 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 Trusts portion of these overhead charges
for the distributions made during the three and nine months ended September 30, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Total overhead charges
|
|
$
|
454,988
|
|
|
$
|
447,310
|
|
|
$
|
1,337,210
|
|
|
$
|
1,294,577
|
|
Overhead charge per month per active operated well
|
|
$
|
438
|
|
|
$
|
428
|
|
|
$
|
429
|
|
|
$
|
413
|
|
Administrative Services Fee
Under the terms of the administrative services
agreement, the Trust pays a quarterly administration fee of $50,000 to Whiting 60 days following the end of each calendar quarter. General and administrative expenses in the Trusts statements of distributable income for the three and nine
months ended September 30, 2013 include $50,000 and $150,000, respectively, for quarterly administrative fees paid to Whiting. General and administrative expenses in the Trusts statements of distributable income for the three and nine
months ended September 30, 2012 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 $160,000, paid in four quarterly installments of $40,000 each and is billed in arrears. General and administrative expenses in the Trusts statements of distributable income for the three and nine months ended September 30,
2013 include $40,000 and $120,000, respectively, for quarterly administrative fees paid to the Trustee. General and administrative expenses in the Trusts statements of distributable income for the three and nine months ended September 30,
2012 include $40,000 and $120,000, respectively, for quarterly administrative fees paid to the Trustee.
8
Letter of Credit
In February 2011, 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 Whiting has no obligation to lend funds to the Trust. If the Trustee were to draw on the letter of credit or borrow funds from Whiting or otherwise, no further distributions would be made to
unitholders until all such amounts have been repaid by the Trust.
7. SUBSEQUENT EVENT
On November 7, 2013, the Trustee announced the Trust distribution of net profits for the third quarterly payment period in 2013.
Unitholders of record on November 19, 2013 are expected to receive a distribution of $0.592105 per Trust unit, which is payable on or before November 29, 2013. This aggregate distribution to all Trust unitholders is expected to consist of
net cash proceeds of $8.4 million paid by Whiting to the Trust, less a provision of $140,000 for estimated Trust expenses and $64,891 for Montana state income tax withholdings.
9
Item 2.
|
Trustees Discussion and Analysis of Financial Condition and Results of Operations
|
References to the Trust in this document refer to Whiting USA Trust I. References to Whiting in this document refer to
Whiting Petroleum Corporation and its wholly-owned subsidiaries. References to Whiting Oil and Gas in this document refer to Whiting Oil and Gas Corporation, a wholly-owned subsidiary of Whiting Petroleum Corporation and the successor to
Equity Oil Company. Equity Oil Company was merged into Whiting Oil and Gas Corporation effective September 30, 2009. The merger did not have an effect on the Trust.
The following review of the Trusts financial condition and results of operations should be read in conjunction with the financial
statements and notes thereto, as well as the Trustees discussion and analysis contained in the Trusts 2012 Annual Report on Form 10-K. The Trusts 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 SECs 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. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation
the statements under Trustees 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, projects, 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 of oil and natural gas wells;
|
|
|
|
future production 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 in the energy industry;
|
|
|
|
inflation or deflation; and
|
|
|
|
other risks described under the caption Risk Factors in the Trusts 2012 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 Trusts purpose is, in general, to hold the NPI, to distribute to unitholders
cash that the Trust receives in respect of the NPI, and to perform certain administrative functions in respect of 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, 2012 (which hedging effects impacted the February 2013 distribution to unitholders and ceased thereafter). The NPI entitles the Trust to receive 90% of the net proceeds from the sale of
production from the underlying properties.
10
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, 2013. The August 2013 distribution in the third quarter of 2013 was mainly affected,
however, by April 2013 through June 2013 oil prices and March 2013 through May 2013 natural gas prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
Crude Oil (per Bbl)
|
|
$
|
94.25
|
|
|
$
|
102.55
|
|
|
$
|
89.81
|
|
|
$
|
94.02
|
|
|
$
|
102.94
|
|
|
$
|
93.51
|
|
|
$
|
92.19
|
|
|
$
|
88.20
|
|
|
$
|
94.34
|
|
|
$
|
94.23
|
|
|
$
|
105.82
|
|
Natural Gas (per MMBtu)
|
|
$
|
4.10
|
|
|
$
|
4.32
|
|
|
$
|
4.20
|
|
|
$
|
3.54
|
|
|
$
|
2.72
|
|
|
$
|
2.21
|
|
|
$
|
2.81
|
|
|
$
|
3.41
|
|
|
$
|
3.34
|
|
|
$
|
4.10
|
|
|
$
|
3.58
|
|
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 9.11 MMBOE (8.20 MMBOE at the 90% NPI). All costless collar hedge contracts Whiting entered into, and in turn conveyed to the Trust, terminated as of December 31, 2012 (which hedging effects impacted the February
2013 distribution to unitholders and ceased thereafter) and no additional hedges are allowed to be placed on the Trust assets. Consequently, for production applicable to quarterly payment periods after the February 2013 distribution, there will be
no cash settlement gains or losses on commodity derivatives, and the Trust will have increased exposure to oil and natural gas price volatility.
Trust Termination.
The NPI will terminate when 9.11 MMBOE have been produced and sold from the underlying properties (which amount is
equivalent to 8.20 MMBOE attributable to the NPI), and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. Since the assets of the Trust are depleting assets, a portion of each cash
distribution paid on the Trust units should be considered by investors as a return of capital, with the remainder being considered as a return on investment or yield. As a result, the market price of the Trust units will decline to zero at
termination of the Trust. As of September 30, 2013 on a cumulative accrual basis, 6.86 MMBOE (84%) of the Trusts total 8.20 MMBOE have been produced and sold (of which proceeds from the sale of 260 MBOE, which is 90% of 288 MBOE,
will be distributed to unitholders in the Trusts forthcoming November 2013 distribution) and a cumulative reserve quantity of 0.02 MMBOE have been divested. The remaining reserve quantities are projected to be produced by June 30, 2015,
based on the reserve report for the underlying properties as of December 31, 2012. For additional discussion relating to, and of the assumptions underlying, the estimated date when 9.11 MMBOE (8.20 MMBOE at the 90% NPI) will be produced and
sold from the underlying properties, after which the Trust will soon thereafter wind up its affairs and terminate, see Description of the Underlying Properties in Item 2 of the Trusts 2012 Annual Report on Form 10-K.
Establishment of Reserves.
The Trust agreement authorizes the Trustee to establish a cash reserve for the payment of any liability that
is contingent or uncertain in amount or that is not otherwise currently due and payable. In preparation for the termination of the Trust, the Trustee expects to establish a cash reserve for the payment of expenses after the final distribution to
unitholders. The reserve may be funded from time to time beginning with the first distribution expected to be made in 2014, or may be funded largely or entirely from the final distribution to be made to unitholders. The aggregate amount of any such
reserve is not expected to be material to the distributions expected to be made during the remainder of the Trusts existence. In any case, however, any final distribution to unitholders will be subject to the prior payment of all expenses and
liabilities of the Trust, and to the establishment and funding of any reserves the Trustee deems appropriate for contingent liabilities.
11
Results of Trust Operations
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
The following is a summary of income from net profits interest received by the Trust for the nine months ended September 30, 2013 and
2012, consisting of the February, May and August distributions for each respective year (dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(a)
|
|
|
529,156
|
(b)
|
|
|
572,419
|
(c)
|
Natural gas from underlying properties (Mcf)
|
|
|
1,917,885
|
(b)
|
|
|
2,132,098
|
(c)
|
|
|
|
|
|
|
|
|
|
Total production (BOE)
|
|
|
848,804
|
|
|
|
927,769
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(a)
|
|
$
|
79.52
|
|
|
$
|
82.61
|
|
Effect of oil hedges on average price (per Bbl)
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil net of hedging (per Bbl)
|
|
$
|
79.52
|
|
|
$
|
82.61
|
|
|
|
|
|
|
|
|
|
|
Natural gas (per Mcf)
|
|
$
|
3.41
|
|
|
$
|
3.31
|
|
Effect of natural gas hedges on average price (per Mcf)
(d)
|
|
|
0.72
|
|
|
|
2.21
|
|
|
|
|
|
|
|
|
|
|
Natural gas net of hedging (per Mcf)
|
|
$
|
4.13
|
|
|
$
|
5.52
|
|
|
|
|
|
|
|
|
|
|
Costs (per BOE):
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
25.54
|
|
|
$
|
23.28
|
|
Production taxes
|
|
$
|
3.95
|
|
|
$
|
3.99
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(a)
|
|
$
|
42,077
|
(b)
|
|
$
|
47,285
|
(c)
|
Natural gas sales
|
|
|
6,536
|
(b)
|
|
|
7,066
|
(c)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
48,613
|
|
|
|
54,351
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
21,674
|
|
|
|
21,597
|
|
Production taxes
|
|
|
3,352
|
|
|
|
3,701
|
|
Cash settlement gains received on commodity derivatives
(d)
|
|
|
(1,381
|
)
|
|
|
(4,699
|
)
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
23,645
|
|
|
|
20,599
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
|
24,968
|
|
|
|
33,752
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
Income from net profits interest
|
|
$
|
22,471
|
|
|
$
|
30,376
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Oil includes natural gas liquids.
|
(b)
|
Oil and gas sales volumes and related revenues for the nine months ended September 30, 2013 (consisting of Whitings February 2013
distribution, May 2013 distribution and August 2013 distribution to the Trust) generally represent crude oil production from October 2012 through June 2013 and natural gas production from September 2012 through May 2013.
|
(c)
|
Oil and gas sales volumes and related revenues for the nine months ended September 30, 2012 (consisting of Whitings February 2012
distribution, May 2012 distribution and August 2012 distribution to the Trust) generally represent crude oil production from October 2011 through June 2012 and natural gas production from September 2011 through May 2012.
|
(d)
|
Commodity derivative contracts that settled from October through December 2012 provided cash receipts of $1.4 million ($1.2 million to the 90% NPI)
which were included in the February 2013 distribution to Trust unitholders. Commodity derivatives that settled from October 2011 through June 2012 provided cash receipts of $4.7 million ($4.2 million to the 90% NPI) which were included in the
February 2012 distribution, May 2012 distribution and August 2012 distribution to Trust unitholders. As discussed below, all hedges terminated as of the February 2013 distribution.
|
12
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 that Whiting remits to the Trust are based on the oil and gas production Whiting has received payment for 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 cash settlements on commodity derivatives as follows:
Revenues.
Oil and natural gas revenues decreased $5.7 million or 11% for the nine months ended September 30, 2013
as compared to the same period in 2012. Revenues are a function of oil and natural gas sales prices and production volumes sold. The decrease in revenue between periods was due to a lower sales price realized for oil and lower oil and natural gas
production volumes, partially offset by a higher sales price realized for natural gas during the first nine months of 2013 as compared to the first nine months of 2012. The average price for oil decreased 4% between periods, while the average price
for gas before the effects of hedging increased 3%. Oil sales volumes decreased 8% or 43 MBbls, and gas sales volumes decreased 10% or 214 MMcf during the first nine months of 2013 compared to the same period in 2012. Both of these volume decreases
were primarily related to normal field production decline, and were also impacted between reporting periods by differences in timing associated with revenues distributed and received from non-operated properties. The oil volume decline was partially
offset by oil production increases from three recently drilled oil wells that came online during the last twelve months. The gas volume decline was partially offset by well workover activity that resulted in increased gas production on such wells
between periods. In the December 31, 2012 reserve report, natural gas production attributable to the underlying properties is estimated to decline at rates ranging from 11% to 13% annually from 2013 through the estimated June 30, 2015 NPI
termination date, while oil production is estimated to decline at approximately 9% annually over this same time period.
Lease Operating Expenses
. Lease operating expenses (LOE) increased $0.1 million during the first nine months
of 2013 compared to the first nine months of 2012, primarily due to $0.4 million in higher labor costs on Whiting-operated properties, partially offset by a $0.3 million decrease in the cost of oilfield goods and services between periods. The
increase in overall LOE coupled with the decrease in overall production volumes between periods resulted in an increase in LOE on a per BOE basis of 10%, from $23.28 during the first nine months of 2012 to $25.54 for the same period in 2013. LOE per
BOE may continue to be subject to increases in the future as overall production declines at a faster rate than the fixed and semi-variable costs attributable to the underlying properties.
Production Taxes.
Production taxes are typically calculated as a percentage of oil and natural gas revenues before the
effects of hedging, and production taxes as a percent of revenues remained relatively consistent at 6.9% and 6.8% for the first nine months of 2013 and 2012, respectively. Overall production taxes for the nine months ended September 30, 2013
decreased, however, by $0.3 million or 9% compared to the same period in 2012, primarily due to lower oil and gas sales revenue between periods.
Cash Settlements on Commodity Derivatives.
In connection with Whitings conveyance of the net profits interest to
the Trust, Whiting entered into certain costless collar hedge contracts in order to reduce the Trusts exposure to commodity price volatility. If market prices were lower than a collars price floor when the cash settlement amount was
calculated, Whiting received cash proceeds from the contract counterparty. Conversely, if market prices were higher than a collars price ceiling when the cash settlement amount was calculated, Whiting was required to pay the contract
counterparty.
Cash settlements relating to these hedges resulted in a gain of $1.4 million for the nine months ended
September 30, 2013, which had the effect of increasing the average price of natural gas by $0.72 per Mcf for that period, and cash settlements relating to these hedges also resulted in a gain of $4.7 million for the nine months ended
September 30, 2012, which had the effect of increasing the average price of natural gas by $2.21 per Mcf for that period. As a result, the total net price of natural gas of $4.13 per Mcf and $5.52 per Mcf that the Trust received for the nine
months ended September 30, 2013 and 2012, respectively, included premiums of 17% and 40%, respectively, related to the effects of hedging for those same periods. However, all hedge related pricing impacts ceased after the February 2013
distribution, which is included in the results of trust operations for the nine months ended September 30, 2013 presented above, while the Trusts oil and gas reserves are currently projected to terminate in June 2015 based on the
Trusts December 31, 2012 reserve report. Therefore, no commodity price hedges were in effect during the quarterly payment periods covered by the May 2013 distribution and August 2013 distribution, nor will there be hedges in effect during
any future Trust distributions through Trust termination, which has the effect of increasing the Trusts exposure to oil and natural gas price volatility.
General and Administrative Expenses.
For the nine months ended September 30, 2013 and 2012, the Trusts general and
administrative expenses remained relatively consistent at $0.6 million and $0.7 million for each respective period.
13
Distributable Income.
For the nine months ended September 30, 2013, the Trusts
distributable income was $21.7 million and was based on income from net profits interest of $22.5 million, reduced by Trust general and administrative costs of $0.6 million and Montana state income tax withholdings of $0.2 million, and adjusted for
changes in Trust cash reserves. This compares to distributable income of $29.6 million for the first nine months of 2012, which was based on income from net profits interest of $30.4 million, reduced by $0.7 million of Trust administrative expenses
and $0.2 million in Montana state income tax withholdings, and adjusted for changes in Trust cash reserves.
Three Months Ended
September 30, 2013 Compared to Three Months Ended September 30, 2012
The following is a summary of income from net profits
interest received by the Trust for the three months ended September 30, 2013 and 2012, consisting of the August distribution for each respective year (dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Sales volumes:
|
|
|
|
|
|
|
|
|
Oil from underlying properties (Bbl)
(a)
|
|
|
177,367
|
(b)
|
|
|
200,283
|
(c)
|
Natural gas from underlying properties (Mcf)
|
|
|
637,115
|
(b)
|
|
|
746,709
|
(c)
|
|
|
|
|
|
|
|
|
|
Total production (BOE)
|
|
|
283,553
|
|
|
|
324,735
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(a)
|
|
$
|
80.94
|
|
|
$
|
79.47
|
|
Effect of oil hedges on average price (per Bbl)
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil net of hedging (per Bbl)
|
|
$
|
80.94
|
|
|
$
|
79.47
|
|
|
|
|
|
|
|
|
|
|
Natural gas (per Mcf)
|
|
$
|
3.65
|
|
|
$
|
2.68
|
|
Effect of natural gas hedges on average price (per Mcf)
(d)
|
|
|
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
Natural gas net of hedging (per Mcf)
|
|
$
|
3.65
|
|
|
$
|
4.68
|
|
|
|
|
|
|
|
|
|
|
Costs (per BOE):
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
24.91
|
|
|
$
|
22.62
|
|
Production taxes
|
|
$
|
3.87
|
|
|
$
|
3.48
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil sales
(a)
|
|
$
|
14,356
|
(b)
|
|
$
|
15,917
|
(c)
|
Natural gas sales
|
|
|
2,326
|
(b)
|
|
|
2,001
|
(c)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
16,682
|
|
|
|
17,918
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
7,065
|
|
|
|
7,347
|
|
Production taxes
|
|
|
1,096
|
|
|
|
1,130
|
|
Cash settlement gains received on commodity derivatives
(d)
|
|
|
|
|
|
|
(1,497
|
)
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
8,161
|
|
|
|
6,980
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
|
8,521
|
|
|
|
10,938
|
|
Net profits percentage
|
|
|
90
|
%
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
Income from net profits interest
|
|
$
|
7,668
|
|
|
$
|
9,844
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Oil includes natural gas liquids.
|
(b)
|
Oil and gas sales volumes and related revenues for the three months ended September 30, 2013 (consisting of Whitings August 2013
distribution to the Trust) generally represent crude oil production from April 2013 through June 2013 and natural gas production from March 2013 through May 2013.
|
(c)
|
Oil and gas sales volumes and related revenues for the three months ended September 30, 2012 (consisting of Whitings August 2012
distribution to the Trust) generally represent crude oil production from April 2012 through June 2012 and natural gas production from March 2012 through May 2012.
|
(d)
|
As discussed below, all hedges terminated as of the February 2013 distribution.
|
14
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 that Whiting remits to the Trust are based on the oil and gas production Whiting has received payment for 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 cash settlements on commodity derivatives as follows:
Revenues.
Oil and natural gas revenues decreased $1.2 million or 7% for the three months ended September 30, 2013
as compared to the same period in 2012. Revenues are a function of oil and natural gas sales prices and production volumes sold. The decrease in revenue between periods was due to lower oil and natural gas production volumes, partially offset by
higher sales prices realized for oil and natural gas during the third quarter of 2013 as compared to the third quarter of 2012. The average price for oil increased 2% between periods, and the average price for gas before the effects of hedging
increased 36%. Oil sales volumes decreased 11% or 23 MBbls, and gas sales volumes decreased 15% or 110 MMcf during the third quarter of 2013 compared to the same period in 2012. Both of these volume decreases were primarily related to normal field
production decline, and were also impacted between reporting periods by differences in timing associated with revenues distributed and received from non-operated properties. The oil volume decline was partially offset by oil production increases
from three recently drilled oil wells that came online during the last twelve months. The gas volume decline was partially offset by well workover activity that resulted in increased gas production on such wells between periods. In the
December 31, 2012 reserve report, natural gas production attributable to the underlying properties is estimated to decline at rates ranging from 11% to 13% annually from 2013 through the estimated June 30, 2015 NPI termination date, while
oil production is estimated to decline at approximately 9% annually over this same time period.
Lease Operating
Expenses
. LOE decreased $0.3 million or 4% during the third quarter of 2013 compared to the third quarter of 2012, primarily due to a decrease of $0.5 million in the cost of oilfield goods and services, partially offset by $0.2 million in higher
labor costs on Whiting-operated properties. LOE on a per BOE basis, however, increased 10% from $22.62 during the third quarter of 2012 to $24.91 for the same period in 2013. This higher LOE rate was mainly due to overall production declining at a
faster rate than the fixed and semi-variable costs attributable to the underlying properties.
Production Taxes.
Production taxes are typically calculated as a percentage of oil and natural gas revenues before the effects of hedging, and production taxes as a percent of revenues remained relatively consistent at 6.6% and 6.3% for the third quarter of 2013 and
2012, respectively. Overall production taxes also remained relatively consistent between periods.
Cash Settlements on
Commodity Derivatives.
In connection with Whitings conveyance of the net profits interest to the Trust, Whiting entered into certain costless collar hedge contracts in order to reduce the Trusts exposure to commodity price
volatility. If market prices were lower than a collars price floor when the cash settlement amount was calculated, Whiting received cash proceeds from the contract counterparty. Conversely, if market prices were higher than a collars
price ceiling when the cash settlement amount was calculated, Whiting was required to pay the contract counterparty.
All
hedges terminated as of December 31, 2012, and all hedge related pricing impacts ceased after the February 2013 distribution. Thus, there were no hedges in effect or related cash settlements during the third quarter of 2013. Cash settlements
relating to these hedges resulted in a gain of $1.5 million for the third quarter of 2012, however, which had the effect of increasing the average price of natural gas by $2.00 per Mcf for that period. As a result, the total net price of natural gas
of $4.68 per Mcf that the Trust received for the three months ended September 30, 2012 included a premium of 43% related to the effects of hedging for that period. Although the hedges terminated as of the February 2013 distribution, the
Trusts oil and gas reserves are currently projected to terminate in June 2015 based on the Trusts December 31, 2012 reserve report. Therefore, no commodity price hedges will impact future Trust distributions through Trust
termination, which has the effect of increasing the Trusts exposure to oil and natural gas price volatility.
General and
Administrative Expenses.
For the three months ended September 30, 2013 and 2012, the Trusts general and administrative expenses remained consistent at $0.2 million for each respective period.
Distributable Income.
For the three months ended September 30, 2013, the Trusts distributable income was $7.4 million and
was based on income from net profits interest of $7.7 million, reduced by Trust general and administrative costs of $0.2 million and Montana state income tax withholdings of $0.05 million, and adjusted for changes in Trust cash reserves. This
compares to distributable income of $9.6 million for the third quarter of 2012, which was based on income from net profits interest of $9.8 million, reduced by $0.2 million of Trust administrative expenses and $0.05 million in Montana state income
tax withholdings, and adjusted for changes in Trust cash reserves.
15
Liquidity and Capital Resources
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 Trusts only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee, a quarterly fee
to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustees 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
Trusts expenses for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities. The Trustee may borrow funds required to pay liabilities if the Trustee determines that the cash on
hand and the cash to be received are insufficient to cover the Trusts liabilities. If the Trustee borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid.
Income to the Trust from the NPI is based on the calculation and definitions of gross proceeds and net proceeds
contained in the conveyance agreement, which is listed as an exhibit to this report, and reference is hereby made to such conveyance agreement for the actual definitions of gross proceeds and net proceeds.
Although capital expenditures for the testing, drilling, completion, equipping, plugging back or recompletion of any well that is a part of
the underlying properties cannot be deducted from gross proceeds pursuant to the terms of the conveyance agreement, Whiting incurred capital expenditures of $13.4 million on the underlying properties during the nine months ended September 30,
2013. Such expenditures were not deducted from gross proceeds or Trust distributions, but they may have the effect of ultimately accelerating the receipt of NPI net proceeds and thereby benefiting the Trust unitholders by accelerating their return
on investment. The Trust cannot provide any assurance that this will continue to occur or that future capital expenditures will be consistent with historical levels.
In February 2011, 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 Whiting has no obligation
to lend funds to the Trust. If the Trustee were to draw on the letter of credit or borrow funds from Whiting or otherwise, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust.
The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially
affect the Trusts liquidity or the availability of capital resources.
Future Trust Distributions to Unitholders
On November 7, 2013, the Trustee announced the Trust distribution of net profits for the third quarterly payment period in 2013.
Unitholders of record on November 19, 2013 are expected to receive a distribution of $0.592105 per Trust unit, which is payable on or before November 29, 2013. This aggregate distribution to all Trust unitholders is expected to consist of
net cash proceeds of $8.4 million paid by Whiting to the Trust, less a provision of $140,000 for estimated Trust expenses and $64,891 for Montana state income tax withholdings.
New Accounting Pronouncements
There were no accounting pronouncements issued during the nine months ended September 30, 2013 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 Trusts
financial statements is included in Item 7 of the Trusts Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes to the critical accounting policies during the nine months ended
September 30, 2013.
16