VOC Energy Trust Quarterly Report (Form 10-Q)

Summary and Analysis of Key Points

Financial Performance Overview

The financial report provides an overview of the VOC Brazos Energy Partners Royalty Trust’s (the “Trust”) financial results for the quarters and six months ended June 30, 2024 and 2023. The key highlights are:

• Total gross proceeds from oil and natural gas sales decreased by 13.7% and 13.5% for the three and six-month periods, respectively, compared to the same periods in 2023. This was due to decreases in both sales volumes and average sales prices for oil and natural gas.
• Lease operating expenses, production and property taxes, and development expenses decreased overall, but the excess of revenues over direct operating expenses and development costs still declined by 20.0% and 18.4% for the three and six-month periods, respectively.
• The Trust’s 80% net profits interest income decreased by 20.0% and 18.4% for the three and six-month periods, respectively, compared to the same periods in 2023.
• Distributable income to unitholders decreased by 21.7% and 19.5% for the three and six-month periods, respectively, compared to the same periods in 2023.

Revenue and Profit Trends

The decreases in revenue and profits were primarily driven by:

1. Decreases in oil and natural gas sales volumes:
   • Oil sales volumes decreased by 8.5% and 8.6% for the three and six-month periods, respectively.
   • Natural gas sales volumes decreased by 13.2% and 16.1% for the three and six-month periods, respectively.
2. Decreases in average sales prices:
   • Oil prices decreased by 3.9% and 2.7% for the three and six-month periods, respectively.
   • Natural gas prices decreased by 42.3% and 51.8% for the three and six-month periods, respectively.
3. Severe winter storms in January 2024 that affected production in Kansas and Texas.

Strengths and Weaknesses

Strengths:

• The Trust has a stable 80% net profits interest in the underlying oil and gas properties, which provides a consistent revenue stream.
• VOC Brazos has provided a $1.7 million letter of credit to protect the Trust against the risk of insufficient cash to pay future expenses.
• The Trustee has established a $1.175 million cash reserve to cover future known, anticipated, or contingent expenses or liabilities of the Trust.

Weaknesses:

• The Trust’s revenue and profits are heavily dependent on the production volumes and commodity prices of oil and natural gas, which can be volatile and outside the Trust’s control.
• The severe winter storms in January 2024 resulted in a temporary curtailment of production, negatively impacting the Trust’s financial results.
• As the underlying properties are in mature fields, future costs may not change significantly, limiting the Trust’s ability to improve profitability.

Outlook and Future Considerations

The Trust’s future performance will largely depend on the following factors:

1. Commodity price trends: The Trust’s revenue and profits are directly tied to the market prices of oil and natural gas. Any significant changes in these prices will impact the Trust’s financial results.
2. Production volumes: Maintaining or increasing production levels from the underlying properties will be crucial for the Trust’s performance.
3. Cost management: VOC Brazos’ ability to control and optimize operating expenses will affect the Trust’s profitability.
4. Impact of future events: The Trust’s results may be affected by unforeseen events, such as the severe winter storms in 2024, that can disrupt production and operations.

Overall, the Trust’s financial performance has declined in the first half of 2024 compared to the same period in 2023, primarily due to lower sales volumes and prices. The Trust’s management of its cash reserves and cost structure will be important in navigating any future challenges and maintaining stable distributions to unitholders.