The accompanying notes are an integral part
of these condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Organization of the Trust
MV Oil Trust (the “Trust”) is
a statutory trust formed on August 3, 2006, under the Delaware Statutory Trust Act pursuant to a Trust Agreement (the “Trust
Agreement”) among MV Partners, LLC, a Kansas limited liability company (“MV Partners”), as trustor, The Bank
of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and Wilmington Trust Company, as Delaware Trustee
(the “Delaware Trustee”).
The Trust was created to acquire and hold
a term net profits interest for the benefit of the Trust unitholders pursuant to a conveyance from MV Partners to the Trust. The
term net profits interest represents the right to receive 80% of the net proceeds (calculated as described below in Note 5) from
production from the underlying properties (as defined below) (the “net profits interest”). The net profits interest
consists of MV Partners’ net interests in all of its oil and natural gas properties located in the Mid-Continent region in
the states of Kansas and Colorado (the “underlying properties”). The underlying properties include approximately 900
producing oil and gas wells.
The net profits interest is passive in nature,
and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The
net profits interest entitles the Trust to receive 80% of the net proceeds attributable to MV Partners’ interest from the
sale of production from the underlying properties during the term of the Trust. The net profits interest will terminate on the
later to occur of (1) June 30, 2026 or (2) the time when 14.4 million barrels of oil equivalent (“MMBoe”)
have been produced from the underlying properties and sold (which amount is the equivalent of 11.5 MMBoe with respect to the Trust’s
net profits interest), and the Trust will soon thereafter wind up its affairs and terminate.
The Trustee can authorize the Trust to borrow
money to pay administrative or incidental expenses of the Trust that exceed cash held by the Trust. The Trustee may authorize the
Trust to borrow from the Trustee or the Delaware Trustee as a lender provided 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 and make other short-term investments with the funds distributed
to the Trust.
Note 2—Basis of Presentation
The accompanying Condensed Statement of
Assets and Trust Corpus as of December 31, 2019, which has been derived from audited financial statements, and the unaudited
interim condensed financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and March 31,
2019, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Accordingly, certain information and note disclosures normally included in annual financial statements have been condensed or omitted
pursuant to those rules and regulations.
The preparation of financial statements
requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The Trustee believes such information includes all the
disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments that
are, in the opinion of the Trustee, necessary for a fair presentation of the results of the interim period presented. The financial
information should be read in conjunction with the financial statements and notes thereto included in the Trust’s Annual
Report on Form 10-K for the year ended December 31, 2019.
Note 3—Trust Accounting Policies
The Trust uses the modified cash basis of
accounting to report receipts of the net profits interest and payments of expenses incurred. The net profits interest represents
the right to receive revenues (oil, gas and natural gas liquid sales) less direct operating expenses (lease operating expenses,
lease maintenance, lease overhead, and production and property taxes) and an adjustment for lease equipment costs and lease development
expenses (which are capitalized in financial statements prepared in accordance with accounting principles generally accepted in
the United States of America (“U.S. GAAP”)) of the underlying properties times 80%. Actual cash receipts may vary due
to timing delays of actual cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing
agreements or practices. The actual cash distributions of the Trust will be made based on the terms of the conveyance that created
the Trust’s net profits interest. Expenses of the Trust, which include accounting, engineering, legal and other professional
fees, Trustee fees, an administrative fee paid to MV Partners and out-of-pocket expenses, are recognized when paid. Under U.S.
GAAP, revenues and expenses would be recognized on an accrual basis. Amortization of the investment in net profits interest is
recorded on a unit-of-production method in the period in which the cash is received with respect to such production. Such amortization
does not reduce distributable income, rather it is charged directly to Trust Corpus.
This comprehensive basis of accounting other than U.S. GAAP
corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial
Statements of Royalty Trusts.
Investment in the net profits interest was
recorded initially at the historical cost of MV Partners and is periodically assessed to determine whether its aggregate value
has been impaired below its total capitalized cost based on the underlying properties. The Trust will provide a write-down to its
investment in the net profits interest if and when total capitalized costs, less accumulated amortization, exceed undiscounted
future net revenues attributable to the proved oil and gas reserves of the underlying properties.
No new accounting pronouncements have been
adopted or issued during the quarter ended March 31, 2020 that would impact the financial statements of the Trust.
Note 4—Investment in Net Profits Interest
The net profits interest was recorded at
the historical cost of MV Partners on January 24, 2007, the date of conveyance of the net profits interest to the Trust, and
was calculated as follows:
Oil and gas properties
|
|
$
|
96,210,819
|
|
Accumulated depreciation and depletion
|
|
|
(40,468,762
|
)
|
Hedge asset
|
|
|
7,237,537
|
|
Net property value to be conveyed
|
|
|
62,979,594
|
|
Times 80% net profits interest to Trust
|
|
$
|
50,383,675
|
|
Note 5—Income from Net Profits Interest
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Excess of revenues over direct operating expenses and lease equipment and development costs(1)
|
|
$
|
3,032,693
|
|
|
$
|
4,774,309
|
|
Times net profits interest over the term of the Trust
|
|
|
80
|
%
|
|
|
80
|
%
|
Income from net profits interest before reserve adjustments
|
|
|
2,426,155
|
|
|
|
3,819,447
|
|
MV Partners reserve for future capital expenditures(2)
|
|
|
0
|
|
|
|
0
|
|
Income from net profits interest(3)
|
|
$
|
2,426,155
|
|
|
$
|
3,819,447
|
|
|
(1)
|
Excess of revenues over direct operating expenses and lease equipment and development costs reflect expenses and costs incurred
by MV Partners during the September through November production period. Pursuant to the terms of the conveyance of the
net profits interest, lease equipment and development costs are to be deducted when calculating the distributable income to the
Trust.
|
|
(2)
|
Pursuant to the terms of the conveyance of the net profits interest, MV Partners can reserve up to $1.0 million for future
capital expenditures at any time. During the three months ended March 31, 2020 and March 31, 2019, MV Partners did not
withhold or release any dollar amounts due to the Trust. The reserve balance was $1,000,000 at March 31, 2020 and 2019.
|
|
(3)
|
The income from net profits interest is based upon the cash receipts from MV Partners for the oil and gas production. The revenues
from oil production are typically received by MV Partners one month after production; thus, the cash received by the Trust during
the three months ended March 31, 2020 substantially represents the production by MV Partners from September 2019 through
November 2019, and the cash received by the Trust during the three months ended March 31, 2019 substantially represents
the production by MV Partners from September 2018 through November 2018.
|
For the three months ended March 31,
2020 and 2019, MV Purchasing, LLC, which is majority-owned by the indirect equity owners of MV Partners, purchased a majority of
the production from the underlying properties. Sales to MV Purchasing, LLC are under short-term arrangements, ranging from one
to six months, using market-sensitive pricing.
Note 6—Income Taxes
The Trust is a Delaware statutory trust
and is not required to pay federal or state income taxes. Accordingly, no provision for federal or state income taxes has been
made.
Note 7—Distributions to Unitholders
MV Partners makes quarterly payments of
the net profits interest to the Trust. The Trustee determines for each quarter the amount available for distribution to the Trust
unitholders. This distribution is expected to be made on or before the 25th day of the month following the end of each quarter
to the Trust unitholders of record on the 15th day of the month following the end of each quarter (or the next succeeding business
day). Such amounts will be equal to the excess, if any, of the cash received by the Trust relating to the preceding quarter, over
the expenses of the Trust paid during such quarter, subject to adjustments for changes made by the Trustee during such quarter
in any cash reserves established for future expenses of the Trust.
The first quarterly distribution during
2020 was $2,185,000, or $0.190 per Trust unit, and was made on January 24, 2020 to Trust unitholders owning Trust units as
of January 15, 2020. Such distribution included the net proceeds attributable to the sale of production received by MV Partners
from October 1, 2019 through December 31, 2019.
The first quarterly distribution during
2019 was $3,622,500, or $0.315 per Trust unit, and was made on January 25, 2019 to Trust unitholders owning Trust units as
of January 15, 2019. Such distribution included the net proceeds attributable to the sale of production received by MV Partners
from October 1, 2018 through December 31, 2018.
Note 8—Advance for Trust Expenses
Under the terms of the Trust Agreement,
the Trustee is allowed to borrow money to pay Trust expenses. During the three months ended March 31, 2020 and 2019, there
were no borrowings or amounts owed for money borrowed in previous quarters. MV Partners has provided a letter of credit in the
amount of $1.8 million to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future
expenses.
Note 9—Subsequent Events
The second quarterly distribution during
2020 was $2,357,500, or $0.205 per Trust unit, and was made on April 24, 2020 to Trust unitholders owning Trust units as of
April 15, 2020. Such distribution included the net proceeds attributable to the sale of production received by MV Partners
from January 1, 2020 through March 31, 2020.
The
West Texas Intermediate spot price of crude oil has dropped sharply since the beginning of 2020, from $61.18 per barrel
on January 2, 2020 to $12.34 per barrel on April 28, 2020, primarily attributable to the economic effects of the COVID-19
pandemic and the dispute over production levels between Russia and the members of the Organization of Petroleum Exporting Countries,
including Saudi Arabia, which resulted in an oversupply of crude oil and exacerbated the decline in crude oil prices. If commodity
prices for crude oil remain at reduced levels, subsequent distributions in 2020 will be substantially lower than historical distributions,
and in certain periods there may be no distribution to unitholders. In light of the current uncertain economic environment, the
Trustee has withheld an amount from the second quarterly distribution that is estimated to be sufficient to pay Trust expenses
over the next twelve months.