VOC Energy: A Fine Hold For Current Owners, New Investors Should Look Elsewhere

Thesis

VOC Energy Trust (NYSE:VOC) is a perfectly fine hold for current owners, but due to its structure needs to be avoided by anyone looking for a new position. As of this March, VOC has already received payment for approximately 80% of its theoretical reserves, so the remaining payments may not cover the purchase price of the stock, depending on the price.

When the trust terminates, they will not redeem any shares, but will rather liquidate assets and pay out shareholders. This payment is difficult to properly value so far ahead of time, and may not cover the cost of your shares. That payment will depend largely on proven remaining reserves and the prices of oil in 2030.

Company Overview

VOC was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders. Vess Oil was responsible for the formation and execution of the first initial public offering of VOC Energy Trust in May 2011.

In connection with the formation of VOC, VOC Brazos Energy Partners conveyed an 80% term net profits interest in oil and natural gas properties across Kansas and Texas in exchange for trust units. Vess Oil serves as the contract operator for VOC Brazos. Vess Energy Group operates approximately 90% of the proved reserves attributable to underlying properties.

Revenue

As of December 31, 2022, the company’s underlying properties included interests in 739 gross (454 net) producing wells and included 81,095 gross acres (50,310 net). Virtually all of the interests of the trust are geographically located across Texas and Kansas.

Based on the reserve report, the net profits interest would entitle the trust to receive net proceeds for the sale of production of not less than 10.6 MMBoe of proved reserves attributable to the underlying properties expected to be produced over the term of the trust. The trust is entitled to receive 80% of the net proceeds from production from the underlying properties.

One thing investors should certainly make note of is the duration of production and production and reserve levels for the company. The net profits interest will terminate on December 21, 2030, or when 10.6 million barrels of oil equivalent (which is the equivalent of 8.5MMBoe in respect of the net profits interest) have been produced from the underlying properties and sold.

At this time the trust will wind up its affairs and terminate. As of March 31, 2023, VOC Energy Trust has received payment for approximately 80% of potential net proceeds, equivalent to around 6.6 MMBoe worth of the potential 8.5 MMBoe production in underlying properties.

Operations

VOC Energy Trust’s underlying property interests are operated almost exclusively by Vess Oil. Vess Oil has operated oil and natural gas properties in Kansas for more than 40 years and was the fourth-largest operator of oil properties measured by production in Kansas according to the Kansas Geological Survey in 2020. The company also operates in East Texas, primarily under the company VOC Brazos. Vess oil currently operates over 1,500 oil, natural gas, and service wells (such as wastewater injection wells) across Kansas and East Texas.

Niobrara Shale

A majority of the company’s position lies in the Niobrara Shale play in Western Kansas, one of the major shale plays in the United States. This position should be attractive for investors as breakeven pricing for new wells hovers around $53/bbl in the shale.

Even with the looming recession facing the U.S. and resulting potential commodity pricing drops, crude oil pricing floors should remain at levels that are favorable for VOC Energy Trust to absorb any negative recession effects and maintain production levels.

Analysis

VOC Energy Trust is a stock that will likely provide continued predictable returns to current shareholders through solid dividend payments and projected decreasing operating costs. The company has interests in a well-established area that has been steadily high producing for over a decade.

As the company’s position in its underlying interests is approximately 80% complete, new drilling activity will continue to decrease in the coming years. This shouldn’t matter as the decrease in new production will be offset by the decrease in operating costs. As the trust continues toward completion, investors should expect higher margins with decreasing operating costs.

While VOC Energy Trust can be considered a perfectly solid position if you already own it, but if you're looking to enter a new position in upstream then there is better value to be found amongst other players like Devon Energy or Dorchester Minerals.

The fact that 80% of the company’s interests have been produced and sold means that the company has entered the home stretch of its lifespan. While it should remain productive and profitable, investors should not be entering new positions in it.

However, just because the company is in the home stretch doesn’t mean it’s not a good hold for current owners. In the event of commodity price drops, investors can rest easier knowing the company isn’t going to rely on new production and capital investment to drive revenues.

With a large majority of the interest having wells already in production, the company has a much smaller risk exposure than its peers to crude oil and natural gas pricing dips. And on top of that, the company operates in the Niobrara, one of the lower-cost areas to produce in United States shale plays with an average breakeven price of $53/bbl for new wells.

Conclusion

VOC Energy Trust also has financial flexibility in the face of looming recession effects with projected year-over-year decreases in operating costs throughout the lifespan of the company, and could be held by current investors.

New investors should be looking elsewhere for oilfield returns as there are trusts that will last longer, and companies that are undervalued and begging for an investment.