- The Whiting Trust II distribution increased by 24% from the previous quarter.
- The increase was due mainly to decreased expenses coupled with good oil prices.
- Production was up very slightly, but tracked the expected long-term trend.
Whiting (NYSE:WHZ) announced the trust distribution August 7, 2014 as:
Lease op exp
Montana inc tax
Dist per share
Production of oil was up slightly (about 2000 barrels), not a large increase but offsetting a longer trend of steady declines. This is perhaps more a result of a bad previous quarter due to harsh winter weather than a long term trend. The May results were for oil production from Jan-Mar and were down about 8% compared to the Fall quarter. The current quarter results are for oil produced Apr-June. The gas price remains good due to the large liquid content, although it reflects the generalized downturn in Henry Hub prices. The cost differential to Nymex oil was generally steady. We will see more detail in the formal releases in a few weeks.
Lease operating expenses and development costs were unexpectedly low (the least for any full quarter on record) accounting for a significant part of the increase in distribution (almost $0.11 of the total of nearly $0.16). Both the good oil prices and the low costs seem unlikely to hold up next quarter, so the distribution may be reduced.
I published an estimate for quarterly data on August 4, 2014. The table below shows a comparison between the current numbers and my estimates. I estimated the earnings by reviewing production patterns, calculating average gas and oil prices over the quarter, estimating the spread between Whiting's prices and Nymex WTI, and calculating estimated expenses based on the relatively-short history of the trust. My estimate for the gas price did not include the liquids content, a mistake which will be corrected in the next estimate. The costs were significantly lower than expected. The lease operating expenses seasonal dip for this quarter was a bit deeper than expected. The single biggest difference was in development costs, which dipped to nearly the lowest on record.
2014 08 07 release
2014 08 04 prediction
Lease op exp
Montana inc tax
Dist per share
For the next quarter, I expect development costs and lease costs to return to more normal levels. Coupled with the decrease in oil prices, the continued seasonal softness in gas prices, and the reduction in oil production as the properties age, I expect a significant reduction in the distribution. I will update my predictions in a subsequent article.
Looking more toward the future, per-well production might increase because of the change from uncemented sliding sleeve, to cemented plug and perf, to coiled tubing and slickwater. Whiting is deploying these technologies relatively slowly, in a few wells. Whether they have much incentive to do so in the trust's wells, and whether other operators of the trust assets will do so is unknown. Given the lifetime of the trust, it's not clear that production advances will change the rate of decline of production by a significant amount. Development costs are also limited by trust provisions.
The price of the trust follows a cyclical pattern driven by the earnings dates, but has generally trended flatter than expected given that the value of the trust will decline to zero at the end date (December 21, 2021). This is driven in part by the high nominal yield, part of which represents a return of capital, a factor not always recognized by some investors. The recent short-side piece by Cutler which drove the price down briefly and erratically may have had the unexpected result of resetting the price into a more rational channel. The rate of production decline is the critical factor over the long term. The current trend line is about a 7.9% per year decline, slightly less than the Whiting estimate of 8.2% (but certainly within the error of estimate). I am developing a forward-price estimate for the trust which I will publish in a future article.
Disclosure: The author is long WHZ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer, not a financial analyst. This article makes no recommendations. I am long WHZ, but have sold in the last 72 hours and will sell more as the price rises into the pre-dividend period. Please use your own judgment in taking any positions. Royalty trusts like WHZ are very specialized and should be bought or sold only with an understanding of their special characteristics.