IPO Preview: VOC Energy Trust

| About: VOC Energy (VOC)

VOC Energy Trust (NYSE:VOC) is scheduling a $222 million IPO with a market capitalization of $340 million at a proposed price range mid-point of $20 for Thursday 5, 2011. The IPO calendar includes seven others for this week.

CONCLUSION -- Based in Austin, Texas, VOC offers an attractive 10.5% expected yield for 2011. VOC, however, doesn’t have a (strong) parent similar to other successful trusts & partnerships, and VOC’s growth plan is not visible. In addition, 88% of the IPO proceeds revert directly to the sponsor.

SUMMARY -- VOC is a stand-alone trust oil without a strong parent. VOC intends to sell 65% of the company on the IPO. VOC’s sponsors and related parties will retain 48% of the net proceeds from the underlying properties until the trust expires, then will retain 100% of the net proceeds.

The VOC trust has a 20 year life span and expires in 2030, or when 10.6 MMBoe (which is the equivalent of 8.5 MMBoe in respect of the Net Profits Interest) have been produced from the Underlying Properties and sold.

VOC Comparisons

Trusts and Limited Partnerships with strong parents typically sell a smaller percentage on the IPO than VOC. For example two recent IPOs with strong parents increased in price after their IPOs.

  • Sandridge Mississippian Trust (NYSE:SDT) is up 23% to $25.72 from the IPO price of $21 on April 6, 2011. See our pre-IPOreport on SDT
  • Tesoro Logistics (NYSE:TLLP) is up 14% to $24 from the IPO price of $21 on April 19, 2011. See our pre-IPOreport on TLLP

CASH DISTRIBUTIONS -- Projected to be 10.5% or $2.09 per trust unit for the year ending December 31. 2011. See page 56 in the S-1 You can read about the ‘significant assumptions used to prepare the projected cash distributions’ on pages 57-59 in the S-1, especially the table on page 60

INCOME TAX -- “The trust is not subject to income tax; trust unit holders are subject to income tax on their pro rata share of trust income, gain, loss and deduction.” Page 101 S-1

GROWTH PLAN -- VOC's growth plan is filled with disclaimers. Trusts and Partnerships in the oil production and development business offer more visibility if they are spin-offs of a strong parent.

“The primary goals of VOC Sponsor’s development and workover program have been to develop proved undeveloped reserves, manage workovers and minimize the natural decline in production in areas in which it operates. However, VOC Sponsor is not obligated to undertake any development activities, so any drilling and completing activities will be subject to the reasonable discretion of VOC Sponsor. No assurance can be given, however, that any development well will produce in commercially paying quantities or that the characteristics of any development well will match the characteristics of VOC Sponsor’s existing wells or VOC Sponsor’s historical drilling success rate.” Page 74, S-1

After giving effect to the conveyance of the Net Profits Interest to the trust, VOC Sponsor’s interest in the Underlying Properties will entitle it to 20% of the net proceeds from the sale of production of oil and natural gas attributable to the Underlying Properties during the term of the trust, and 100% thereafter.

MANAGEMENT -- Certain members of VOC Sponsor’s management team were involved in the formation and initial public offering of MV Oil Trust (NYSE:MVO) a publicly traded trust that is similar to VOC Energy Trust. MVO has a market capitalization of $475 and the trust yield is 7.4%

VOC SPONSOR & THE OPERATOR -- Notice below that Vess Oil is the contract operator, not the sponsor. The trust units do not represent interests in, or obligations of, VOC Sponsor.

As of December 31, 2010, Vess Oil employed 19 full-time employees, three contract professionals and 14 contract personnel in its Wichita, office and in five field and satellite offices.

VOC's Sponsor believes that its retained interests in the Underlying Properties combined with VOC Partners, LLC’s ownership of trust units representing a 34.8% beneficial interest in the trust collectively entitles VOC Sponsor and VOC Partners, LLC to receive an aggregate of approximately 48% of the net proceeds from the Underlying Properties, which will provide sufficient incentive to operate and develop the oil and natural gas properties comprising the Underlying Properties in an efficient and cost-effective manner.

As of December 31, 2010, based on PV-10 value, the VOC Operators were the operators or contract operators of approximately 98% of the total proved reserves attributable to the Underlying Properties with Vess Oil operating, on behalf of VOC Sponsor, approximately 91% of the total proved reserves and L.D. Drilling Inc. and Davis Petroleum, Inc. operating approximately 7% of the total proved reserves.

RELATED PARTY TRANSACTIONS -- As of December 31, 2010, the VOC Operators, which includes Vess Oil, L.D. Drilling, Inc. and Davis Petroleum, Inc., operated or operated on a contract basis, approximately 98% of the total proved reserves attributable to the Underlying Properties based on PV-10 value.

Vess Oil operates approximately 91% of the total proved reserves for which VOC Sponsor is the designated operator and L.D. Drilling Inc. and Davis Petroleum, Inc. operates approximately 7% of the total proved reserves.

Vess Oil is controlled by J. Michael Vess, L.D. Drilling Inc. is controlled by L.D. Davis and Davis Petroleum, Inc. is controlled by both Mr. Vess and Mr. Davis. Under the terms of the operating arrangement among VOC Sponsor and Vess Oil, all expenses of Vess Oil incurred on behalf of VOC Sponsor are paid by VOC Sponsor at the cost incurred.

USE OF PROCEEDS of $204 million. Repay $24.0 million of outstanding borrowings under the credit facility, repurchase $65 million certain outstanding equity interests in the VOC sponsor, and make cash distributions to its remaining limited partners.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.