VOC Energy Trust: Providing Investor Cash Flow

| About: VOC Energy (VOC)

VOC Energy Trust Units (NYSE:VOC) began trading on May 6th. The trust has operating oil and natural gas wells in Central and Eastern Kansas and Eastern Texas. The trust has 892 gross (550.2 net) wells located in 193 fields. These are mature wells with a projected life span of 50-years.

750-wells are in Kansas and 142-wells in Texas. The trust's wells produced, on average, 2,583 Boe per day. The breakdown is 1,559 Boe per day from Kansas properties and 1,024 Boe per day from Texas wells. These numbers are based on the first 9-months of 2010.

VOC is a U.S. trust with a finite life. Over time, the investor should be prepared for a reduction in royalties received. Because the trust is finite, part of the royalties received will be a return of capital. The trust will terminate on the later of December 31, 2030 or when 9.7-MMBoe have been produced.

VOC Sponsors
The VOC sponsors represent the parties who initially acquired and are offering the trust assets represented in the IPO. Certain members of the VOC sponsors are the same as those who formed MV Oil Trust (NYSE: MVO). These parties assisted in the MVO inital public offering. Vess Oil owns a position in MVO.

The VOC sponsors and the VOC partners collectively will receive 48% of the trust's distributions. VOC is set up to pay 80% of net oil and natural gas production. VOC sponsors will receive the remaining 20% of oil and natural gas production. VOC partners will own 35% of the outstanding VOC shares.

VOC Operators
VOC's properties will be operated by Vess Oil Corporation, L. D. Drilling Inc. or Davis Petroleum, Incorporated. Collectively these entities are known as the "VOC Operators".

The VOC operators will use "discretion" to develop new wells on proven reserves. This will assist in providing income to oil depletion levels from the 892-wells. The VOC operators will focus primarily on ensuring the 892-wells are up and running so the trust can make dividends for the foreseeable future.

Production Costs
Production costs should be static due to the maturity of the wells. Cost production per BOE is based upon the following assumptions:

  • Lease operating expenses: $14.07 per Boe,
  • Production and operating taxes: $4.07 per Boe,
  • Net production cost: $18.14 per Boe,

Hedged Production
22% of 2011's anticipated oil production are hedged at $94.90. The first 9-months of 2010 indicated a 88% oil production revenue and 12% natural gas production revenue stream.

The trust, beginning in 2012, is prohibited from hedging oil and natural gas production. This will allow the trust to reflect potentially higher oil prices in the future. The risk of lower oil prices is present.

Quarterly Dividends
The trust expects to make quarterly distributions beginning with the first payment on August 15th, 2011. The first dividend represents the net income earned from January 1st, 2011 thru June 30th, 2011. The first dividend, in essence, represents 2-quarters. Future dividends should be less than the initial dividend due to the quarterly distributions in future periods. The August dividend should be approximately 83-cents.

I own and like this name. Vess Oil has been straightforward with their MVO IPO. The investor needs to be aware of a U.S. trust and the depleting asset issues. Owning an oil producing trust with quarterly dividends works and provides cash flow to the investor.

Disclosure: I am long VOC, MVO.