The following review of the trust's financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto. The trust's purpose is, in general, to hold the net profits interest,
to distribute to the trust unitholders cash that the trust receives in respect
of the net profits interest, and to perform certain administrative functions in
respect of the net profits interest and the trust units. The trust derives
substantially all of its income and cash flows from the net profits interest.
Critical Accounting Policies and Estimates
The trust uses the modified cash basis of accounting to report receipts by the
trust of the net profits interest and payments of expenses incurred. The net
profits interest represents the right to receive revenues (oil, gas and natural
liquid gas sales) less direct operating expenses (lease operating, maintenance
and overhead expenses and production and property taxes) and an adjustment for
lease equipment cost 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%. Cash distributions of the trust will be made based on the
amount of cash received by the trust pursuant to terms of the conveyance
creating the net profits interest.
The financial statements of the trust, as prepared on a modified cash basis,
reflect the trust's assets, trust corpus, earnings and distributions as follows:
(a)
Income from the net profits interest is recorded when distributions are received
by the trust;
(b)
Distributions to trust unitholders are recorded when paid by the trust;
(c)
Trust general and administrative expenses (which include the trustee's fees as
well as accounting, engineering, legal and other professional fees) are recorded
when paid;
(d)
Cash reserves for trust expenses may be established by the trustee for certain
expenditures that would not be recorded as contingent liabilities under U.S.
GAAP;
(e)
Amortization of the investment in net profits interest, calculated using
the units-of-production method based upon total estimated proved reserves, is
charged directly to trust corpus and does not affect distributable income; and
(f)
The trust evaluates its investment in the net profits interest periodically 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
cash flows attributable to the trust's interests in the proved oil and gas
reserves of the underlying properties.
While these statements differ from financial statements prepared in accordance
with U.S. GAAP, the modified cash basis of reporting revenues and distributions
is considered most meaningful because quarterly distributions to the trust
unitholders are based on net cash receipts received from MV Partners. 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.
Comparison of Results of the Trust for the Years Ended December 31, 2022 and
2021
The following represents a discussion of the Comparison of Results of the Trust
for the Years Ended December 31, 2022 and 2021. Refer to "Item 7. Trustee's
Discussion and Analysis of Financial Condition and Results of Operations" in the
trust's Annual Report on Form 10-K for the year ended December 31, 2021, filed
with the SEC on March 17, 2022 for a discussion of the Comparison of Results of
the Trust for the Years Ended December 31, 2021 and 2020.
Income for the trust from the net profits interest was $27.2 million for the
year ended December 31, 2022 compared to $12.1 million for the year ended
December 31, 2021. The trustee withheld $1.7 million and $0.8 million for future
trust expenses for the years ended December 31, 2022 and 2021, respectively.
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General and administrative expense for the trust was $0.94 million for 2022 and
$0.96 million for 2021. These factors resulted in distributable income of
$25.5 million, or $2.220 per unit, in 2022 compared to $11.3 million, or $0.985
per unit, in 2021.
The revenues from oil production are typically received by MV Partners one month
after production; thus, the cash received by the trust during the year ended
December 31, 2022 substantially represented the production by MV Partners from
September 2021 through August 2022, and the cash received by the trust during
the year ended December 31, 2021 substantially represented the production by MV
Partners from September 2020 through August 2021. MV Partners computes net
proceeds quarterly on a calendar basis and distributes to the trust 80% of the
aggregate of such net proceeds attributable to a computation period on or before
the 25th day of the month following the computation period. As a result, for the
year ended December 31, 2022, the trust's net profits interest represented the
cash proceeds received by the trust, which was based upon the cash receipts for
the oil and gas production collected by MV Partners from October 1, 2021 through
September 30, 2022. For the year ended December 31, 2021, the trust's net
profits interest represented the cash proceeds received by the trust, which was
based upon the cash receipts for the oil and gas production collected by MV
Partners from October 1, 2020 through September 30, 2021.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $34.0 million for the
period from October 1, 2021 through September 30, 2022. The trust's net profits
interest (80%) of this total was $27.2 million for the year ended December 31,
2022. During the year ended December 31, 2022, MV Partners did not withhold or
release any dollar amounts due to the trust from previously established cash
reserves for future capital expenditures, which resulted in total cash proceeds
received by the trust of $27.2 million for the year ended December 31, 2022.
Excess of revenues over direct operating expenses and lease equipment and
development costs from the underlying properties was $15.1 million for the
period from October 1, 2020 through September 30, 2021. The trust's net profits
interest (80%) of this total was $12.1 million for the year ended December 31,
2021. During the year ended December 31, 2021, MV Partners did not withhold or
release any dollar amounts due to the trust from previously established cash
reserves for future capital expenditures, which resulted in total cash proceeds
received by the trust of $12.1 million for the year ended December 31, 2021.
The average price received for crude oil sold during 2022 was $87.86 per Bbl,
while the average price received for crude oil sold during 2021 was $51.97 per
Bbl. The average price received for natural gas sold during 2022 was $5.21 per
Mcf, while the average price received for natural gas sold during 2021 was $2.22
per Mcf. The average prices for 2022 related to production by MV Partners from
September 2021 through August 2022, and the average prices for 2021 related to
production by MV Partners from September 2020 through August 2021.
The overall production volumes sold and delivered to purchasers attributable to
the 80% net profits interest that was for the oil and gas production sold and
delivered during the period from October 1, 2021 to September 30, 2022 were
496,767 Bbls of oil, 27,130 Mcf of natural gas and 82 Bbls of natural gas
liquids, for a total of 501,342 Boe. The overall production volumes sold and
delivered to purchasers attributable to the 80% net profits interest that was
for the oil and gas production sold and delivered during the period from
October 1, 2020 to September 30, 2021 were 519,518 Bbls of oil, 31,708 Mcf of
natural gas and 94 Bbls of natural gas liquids, for a total of 524,864 Boe.
As noted above, the amounts reflected in the accompanying financial statements
for the trust's year ended December 31, 2022 reflect cash received by the trust
during the year. Such cash is primarily derived from production by MV Partners
from September 2021 through August 2022. The amounts reflected in the
accompanying financial statements for the trust's year ended December 31, 2021
reflect cash received by the trust during the year. Such cash is primarily
derived from production by MV Partners from September 2020 through August 2021.
Liquidity and Capital Resources
Other than trust administrative expenses, including any reserves established by
the trustee for future liabilities, the trust's only use of cash is for
distributions to trust unitholders. Administrative expenses include payments to
the trustee as well as an annual administrative fee to MV Partners pursuant to
the
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administrative services agreement. Each quarter, the trustee determines the
amount of funds available for distribution. Available funds are the excess cash,
if any, received by the trust from the net profits interest and payments from
other sources (such as interest earned on any amounts reserved by the trustee)
in that quarter, over the trust's expenses paid for that quarter. Available
funds are reduced by any cash the trustee decides to hold as a reserve against
future expenses. As of December 31, 2022, the trustee held $298,295 as such a
reserve, in addition to $737,919 of the $1.265 million cash reserve described
below.
As previously disclosed, the trustee is building a reserve for the payment of
future known, anticipated or contingent expenses or liabilities of the trust.
Since January 2022, the Trustee has been withholding, and in the future intends
to withhold, a portion of the proceeds otherwise available for distribution each
quarter to build a cash reserve of approximately $1.265 million. This amount is
in addition to the letter of credit in the amount of $1.8 million provided to
the Trustee by MV Partners to protect the Trust against the risk that it does
not have sufficient cash to pay future expenses. The Trustee may increase or
decrease the targeted amount at any time, and may increase or decrease the rate
at which it is withholding funds to build the cash reserve at any time, without
advance notice to the unitholders. Cash held in reserve will be invested as
required by the Trust Agreement. Any cash reserved in excess of the amount
necessary to pay or provide for the payment of future known, anticipated or
contingent expenses or liabilities eventually will be distributed to trust
unitholders, together with interest earned on the funds. Through March 16, 2023,
the Trustee has withheld a total of $1,001,460 from the proceeds otherwise
available for distribution towards the building of the cash reserve described
above.
The trustee may cause the trust to borrow funds required to pay expenses if the
trustee determines that the cash on hand and the cash to be received are
insufficient to cover the trust's liabilities. If the trust borrows funds, the
trust unitholders will not receive distributions until the borrowed funds are
repaid. During each of 2021 and 2022, the trust made no borrowings.
Income to the trust from the net profits interest is based on the calculation
and definitions of "gross proceeds" and "net proceeds" contained in the
conveyance.
As further discussed below, MV Partners' development and workover program will
require MV Partners to make future capital expenditures in connection with the
development, exploration and production of oil and gas. Substantially all of the
underlying properties are located in mature fields and MV Partners does not
expect future costs for the underlying properties to change significantly as
compared to recent historical costs other than increases due to increases in the
general cost of oilfield services.
The trust does not have any transactions, arrangements or other relationships
with unconsolidated entities or persons that could materially affect the trust's
liquidity or the availability of capital resources.
Planned Development and Workover Program
Since acquiring the underlying properties in 1998 and 1999, MV Partners has
implemented a development program on the underlying properties to develop
further proved undeveloped reserves and to help offset the natural decline in
production. These activities included recompletion of certain existing wells
into new producing horizons, workovers of existing wells, and the drilling of
infill development wells.
The development program that MV Partners currently intends to implement over the
four years ending December 31, 2026 with respect to the underlying properties
categorized as proved undeveloped reserves consists of recompletion and workover
projects, and polymer workovers. The development program that MV Partners
currently intends to implement over the next five years with respect to the
underlying properties categorized as proved developed non-producing reserves
consists of well-reactivation projects, injection well-workover projects,
recompletion projects, and well-workover projects.
MV Partners expects total capital expenditures for the underlying properties
during the four years ending December 31, 2026 will be approximately
$1.3 million. Of this total, MV Partners contemplates spending approximately
$0.3 million to drill a saltwater disposal well and approximately $1.0 million
for recompletion and workovers of existing wells. MV Partners expects that these
capital projects will add production that will partially offset the natural
decline in production otherwise expected to occur with respect to the underlying
properties. The trust is not directly obligated to pay any portion of any
capital expenditures made with respect to the underlying properties; however,
capital expenditures made by MV Partners with
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respect to the underlying properties will be deducted from the gross proceeds in
calculating the net proceeds from which cash will be paid to the trust. As a
result, the trust will indirectly bear an 80% (subject to certain limitations
during the final three years of the trust, as described above under "Item 1.
Business - Computation of Net Proceeds - Net Profits Interest") share of any
capital expenditures made with respect to the underlying properties.
Accordingly, higher or lower capital expenditures will, in general, directly
decrease or increase, respectively, the cash received by the trust in respect of
its net profits interest, which will have a corresponding effect on cash
available for distribution to trust unitholders. As the cash received by the
trust in respect of the net profits interest will be reduced by the trust's
pro rata share of these capital expenditures, MV Partners expects that it will
incur capital expenditures with respect to the underlying properties throughout
the term of the trust on a basis that balances the impact of the capital
expenditures on current cash distributions to the trust unitholders with the
longer term benefits of increased oil and natural gas production expected to
result from the capital expenditures. In addition, MV Partners may establish a
capital reserve of up to $1.0 million in the aggregate at any given time to
reduce the impact on distributions of uneven capital expenditure timing.
MV Partners, as the operator of the underlying properties, is entitled to make
all determinations related to capital expenditures with respect to the
underlying properties, and there are no limitations on the amount of capital
expenditures that MV Partners may incur with respect to the underlying
properties, except as described above under "Item 1. Business - Computation of
Net Proceeds - Net Profits Interest." As the trust unitholders would not be
expected to fully realize the benefits of capital expenditures made with respect
to the underlying properties toward the end of the term of the trust, during
each twelve-month period beginning on the later to occur of (1) June 30, 2023,
and (2) the time when 13.2 MMBoe have been produced from the underlying
properties and sold (which is the equivalent of 10.6 MMBoe in respect of the net
profits interest), capital expenditures that may be taken into account in
calculating net proceeds attributable to the net profits interest will be
limited to the average annual capital expenditures during the preceding
three years, as adjusted for inflation. See "Item 1. Business - Computation of
Net Proceeds - Net Profits Interest."
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