VOC Energy (5VC) Risk Analysis
Risk Overview Q4, 2023
Source: the company's latest filing for the period ended Dec 31, 2023, filed Mar 20, 2024
Risk Change Over Time
- Share Price & Shareholder Rights - Risk 1The Trust is a smaller reporting company and benefits from certain reduced governance and disclosure requirements, including that the Trust's independent registered public accounting firm is not required to attest to the effectiveness of the Trust's internal control over financial reporting. The Trust cannot be certain if the omission of reduced disclosure requirements applicable to smaller reporting companies will make the Trust Units less attractive to investors.
Currently, the Trust is a "smaller reporting company," meaning that the outstanding Trust Units held by nonaffiliates had a value of less than $250 million at the end of the Trust's most recently completed second fiscal quarter. As a smaller reporting company, the Trust is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, meaning the Trust's auditors are not required to attest to the effectiveness of the Trust's internal control over financial reporting. As a result, investors and others may be less comfortable with the effectiveness of the Trust's internal controls and the risk that material weaknesses or other deficiencies in internal controls go undetected may increase. In addition, as a smaller reporting company, the Trust takes advantage of its ability to provide certain other less comprehensive disclosures in its SEC filings, including, among other things, providing only two years of audited financial statements in annual reports. Consequently, it may be more challenging for investors to analyze the Trust's results of operations and financial prospects, as the information the Trust provides to Trust unitholders may be different from what one might receive from other public companies in which one holds shares. As a smaller reporting company, the Trust is not required to provide this information.
- Accounting & Financial Operations - Risk 2Financial information of the Trust is not prepared in accordance with GAAP.
The financial statements of the Trust are prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States, or GAAP. Although this basis of accounting is permitted for royalty trusts by the SEC, the financial statements of the Trust differ from GAAP financial statements because revenues are not accrued in the month of production and cash reserves may be established for specified contingencies and deducted which could not be accrued in GAAP financial statements.
Risk Highlights Q4, 2023
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 34
- Share Price & Shareholder Rights - Risk 1AddedThe Trust is a smaller reporting company and benefits from certain reduced governance and disclosure requirements, including that the Trust's independent registered public accounting firm is not required to attest to the effectiveness of the Trust's internal control over financial reporting. The Trust cannot be certain if the omission of reduced disclosure requirements applicable to smaller reporting companies will make the Trust Units less attractive to investors.
Currently, the Trust is a "smaller reporting company," meaning that the outstanding Trust Units held by nonaffiliates had a value of less than $250 million at the end of the Trust's most recently completed second fiscal quarter. As a smaller reporting company, the Trust is not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, meaning the Trust's auditors are not required to attest to the effectiveness of the Trust's internal control over financial reporting. As a result, investors and others may be less comfortable with the effectiveness of the Trust's internal controls and the risk that material weaknesses or other deficiencies in internal controls go undetected may increase. In addition, as a smaller reporting company, the Trust takes advantage of its ability to provide certain other less comprehensive disclosures in its SEC filings, including, among other things, providing only two years of audited financial statements in annual reports. Consequently, it may be more challenging for investors to analyze the Trust's results of operations and financial prospects, as the information the Trust provides to Trust unitholders may be different from what one might receive from other public companies in which one holds shares. As a smaller reporting company, the Trust is not required to provide this information.
- Share Price & Shareholder Rights - Risk 2ChangedThe Trust is managed by a Trustee who cannot be replaced except by a vote of the Trust unitholders holding a majority of the Trust Units at a special meeting, which may make it difficult for Trust unitholders to remove or replace the Trustee.
The business and affairs of the Trust are managed by the Trustee. The voting rights of a Trust unitholder are more limited than those of stockholders of most public corporations. For example, there is no requirement for annual meetings of Trust unitholders or for an annual or other periodic re-election of the Trustee. The Trust agreement provides that the Trustee may only be removed and replaced by the holders of a majority of the outstanding Trust Units, including Trust Units held by VOC Partners, LLC, at a special meeting of Trust unitholders called by either the Trustee or the holders of not less than 10% of the outstanding Trust Units. VOC Partners, LLC owns 25% of the outstanding Trust Units. As a result, it will be difficult for public unitholders to remove or replace the Trustee without the cooperation of VOC Partners, LLC as long as it holds a significant percentage of total Trust Units.
- Share Price & Shareholder Rights - Risk 3The Trust Units may lose value as a result of title deficiencies with respect to the Underlying Properties.
VOC Brazos acquired the Underlying Properties beginning in the early 1980s. The existence of a material title deficiency with respect to the Underlying Properties could reduce the value of a property or render it worthless, thus adversely affecting the net profits interest and distributions to Trust unitholders. VOC Brazos does not obtain title insurance covering mineral leaseholds, and VOC Brazos' failure to cure any title defects may cause VOC Brazos to lose its rights to production from the Underlying Properties. In the event of any such material title problem, proceeds available for distribution to Trust unitholders and the value of the Trust Units may be reduced.
- Share Price & Shareholder Rights - Risk 4Neither the Trust nor the Trust's unitholders have the ability to influence VOC Brazos or control the operations or development of the Underlying Properties.
The Trust and the Trust's unitholders have no voting rights with respect to VOC Brazos and therefore have no managerial, contractual or other ability to influence VOC Brazos' activities or the operations of the Underlying Properties. Oil and natural gas properties are typically managed pursuant to an operating agreement among the working interest owners of oil and natural gas properties. Vess Oil Corporation operates, or operates on a contract basis, substantially all of the Underlying Properties. The typical operating agreement contains procedures whereby the owners of the working interests in the property designate one of the interest owners to be the operator of the property. Under these arrangements, the operator is typically responsible for making all decisions relating to drilling activities, sale of production, compliance with regulatory requirements and other matters that affect the property.
- Share Price & Shareholder Rights - Risk 5VOC Brazos may transfer all or a portion of the Underlying Properties at any time without Trust unitholder consent, subject to specified limitations.
VOC Brazos may at any time transfer all or part of the Underlying Properties, subject to and burdened by the net profits interest, and may abandon individual wells or properties that it reasonably believes would no longer produce oil or natural gas in commercially paying quantities. For the years ended December 31, 2021, 2022 and 2023, VOC Brazos plugged and abandoned 26, 16 and 7 wells, respectively, located on leases on the Underlying Properties. Trust unitholders will not be entitled to vote on any transfer of the Underlying Properties, and the Trust will not receive any proceeds from any such transfer, except in certain limited circumstances when the net profits interest is released in connection with such transfer, in which case the Trust will receive an amount equal to the fair market value (net of sales costs) of the net profits interest released. Following any sale or transfer of any of the Underlying Properties, if the net profits interest is not released in connection with such sale or transfer, the net profits interest will continue to burden the transferred property and net proceeds attributable to such property will be calculated as part of the computation of net proceeds described in this Form 10-K. VOC Brazos may delegate to the transferee responsibility for all of VOC Brazos' obligations relating to the net profits interest on the portion of the Underlying Properties transferred. In addition, VOC Brazos may, without the consent of the Trust unitholders, require the Trust to release the net profits interest associated with any lease that accounts for no more than 0.25% of the total production from the Underlying Properties in the prior 12 months and provided that the net profits interest covered by such releases cannot exceed, during any 12-month period, an aggregate fair market value to the Trust of $500,000. These releases will be made only in connection with a sale by VOC Brazos to a non-affiliate of the relevant Underlying Properties and are conditioned upon the Trust's receiving an amount equal to the fair market value to the Trust of such net profits interest. Any net sales proceeds paid to the Trust will be distributable to Trust unitholders for the quarter in which they are received.
- Share Price & Shareholder Rights - Risk 6The Trustee may, under certain circumstances, sell the net profits interest and dissolve the Trust prior to the expected termination of the Trust. As a result, Trust unitholders may not recover their investment.
The Trustee must sell the net profits interest if the holders of a majority of the Trust Units approve the sale or vote to dissolve the Trust. The Trustee must also sell the net profits interest if the annual cash proceeds from the Underlying Properties attributable to the net profits interest are less than $1.0 million for each of any two consecutive years. The sale of the net profits interest will result in the dissolution of the Trust. The net proceeds of any such sale will be distributed to the Trust unitholders; however, Trust unitholders may not recover their investment in the Trust Units.
- Share Price & Shareholder Rights - Risk 7Conflicts of interest could arise between VOC Brazos and its affiliates, on the one hand, and the Trust and the Trust unitholders, on the other hand.
As working interest owners in, and operators of substantially all the wells on, the Underlying Properties, VOC Brazos and its affiliates could have interests that conflict with the interests of the Trust and the Trust unitholders. For example: VOC Brazos' interests may conflict with those of the Trust and the Trust unitholders in situations involving the development, maintenance, operation or abandonment of the Underlying Properties. VOC Brazos may also make decisions with respect to development expenditures that adversely affect the Underlying Properties. These decisions include reducing development expenditures on these properties, which could cause oil and natural gas production to decline at a faster rate and thereby result in lower cash distributions by the Trust in the future. VOC Brazos may sell some or all of the Underlying Properties without taking into consideration the interests of the Trust unitholders. Such sales may not be in the best interests of the Trust unitholders. These purchasers may lack VOC Brazos' experience or its creditworthiness. VOC Brazos also has the right, under certain limited circumstances, to cause the Trust to release all or a portion of the net profits interest in connection with a sale of a portion of the Underlying Properties to which such net profits interest relates. MV Purchasing, an affiliate of VOC Brazos, is expected to market and/or purchase a substantial portion of the oil produced from the Underlying Properties, and it is expected to profit from this arrangement. Provisions in the net profits interest conveyance, however, require that charges and other terms under contracts with affiliates of VOC Brazos be comparable to prices and other terms prevailing in the area for similar services or sales. During the year ended December 31, 2023, VOC Brazos sold approximately 35% of the oil produced from the Underlying Properties to MV Purchasing. VOC Partners, LLC has registration rights and can sell its Trust Units without considering the effects such sale may have on Trust Unit prices or on the Trust itself. In addition, VOC Partners, LLC can vote its Trust Units in its sole discretion without considering the interests of the other Trust unitholders.
- Share Price & Shareholder Rights - Risk 8Trust unitholders have limited ability to enforce provisions of the net profits interest, and VOC Brazos' liability to the Trust is limited.
The Trust Agreement permits the Trustee to sue VOC Brazos or any other future owner of the Underlying Properties to enforce the terms of the Conveyance. If the Trustee does not take appropriate action to enforce provisions of the Conveyance, Trust unitholders' recourse would be limited to bringing a lawsuit against the Trustee to compel the Trustee to take specified actions. The Trust Agreement expressly limits a Trust unitholder's ability to directly sue VOC Brazos or any other third party other than the Trustee. As a result, Trust unitholders will not be able to sue VOC Brazos or any future owner of the Underlying Properties to enforce these rights. Furthermore, the Conveyance provides that, except as set forth in the Conveyance, VOC Brazos will not be liable to the Trust for the manner in which it performs its duties in operating the Underlying Properties as long as it acts without gross negligence or willful misconduct.
- Share Price & Shareholder Rights - Risk 9Courts outside of Delaware may not recognize the limited liability of the Trust unitholders provided under Delaware law.
Under the Delaware Statutory Trust Act, Trust unitholders are entitled to the same limitation of personal liability extended to stockholders of corporations under the General Corporation Law of the State of Delaware. Courts in jurisdictions outside of Delaware, however, may not give effect to such limitation.
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