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EX-32 - EX-32 - WHITING USA TRUST I | d70104exv32.htm |
EX-31 - EX-31 - WHITING USA TRUST I | d70104exv31.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended September 30, 2009 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to |
Commission File Number: 001-34026
WHITING USA TRUST I
(Exact name of registrant as specified in its charter)
Delaware | 26-6053936 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
The Bank of New York Mellon | ||
Trust Company, N.A., Trustee | ||
Global Corporate Trust | ||
919 Congress Avenue | ||
Austin, Texas | 78701 | |
(Address of principal executive offices) | (Zip Code) |
1-800-852-1422
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 3, 2009, 13,863,889 Units of Beneficial Interest in Whiting USA Trust I were
outstanding.
Table of Contents
GLOSSARY OF CERTAIN TERMS
The following are definitions of significant terms used in this report:
Bbl One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to
oil and other liquid hydrocarbons.
BOE One stock tank barrel equivalent of oil, calculated by converting natural gas volumes to
equivalent oil barrels at a ratio of six Mcf to one Bbl of oil.
Completion The installation of permanent equipment for the production of oil or natural gas, or
in the case of a dry hole, the reporting of abandonment to the appropriate agency.
COPAS The Council of Petroleum Accountants Societies.
Costless collar An options position where the proceeds from the sale of a call option fund the
purchase of a put option.
FASB ASC the Financial Accounting Standards Board Accounting Standards Codification.
GAAP Generally accepted accounting principles in the United States of America.
Mcf One thousand cubic feet of natural gas.
MMcf One million cubic feet of natural gas.
MBOE One thousand BOE.
MMBOE One million BOE.
Net Profits Interest (NPI) A nonoperating interest that creates a share in gross production from
an operating or working interest in oil and natural gas properties. The share is measured by net
profits from the sale of production after deducting costs associated with that production.
Plugging and abandonment Refers to the sealing off of fluids in the strata penetrated by a well
so that the fluids from one stratum will not escape into another or to the surface. Regulations of
many states require plugging of abandoned wells.
Recompletion The completion for production of an existing well bore in another formation from
which that well has been previously completed.
SEC The United States Securities and Exchange Commission.
Working Interest The interest in a crude oil and natural gas property (normally a leasehold
interest) that gives the owner the right to drill, produce and conduct operations on the property
and to share in production, subject to all royalties, overriding royalties and other burdens and to
share in all costs of exploration, development and operations and all risks in connection
therewith.
Workover Operations on a producing well to restore or increase production.
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Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements.
WHITING USA TRUST I
Statements of Assets, Liabilities and Trust Corpus
(Unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and short-term investments |
$ | 220,687 | $ | 131,584 | ||||
Investment in net profits interest, net |
83,792,249 | 97,798,149 | ||||||
Total assets |
$ | 84,012,936 | $ | 97,929,733 | ||||
LIABILITIES AND TRUST CORPUS |
||||||||
Reserve for Trust expenses |
$ | 220,677 | $ | 131,574 | ||||
Trust corpus (13,863,889 Trust units issued and outstanding) |
83,792,259 | 97,798,159 | ||||||
Total liabilities and Trust corpus |
$ | 84,012,936 | $ | 97,929,733 | ||||
Statements of Distributable Income
(Unaudited)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Income from net profits interest |
$ | 8,732,245 | $ | 21,546,068 | $ | 29,563,389 | $ | 36,325,105 | ||||||||
General and administrative expenses |
(130,275 | ) | (372,338 | ) | (685,897 | ) | (549,422 | ) | ||||||||
Cash reserves (withheld) used for Trust expenses |
(169,725 | ) | 122,338 | (89,103 | ) | (578 | ) | |||||||||
State income tax withholding |
(35,345 | ) | (139,323 | ) | (112,543 | ) | (235,499 | ) | ||||||||
Distributable income |
$ | 8,396,900 | $ | 21,156,745 | $ | 28,675,846 | $ | 35,539,606 | ||||||||
Distributable income per unit |
$ | 0.605667 | $ | 1.526032 | $ | 2.068384 | $ | 2.563466 | ||||||||
Statements of Changes in Trust Corpus
(Unaudited)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Trust corpus, beginning of period |
$ | 88,486,150 | $ | 107,959,552 | $ | 97,798,159 | $ | 10 | ||||||||
Investment in net profits interest |
| | | 111,223,059 | ||||||||||||
Distributable income |
8,396,900 | 21,156,745 | 28,675,846 | 35,539,606 | ||||||||||||
Distributions to unitholders |
(8,396,900 | ) | (21,156,745 | ) | (28,675,846 | ) | (35,539,606 | ) | ||||||||
Amortization of investment in net profits interest |
(4,693,891 | ) | (5,194,312 | ) | (14,005,900 | ) | (8,457,829 | ) | ||||||||
Trust corpus, end of period |
$ | 83,792,259 | $ | 102,765,240 | $ | 83,792,259 | $ | 102,765,240 | ||||||||
The accompanying notes are an integral part of these financial statements.
4
Table of Contents
WHITING USA TRUST I
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION OF THE TRUST
Formation of the Trust Whiting USA Trust I (the Trust) is a statutory trust formed in October
2007 under the Delaware Statutory Trust Act, pursuant to a trust agreement (the Trust agreement)
among Whiting Oil and Gas Corporation and Equity Oil Company, as trustors, The Bank of New York
Trust Company, N.A., as Trustee (The Bank of New York Trust Company, N.A. being subsequently
renamed The Bank of New York Mellon Trust Company, N.A., and hereinafter referred to as Trustee),
and Wilmington Trust Company, as Delaware Trustee (the Delaware Trustee). The initial
capitalization of the Trust estate was funded by Whiting Petroleum Corporation (Whiting) in
November 2007. Effective September 30, 2009, Equity Oil Company merged into Whiting Oil and Gas
Corporation (Whiting Oil and Gas) with Whiting Oil and Gas as the surviving corporation. Whiting
Oil and Gas, as referred to herein, is a subsidiary of Whiting and the successor to Equity Oil
Company.
The Trust was created to acquire and hold a term net profits interest (NPI) for the benefit of
the Trust unitholders pursuant to a conveyance to the Trust from Whiting Oil and Gas. The term NPI
is an interest in underlying oil and natural gas properties located in the Rocky Mountains,
Mid-Continent, Permian Basin and Gulf Coast regions (the underlying properties). The NPI is the
only asset of the Trust, other than cash held for Trust expenses. These oil and gas properties
include interests in 3,099 gross (385.4 net) producing oil and gas wells.
The NPI is passive in nature, and the Trustee has no management control over and no responsibility
relating to the operation of the underlying properties. The NPI entitles the Trust to receive 90%
of the net proceeds from the sale of production from the underlying properties. The NPI will
terminate when 9.11 MMBOE have been produced from the underlying properties and sold (which amount
is the equivalent of 8.20 MMBOE in respect of the Trusts right to receive 90% of the net proceeds
from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and
terminate. These reserve quantities are projected to be produced by December 31, 2021, based on the
reserve report for the underlying properties as of December 31, 2008.
The Trustee can authorize the Trust to borrow money to pay Trust administrative or incidental
expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the
Trustee, Whiting, or the Delaware Trustee as a lender provided the terms of the loan are similar to
the terms it would grant to a similarly situated commercial customer with whom it did not have a
fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with
itself and make other short-term investments with the funds distributed to the Trust.
Initial Issuance of Trust units and Net Profits Interest Conveyance In April 2008, the
registration statement on Form S-1/S-3 (Registration No. 333-147543) filed by Whiting and the Trust
in connection with the initial public offering of the Trust units was declared effective by the
SEC. Subsequently, the Trust issued 13,863,889 Trust units to Whiting in exchange for the
conveyance of the term NPI from Whiting Oil and Gas, as discussed above. Immediately thereafter,
Whiting completed an initial public offering of units of beneficial interest in the Trust, selling
11,677,500 Trust units to the public. Whiting retained an ownership in 2,186,389 Trust units, or
15.8% of the total Trust units issued and outstanding.
2. BASIS OF ACCOUNTING
Interim Financial Statements The accompanying unaudited financial information has been prepared
by the Trustee in accordance with the instructions to Form 10-Q. The accompanying financial
information is prepared on a comprehensive basis of accounting other than GAAP. The Trustee
believes that the information furnished reflects all adjustments (consisting of normal and
recurring adjustments) which are, in the opinion of the Trustee, necessary for a fair presentation
of the results for the interim periods presented. The Trusts 2008 Annual Report on Form 10-K
includes certain definitions and a summary of significant accounting policies and should be read in
conjunction with this Form 10-Q. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the full year.
Term Net Profits Interest The Trust uses the modified cash basis of accounting to report Trust
receipts from the term NPI and payments of expenses incurred. The actual cash distributions to the
Trust are made based on the terms of the conveyance creating the Trusts NPI. The term NPI
entitles the Trust to receive revenues (oil, gas and natural gas liquid sales) less expenses (the
amount by which all royalties, lease operating expenses including well workover costs, production
and property taxes, payments made by Whiting to the hedge counterparty upon settlements of hedge
contracts, maintenance expenses, postproduction costs including
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plugging and abandonment, and producing overhead, exceed hedge payments received by Whiting under
hedge contracts and other non-production revenue) of the underlying properties multiplied by 90%
(term NPI percentage). Actual cash receipts may vary due to timing delays of cash receipts from the
property operators or purchasers and due to wellhead and pipeline volume balancing agreements or
practices.
Modified Cash Basis of Accounting The financial statements of the Trust, as prepared on a
modified cash basis, reflect the Trusts assets, liabilities, Trust corpus, earnings and
distributions, as follows:
a) Income from net profits interest is recorded when NPI 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 accounting, engineering, legal, and
other professional fees, Trustees fees, and out-of-pocket expenses) are recorded when paid;
d) Cash reserves may be established by the Trustee for certain expenditures that would not be
recorded as contingent liabilities under GAAP;
e) Amortization of the investment in net profits interest is calculated based on the
units-of-production method. Such amortization is charged directly to Trust corpus and does not
affect cash earnings; and
f) The Trust evaluates impairment of the investment in net profits interest by comparing the
undiscounted cash flows expected to be realized from the investment in net profits interest to its
carrying value. If the expected future undiscounted cash flows are less than the carrying value,
the Trust recognizes an impairment loss for the difference between the carrying value and the
estimated fair value of the investment in net profits interest.
While these statements differ from financial statements prepared in accordance with GAAP, the
modified cash basis of reporting revenues and distributions is considered the most meaningful
because quarterly distributions to the Trust unitholders are based on net cash receipts. This
comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for
royalty trusts by the SEC as specified by FASB ASC topic Extractive Activities Oil and Gas:
Financial Statements of Royalty Trusts.
Most accounting pronouncements apply to entities whose financial statements are prepared in
accordance with GAAP, directing such entities to accrue or defer revenues and expenses in periods
other than when such revenues are received or expenses are paid. Because the Trusts financial
statements are prepared on the modified cash basis, as described above, most accounting
pronouncements are not applicable to the Trusts financial statements.
Recent Accounting Pronouncements On December 31, 2008, the SEC published the final rules and
interpretations updating its oil and gas reporting requirements. Many of the revisions are updates
to definitions in the existing oil and gas rules to make them consistent with the petroleum
resource management system, which is a widely accepted standard for the management of petroleum
resources that was developed by several industry organizations. Key revisions include the ability
to include nontraditional resources in reserves, the use of new technology for determining
reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used
to determine reserves in that companies must use a 12-month average price. Such average is
calculated using the first-day-of-the-month price for each of the 12 months that make up the
reporting period. The SEC will require companies to comply with the amended disclosure requirements
for registration statements filed after January 1, 2010, and for annual reports for fiscal years
ending on or after December 31, 2009. Early adoption is not permitted. The Trust is currently
assessing the impact that the adoption will have on its disclosures, operating results and
financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, as codified in FASB ASC topic Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162. This standard establishes
only two levels of GAAP, authoritative and nonauthoritative. The FASB ASC was not intended to
change or alter existing GAAP, and the Trusts adoption effective July 1, 2009 did not therefore
have any impact on its financial statements other than to modify certain existing disclosures. The
FASB ASC will become the source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All
other nongrandfathered, non-SEC accounting literature not included in the FASB ASC will become
nonauthoritative. FASB ASC is effective for financial statements for interim or annual reporting
periods ending after September 15, 2009. Upon
adoption in the third quarter of 2009, the Trust began to use the new guidelines and numbering
system prescribed by the FASB ASC when referring to GAAP.
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In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), as codified in FASB ASC
topic Subsequent Events. This standard is intended to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this standard sets forth the period after
the balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for
fiscal years and interim periods ended after June 15, 2009. The Trust adopted SFAS 165 effective
April 1, 2009, which did not have an impact on the Trusts financial statements, other than
additional disclosures.
3. INVESTMENT IN NET PROFITS INTEREST
Whiting Oil and Gas conveyed the NPI to the Trust in exchange for 13,863,889 Trust units. The
investment in net profits interest was recorded at the historical cost of Whiting on April 30,
2008, the date of conveyance, and was determined to be $123,581,177, of which $111,223,059 (90% of
the NPI) was attributed to the Trust. As of September 30, 2009 and December 31, 2008, accumulated
amortization of the investment in net profits interest was $27,430,810 and $13,424,910,
respectively.
4. INCOME TAXES
The Trust is a grantor trust and therefore is not subject to federal income taxes. Accordingly, no
recognition has been given to federal income taxes in the Trusts financial statements. The Trust
unitholders are treated as the owners of Trust income and corpus, and the entire federal taxable
income of the Trust will be reported by the Trust unitholders on their respective tax returns.
For Montana state income tax purposes, Whiting must withhold from the NPI payable to the Trust, an
amount equal to 6% of the net amount payable to the Trust from the sale of oil and gas in Montana.
For North Dakota, Oklahoma, Arkansas, Michigan, New Mexico, Alabama, Louisiana, Colorado, Kansas,
Utah and Mississippi, neither the Trust nor Whiting is withholding the income tax due such states
on distributions made to an individual resident or nonresident Trust unitholder, as long as the
Trust is taxed as a grantor trust under the Internal Revenue Code.
5. DISTRIBUTION TO UNITHOLDERS
Actual cash distributions to the Trust unitholders depend upon the quantity of and prices received
for oil, natural gas and natural gas liquids produced from the underlying properties, among other
factors. Quarterly cash distributions during the term of the Trust will be made by the Trustee no
later than 60 days following the end of each quarter (or the next succeeding business day) to the
Trust unitholders of record on the 50th day following the end of each quarter. Such amounts will be
equal to the excess, if any, of the cash received by the Trust during the quarter, over the
expenses of the Trust paid during such quarter, subject to adjustments for changes made by the
Trustee during such quarter in any cash reserves established for future expenses of the Trust.
6. RELATED PARTY TRANSACTIONS
Capital Expenditures During the nine months ended September 30, 2009, Whiting incurred $819,828
of capital expenditures on the underlying properties related to the drilling and completing of oil
and gas wells, capital workovers, facility upgrades and well recompletions performed to secure
production from new horizons, which may have the effect of ultimately increasing current and future
period NPI net proceeds and thereby benefiting the Trust unitholders by accelerating their return
on investment. Pursuant to the terms of the conveyance agreement, however, Whiting did not deduct,
nor will it deduct in the future, such capital expenditures from the NPI gross proceeds or related
distributions to the Trust.
Operating Overhead Pursuant to the terms of the applicable operating agreements, Whiting deducts
from the gross proceeds an overhead fee to operate those underlying properties for which Whiting
has been designated as the operator. Additionally, for those underlying properties for which
Whiting is the operator but for which there is no operating agreement, Whiting deducts from the
gross proceeds an overhead fee calculated in the same manner Whiting allocates overhead to other
similarly owned properties. The operating overhead activities include various engineering, legal,
and administrative functions. For the three and nine months ended September 30, 2009, the Trusts
portion of the monthly charge totaled $447,572 and $1,315,368, respectively, and averaged $404 per
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active operated well. The fee is adjusted annually pursuant to COPAS guidelines and will increase
or decrease each year based on changes in the year-end index of average weekly earnings of crude
petroleum and natural gas workers.
Administrative Services Fee Under the terms of the administrative services agreement, the Trust
pays a quarterly administration fee of $50,000 to Whiting 60 days following the end of each
calendar quarter. General and administrative expenses in the Trusts statements of distributable
income for the three and nine months ending September 30, 2009 include $0 and $100,000,
respectively, for quarterly administrative fees paid to Whiting.
The administrative fees for both the first and second quarters of 2008 were billed and paid during
the third quarter of 2008. As the Trust uses the modified cash basis of accounting, general and
administrative expenses in the Trusts statements of distributable income for the three and nine
months ending September 30, 2008 reflect $100,000 for quarterly administrative fees paid to
Whiting.
Trustee Administrative Fee Under the terms of the Trust agreement, the Trust pays an annual
administrative fee to the Trustee of $160,000, paid in four quarterly installments of $40,000 each
and is billed in arrears. General and administrative expenses in the Trusts statements of
distributable income for the three and nine months ending September 30, 2009 include $40,000 and
$120,000, respectively, for quarterly administrative fees paid to the Trustee.
Since the Trust began operations in the second quarter of 2008, no fees were charged for the first
quarter of 2008, and the Trustees administrative fees for the second quarter of 2008 were paid
during the third quarter of 2008. As the Trust uses the modified cash basis of accounting, general
and administrative expenses in the Trusts statements of distributable income for the three and
nine months ended September 30, 2008 include $40,000 for quarterly administrative fees paid to the
Trustee.
7. SUBSEQUENT EVENTS
The Trustee has evaluated subsequent events through November 12, 2009, the date that these
financial statements were issued. The following information is disclosed as a nonrecognized
subsequent event:
On November 6, 2009, the Trustee announced the Trust distribution of net profits for the third
quarterly payment period in 2009. Unitholders of record on November 19, 2009 are expected to
receive a distribution amounting to $8.4 million or $0.608855 per Trust unit, which is payable on
or before November 30, 2009. This distribution is expected to consist of net cash proceeds of $8.8
million paid by Whiting to the Trust, including cash receipts of $2.3 million (90% of $2.6 million)
for commodity derivative contracts settled from July through September 2009, less a provision of
$275,000 for estimated Trust expenses and $68,258 for Montana state income tax withholdings.
* * * * * * *
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Item 2. | Trustees Discussion and Analysis of Financial Condition and Results of Operations. |
References to the Trust in this item refer to Whiting USA Trust I, while references to Whiting
in this document refer to Whiting Petroleum Corporation and its wholly-owned subsidiary Whiting Oil
and Gas Corporation.
The following review of the Trusts financial condition and results of operations should be read in
conjunction with the financial statements and notes thereto, as well as the Trustees discussion
and analysis contained in the Trusts 2008 Annual Report on Form 10-K. The Trusts Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports are available on the SECs website www.sec.gov.
Note Regarding Forward-Looking Statements
This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements other than statements of historical facts included in this Form 10-Q,
including without limitation the statements under Trustees Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements. No assurance can be given that
such expectations will prove to have been correct. When used in this document, the words
believes, expects, anticipates, projects, intends or similar expressions are intended to
identify such forward-looking statements. The following important factors, in addition to those
discussed elsewhere in this Form 10-Q, could affect the future results of the energy industry in
general, and Whiting and the Trust in particular, and could cause actual results to differ
materially from those expressed in such forward-looking statements:
| the effect of changes in commodity prices and conditions in the capital markets; | ||
| the effects of global credit, financial and economic issues; | ||
| uncertainty of estimates of oil and natural gas reserves and production; | ||
| risks incident to the operation of oil and natural gas wells; | ||
| future production costs; | ||
| the inability to access oil and natural gas markets due to market conditions or operational impediments; | ||
| failure of the underlying properties to yield oil or natural gas in commercially viable quantities; | ||
| the effect of existing and future laws and regulatory actions; | ||
| competition from others in the energy industry; | ||
| risks arising out of hedge contracts; | ||
| inflation or deflation; and | ||
| other risks described under the caption Risk Factors in the Trusts Annual Report filed on Form 10-K. |
All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or
persons acting on behalf of Whiting or the Trust are expressly qualified in their entirety by these
factors. The Trust assumes no obligation, and disclaims any duty, to update these forward-looking
statements.
Overview
The Trust does not conduct any operations or activities. The Trusts purpose is, in general, to
hold the NPI, to distribute to the Trust unitholders cash that the Trust receives in respect of the
NPI and to perform certain administrative functions in respect of the NPI and the Trust units. The
Trust derives substantially all of its income and cash flows from the NPI, which is in turn subject
to commodity hedge contracts.
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Oil and natural gas prices have fallen significantly since their third quarter 2008 levels. The
daily average NYMEX oil price was $118.13 per Bbl for the third quarter of 2008, $58.75 per Bbl for
the fourth quarter of 2008 and $57.13 per Bbl for the first nine months of 2009. Similarly, the
daily average NYMEX natural gas prices have declined from $10.27 per Mcf for the third quarter of
2008 to $6.96 per Mcf for the fourth quarter of 2008 and $3.93 for the first nine months of 2009.
In general, lower oil and gas prices on production from the underlying properties could cause the
following: (i) a reduction in the amount of the net proceeds to which the Trust is entitled; (ii)
an extension of the length of time required to produce 9.11 MMBOE (8.20 MMBOE to the 90% NPI); and
(iii) a reduction in the amount of oil, natural gas and natural gas liquids that is economic to
produce from the underlying properties.
Results of Trust Operations
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The Trust was formed in October 2007. The conveyance of the NPI, however, did not occur until April
2008. As a result, the Trust did not recognize any income or make any distributions during the
quarter ended March 31, 2008. The following is a summary of income from net profits interest
received by the Trust for the nine months ended September 30, 2009 (consisting of the February, May
and August 2009 distributions) and September 30, 2008 (consisting of the May and August 2008
distributions):
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Sales Volumes: |
||||||||
Oil from underlying properties (Bbls) |
640,095 | (a) | 439,010 | (c) | ||||
Natural gas from underlying properties (Mcf) |
2,785,312 | (b) | 1,788,331 | (d) | ||||
Total production (BOE) |
1,104,314 | 737,065 | ||||||
Average Sales Prices: |
||||||||
Oil (per Bbl) |
$ | 45.76 | $ | 96.02 | ||||
Effect of oil hedges on average price (per Bbl) |
17.09 | (0.22 | ) | |||||
Oil net of hedging (per Bbl) |
$ | 62.85 | $ | 95.80 | ||||
Natural gas (per Mcf) |
$ | 4.43 | $ | 8.19 | ||||
Effect of natural gas hedges on average price (per Mcf) |
1.13 | | ||||||
Natural gas net of hedging (per Mcf) |
$ | 5.56 | $ | 8.19 | ||||
Costs (per BOE): |
||||||||
Lease operating expenses |
$ | 18.10 | $ | 16.69 | ||||
Production taxes |
$ | 2.60 | $ | 5.48 | ||||
Revenues: |
||||||||
Oil sales |
$ | 29,291,050 | (a) | $ | 42,155,092 | (c) | ||
Natural gas sales |
12,337,809 | (b) | 14,640,784 | (d) | ||||
Total revenues |
$ | 41,628,859 | $ | 56,795,876 | ||||
Costs: |
||||||||
Lease operating expenses |
$ | 19,984,966 | $ | 12,301,866 | ||||
Production taxes |
2,873,809 | 4,037,136 | ||||||
Cash settlement payments (gains received) on commodity derivatives |
(14,078,124 | ) | 95,646 | |||||
Total costs |
$ | 8,780,651 | $ | 16,434,648 | ||||
Net proceeds |
$ | 32,848,208 | $ | 40,361,228 | ||||
Net profits percentage |
90 | % | 90 | % | ||||
Income from net profits interest |
$ | 29,563,389 | $ | 36,325,105 | ||||
(a) | Oil volumes and sales for the nine months ended September 30, 2009 generally represent crude oil production from October 2008 through June 2009. | |
(b) | Natural gas volumes and sales for the nine months ended September 30, 2009 generally represent gas production from September 2008 through May 2009. | |
(c) | Oil volumes and sales for the nine months ended September 30, 2008 generally represent crude oil production from January through June 2008. | |
(d) | Natural gas volumes and sales for the nine months ended September 30, 2008 generally represent gas production from January through May 2008. |
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Income from Net Profits Interest. Income from net profits interest is recorded on a cash basis when
NPI proceeds are received by the Trust from Whiting. NPI proceeds that Whiting remits to the Trust
are based on the oil and gas production Whiting has received payment for within one month following
the end of the most recent fiscal quarter. Whiting receives payment for its crude oil sales
generally within 30 days following the month in which it is produced, and Whiting receives payment
for its natural gas sales generally within 60 days following the month in which it is produced.
Income from net profits interest is generally a function of oil and gas revenues, lease operating
expenses, production taxes, and cash settlements on commodity derivatives as follows:
Revenues. Oil and natural gas revenues decreased $15.2 million or 27% for the first nine months of 2009 compared to the same period in 2008. Revenues are a function of volumes sold and average sales prices. Oil sales volumes increased 46% or 201 MBOE and gas sales volumes increased 56% or 997 MMcf for the nine months ended September 30, 2009 as compared to the same period in 2008. These volume increases were due to the fact that there were three NPI distributions and therefore nine months of oil and gas production for the nine months ended September 30, 2009 compared to only two NPI distributions, which included six months of oil and five months of gas production, during the nine months ended September 30, 2008. There were only two NPI distributions during the nine months ending September 30, 2008 because the NPI was conveyed effective for production from the underlying properties beginning January 1, 2008. Despite this increase in production volumes between periods, oil and gas production attributable to the underlying properties is estimated to decline at a rate of approximately 14.4% annually from 2009 to 2021, based on the reserve report at December 31, 2008. More than offsetting this increase in volumes between periods was a substantial decline in realized commodity prices. The average price realized for oil before the effects of hedging decreased 52% between periods, and the average price realized for natural gas before the effects of hedging decreased 46%. |
Lease Operating Expenses. Lease operating expenses increased $7.7 million or 62% from the first nine months of 2008 to the first nine months of 2009 because there were three NPI distributions and therefore nine months of LOE during the nine months ended September 30, 2009, as compared to two NPI distributions and only six months of LOE during the nine months ended September 30, 2008. Lease operating expenses per BOE increased from $16.69 during the first nine months of 2008 to $18.10 during the same period in 2009. The 8% increase on a BOE basis was primarily caused by the timing of receipt and cash disbursements for expenditures. |
Production Taxes. Production taxes are generally calculated as a percentage of oil and gas revenues before the effects of hedging. All credits and exemptions allowed in the various taxing jurisdictions are fully utilized. Production taxes during the first nine months of 2009 decreased $1.2 million or 29% over the same period in 2008, primarily due to lower oil and natural gas sales between periods. Production taxes for the first nine months of 2009 and 2008 were 6.9% and 7.1%, respectively, of oil and gas sales. |
Cash Settlements on Commodity Derivatives. Whiting entered into certain costless collar hedge contracts for the benefit of the Trust prior to the conveyance. Cash settlements relating to the hedges resulted in a gain of $14.1 million for the nine months ended September 30, 2009, which had the effect of increasing the average price of oil and natural gas net of hedging by $17.09 per Bbl and $1.13 per Mcf, respectively. Cash settlements relating to the hedges resulted in a deduction of $95,646, or $0.22 per Bbl, for the nine months ended September 30, 2008. There were no cash settlements on natural gas derivatives for the nine months ended September 30, 2008. |
Distributable Income. For the nine months ended September 30, 2009, the Trusts distributable
income was $28.7 million and was based on income from net profits interest of $29.6 million less
estimated Trust expenses of $775,000 and Montana state income tax withholdings of $112,543. This
compares to distributable income of $35.5 million during the first nine months of 2008, which was
based on income from net profits interest of $36.3 million less $550,000 for estimated Trust
expenses and $235,499 for Montana state income tax withholdings.
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Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
The following is a summary of income from net profits interest received by the Trust for the three
months ended September 30, 2009 (consisting of the August 2009 distribution) and September 30, 2008
(consisting of the August 2008 distribution):
Three Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Sales Volumes: |
||||||||
Oil from underlying properties (Bbls) |
219,964 | (a) | 234,986 | (c) | ||||
Natural gas from underlying properties (Mcf) |
939,727 | (b) | 998,476 | (d) | ||||
Total production (BOE) |
376,585 | 401,399 | ||||||
Average Sales Prices: |
||||||||
Oil (per Bbl) |
$ | 47.21 | $ | 103.93 | ||||
Effect of oil hedges on average price (per Bbl) |
10.91 | (0.40 | ) | |||||
Oil net of hedging (per Bbl) |
$ | 58.12 | $ | 103.53 | ||||
Natural gas (per Mcf) |
$ | 3.04 | $ | 8.86 | ||||
Effect of natural gas hedges on average price (per Mcf) |
1.55 | | ||||||
Natural gas net of hedging (per Mcf) |
$ | 4.59 | $ | 8.86 | ||||
Costs (per BOE): |
||||||||
Lease operating expenses |
$ | 17.06 | $ | 17.18 | ||||
Production taxes |
$ | 2.58 | $ | 5.82 | ||||
Revenues: |
||||||||
Oil sales |
$ | 10,385,451 | (a) | $ | 24,423,282 | (c) | ||
Natural gas sales |
2,852,156 | (b) | 8,844,908 | (d) | ||||
Total revenues |
$ | 13,237,607 | $ | 33,268,190 | ||||
Costs: |
||||||||
Lease operating expenses |
$ | 6,424,668 | $ | 6,896,759 | ||||
Production taxes |
970,054 | 2,335,709 | ||||||
Cash settlement payments (gains received) on commodity derivatives |
(3,859,608 | ) | 95,646 | |||||
Total costs |
$ | 3,535,114 | $ | 9,328,114 | ||||
Net proceeds |
$ | 9,702,493 | $ | 23,940,076 | ||||
Net profits percentage |
90 | % | 90 | % | ||||
Income from net profits interest |
$ | 8,732,245 | $ | 21,546,068 | ||||
(a) | Oil volumes and sales for the three months ended September 30, 2009 generally represent crude oil production from April through June 2009. | |
(b) | Natural gas volumes and sales for the three months ended September 30, 2009 generally represent gas production from March through May 2009. | |
(c) | Oil volumes and sales for the three months ended September 30, 2008 generally represent crude oil production from April through June 2008. | |
(d) | Natural gas volumes and sales for the three months ended September 30, 2008 generally represent gas production from March through May 2008. |
Income from Net Profits Interest. Income from net profits interest is recorded on a cash basis when
NPI proceeds are received by the Trust from Whiting. NPI proceeds that Whiting remits to the Trust
are based on the oil and gas production Whiting has received payment for within one month following
the end of the most recent fiscal quarter. Whiting receives payment for its crude oil sales
generally within 30 days following the month in which it is produced, and Whiting receives payment
for its natural gas sales generally within 60 days following the month in which it is produced.
Income from net profits interest is generally a function of oil and gas sales revenues, lease
operating expenses, production taxes, and cash settlements on commodity derivatives as follows:
Revenues. Oil and natural gas revenues decreased $20.0 million during the quarter ended September 30, 2009 as compared to the same period in 2008. Revenues are a function of average sales prices and volumes sold. The decrease in revenues between periods was primarily due to the significant decline in market prices for oil and natural gas. The average price for oil before the effects of hedging decreased 55%, while the average price for natural gas before the effects of hedging decreased 66%. Oil sales volumes decreased 6% or 15 MBOE and gas sales volumes decreased 6% or 59 MMcf in the third quarter of 2009 as compared to the same |
12
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period in 2008, primarily due to normal field decline. Oil and gas production attributable to the underlying properties is estimated to decline at a rate of approximately 14.4% annually from 2009 to 2021, based on the reserve report at December 31, 2008. |
Lease Operating Expenses. Lease operating expenses decreased $472,091 or 7% from the third quarter of 2008 to the third quarter of 2009 due to lower ad valorem taxes and a lower level of required well maintenance activities. For these same reasons, lease operating expenses per BOE decreased from $17.18 during the third quarter of 2008 to $17.06 during the same period in 2009. |
Production Taxes. Production taxes are generally calculated as a percentage of oil and gas revenues before the effects of hedging. All credits and exemptions allowed in the various taxing jurisdictions are fully utilized. Production taxes during the third quarter of 2009 decreased $1.4 million or 58% over the same period in 2008, primarily due to lower oil and natural gas sales. Production taxes for the third quarter of 2009 and 2008 were 7.3% and 7.0%, respectively, of oil and gas sales. |
Cash Settlements on Commodity Derivatives. Whiting entered into certain costless collar hedge contracts for the benefit of the Trust prior to the conveyance. Cash settlements relating to the hedges resulted in a gain of $3.9 million for the three months ended September 30, 2009, which had the effect of increasing the average price of oil and natural gas net of hedging by $10.91 per Bbl and $1.55 per Mcf, respectively. Cash settlements relating to the hedges resulted in a deduction of $95,646, or $0.40 per Bbl, for the three months ended September 30, 2008. There were no cash settlements on natural gas derivatives for the three months ended September 30, 2008. |
Distributable Income. For the three months ended September 30, 2009, the Trusts distributable
income was $8.4 million and was based on income from net profits interest of $8.7 million less
estimated Trust expenses of $300,000 and Montana state income tax withholdings of $35,345. This
compares to distributable income of $21.2 million during the third quarter of 2008, which was based
on income from net profits interest of $21.5 million less $250,000 for estimated Trust expenses and
$139,323 for Montana state income tax withholdings.
Results of Underlying Property Operations
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Because the Trust had not engaged in any activities during the three months ended March 31, 2008
other than organizational activities, the Trust is providing financial information with respect to
the underlying properties for the nine months ended September 30, 2009 and 2008 so that investors
can review comparative results of operations for those periods. The underlying properties results
of operations for the nine months ended September 30, 2009 and 2008 are presented on a cash basis
of accounting in the table below and in the related comparative period discussion, and this cash
basis presentation is consistent with the Trusts financial statements, which have been prepared on
a modified cash basis. The table below sets forth revenues and direct operating expenses, as well
as operating data, relating to the underlying properties for the nine months ended September 30,
2009 and 2008.
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Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Revenues: |
||||||||
Oil sales |
$ | 27,513,927 | (a) | $ | 66,206,782 | (c) | ||
Natural gas sales |
10,124,679 | (b) | 27,176,069 | (d) | ||||
Total revenues |
37,638,606 | 93,382,851 | ||||||
Direct operating expenses: |
||||||||
Lease operating expenses |
18,660,916 | 19,808,005 | ||||||
Production taxes |
2,673,376 | 6,542,209 | ||||||
Cash settlement payments (gains received) on commodity derivatives |
(12,767,693 | ) | 175,949 | |||||
Total direct operating expenses |
8,566,599 | 26,526,163 | ||||||
Excess of revenues over direct operating expenses |
$ | 29,072,007 | $ | 66,856,688 | ||||
Operating data: |
||||||||
Oil (Bbls) |
634,688 | (a) | 666,344 | (c) | ||||
Natural gas (Mcf) |
2,730,929 | (b) | 3,224,839 | (d) | ||||
Total production (BOE) |
1,089,843 | 1,203,818 | ||||||
Average Sales Prices: |
||||||||
Oil (per Bbl) |
$ | 43.35 | $ | 99.36 | ||||
Effect of oil hedges on average price (per Bbl) |
13.31 | (0.27 | ) | |||||
Oil net of hedging (per Bbl) |
$ | 56.66 | $ | 99.09 | ||||
Natural gas (per Mcf) |
$ | 3.71 | $ | 8.43 | ||||
Effect of natural gas hedges on average price (per Mcf) |
1.58 | | ||||||
Natural gas net of hedging (per Mcf) |
$ | 5.29 | $ | 8.43 | ||||
Per BOE data: |
||||||||
Lease operating expenses |
$ | 17.12 | $ | 16.45 | ||||
Production taxes |
$ | 2.45 | $ | 5.43 | ||||
Drilling and development capital expenditures |
$ | 819,828 | $ | 4,372,263 |
(a) | Because of the one-month interval between the time crude oil volumes are produced and the receipt of oil sales proceeds by Whiting, oil volumes and sales for the nine months ended September 30, 2009, as presented on a cash basis, generally represent crude oil production from December 2008 through August 2009. | |
(b) | Because of the two-month interval between the time natural gas volumes are produced and the receipt of natural gas sales proceeds by Whiting, natural gas volumes and sales for the nine months ended September 30, 2009, as presented on a cash basis, generally represent gas production from November 2008 through July 2009. | |
(c) | Because of the one-month interval between the time crude oil volumes are produced and the receipt of oil sales proceeds by Whiting, oil volumes and sales for the nine months ended September 30, 2008, as presented on a cash basis, generally represent crude oil production from December 2007 through August 2008. | |
(d) | Because of the two-month interval between the time natural gas volumes are produced and the receipt of natural gas sales proceeds by Whiting, natural gas volumes and sales for the nine months ended September 30, 2008, as presented on a cash basis, generally represent gas production from November 2007 through July 2008. |
Revenues. Oil and natural gas revenues decreased $55.7 million or 60% for the first nine months of
2009 compared to the same period in 2008. Revenues are a function of average sales prices and
volumes sold. The average price realized for both crude oil and natural gas before the effects of
hedging each decreased 56% between periods. In addition, oil sales volumes decreased 5% or 32 MBbls
compared to the same period in 2008, primarily due to normal field production decline, which was
minimally offset by production from new wells drilled. Gas sales volumes decreased 15% or 494 MMcf
between periods primarily due to normal field decline, which was also minimally offset by
production from new wells drilled. Based upon the reserve report at December 31, 2008, oil and gas
production attributable to the underlying properties is estimated to decline at a rate of
approximately 14.4% annually from 2009 to 2021.
Lease Operating Expenses. Lease operating expenses decreased $1.1 million or 6%, from the first
nine months of 2008 to the first nine months of 2009, primarily due to lower ad valorem taxes and
fuel costs and a lower level of required well maintenance activities. Lease operating expenses per
BOE increased from $16.45 during the first nine months of 2008 to $17.12 during the same period in
2009. The 4% increase on a BOE basis was caused by a greater decrease in production volumes than in
cash costs incurred.
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Production Taxes. Production taxes are generally calculated as a percentage of oil and gas revenues
before the effects of hedging. All credits and exemptions allowed in the various taxing
jurisdictions are fully utilized. Production taxes during the first nine months of 2009 decreased
$3.9 million or 59% over the same period in 2008, primarily due to lower oil and natural gas sales.
Production taxes for the first nine months of 2009 and 2008 were 7.1% and 7.0%, respectively, of
oil and gas sales.
Cash Settlements on Commodity Derivatives. Whiting entered into certain costless collar hedge
contracts in which the rights to any future hedge payments made or received were conveyed to the
Trust on April 30, 2008. Cash settlements relating to the conveyed hedges resulted in a gain of
$12.8 million for the nine months ended September 30, 2009, which had the effect of increasing the
average price of oil and natural gas net of hedging by $13.31 per Bbl and $1.58 per Mcf,
respectively. Cash settlements relating to the conveyed hedges resulted in a deduction of
$175,949, or $0.27 per Bbl, for the nine months ended September 30, 2008. There were no cash
settlements on natural gas derivatives for the nine months ended September 30, 2008.
Excess of Revenues Over Direct Operating Expenses. Excess of revenues over direct operating
expenses decreased $37.8 million from the first nine months of 2008 to the same period in 2009. The
reasons for this decrease included a 43% decline in oil prices net of hedging and a 37% decline in
gas prices net of hedging between periods, in addition to a 9% decrease in equivalent volumes sold.
These factors were partially offset by lower lease operating expenses and production taxes between
periods.
Liquidity and Capital Resources
The Trust has no significant sources of liquidity or capital resources other than cash flows from
the NPI. Other than Trust administrative expenses, including any reserves established by the
Trustee for future liabilities, the Trusts only use of cash is for distributions to Trust
unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee as
well as a quarterly administrative fee to Whiting pursuant to an 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 NPI, which is in turn subject to
hedge contracts, and other sources (such as interest earned on any amounts reserved by the Trustee)
that quarter over the Trusts cash expenses for that quarter. Available funds are reduced by any
cash the Trustee decides to hold as a reserve against future liabilities. The Trustee may borrow
funds required to pay liabilities if the Trustee determines that the cash on hand and the cash to
be received are insufficient to cover the Trusts administrative or incidental expenses. If the
Trustee borrows funds, the Trust unitholders will not receive distributions until the borrowed
funds are repaid.
Income to the Trust from the NPI is based on the calculation and definitions of gross proceeds
and net proceeds contained in the conveyance, which is filed as an exhibit to this report, and
reference is hereby made to the conveyance for the actual definitions of gross proceeds and net
proceeds.
Although capital expenditures for the testing, drilling, completion, equipping, plugging back or
recompletion of any well that is a part of the underlying properties cannot be deducted from gross
proceeds pursuant to the terms of the conveyance agreement, Whiting incurred capital expenditures
of $819,828 on the underlying properties that were not deducted from gross proceeds during the nine
months ended September 30, 2009, but which may have the effect of ultimately accelerating the
receipt of NPI net proceeds and thereby benefiting Trust unitholders by accelerating their return
on investment.
The Trust does not have any transactions, arrangements or other relationships with unconsolidated
entities or persons that could materially affect the Trusts liquidity or the availability of
capital resources.
Future Trust Distributions to Unitholders
On November 6, 2009, the Trustee announced the Trust distribution of net profits for the third
quarterly payment period in 2009. Unitholders of record on November 19, 2009 are expected to
receive a distribution amounting to $8.4 million or $0.608855 per Trust unit, which is payable on
or before November 30, 2009. This distribution is expected to consist of net cash proceeds of $8.8
million paid by Whiting to the Trust, including cash receipts of $2.3 million (90% of $2.6 million)
for commodity derivative contracts settled from July through September 2009, less a provision of
$275,000 for estimated Trust expenses and $68,258 for Montana state income tax withholdings.
15
Table of Contents
Recent Accounting Pronouncements
On December 31, 2008, the SEC published the final rules and interpretations updating its oil and
gas reporting requirements. Many of the revisions are updates to definitions in the existing oil
and gas rules to make them consistent with the petroleum resource management system, which is a
widely accepted standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include the ability to include nontraditional resources in
reserves, the use of new technology for determining reserves, permitting disclosure of probable and
possible reserves, and changes to the pricing used to determine reserves in that companies must use
a 12-month average price. Such average is calculated using the first-day-of-the-month price for
each of the 12 months that make up the reporting period. The SEC will require companies to comply
with the amended disclosure requirements for registration statements filed after January 1, 2010,
and for annual reports for fiscal years ending on or after December 31, 2009. Early adoption is not
permitted. The Trust is currently assessing the impact that the adoption will have on its
disclosures, operating results and financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, as codified in FASB ASC topic Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162. This standard establishes
only two levels of GAAP, authoritative and nonauthoritative. The FASB ASC was not intended to
change or alter existing GAAP, and the Trusts adoption effective July 1, 2009 did not therefore
have any impact on its financial statements other than to modify certain existing disclosures. The
FASB ASC will become the source of authoritative, nongovernmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All
other nongrandfathered, non-SEC accounting literature not included in the FASB ASC will become
nonauthoritative. FASB ASC is effective for financial statements for interim or annual reporting
periods ending after September 15, 2009. Upon adoption in the third quarter of 2009, the Trust
began to use the new guidelines and numbering system prescribed by the FASB ASC when referring to
GAAP.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), as codified in FASB ASC
topic Subsequent Events. This standard is intended to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, this standard sets forth the period after
the balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for
fiscal years and interim periods ended after June 15, 2009. The Trust adopted SFAS 165 effective
April 1, 2009, which did not have an impact on the Trusts financial statements, other than
additional disclosures.
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies which affect the more significant judgments and
estimates used in the preparation of the Trusts financial statements is included in Item 7 of the
Trusts Annual Report on Form 10-K for the year ended December 31, 2008. There have been no
significant changes to the critical accounting policies during 2009.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Commodity Hedge Contracts
The primary asset of and source of income to the Trust is the term NPI, which generally entitles
the Trust to receive 90% of the net proceeds from oil and gas production from the underlying
properties. Consequently, the Trust is exposed to market risk from fluctuations in oil and gas
prices. However, the NPI is subject to commodity hedge contracts in the form of costless collars,
which reduce its exposure to commodity price volatility.
The revenues derived from the underlying properties depend substantially on prevailing crude oil,
natural gas and natural gas liquid prices. As a result, commodity prices also affect the amount of
cash flow available for distribution to the Trust unitholders. Lower prices may also reduce the
amount of oil, natural gas and natural gas liquids that Whiting can economically produce. Whiting
sells the oil, natural gas and natural gas liquid production from the underlying properties under
floating market price contracts each month. Whiting has entered into certain hedge contracts
through December 31, 2012 to manage the exposure to crude oil and natural gas price volatility
associated with revenues generated from the underlying properties and to achieve more predictable
cash flow. However, these contracts limit the amount of cash available for distribution if prices
increase above the fixed ceilings. The hedge contracts
16
Table of Contents
consist of costless collar arrangements placed with a single trading counterparty, JPMorgan
Chase Bank National Association. Whiting cannot provide assurance that this trading counterparty
will not become a credit risk in the future. No additional hedges are allowed to be placed on Trust
assets.
Crude oil costless collar arrangements settle based on the average of the closing settlement price
for each commodity business day in the contract period. Natural gas costless collar arrangements
settle based on the closing settlement price on the second to last scheduled trading day of the
month prior to delivery. In a collar arrangement, the counterparty is required to make a payment to
Whiting for the difference between the fixed floor price and the settlement price if the settlement
price is below the fixed floor price. Whiting is required to make a payment to the counterparty for
the difference between the fixed ceiling price and the settlement price if the settlement price is
above the fixed ceiling price. Whitings crude oil and natural gas price risk management positions
in collar arrangements through December 31, 2012 (which collars have the potential to affect
Whitings future distributions to the Trust) are as follows:
Oil Collars | Natural Gas Collars | |||||||||||
Weighted | Weighted | |||||||||||
Average Price | Average Price | |||||||||||
Volumes | (per Bbl) | Volumes | (per Mcf) | |||||||||
(Bbls) | Floor / Ceiling | (Mcf) | Floor / Ceiling | |||||||||
Three Months Ending September 30, 2009
|
142,530 | $76.00/$136.41 | 578,610 | $6.00/$15.60 | ||||||||
Three Months Ending December 31, 2009
|
138,720 | $76.00/$135.72 | 556,290 | $7.00/$14.85 | ||||||||
Three Months Ending March 31, 2010
|
135,252 | $76.00/$135.09 | 536,709 | $7.00/$18.65 | ||||||||
Three Months Ending June 30, 2010
|
131,934 | $76.00/$134.85 | 518,619 | $6.00/$13.20 | ||||||||
Three Months Ending September 30, 2010
|
128,898 | $76.00/$134.89 | 502,749 | $6.00/$14.00 | ||||||||
Three Months Ending December 31, 2010
|
125,772 | $76.00/$135.11 | 488,991 | $7.00/$14.20 | ||||||||
Three Months Ending March 31, 2011
|
122,934 | $74.00/$139.68 | 472,800 | $7.00/$17.40 | ||||||||
Three Months Ending June 30, 2011
|
120,198 | $74.00/$140.08 | 458,109 | $6.00/$13.05 | ||||||||
Three Months Ending September 30, 2011
|
117,510 | $74.00/$140.15 | 444,489 | $6.00/$13.65 | ||||||||
Three Months Ending December 31, 2011
|
114,726 | $74.00/$140.75 | 428,361 | $7.00/$14.25 | ||||||||
Three Months Ending March 31, 2012
|
112,236 | $74.00/$141.27 | 413,820 | $7.00/$15.55 | ||||||||
Three Months Ending June 30, 2012
|
109,716 | $74.00/$141.73 | 402,609 | $6.00/$13.60 | ||||||||
Three Months Ending September 30, 2012
|
107,226 | $74.00/$141.70 | 390,519 | $6.00/$14.45 | ||||||||
Three Months Ending December 31, 2012
|
105,084 | $74.00/$142.21 | 379,839 | $7.00/$13.40 |
The collared hedges shown above have the effect of providing a protective floor while allowing
Trust unitholders to share in upward pricing movements. Consequently, while these hedges are
designed to decrease exposure to price decreases, they also have the effect of limiting the benefit
of price increases beyond the ceiling. For the crude oil contracts listed above, a hypothetical
$5.00 change in the NYMEX price above the ceiling price or below the floor price applied to the
notional amounts of contracts expiring in the next twelve months would cause a change in the gain
(loss) on hedging activities over that same period of $2.7 million to Whiting, of which 90% would
be transferred to the Trust. For the natural gas contracts listed above, a hypothetical $0.50
change in the NYMEX price above the ceiling price or below the floor price applied to the notional
amounts of contracts expiring in the next twelve months would cause a change in the gain (loss) on
hedging activities over the same period of $1.1 million to Whiting, of which 90% would be
transferred to the Trust.
The amounts received by Whiting from the hedge contract counterparty upon settlements of the hedge
contracts will reduce the operating expenses related to the underlying properties in calculating
the net proceeds. However, if the hedge payments received by Whiting under the hedge contracts and
other non-production revenue exceed operating expenses during a quarterly period, the ability to
use such excess amounts to offset operating expenses may be deferred, with interest accruing on
such amounts at the prevailing money market rate, until the next quarterly period where the hedge
payments and the other non-production revenue are less than such expenses. In addition, the
aggregate amounts paid by Whiting on settlement of the hedge contracts will reduce the amount of
net proceeds paid to the Trust.
Item 4.T Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Trustee maintains disclosure controls and
procedures designed to ensure that information required to be disclosed by the Trust in the reports
that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and
regulations promulgated by the SEC. Disclosure controls and procedures include controls and
procedures designed to ensure that information required to be disclosed by the Trust is accumulated
and communicated by Whiting to The Bank of New York Mellon Trust
Company, N.A., as Trustee of the Trust, and its employees who participate in the preparation of the
Trusts periodic reports as appropriate to allow timely decisions regarding required disclosure.
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As of the end of the period covered by this report, the Trustee carried out an evaluation of the
Trustees disclosure controls and procedures. Mike Ulrich, as Trust Officer of the Trustee, has
concluded that the disclosure controls and procedures of the Trust are effective.
Due to the contractual arrangements of (i) the Trust agreement and (ii) the conveyance of the NPI,
the Trustee relies on (A) information provided by Whiting, including historical operating data,
plans for future operating and capital expenditures, reserve information and information relating
to projected production, and (B) conclusions and reports regarding reserves by the Trusts
independent reserve engineers. See Item 1A. Risk Factors included in the Trusts Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 and Trustees Discussion and Analysis of
Financial Condition and Results of Operation contained in this report, for a description of
certain risks relating to these arrangements and reliance on information when reported by Whiting
to the Trustee and recorded in the Trusts results of operation.
Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2009,
there has been no change in the Trustees internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Trustees internal control
over financial reporting relating to the Trust. The Trustee notes for purposes of clarification
that it has no authority over, and makes no statement concerning, the internal control over
financial reporting of Whiting.
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PART II-OTHER INFORMATION
Item 1A. Risk Factors.
Risk factors relating to the Trust are contained in Item 1A of the Trusts Annual Report on Form
10-K for the fiscal year ended December 31, 2008. No material change to such risk factors has
occurred during the three months ended September 30, 2009.
Item 6. Exhibits.
The exhibits listed in the accompanying index to exhibits are filed as part of the Quarterly Report
on Form 10-Q.
Exhibit | ||||
Number | Description | |||
3.1*
|
| Certificate of Trust of Whiting USA Trust I (Incorporated herein by reference to Exhibit 3.4 to the Registration Statement on Form S-1 (Registration No. 333-147543)) | ||
3.2*
|
| Amended and Restated Trust Agreement, dated April 30, 2008, among Whiting Oil and Gas Corporation, Equity Oil Company (subsequently merged into Whiting Oil and Gas Corporation), The Bank of New York Mellon Trust Company, N.A. (formerly known as (f/k/a) The Bank of New York Trust Co., N.A.) as Trustee and Wilmington Trust Company as Delaware Trustee. (Incorporated herein by reference to Exhibit 3.1 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
10.1*
|
| Conveyance of Net Profits Interest, dated April 30, 2008, from Whiting Oil and Gas Corporation and Equity Oil Company (subsequently merged into Whiting Oil and Gas Corporation), to The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee of Whiting USA Trust I. (Incorporated herein by reference to Exhibit 10.1 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
10.2*
|
| Administrative Services Agreement, dated April 30, 2008, by and between Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee of Whiting USA Trust I. (Incorporated herein by reference to Exhibit 10.2 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
10.3*
|
| Registration Rights Agreement, dated April 30, 2008, by and between Whiting Petroleum Corporation and The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee of Whiting USA Trust I. (Incorporated herein by reference to Exhibit 10.3 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
31
|
| Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32
|
| Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(* Asterisk indicates exhibit previously filed with the SEC and incorporated herein by reference.) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
WHITING USA TRUST I | ||||||
By | THE BANK OF NEW YORK MELLON TRUST | |||||
COMPANY, N.A. | ||||||
By: | /s/ MIKE ULRICH
|
|||||
Vice President |
Date: November 12, 2009
The Registrant, Whiting USA Trust I, has no principal executive officer, principal financial
officer, board of directors or persons performing similar functions. Accordingly, no additional
signatures are available and none have been provided. In signing the report above, the Trustee does
not imply that it has performed any such function or that such function exists pursuant to the
terms of the Trust agreement under which it serves.
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
3.1*
|
| Certificate of Trust of Whiting USA Trust I (Incorporated herein by reference to Exhibit 3.4 to the Registration Statement on Form S-1 (Registration No. 333-147543)) | ||
3.2*
|
| Amended and Restated Trust Agreement, dated April 30, 2008, among Whiting Oil and Gas Corporation, Equity Oil Company (subsequently merged into Whiting Oil and Gas Corporation), The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee and Wilmington Trust Company as Delaware Trustee. (Incorporated herein by reference to Exhibit 3.1 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
10.1*
|
| Conveyance of Net Profits Interest, dated April 30, 2008, from Whiting Oil and Gas Corporation and Equity Oil Company (subsequently merged into Whiting Oil and Gas Corporation), to The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee of Whiting USA Trust I. (Incorporated herein by reference to Exhibit 10.1 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
10.2*
|
| Administrative Services Agreement, dated April 30, 2008, by and between Whiting Oil and Gas Corporation and The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee of Whiting USA Trust I. (Incorporated herein by reference to Exhibit 10.2 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
10.3*
|
| Registration Rights Agreement, dated April 30, 2008, by and between Whiting Petroleum Corporation and The Bank of New York Mellon Trust Company, N.A. (f/k/a The Bank of New York Trust Co., N.A.) as Trustee of Whiting USA Trust I. (Incorporated herein by reference to Exhibit 10.3 to the Trusts Current Report on Form 8-K filed on April 30, 2008 (File No. 001-34026)) | ||
31
|
| Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32
|
| Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(* Asterisk indicates exhibit previously filed with the SEC and incorporated herein by reference.) |
21