VOC Energy Trust: A Pure Play In Crude Oil Price Exposure (NYSE:VOC)

Oil and gas industry. Oil pump oil rig energy industrial machine for petroleum in the sunset background, Increase in oil production

Evgenii Mitroshin

VOC Energy Trust (NYSE:VOC) (the “Trust”) was formed as a statutory trust in November 2010 by VOC Brazos Energy Partners, L.P. According to the Form 10-K:

The underlying properties consist of VOC Brazos’ net interests in substantially all of its oil and natural gas properties after deduction of all royalties and other burdens on production thereon as of May 10, 2011, which properties are located in the states of Kansas and Texas. The VOC Operators are currently the operators or contract operators of substantially all of the underlying properties.”

As of December 31, 2021, total proved reserves of the underlying properties and forecasts for the remainder of the term of the trust are as follows:

Reserves, Revenues, Expenses

VOC

Notes:

1. Oil and gas prices were adjusted to a WTI Cushing oil price of $66.56 per Bbl and a Henry Hub natural gas price of $3.598 per MMBtu.

2. As specified by the SEC, these prices are 12-month averages based upon the price on the first day of each month during 2021. The price adjustments were based on oil price differentials forecast at −$4.50 per Bbl for the Kansas underlying properties, −$2.00 per Bbl for the Kurten (Woodbine) Field wells in Texas, −$3.75 per Bbl for the Sand Flat Unit and Hitts Lake North Field wells in Texas and −$2.00 per Bbl for all other Texas underlying properties.

Sales and costs for the three years ending 2021 shows that Oil accounts for the vast majority of the sales revenue, making it a “pure play” in crude oil price exposure.

Performance

Since inception, May 6, 2011, VOC has had a total return of 14.5%, even with the surge in crude oil prices in 2022.

Prices

Yahoo Finance

The Maximum Drawdown (“MD”) over the period was 87%, reached on September 9, 2020. I view the MD as the primary risk measure because it quantifies how much an investor could have lost from its peak valley. Investors often exit positions when losses exceed risk tolerances, locking in the loss.

An MD of 87% implies that the product is not suitable as a long-term investment. And its long-term total return pales beside that of the broad equity market, as indicated below.

Drawdown

Yahoo Finance, BRS

Over the past ten years, VOC had a total return of just 6.6%. That compares to the S&P (SP500TR) return of 156.4%.

MV Oil Trust (MVO) and VOC are both limited trusts run by Vess Oil. Its return was, therefore, very similar, totaling + 4.0% over the past ten years.

Returns

Seeking Alpha

As I previously explained in another article, I commenced trading in a futures market account on June 23rd. I have had many other oil futures trading accounts going back to 1980, when I began trading NYMEX heating oil (“HO”).

The market has been highly volatile and challenging. I captured a profit of 22.6 % through September 26th, against a loss in NYMEX crude oil futures prices (“NYMEX”) of about 27% and a loss in VOC of about 7%.

Returns

Yahoo Finance, BRS

The Maximum Drawdown of the BRS crude oil account was 8%, compared to 30% for NYMEX and 22% for VOC.

Drawdowns

Yahoo Finance, BRS

Market Fundamentals

The major story in 2022 so far this year, and going back to the OPDEC oil embargo in 1973-74, is Russia’s invasion of Ukraine in February 2022 and the resulting sanctions and bans of Russian oil and its interruption of natural gas pipeline shipments to Europe. The EU has agreed to ban all Russian oil imports which arrive by sea by the end of this year.

Russian oil imports

IEA

Russian Oil Imports

IEA

The U.S. has replaced about half of the 800,000 b/d of Russian oil imports to the EU, as U.S. crude oil exports have surged to record levels.

Crude exports

EIA

The U.S. may soon overtake Russian crude oil imports to the EU and UK. Norway has replaced about one-third of the Russian imports.

Crude Imports

IEA

Source: Reuters.

The IEA has estimated that:

“the EU will need to replace an additional 1.4 million barrels of Russian crude, with some 300,000 bpd potentially coming from the United States and 400,000 bpd from Kazakhstan.”

In order to retain oil revenues, Russia has increased exports to China, India and Turkey.

Norway is expected to increase its production from the North Sea in the fourth quarter, and exports from the Middle East and Latin America that were going to China and India could be re-routed to the EU.

It has been reported that “Europe has decreased its consumption of Russian gas from 40% to less than 10%. And its reserve targets for the winter are nearly full.”

U.S. crude oil production was disrupted due to the severe oil price drop in 2020, when Saudi Arabia and Russia waged an oil price war.

Crude Production

EIA

However, “Other Supply,” such as Natural Gas Plant Liquids and Renewable Fuels, also contribute to the U.S. Petroleum Supply.

Other Supply

EIA

In total, U.S. Petroleum Supplies recently reached a new record high. This fact is rarely reported.

Crude + Other Supply

EIA

With the addition of crude withdrawals from the U.S. Strategic Petroleum Reserve (“SPR”), commercially-available crude oil stocks now exceed levels in 2019 and 2021. And the DOE recently announced:

“a Notice of Sale of up to 10 million barrels of crude oil to be delivered from the Strategic Petroleum Reserve in November 2022. This Notice of Sale is part of President Biden’s announcement on March 31, 2022 authorizing the sale of crude oil from the SPR as continued support to help address the significant market supply disruption caused by Putin’s war on Ukraine and aid in lowering energy costs for American families.”

Crude Stocks

EIA

U.S. refiners have increased petroleum product output, compared to 2020 and 2021.

Refinery Inputs

EIA

That has contributed to the recovery in petroleum product stocks.

Product Stocks

EIA

However, high retail petroleum prices have also resulted in petroleum product demand.

Product Demand

EIA

Gasoline and distillate fuel demand has fallen to the 2020-pandemic levels for this time of year.

Gasoline Demand

EIA

Distillate Demand

EIA

Conclusions

VOC is an energy trust which is almost entirely exposed to crude oil prices. For investors who want that exposure without trading an oil futures market account, it is a suitable alternative. However, as noted above, it is not a suitable long-term investment because it has returned too little and has been subject to an excessively-large drawdown.

The oil market has shifted since Russia’s invasion of Ukraine in February. High oil and natural gas prices, especially in Europe, have created major risks of economic recessions. And the most recent rises in interest rates to combat inflation adds to the risks. Therefore, petroleum demand has dropped and inventories have adjusted along with trade flows.

I have shifted my futures trading to be a “short” seller. My results have been profitable, especially as compared to passive long positions in crude futures and VOC. I provide my positioning and track record in my Seeking Alpha Marketplace service, Boslego Risk Services.

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