WHITING USA TRUST II References to the "Trust" in this document refer toWhiting USA Trust II . References to "Whiting" in this document refer toWhiting Petroleum Corporation and its subsidiaries. References to "Whiting Oil and Gas" in this document refer toWhiting Oil and Gas Corporation , a 100%-owned subsidiary ofWhiting Petroleum Corporation . The following review of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto, as well as the Trustee's discussion and analysis contained in the Trust's 2019 Annual Report on Form 10-K. The Trust's 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 theSEC's website www.sec.gov.
Note Regarding Forward-Looking Statements
This Quarterly Report on 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 (the "Exchange Act"). All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation the statements under "Trustee's 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," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on 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 effect, impact, potential duration or other implications of the outbreak of
? a novel strain of coronavirus ("COVID-19") which the
declared a pandemic in
? the actions of the
? changes in regional, domestic and global supply and demand for oil and natural
gas and the impacts on storage capacity;
? uncertainty of estimates of oil and natural gas reserves and production;
? risks incidental to the operation and drilling of oil and natural gas wells;
? future production and development costs, which include capital expenditures;
? 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;
? inflation or deflation; and
other risks described under the caption "Risk Factors" in Item 1A of Part II of
? this Quarterly Report on Form 10-Q and in Item 1A of the Trust's 2019 Annual
Report 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 Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Overview and Trust Termination
The Trust does not conduct any operations or activities. The Trust's purpose is,
in general, to hold the NPI, to distribute to unitholders cash that the Trust
receives pursuant to the NPI, and to perform certain administrative functions
with respect to the NPI and the Trust units. The Trust derives substantially all
of its income and cash flows from the NPI. The NPI entitles the Trust to receive
90% of the net proceeds from the sale of production from the underlying
properties until the NPI terminates.
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Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices for the periods indicated throughSeptember 30, 2020 . TheAugust 2020 net loss was mainly affected byApril 2020 throughJune 2020 oil prices andMarch 2020 throughMay 2020 natural gas prices. 2018 2019 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Crude oil$ 62.89 $ 67.90 $ 69.50 $ 58.83 $ 54.90 $ 59.83 $ 56.45 $ 56.96 $ 46.08 $ 27.85 $ 40.94 Natural gas$ 3.13 $ 2.77 $ 2.88 $ 3.62 $ 3.00 $ 2.58 $ 2.29 $ 2.44 $ 1.88 $ 1.66 $ 1.89 Oil prices declined sharply during the first half of 2020, dropping below$21.00 per Bbl inMarch 2020 and further dropping below negative$37.00 per Bbl inApril 2020 . This dramatic decline in pricing was primarily attributable toSaudi Arabia's announcement of plans to abandon previously agreed upon output restraints and the economic effects of the COVID-19 pandemic on the demand for oil and natural gas. While prices began to recover in the third quarter of 2020, uncertainties related to demand for oil and natural gas products remain as the pandemic continues to impact the world economy. Continued low oil and gas prices could cause (i) a reduction in the amount of net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to Trust unitholders, as was the case for theMay 2020 distribution and theAugust 2020 net loss, (ii) a reduction in the amount of oil, natural gas and natural gas liquids that are economic to produce from the underlying properties and (iii) the recognition of additional impairment charges on the NPI. All costless collar hedge contracts terminated as ofDecember 31, 2014 and no additional hedges are allowed to be placed on the Trust assets. Consequently, there are no further cash settlement gains or losses on commodity derivatives for inclusion in the Trust's computation of net proceeds (or net losses, as the case may be), and the Trust therefore has increased exposure to oil and natural gas price volatility. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in actual and anticipated operating and capital expenditures, as was the case for (i) the first quarter of 2019, (ii) the second quarter of 2020, where Whiting established a reserve for future development, maintenance or operating expenses and (iii) the third quarter of 2020 which resulted in no distribution being made to unitholders even after the$1.6 million reserve was released and applied by Whiting. Trust termination. The Trust will wind up its affairs and terminate after the NPI termination date, which is set atDecember 31, 2021 . After the termination of the Trust, it will pay no further distributions. Impairment of net profits interest. As ofMarch 31, 2020 , the Trust's investment in the NPI with a carrying value of$6.8 million was written down to its fair value of$1.0 million , resulting in a$5.8 million impairment charged directly to Trust corpus during the first quarter of 2020. The write-down of the net profits interest was due to a reduction in anticipated future cash flows primarily driven by an expectation of sustained depressed oil prices atMarch 31, 2020 . Since the assets of the Trust are depleting assets, a portion of each cash distribution paid, if any, on the Trust units is a return of capital to investors, with the remainder being considered as a return on investment or yield. As a result, the market price of the Trust units will decline to zero at the termination of the Trust. As ofSeptember 30, 2020 on a cumulative accrual basis, 10.57 MMBOE (99.6%) of the 10.61 MMBOE attributable to the NPI have been produced and sold or divested (of which 204 MBOE, which is 90% of 227 MBOE, are included as gross proceeds in the Trust'sAugust 2020 net loss). Subsequent toSeptember 30, 2020 , the remaining minimum reserve quantities were produced. Consequently, the NPI will terminate onDecember 31, 2021 because the minimum amount of production (11.79 MMBOE) applicable to the NPI has have been produced from the underlying properties and sold (which amount is the equivalent of 10.61 MMBOE in respect of the Trust's right to receive 90% of the net proceeds from such reserves pursuant to the NPI).
Capital Expenditure Activities
The primary goal of the planned capital expenditures relative to the underlying properties is to mitigate a portion of the natural decline in production from producing properties. No assurance can be given, however, that any such expenditures will be made, or if made, will result in production in commercially paying amounts, if any, or that the characteristics of any newly developed well will match the characteristics of existing wells on the underlying properties or the operator's historical drilling success rate. The underlying properties have a capital expenditure budget per theDecember 31, 2019 reserve report of$3.8 million estimated to be spent betweenJanuary 1, 2020 andDecember 31, 2021 , the termination date of the NPI. In addition, no assurance can be given that the actual level of capital expenditures on the underlying properties will meet this$3.8 million amount of budgeted capital expenditures over such time frame. With respect to fields for which Whiting is not the operator, Whiting has limited control over the timing and amount of capital expenditures relative to such fields. Please read the Trust's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , Item 1A. Risk Factors "Whiting has limited control over activities on the underlying properties that Whiting does not operate, which could reduce production from the underlying properties, increase capital expenditures and reduce cash available for distribution to Trust 12
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unitholders." The following table presents the underlying properties' aggregate
capital expenditures attributable to the
2020
Capital
Region Expenditures
Rocky Mountains $ 1,025
Permian Basin 75
Gulf Coast 19
Mid-Continent -
Total $ 1,119
Annual capital expenditure limitation. The capital expenditures included in the
net proceeds attributable to the underlying properties are subject to an annual
limitation which became effective January 1, 2018 . As a result, the sum of the
capital expenditures and amounts reserved for development, maintenance or
operating costs of the underlying properties or related activities for each year
beginning in 2018 may not exceed the average annual capital expenditure amount.
The "average annual capital expenditure amount" means the quotient of (x) the
sum of the capital expenditures and amounts reserved for approved capital
expenditure projects with respect to the three years ended December 31, 2017 ,
divided by (y) three, which amount equaled $3.9 million and is increased
annually by 2.5% to account for expected increased costs due to inflation.
Therefore, the capital expenditures included in the net proceeds attributable to
the underlying properties and amounts reserved for expenditures cannot exceed
$4.2 million during the year ending December 31, 2020 .
Reserve for expenditures. Whiting may establish and withhold amounts for
development, maintenance or operating costs of the underlying properties or
related activities from the net proceeds attributable to the underlying
properties up to a total of $2.0 million at any time. During the second quarter
of 2020, $1.6 million was reserved for expenditures. The $1.6 million reserve
was released and applied by Whiting to qualifying expenses incurred during the
third quarter of 2020. Accordingly, there is no remaining reserve for
expenditures to offset future development, maintenance or operating expenses on
the underlying properties and related activities.
Farm-out agreements. In an effort to develop the underlying properties while
limiting additional capital expenditures for the Trust (other than those capital
expenditures already contemplated in the reserve report), Whiting Oil and Gas
entered into three farm-out agreements with separate third-party partners
covering (i) 5,127 gross acres in eight leasehold sections within the Keystone
South field in Winkler, Texas in April 2016 , as amended in July 2020 (the
"Keystone South farm-out"), (ii) 9,740 gross acres in approximately 15 units
(which unit size is determined by the lateral well length) within the Signal
Peak field in Howard County, Texas in February 2017 , as amended in May 2018 ,
September 2019 and February 2020 (the "Signal Peak farm-out") and (iii) 640
gross acres in one leasehold section within the Flying W, SE field in Winkler
County, Texas in March 2017 (the "Flying W farm-out").
These farm-out agreements provide the third-party partner with the option, but
not the obligation, to drill one well in each of the leasehold sections or
units, as the case may be, subject to the applicable farm-out agreement, whereby
the partner will pay 100% of the related drilling and well completion costs to
earn a 75% working interest. As a result, the applicable underlying properties
will consist of (i) 25% of the original working interest in these properties and
(ii) an overriding royalty interest equal to the difference between 25% and the
lease burdens of record. Upon completion of one well in each section or unit, as
the case may be, pursuant to the terms of the applicable agreements, the partner
has the option to drill (i) up to 15 additional wells under the Keystone South
farm-out, (ii) up to 12 additional wells under the Signal Peak farm-out and
(iii) one additional well under the Flying W farm-out. For each of these
additional optional wells, the partner is required to pay 85% of the drilling
and well completion costs otherwise ascribed to the underlying properties for a
75% working interest. Given the Trust's interest in the NPI, the Trust would be
responsible for 13.5% of the underlying properties' remaining drilling and well
completion costs at the 90% NPI, subject to the average annual capital
expenditure amount limitation discussed above.
The third-party partner drilled and completed the first three wells pursuant to
the terms of the Keystone South farm-out agreement during 2017, a fourth well
was drilled and completed during the second quarter of 2018 and a fifth well was
drilled and completed during the fourth quarter of 2019, whereby the partner
earned a 75% working interest in each of the underlying properties' respective
leasehold sections. The partner has no obligation to drill and complete any
additional wells, and the Keystone South farm-out agreement will terminate
during the first quarter of 2021 if no additional drilling has commenced by that
time.
During the fourth quarter of 2019, the third-party partner drilled and completed
the first well under the Signal Peak farm-out, whereby the partner earned a 75%
working interest in the underlying properties' respective leasehold section. The
partner has no obligation to drill and complete any additional wells, and the
Signal Peak farm-out will terminate during the fourth quarter of 2021 if no
additional drilling has commenced by that time.
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In addition, the partner drilled and completed the first well under the Flying W farm-out during the second quarter of 2018, whereby the partner earned a 75% working interest in the underlying properties' respective leasehold section. As a result of the significant decline in crude oil prices in the first quarter of 2020, certain of the wells subject to these farm-out agreements were temporarily shut-in duringApril 2020 and were brought back online in earlyMay 2020 . These temporary shut-ins negatively impacted production. No assurance can be given, however, that these wells will remain online going forward. A well being shut-in may reduce the net proceeds to which the Trust is entitled, which could materially reduce or completely eliminate the amount of cash available for distribution to unitholders. Results of Trust Operations
Comparison of results of the Trust for the nine months ended
The following is a summary of income from net profits interest and distributable income received by the Trust for the nine months endedSeptember 30, 2020 and 2019 (dollars in thousands, except per Bbl, per Mcf and per BOE amounts): Nine Months Ended September 30, 2020 2019 Sales volumes: Oil from underlying properties (Bbl)(1) 601,228 (3) 701,583 (4) Natural gas from underlying properties (Mcf) 706,523 (3) 816,397 (4) Total production (BOE) 718,982 837,649 Average sales prices: Oil (per Bbl)(1)$ 38.22 $ 47.99 Natural gas (per Mcf)(2)$ 1.46 $ 2.57 Cost metrics: Lease operating expenses (per BOE)$ 29.48 $
28.29
Production tax rate (percent of total revenues) 4.7 % 4.9 % Revenues: Oil sales(1)$ 22,977 (3)$ 33,668 (4) Natural gas sales 1,032 (3) 2,097 (4) Total revenues 24,009 35,765 Costs: Lease operating expenses 21,195 23,697 Production taxes 1,124 1,767 Development costs 1,119 1,686 Reserve for expenditures - - Total costs 23,438 27,150 Net proceeds 571 8,615 Net profits percentage 90 % 90 % Income from net profits interest 514
7,754
Provision for estimated Trust expenses (1,100)
(600)
Montana state income tax withheld (6) (11) Distributable income$ 268 $ 7,143 __________
(1) Oil includes natural gas liquids.
A portion of the natural gas volumes produced and sold from the underlying
properties during the nine months ended
(2) "liquids-rich" content; however, such liquids content did not result in a
premium to the NYMEX natural gas price primarily due to the depressed liquids
prices during such periods.
Oil and gas sales volumes and related revenues for the nine months ended
(3) distributions to the Trust, and
production from
from
Oil and gas sales volumes and related revenues for the nine months ended
(4)
from October 2018 through June 2019 and natural gas production from September
2018 through May 2019 .
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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 are based on the oil and gas production for which Whiting has received payment 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 sold, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced and sold. Income from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes, development costs and reserve for expenditures as follows: Revenues. Oil and natural gas revenues decreased$11.8 million (or 33%) during the nine months endedSeptember 30, 2020 as compared to the same 2019 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decrease in revenue between periods was primarily due to lower realized oil prices and the decline in oil production volumes. The average sales price realized for crude oil and natural gas decreased by 20% and 43%, respectively, between periods primarily as a result of a decline in NYMEX oil and gas prices which were partially offset by improved oil differentials. Crude oil production volumes decreased by 100 MBbl (or 14%) and natural gas production volumes decreased by 110 MMcf (or 13%) when comparing the first nine months of 2020 compared to the same period in 2019. The decline in oil volumes between periods was primarily related to (i) normal field decline (ii) certain wells within the Garland field being shut-in for a portion of the first nine months of 2020 and (iii) the permanent shutdown of the third-party operatedChatom Gas Plant inNovember 2019 , which impacts wells located in theLake Como field. The decline in gas volumes between periods was primarily related to (i) normal field decline, (ii) differences in timing associated with revenues received from non-operated properties, (iii) the permanent shutdown of the third-party operated Chatom Gas Plant inNovember 2019 , which impacts wells located in theLake Como field and (iv) a unit in the Warmsly South field being shut-in for a portion of the first nine months of 2020. Based on theDecember 31, 2019 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 8.5% for oil and 13.6% for gas from 2020 through the NPI termination date,December 31, 2021 . Lease operating expenses. Lease operating expenses decreased$2.5 million (or 11%) during the first nine months of 2020 compared to the same 2019 period primarily due to lower labor and other operating costs on Whiting-operated properties of$1.6 million and lower oilfield goods and services costs of$1.3 million , which were partially offset by a$0.4 million increase in ad valorem taxes between periods. LOE on a per BOE basis, however, increased 4% between periods from$28.29 during the nine months endedSeptember 30, 2019 to$29.48 for the same period in 2020 primarily due to the decline in overall production volumes. Production taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues decreased from 4.9% for the nine months endedSeptember 30, 2019 to 4.7% for the same period in 2020. Overall production taxes for the first nine months of 2020 decreased$0.6 million (or 36%) as compared to the same 2019 period primarily due to lower oil and natural gas revenues between periods. Development costs. Development costs for the nine months endedSeptember 30, 2020 were$0.6 million (or 34%) lower as compared to the same 2019 period primarily due to reduced drilling and capital workover costs in the RangelyWeber Sand field, Justis andMary Two fields, which were partially offset by higher drilling and capital workover costs in the Keystone South field. Reserve for expenditures. As provided in the terms of the NPI, a$1.6 million reserve for future development, maintenance or operating expenses was established and subsequently utilized and applied against qualifying expenses incurred during the period. Accordingly, there is no remaining reserve for expenditures to offset future development, maintenance or operating expenses on the underlying properties and related activities. Provision for estimated Trust expenses. The provision for estimated Trust expenses increased$0.5 million during the first nine months of 2020 compared to the same 2019 period due to the expected impacts of (i) the sharp decline in oil prices that occurred inMarch 2020 which oil prices remained depressed at the time the expenses were estimated inAugust 2020 and (ii) the COVID-19 pandemic. In consideration of the anticipated impacts, the Trustee increased the provision for Trust expenses to enable it to pay the Trust's future liabilities for approximately 12 months from the time at which it was established. 15
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Comparison of results of the Trust for the three months ended
The following is a summary of income (loss) from net profits interest and distributable income received by the Trust for the three months endedSeptember 30, 2020 and 2019 (dollars in thousands, except per Bbl, per Mcf and per BOE amounts): Three Months EndedSeptember 30, 2020 2019 Sales volumes: Oil from underlying properties (Bbl)(1) 186,554 (3)
229,627 (4)
Natural gas from underlying properties (Mcf) 242,503 (3) 283,127 (4) Total production (BOE) 226,971 276,815 Average sales prices: Oil (per Bbl)(1)$ 20.64 $ 53.24 Natural gas (per Mcf)(2)$ 0.92 $ 1.90 Cost metrics: Lease operating expenses (per BOE)$ 27.37 $
29.61
Production tax rate (percent of total revenues) 3.3 % 4.8 % Revenues: Oil sales(1)$ 3,851 (3)$ 12,225 (4) Natural gas sales 223 (3) 537 (4) Total revenues 4,074 12,762 Costs: Lease operating expenses 6,212 8,196 Production taxes 135 608 Development costs 308 568 Reserve for expenditures (1,625) - Total costs 5,030 9,372 Net proceeds (losses) (956) 3,390 Net profits percentage 90 % 90 % Income (loss) from net profits interest (860)
3,051
Provision for estimated Trust expenses -
(250)
Montana state income tax withheld -
(5)
Accumulated net losses funded by Whiting 860 - Distributable income $ -$ 2,796 __________
(1) Oil includes natural gas liquids.
A portion of the natural gas volumes produced and sold from the underlying
properties during the three months ended
premium to the NYMEX natural gas price primarily due to the depressed liquids
prices during such periods.
Oil and gas sales volumes and related revenues for the three months ended
(3)
represent oil production from
production from
Oil and gas sales volumes and related revenues for the three months ended
(4)
Trust generally represent oil production from
and natural gas production from
Income (loss) from net profits interest. Income (loss) from net profits interest is recorded on a cash basis when NPI proceeds are received by the Trust from Whiting or when NPI losses are generated by the underlying properties. NPI proceeds (or losses) are based on the oil and gas production for which Whiting has received payment 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 sold, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced and sold. Income (loss) from net profits interest is generally a function of oil and gas revenues, lease operating expenses, production taxes, development costs and reserve for expenditures as follows: Revenues. Oil and natural gas revenues decreased$8.7 million (or 68%) during the three months endedSeptember 30, 2020 as compared to the same 2019 period. Sales revenue is a function of average commodity prices realized and oil and gas volumes sold. The decline in revenue between periods was primarily due to lower realized oil prices. The crude oil average realized sales price decreased by 61% and the natural gas average realized sales price decreased by 52% between periods primarily due to lower 16
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NYMEX oil and natural gas prices. Crude oil production volumes decreased by 43 MBbl (or 19%) and natural gas production volumes decreased by 41 MMcf (or 14%) between periods. The decline in oil volumes between periods was related to (i) normal field decline, (ii) the permanent shutdown of the third-party operatedChatom Gas Plant inNovember 2019 , which impacts wells located in theLake Como field and (iii) one well and one unit being shut-in during 2020. The decline in gas volumes between periods was primarily related to (i) normal field decline and (ii) the permanent shutdown of the third-party operated Chatom Gas Plant inNovember 2019 , which impacts wells located in theLake Como field. Based on theDecember 31, 2019 reserve report, overall production attributable to the underlying properties is expected to decline at an average year-over-year rate of approximately 8.5% for oil and 13.6% for gas from 2020 through theDecember 31, 2021 NPI termination date. Lease operating expenses. Lease operating expenses decreased$2 million (or 24%) during the third quarter of 2020 compared to the same 2019 period primarily due to lower oilfield goods and services costs of$1.7 million and lower labor and other operating costs on Whiting-operated properties of$0.5 million , which were partially offset by a$0.2 million increase in ad valorem taxes between periods. The decrease in overall LOE coupled with the decline in overall production volumes resulted in a decrease in LOE on a per BOE basis of 8% between periods from$29.61 during the three months endedSeptember 30, 2019 to$27.37 for the same period in 2020. Production taxes. Production taxes are typically calculated as a percentage of oil and gas revenues. Production taxes as a percentage of revenues decreased from 4.8% for the three months endedSeptember 30, 2019 to 3.3% for the same period in 2020 primarily due to certain wells within the Garland Unit being granted a "stripper well" production tax exemption which reduced the tax rate for production volumes from these wells and resulted in the receipt of tax refunds related to prior periods during the third quarter of 2020. Overall production taxes for the third quarter of 2020 decreased$0.5 million (or 78%) as compared to the same 2019 period primarily due to the aforementioned "stripper well" refunds and lower oil and natural gas revenues between periods. Development costs. Development costs for the three months endedSeptember 30, 2020 were$0.3 million (or 46%) lower as compared to the same 2019 period primarily due to reduced drilling and capital workover costs in the Justis,Mary Two and Torchlight fields. Reserve for expenditures. As provided in the terms of the NPI, a$1.6 million reserve for future development, maintenance or operating expenses was established during the second quarter of 2020. During the third quarter of 2020, Whiting released the$1.6 million reserve and applied it against qualifying expenses incurred during the period. Accordingly, there is no remaining reserve for expenditures to offset future development, maintenance or operating expenses on the underlying properties and related activities. Accumulated Net Losses Funded by Whiting. During the three months endedSeptember 30, 2020 , the net profits interest generated accumulated net losses of$0.9 million attributable to the Trust primarily due to the decline in oil and natural gas prices, which lower commodity prices caused production and development costs on the underlying properties to exceed the proceeds from production. Neither the Trust nor the unitholders are liable for any net losses that are generated by the net profits interest. Whiting funds the payment of any such net losses until the accumulated net losses, plus accrued interest at the money market interest rate, are recovered from future NPI net profits. All accumulated net losses, plus accrued interest, must be repaid to Whiting before any further distributions will be made to Trust unitholders. There were no accumulated net losses during the three months endedSeptember 30, 2019 . Distributable Income. There was no distribution made to unitholders during the third quarter of 2020 due to the net profits interest generating accumulated net losses of$0.9 million during the period. Distributable income for the three months endedSeptember 30, 2019 was$2.8 million , which was based on income from net profits interest of$3.1 million , reduced by Trust general and administrative expenses of$0.3 million and adjusted for changes in Trust cash reserves.
Liquidity and Capital Resources
Overview. The Trust has no source 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 Trust's only use
of cash is for distributions to Trust unitholders. Administrative expenses
include payments to the Trustee and the Delaware Trustee, a quarterly fee paid
to Whiting pursuant to an administrative services agreement and expenses in
connection with the discharge of the Trustee's duties, including third-party
engineering, audit, accounting and legal fees. Each quarter, the Trustee
determines the amount of funds available for distribution to unitholders.
Available funds are the excess cash, if any, received by the Trust from the NPI
and other sources (such as interest earned on any amounts reserved by the
Trustee) that quarter, over the Trust's expenses for that quarter. Available
funds are reduced by (i) any
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cash the Trustee decides to hold as a reserve against future liabilities and (ii) any accumulated net losses to be recovered by Whiting, plus accrued interest. If the NPI generates net losses or limited net proceeds (which was the case during the first quarter of 2019 and the second and third quarters of 2020), the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust's administrative expenses, which may be in excess of the provision for Trust expenses. The Trust may borrow the amount of funds required to pay its liabilities if the Trustee determines that the cash on hand and the cash to be received, which is dependent on future net proceeds, are insufficient to cover the Trust's liabilities. If the Trust borrows funds, the Trust unitholders will not receive distributions until the borrowed funds together with any accumulated net losses and accrued interest are repaid. The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust's liquidity or the availability of capital resources. As ofOctober 31, 2020 , the Trust had cash reserves of$0.5 million remaining for the payment of its administrative expenses. The Trust is highly dependent on Whiting for multiple services, including the operation of wells, remittance of net proceeds generated by the NPI and administrative services performed on behalf of the Trust. Whiting's continued ability to operate wells, including those with interests held by the NPI, depends on its future financial condition, access to capital and other factors outside of its control. OnApril 1, 2020 , Whiting and certain of its direct and indirect subsidiaries, includingWhiting Oil and Gas (collectively, the "Debtors") commenced voluntary cases under chapter 11 ofthe United States Bankruptcy Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "). OnJune 30, 2020 , the Debtors filed the Joint Chapter 11 Plan of Reorganization ofWhiting Petroleum Corporation and its Debtor affiliates (as amended, modified and supplemented, the "Plan"). OnAugust 14, 2020 , theBankruptcy Court confirmed the Plan. OnSeptember 1, 2020 , the Debtors emerged from the Chapter 11 Cases and the Plan became effective in accordance with its terms. Letter of credit. InJune 2012 , Whiting established a$1.0 million letter of credit for the Trustee in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust in the event that Whiting should fail to lend funds to the Trust, if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and if the Trustee were to draw on the letter of credit or were to borrow funds from Whiting or other entities, no further distributions would be made to unitholders until all such amounts have been repaid by the Trust. Such letter of credit will renew inDecember 2020 and expire upon the NPI termination date. As ofSeptember 30, 2020 andDecember 31, 2019 , the Trust had no borrowings under the letter of credit. Reserve for expenditures. Whiting may reserve from the gross proceeds amounts up to a total of$2.0 million at any time for future development, maintenance or operating expenses on the underlying properties and related activities. Whiting did not fund such a reserve during the three and nine months endedSeptember 30, 2019 . Instead, Whiting deducted from the Trust's gross proceeds only actual costs paid for development, maintenance and operating expenses. During the second quarter of 2020, Whiting established a reserve for future expenditures of$1.6 million in response to the expectation that future gross proceeds from the underlying properties may be insufficient to cover the future operating costs of the underlying properties due to (i) the sharp decline in oil prices inMarch 2020 which oil prices remained depressed at the time the reserve was established inMay 2020 and (ii) the impacts of the COVID-19 pandemic. In the third quarter, the$1.6 million reserve was released and applied by Whiting to qualifying expenses incurred during the period. Accordingly, there is no remaining reserve for expenditures to offset future development, maintenance or operating expenses on the underlying properties and related activities. Plugging and abandonment. Plugging and abandonment costs related to the underlying properties, net of any proceeds received from the salvage of equipment, cannot be included as a deduction in the calculation of net proceeds pursuant to the terms of the conveyance agreement. During the three and nine months endedSeptember 30, 2020 , Whiting incurred$0.5 million and$1.6 million , respectively, of plugging and abandonment charges on the underlying properties, and these costs were not charged to the unitholders of the Trust.
Future Trust Payment Periods
OnNovember 9, 2020 , the Trustee announced that no distribution would be made to unitholders in the fourth quarter of 2020. TheNovember 2020 net loss is due to the net profits interest generating net profits of approximately$0.7 million during the third quarterly payment period of 2020 off-setting a portion of the NPI deficit of approximately$0.9 million from a prior period net loss. The limited net profits were primarily due to the continued low oil and natural gas prices.The NPI deficit, plus accrued interest at the prevailing money market rate, will be deducted from gross proceeds in future computation periods for purposes of determining net proceeds (or net losses as the case may be) until the negative net proceeds, including interest, have been recovered in full.The Trust will make no further distributions until that occurs. As discussed above, oil and natural gas prices sharply declined inMarch 2020 and have remained suppressed intoNovember 2020 . The Trust is unable to predict future commodity prices or future performance; however, if prices remain at current levels or decline further, 18
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it appears likely that distributions to unitholders will be significantly impacted by low oil and natural gas prices and may be reduced to zero, as was the case during the second, third and fourth quarters of 2020. Additionally, in the current commodity price environment, the Trust's distributions have increased sensitivity to fluctuations in operating and capital expenditures and commodity price differentials. If the NPI generates net losses or limited net proceeds, the net profits interest may not provide sufficient funds to the Trustee to enable it to pay all of the Trust's administrative expenses, which expenses may be in excess of the provision for Trust expenses.
New Accounting Pronouncements
There were no accounting pronouncements issued during the nine months ended
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust's financial statements is included in Item 7 of the Trust's Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no significant changes to the critical accounting policies during the nine months endedSeptember 30, 2020 .
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