UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
August 23, 2023
Pacific Coast Oil Trust
(Exact name of registrant as specified in its charter)
Delaware |
1-35532 |
80-6216242 |
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification Number) |
The Bank of New York Mellon Trust Company, N.A.
601 Travis, Floor 16
Houston, Texas |
77002 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including
area code: (512) 236-6555
Not applicable
(Former name or former address, if changed since
last report)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction
A.2. below):
¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-(b)) |
¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark whether the registrant is an emerging growth
company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange
Act of 1934 (17 CFR §240.12b-2).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. ¨
Item 2.02 Results of Operations and Financial Condition.
On August 23, 2023, Pacific Coast Oil Trust
issued a press release announcing there will be no distribution payable in August 2023. A copy of the press release is furnished
as Exhibit 99.1 hereto and is incorporated herein by reference.
Pursuant to General Instruction B.2 of Form 8-K
and Securities and Exchange Commission Release No. 33-8176, the press release attached as Exhibit 99.1 is not “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, is not subject to the liabilities of that section
and is not deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, but is instead furnished for purposes
of that instruction.
Item 9.01 Financial Statements and Exhibits.
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 hereunto duly authorized.
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Pacific Coast Oil Trust |
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By: The Bank of New York Mellon Trust
Company, |
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N.A., as Trustee |
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Date: August 23, 2023 |
By: |
/s/
Sarah Newell |
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Sarah Newell |
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Vice President |
Exhibit 99.1
Pacific Coast Oil Trust
Pacific Coast Oil Trust Announces There Will Be No August Cash
Distribution
Pacific Coast
Oil Trust
The Bank of New York Mellon Trust
Company, N.A., Trustee
News Release
For Immediate Release
Houston, Texas – August 23, 2023 –
PACIFIC COAST OIL TRUST (OTC–ROYTL) (the “Trust”), a royalty trust formed by Pacific Coast Energy Company LP (“PCEC”),
announced today that there will be no cash distribution to the holders of its units of beneficial interest of record on August 25,
2023 based on the Trust’s calculation of net profits generated during June 2023 (the “Current Month”) as provided
in the conveyance of net profits interests and overriding royalty interest (the “Conveyance”). Given the Trust’s receipt
of insufficient monthly income from its net profits interests and overriding royalty interest during 2020 and 2021, the Trust had been
expected to terminate by its terms at the end of 2021; however, as described further below, a court had issued a temporary restraining
order enjoining the dissolution of the Trust until an arbitration tribunal could rule on the plaintiff’s request for injunctive
relief. As described further below, based on information from PCEC, any monthly payments that PCEC may make to the Trust may not be sufficient
to cover the Trust’s administrative expenses and outstanding debt to PCEC, and therefore the likelihood of distributions to the
unitholders in the foreseeable future is extremely remote. All financial and operational information in this press release has been provided
to the Trustee by PCEC.
The Current Month’s distribution calculation
for the Developed Properties resulted in an operating income of approximately $740,000. Revenues from the Developed Properties were approximately
$2.3 million, lease operating expenses including property taxes were approximately $1.5 million, and development costs were approximately
$11,000. The average realized price for the Developed Properties was $64.97 per Boe for the Current Month, as compared to $65.55 per Boe
in May 2023. Oil prices in recent months have declined from the elevated levels reached in the middle of 2022 and were lower in the
Current Month as compared to $112.62 for the same month in the prior year. The cumulative net profits deficit amount for the Developed
Properties decreased approximately $0.6 million, to approximately $5.6 million in the Current Month from approximately $6.2 million in
the prior month.
The Current Month’s
calculation included approximately $70,000 generated from the 7.5% overriding royalty interest on the Remaining Properties from Orcutt
Diatomite and Orcutt Field. Average realized prices for the Remaining Properties were $60.84 per Boe in the Current Month, as compared
to $62.57 per Boe in May 2023. The cumulative net profits deficit for the Remaining Properties decreased approximately $90,000,
to approximately $293,000 for the Current Month from approximately $383,000 for the prior month.
The monthly operating and services fee of approximately
$108,000 payable to PCEC, together with Trust general and administrative expenses of approximately $150,000, exceeded the payment of approximately
$70,000 received from PCEC from the 7.5% overriding royalty interest on the Remaining Properties, creating a shortfall of approximately
$188,000.
PCEC has
provided the Trust with a $1 million letter of credit to be used by the Trust if its cash on hand (including available cash reserves)
is not sufficient to pay ordinary course administrative expenses as they become due. As of March 31, 2021, the letter of credit has
been fully drawn down. Further, the trust agreement provides that if the Trust requires more than the $1 million under the letter of credit
to pay administrative expenses, PCEC will, upon written request of the Trustee, loan funds to the Trust in such amount as necessary to
pay such expenses. Under the trust agreement, the Trust may only use funds provided under the letter of credit or loaned by PCEC or another
source to pay the Trust’s current accounts or other obligations to trade creditors in connection with obtaining goods or services
or for the payment of other accrued current liabilities arising in the ordinary course of the Trust’s business. As the Trust has
fully drawn down the letter of credit, PCEC will be loaning funds to the Trust to pay the expected shortfall of approximately $188,000,
which would bring the total amount of outstanding borrowings (including the amount drawn from the letter of credit, which also must be
repaid as provided in the trust agreement) from PCEC to approximately $4.5 million plus interest thereon, related to shortfalls from prior
months. Consequently, no further distributions may be made to Trust unitholders until the Trust’s indebtedness created by such amounts
drawn or borrowed, including interest thereon, has been paid in full.
Sales Volumes and Prices
The following table displays PCEC’s underlying
sales volumes and average prices for the Current Month:
| |
Underlying Properties | |
| |
Sales Volumes | |
Average Price | |
| |
(Boe) | |
(Boe/day) | |
(per Boe) | |
Developed Properties (a) | |
| 35,126 | |
| 1,171 | |
$ | 64.97 | |
Remaining Properties (b) | |
| 15,992 | |
| 533 | |
$ | 60.84 | |
| |
| | |
| | |
| | |
(a) Crude oil sales represented 98% of sales volumes | |
| | |
| | |
| | |
(b) Crude oil sales represented 100% of sales volumes | |
| | |
| | |
| | |
Update on Estimated Asset Retirement Obligations
As previously disclosed, in November 2019,
PCEC informed the Trustee that, as permitted by the Conveyance, PCEC intended to begin deducting its estimated asset retirement obligations
(“ARO”) associated with the West Pico, Orcutt Hill, Orcutt Hill Diatomite, East Coyote and Sawtelle fields, thereby reducing
the amounts payable to the Trust under its Net Profits Interests. ARO is the recognition related to net present value of future plugging
and abandonment costs that all oil and gas operators face. PCEC engaged an accounting firm, Moss Adams LLP (“Moss Adams”),
acting as third-party consultants, to assist PCEC in determining its estimated ARO, and on February 27, 2020, PCEC informed the Trustee
that based on the analysis performed by Moss Adams, PCEC’s estimated ARO, as of December 31, 2019, was $45,695,643, which is
approximately $10.0 million less than the undiscounted amount that was originally estimated before Moss Adams completed its analysis,
as previously disclosed in the Trust’s Current Report on Form 8-K filed on November 13, 2019. According to PCEC
and its third-party consultants, its estimated ARO, which reflected PCEC’s assessment of current market conditions as of December 31,
2019 and changes in California law, was determined to be approximately $33.2 million for the Developed Properties and approximately $12.5
million for the Remaining Properties, or approximately $26.5 million and approximately $3.1 million net to the Trust, respectively, and
PCEC has reflected these amounts beginning with the calculation of the net profits generated during January 2020. The accrual has
resulted in a current cumulative net profits deficit of approximately $5.9 million, which must be recouped from proceeds otherwise payable
to the Trust from the Trust’s Net Profits Interests.
PCEC has informed the Trustee that in accordance
with generally accepted accounting principles, PCEC will evaluate the ARO on a quarterly basis. As a result of that re-evaluation, the
actual ARO incurred in the future may be greater or less than the estimated amounts provided by PCEC. As previously disclosed, PCEC has
informed the Trustee that at year-end 2020, and following the end of each of the first, second and third quarters of 2021, in light of
the accounting guidance under Accounting Standards Codification 410-20-35-3, which requires the recognition of changes in the asset retirement
obligation due to the passage of time and revision of the timing or amount of the originally estimated undiscounted cash flows, PCEC re-evaluated
the estimated ARO, which resulted in an aggregate increase to the ARO accrual for the Developed Properties by approximately $5.1 million,
net to the Trust’s interest, and an aggregate increase to the ARO accrual for the Remaining Properties by approximately $288,000,
net to the Trust’s interest. PCEC previously informed the Trustee that PCEC has recognized additional asset retirement obligations
for the year ended December 31, 2021, in the amount of approximately $1.2 million, of which approximately $0.4 million relates to
the Developed Properties, while approximately $0.8 million relates to the Remaining Properties. Net to the Trust’s interests, this
represents an upward ARO revision of approximately $0.3 million and approximately $0.2 million for the Developed Properties
and the Remaining Properties, respectively. PCEC also previously informed the Trustee that PCEC’s asset retirement obligation for
the year ended December 31, 2022 has increased due to accretion in the amount of approximately $3.3 million, of which approximately
$2.4 million relates to the Developed Properties and approximately $0.9 million relates to the Remaining Properties. Net to the Trust’s
interests, this represents a further upward ARO revision of approximately $1.9 million and approximately $0.2 million for the Developed
Properties and the Remaining Properties, respectively.
Based on PCEC’s estimate of its ARO attributable
to the Net Profits Interest, deductions relating to estimated ARO are likely to eliminate the likelihood of any distributions to Trust
unitholders for the foreseeable future, as previously disclosed in the Trust’s Current Report on Form 8-K filed on November 13,
2019.
As previously disclosed, the Trust engaged Martindale
Consultants, Inc. (“Martindale”), a provider of analysis and compliance review services to the oil and gas industry,
to perform an independent review of the estimated ARO in the Moss Adams report that PCEC provided to the Trustee. The Trustee also has
engaged an accounting expert to advise the Trustee regarding the accruals that PCEC has booked relating to its estimated ARO. As disclosed
in the Trust’s Current Report on Form 8-K filed on December 29, 2020, Martindale has completed its review of the estimated
ARO and on December 21, 2020 provided its analysis and recommendations to the Trustee. Based on Martindale’s recommendations
provided in its report to the Trust, as disclosed in the Trust’s Current Report on Form 8-K filed on December 29, 2020,
the Trustee requested that PCEC promptly make several adjustments to its calculations and methods of deducting ARO from the proceeds to
which the Trust is otherwise entitled pursuant to its Net Profits Interests. PCEC has responded to the Trustee, indicating PCEC’s
view that the adjustments would violate applicable contracts and accounting standards, and has therefore declined to make any adjustments
to the estimated ARO calculation based on those requests and the recommendations of the Martindale report. The Trustee has concluded that
it has taken all action reasonably available to it under the Trust’s governing documents in connection with PCEC’s ARO calculation
and therefore has determined not to take further action at this time.
As described in more detail in the Trust’s
filings with the SEC, the trust agreement provides that the Trust will terminate if the annual cash proceeds received by the Trust from
the Net Profits Interests and 7.5% overriding royalty interest total less than $2.0 million for each of any two consecutive calendar
years. Because of the cumulative net profits deficit—which PCEC contends is the result of the substantial reduction in commodity
prices during 2020 due to the COVID-19 pandemic and PCEC’s deduction of estimated ARO beginning in the first quarter of 2020—the
only cash proceeds the Trust has received from March 2020 has been attributable to the 7.5% overriding royalty interest, other than
the period from August 2022 through February 2023, when the net profits deficit with respect to the Remaining Properties had
been eliminated. As a result, the total proceeds received by the Trust in each of 2020 and 2021 were less than $2.0 million. Therefore,
the Trust had been expected to terminate by its terms at the end of 2021.
Status of the Dissolution of the Trust
As previously disclosed in the Trust’s Current
Report on Form 8-K filed on December 23, 2021, on December 8, 2021, Evergreen Capital Management LLC (“Evergreen”)
filed an Amended Class Action and Shareholder Derivative Complaint alleging a derivative action on behalf of the Trust and against
PCEC in the Superior Court of the State of California for the County of Los Angeles (the “Court”).
On December 10, 2021, Evergreen filed a motion
for temporary restraining order and for preliminary injunction, seeking to (1) enjoin the Trustee from dissolving the Trust, (2) enjoin
PCEC from dissolving the Trust, (3) direct PCEC to account for all monies withheld from the Trust on the basis of ARO costs since
September 2019, and (4) direct PCEC to place such monies in escrow. On December 16, 2021, the Court granted Evergreen’s
application for a temporary restraining order only to the extent of enjoining the dissolution of the Trust. Accordingly, the Trust did
not dissolve at the end of 2021 and commence the process of selling its assets and winding up its affairs.
On January 11, 2022, PCEC and Evergreen filed
an agreed stipulation to stay the prosecution of Evergreen’s derivative claims pending an arbitration of such claims. On January 13,
2022, the Court signed an Order dissolving the December 16, 2021, temporary restraining order and entering a new temporary restraining
order to preserve the status quo until a tribunal of three arbitrators appointed pursuant to the trust agreement could rule on any
request by Evergreen for injunctive relief. On April 11, 2022, PCEC notified the Court, at the arbitrators’ request, that
the arbitration panel had issued an order on April 7, 2022, denying Evergreen’s request for injunctive relief. On April 13,
2022, Evergreen notified the Court that Evergreen had filed a motion for reconsideration with the arbitration panel that same day, which
was denied on May 26, 2022. On August 30, 2022, the arbitration Panel issued a Partial Final Award dismissing with prejudice
Evergreen’s derivative claims against PCEC, including Evergreen’s application for an injunction. On December 5, 2023,
the California Superior Court confirmed that Partial Final Award.
On June 20, 2022, Evergreen filed an amended
pleading in the arbitration, adding the Trustee as a party to that proceeding. In early September 2022, Evergreen informed the Trustee
that it was going to seek a preliminary injunction while its claims against the Trustee were pending. At the request of the arbitration
panel, the Trustee agreed to take no steps toward the sale of the Trust corpus until the Panel decided Evergreen’s application for
a preliminary injunction. On September 12, 2022, the Trustee filed a motion to dismiss Evergreen’s claims against the Trustee.
On September 22, 2022, Evergreen filed an opposition to the Trustee’s motion to dismiss. On September 15, 2022, Evergreen
filed a motion to enjoin the Trustee from selling the Trust assets or dissolving the Trust during the pendency of the arbitration. The
Trustee and PCEC filed in opposition to Evergreen’s motion on September 22, 2022. Both motions were heard by the Panel on October 24,
2022. On October 31, 2022, the Panel granted the Trustee’s motion and dismissed Evergreen’s claims against the Trustee
with prejudice, which mooted Evergreen’s request for injunctive relief.
As a result, the Trustee plans to move forward
with the winding up of the Trust in accordance with the provisions of the Trust Agreement, which will include selling all of the Trust’s
assets and distributing the net proceeds of the sale to the Trust unitholders after payment, or reasonable provision for payment, of all
Trust liabilities, including the establishment of cash reserves in such amounts as the Trustee in its discretion deems appropriate for
the purpose of making reasonable provision for all claims and obligations of the Trust, including any contingent, conditional or unmatured
claims and obligations, in accordance with the Delaware Statutory Trust Act. The Trustee is also working with PCEC and the independent
auditor of the Trust to complete the Trust’s financial statements and its filings with the Securities and Exchange Commission and
will make them available to unitholders as soon as possible. In the meantime, the Trustee will continue to communicate material information
to unitholders via press releases and Forms 8-K.
On March 31, 2023, PCEC submitted a demand
for arbitration against the Trustee, as trustee of the Trust, seeking, among other things, (1) an order compelling the Trustee to
commence the process of dissolving the Trust pursuant to the provisions of the Trust Agreement, (2) a declaration that the Conveyance
permits the legal fees and costs that PCEC, as operator, incurred in defending the Evergreen litigation and arbitration proceedings described
above to be deducted from the proceeds from the Net Profits Interests, and (3) a declaration that the Trust must repay, with interest,
the legal fees and costs that PCEC paid on behalf of the Trust to defend claims against the Trustee in the Evergreen proceedings or, alternatively,
that PCEC may deduct such legal fees and costs from the proceeds from the Net Profits Interests. The total amount of legal fees at issue
is approximately $5.0 million. In its answer to the arbitration panel, the Trustee has denied that PCEC is entitled to the relief it seeks.
The hearing before the arbitration panel was concluded on August 2, 2023, and the panel is expected to announce its award by the
end of September 2023. Regardless of the outcome, the Trustee will incur expenses in connection with the arbitration, and to the
extent such expenses may be subject to indemnification by the Trust, any such expenses could increase the Trust’s administrative
expenses significantly. The Trust is currently unable to assess the probability of loss or estimate a range of any potential loss the
Trust may incur in connection with the arbitration.
Production Update
PCEC has informed the Trustee that PCEC continues
to strategically deploy capital to maintain production within export constraints resulting from the previously disclosed termination of
the Phillips 66 pipeline Connection Agreement described in greater detail below. These constraints have led to a curtailment of production
at Orcutt, resulting in a decrease of 12,567 bbls or (23%) for Orcutt in June 2023, as compared to December 2022, the last full
month of production prior to the termination of the Connection Agreement.
Cancellation of Connection Agreement with Phillips
66
As previously disclosed, PCEC has informed the
Trustee that on September 22, 2022, PCEC received notice from Phillips 66 of the cancellation of the Connection Agreement between
PCEC and Phillips 66 with respect to the three leases located south of Orcutt in Santa Barbara, California, effective upon completion
of PCEC’s deliveries in December 2022. As a result of the cancellation, and the subsequent shutdown of the Santa Maria Refinery
on January 4, 2023, PCEC no longer has a pipeline interconnection between the Orcutt properties and the Santa Maria Refinery. This
pipeline was the sole means by which PCEC transported its crude oil from the Orcutt properties, which relates to approximately 86% and
91% of the production attributable to the Trust’s interests in 2021 and 2022, respectively.
The shutdown of the refinery and the pipeline
will adversely affect PCEC’s financial performance, and the revenues that may be payable to the Trust. PCEC previously informed
the Trustee that it was able to secure a short-term contract to transport oil from the Orcutt properties commencing on January 4,
2023, albeit at reduced volumes and with a higher differential compared to the terms previously achievable through the Phillips 66 Connection
Agreement. PCEC has confirmed to the Trustee that the short-term contract has been extended, with slightly improved terms, to the end
of 2023. PCEC continues to explore alternative options for long-term transportation of oil from the Orcutt properties by other means.
Overview of Trust Structure
Pacific Coast Oil Trust is a Delaware statutory
trust formed by PCEC to own interests in certain oil and gas properties in the Santa Maria Basin and the Los Angeles Basin in California
(the “Underlying Properties”). The Underlying Properties and the Trust’s net profits, and royalty interests are described
in the Trust’s filings with the SEC. As described in the Trust’s filings with the SEC, the amount of any periodic distributions
is expected to fluctuate, depending on the proceeds received by the Trust as a result of actual production volumes, oil and gas prices,
development expenses, and the amount and timing of the Trust’s administrative expenses, among other factors. For additional information
on the Trust, please visit https://royt.q4web.com/home/default.aspx.
Cautionary Statement Regarding Forward-Looking
Information
This press release contains statements that are
"forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements contained in this press release, other than statements of historical facts, are "forward-looking statements" for
purposes of these provisions. These forward-looking statements include estimates of future asset retirement obligations, expectations
regarding the impact of deductions for such obligations on future distributions to unitholders, estimates of future total distributions
to unitholders, expectations regarding the outcome of the legal proceedings relating to the Trust and any future dissolution of the Trust,
statements regarding the impact of returning shut-in wells to production, expectations regarding the cancellation of the Connection Agreement
between Phillips 66 and PCEC and the shutdown of the Santa Maria refinery, and the impact of such cancellation and shutdown on PCEC’s
financial condition and future payments to the Trust, expectations regarding PCEC’s ability to loan funds to the Trust, statements
regarding the expected winding down of the Trust, expectations regarding the outcome of the arbitration proceedings between PCEC and the
Trustee and the amount and date of any anticipated distribution to unitholders. In any case, PCEC’s deductions of its estimated
asset retirement obligations will have a material adverse effect on distributions to the unitholders and on the trading price of the Trust
units and may result in the termination of the Trust. Any anticipated distribution is based, in part, on the amount of cash received
or expected to be received by the Trust from PCEC with respect to the relevant period. Any differences in actual cash receipts by the
Trust could affect this distributable amount. The amount of such cash received or expected to be received by the Trust (and its ability
to pay distributions) has been and will be significantly and negatively affected by low commodity prices, which declined significantly
during 2020, could decline again and could remain low for an extended period of time as a result of a variety of factors that are beyond
the control of the Trust and PCEC. Other important factors that could cause actual results to differ materially include expenses related
to the operation of the Underlying Properties, including lease operating expenses, expenses of the Trust, and reserves for anticipated
future expenses. Statements made in this press release are qualified by the cautionary statements made in this press release. Neither
PCEC nor the Trustee intends, and neither assumes any obligation, to update any of the statements included in this press release. An investment
in units issued by Pacific Coast Oil Trust is subject to the risks described in the Trust's Annual Report on Form 10-K for the year
ended December 31, 2018 filed with the SEC on March 8, 2019, and if applicable, the Trust’s subsequent Quarterly Reports
on Form 10-Q. The Trust's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q are available over the Internet
at the SEC's website at http://www.sec.gov.
Contact:
Pacific Coast Oil Trust
The Bank of New York Mellon Trust Company,
N.A., as Trustee
Sarah Newell
1 (512) 236-6555
601 Travis Street, 16th Floor,
Houston, TX 77002
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