Pacific Coast Stock Price, News & Analysis

Pacific Coast Oil Trust (ROYTL), also referred to as PACIFIC COAST OIL TR UTS, is a royalty trust formed by Pacific Coast Energy Company LP ("PCEC"). The Trust holds net profits interests and a 7.5% overriding royalty interest in certain underlying oil and gas properties, and it is associated with the crude petroleum and natural gas extraction industry within the broader mining, quarrying, and oil and gas extraction sector.

The Trust’s economic interests are defined in a conveyance of net profits interests and overriding royalty interest (the "Conveyance"). Under this structure, the Trust is entitled to a share of net profits generated by specified developed properties (the "Developed Properties") and to an interest in remaining properties (the "Remaining Properties"), including Orcutt Diatomite and Orcutt Field. The Trust’s reported calculations distinguish between an 80% net profits interest in the Developed Properties and a 25% net profits interest in the Remaining Properties, as well as the separate 7.5% overriding royalty interest on the Remaining Properties, as described in its public announcements.

The Trust’s cash flows depend on revenues from the underlying oil and gas production, less lease operating expenses, production and property taxes, development costs, and deductions related to estimated asset retirement obligations ("ARO"). PCEC has informed the Trustee that ARO deductions are made in accordance with the Conveyance and generally accepted accounting principles. These ARO amounts reflect the net present value of future plugging and abandonment costs associated with fields such as West Pico, Orcutt Hill, Orcutt Hill Diatomite, East Coyote and Sawtelle, based on analyses prepared with third-party consultants including Moss Adams LLP and Cornerstone Engineering, Inc.

The Trust has reported that deductions relating to estimated ARO have had a significant effect on net profits calculations. According to the Trust’s public disclosures, PCEC began deducting estimated ARO from amounts otherwise payable to the Trust, and those deductions, along with other expenses, have contributed to cumulative net profits deficits for both the Developed Properties and the Remaining Properties. The Trust has stated that net profits deficits must be recouped from proceeds otherwise payable to the Trust from the applicable net profits interests, and that the Trust itself is not responsible for directly paying such deficits.

Because annual cash proceeds received by the Trust from its net profits interests and 7.5% overriding royalty interest totaled less than $2.0 million for each of 2020 and 2021, the Trust has disclosed that its amended and restated trust agreement (the "Trust Agreement") provides that the Trust is to be dissolved and wound up. The Trust has also explained that loans made by PCEC under a promissory note, and amounts drawn under a $1 million letter of credit previously provided by PCEC, are to be repaid from proceeds, if any, payable to the Trust under the net profits interests and royalty interest, and from any proceeds from a sale of the Trust’s assets in connection with the dissolution of the Trust.

The Trust further reports that, under the Trust Agreement, PCEC is obligated, upon written request of the Trustee, to loan funds to the Trust as necessary to pay ordinary course administrative expenses when Trust cash and the letter of credit are insufficient. The Trust has indicated that the letter of credit has been fully drawn down and that PCEC has continued to loan funds pursuant to a promissory note so that the Trust can meet its administrative obligations. These loans, together with interest, increase the amount owed by the Trust to PCEC and must be repaid before any further distributions can be made to unitholders.

The Trust’s public communications repeatedly state that, based on information from PCEC and its estimates of ARO attributable to the net profits interests, deductions relating to estimated ARO are likely to eliminate the likelihood of any distributions to Trust unitholders for the foreseeable future. In multiple announcements, the Trust notes that there will be no cash distribution to holders of its units of beneficial interest for the relevant record dates, and that the likelihood of distributions in the foreseeable future is described as extremely remote.

In addition to financial and operational matters, the Trust has disclosed information about litigation involving PCEC. A terminated employee of PCEC filed a complaint in the U.S. District Court for the Central District of California alleging retaliation for whistleblowing activities and alleging, among other things, that PCEC provided false data to the Trustee and to the Trust’s independent registered public accounting firm regarding operations and ARO calculations. The Trust has reported procedural developments in that case, including amendments to the complaint, motions to dismiss, and the court’s decisions on those motions, as well as related administrative complaints before agencies such as OSHA or state occupational safety authorities. The Trust has stated that PCEC maintains that the plaintiff’s allegations are without merit and that PCEC intends to defend against them, while the Trustee is in the process of independently investigating relevant allegations made in the SEC complaint, subject to the availability of funds for expert assistance as provided under the Trust Agreement.

For investors and researchers, Pacific Coast Oil Trust represents a royalty trust structure tied to mature oil and gas properties, where cash flows are highly sensitive to commodity prices, operating costs, ARO estimates, and the terms of the Trust Agreement. The Trust’s disclosures emphasize the interaction between net profits interest calculations, cumulative net profits deficits, and the priority of repaying amounts owed to PCEC and other obligations before any potential distributions to unitholders, particularly in the context of the Trust’s contractual dissolution and wind-up provisions.

Business structure and underlying interests

Pacific Coast Oil Trust describes itself as a royalty trust formed by PCEC, with its economic interests defined by the Conveyance. The Trust’s interests are divided among:

• An 80% net profits interest in the Developed Properties.
• A 25% net profits interest in the Remaining Properties.
• A 7.5% overriding royalty interest in the Remaining Properties, including Orcutt Diatomite and Orcutt Field.

In its monthly announcements, the Trust separately reports operating income or loss for the Developed Properties and amounts attributable to the overriding royalty interest or net profits interest on the Remaining Properties. These disclosures show that crude oil sales represent the vast majority of sales volumes from the underlying properties.

Asset retirement obligations and impact on net profits

The Trust’s public statements provide detailed discussion of asset retirement obligations (ARO). PCEC informed the Trustee that, as permitted by the Conveyance, it would begin deducting estimated ARO associated with specified fields from the amounts payable to the Trust. PCEC engaged Moss Adams LLP as third-party consultants to assist in determining estimated ARO as of December 31, 2019, and later engaged Cornerstone Engineering, Inc. to perform an ARO evaluation for certain fields, with Moss Adams providing updated valuations based on Cornerstone’s report.

According to these disclosures, PCEC evaluates ARO on a periodic basis in line with accounting guidance, which can result in upward or downward adjustments to ARO estimates and related accretion. The Trust reports that these adjustments are reflected in the net profits interest calculations for specific months and that they have contributed to substantial cumulative net profits deficits. The Trust has also engaged Martindale Consultants, Inc. to perform an independent review of the estimated ARO in the Moss Adams report and has retained an accounting expert to advise the Trustee regarding PCEC’s ARO accruals.

Dissolution, indebtedness, and distributions

The Trust Agreement contains provisions that govern when the Trust is to be dissolved and wound up. The Trust has disclosed that, because annual cash proceeds from its net profits interests and overriding royalty interest were below $2.0 million for each of 2020 and 2021, these provisions require dissolution and wind-up of the Trust. In connection with this process, the Trust has explained that proceeds from any sale of the Trust’s assets would be used to repay amounts drawn under the letter of credit and borrowed from PCEC, and to pay Trust expenses, including any estimated future remaining expenses, with any remaining net proceeds to be distributed to unitholders.

At the same time, the Trust’s announcements emphasize that loans from PCEC and amounts drawn under the letter of credit, together with interest, must be repaid from proceeds otherwise payable to the Trust under the net profits interests and overriding royalty interest, and from any asset sale proceeds. The Trust states that no further distributions may be made until this indebtedness has been paid in full and that, given the outstanding amount borrowed, there may not be any net proceeds from a sale of the Trust’s assets to be distributed to unitholders.

Risk factors highlighted in public disclosures

In its recurring communications, Pacific Coast Oil Trust highlights several key risk considerations for unitholders:

• Dependence on PCEC for operational data, ARO estimates, and funding of administrative shortfalls under the Trust Agreement.
• The impact of ARO deductions and accretion on net profits calculations and cumulative deficits.
• The existence of significant indebtedness to PCEC under a promissory note and the fully drawn letter of credit.
• The contractual requirement to dissolve and wind up the Trust following periods of low annual cash proceeds.
• Uncertainty related to litigation involving PCEC and regulatory or administrative proceedings referenced in the Trust’s disclosures.

These factors, as described in the Trust’s own announcements, frame Pacific Coast Oil Trust as a royalty trust in the process defined by its governing agreement, with economic outcomes closely tied to the performance of the underlying oil and gas properties, ARO accounting, and the priority of debt repayment before any potential unitholder distributions.