Pacific Coast Oil Trust Reports Monthly Net Profits
Pacific Coast Oil Trust (the “Trust”), a royalty trust established by Pacific Coast Energy Company LP (“PCEC”), has announced that no cash distribution will be made to the holders of its units of beneficial interest for February 28, 2025. This decision is based on the Trust’s calculation of net profits generated in December 2024 (the “Current Month”), as specified in the conveyance of net profits interests and overriding royalty interest (the “Conveyance”).
Financial Challenges and Trust Dissolution
As outlined in the section “Update on Estimated Asset Retirement Obligations,” based on information from PCEC, any monthly payments that PCEC may make to the Trust are unlikely to be sufficient to cover administrative expenses and the Trust’s outstanding debt to PCEC. Consequently, the probability of distributions to unitholders in the near future is extremely low. Additionally, under the provisions of the amended and restated trust agreement (the “Trust Agreement”), the Trust is required to dissolve since annual cash proceeds from net profits interests and the 7.5% overriding royalty interest fell below $2.0 million in both 2020 and 2021.
All financial and operational data in this announcement have been provided to the Trustee by PCEC. The financial struggles of the Trust and its ultimate dissolution are compounded by ongoing legal challenges and concerns regarding financial reporting.
Legal Proceedings Against PCEC
On October 23, 2024, a former PCEC employee filed a lawsuit in the U.S. District Court for the Central District of California. The case, Brendan Potyondy v. Pacific Coast Energy Company, LP, alleges that PCEC retaliated against the plaintiff for engaging in protected whistleblowing activities, violating federal and state laws. The complaint asserts that the plaintiff reported alleged legal violations by PCEC to multiple regulatory agencies, including the U.S. Securities and Exchange Commission (SEC), the California Occupational Safety and Health Administration, the California Geologic Management Division, and the California Department of Fish and Wildlife.
In the complaint submitted to the SEC, the plaintiff accused PCEC of deliberately providing false data to the Trustee and the Trust’s independent registered public accounting firm regarding operational activities, including the calculation of asset retirement obligations. Following these allegations, on November 22, 2024, the plaintiff filed an amended complaint, which removed all claims related to state law violations and reports to state agencies.
On January 28, 2025, the court granted PCEC’s motion to dismiss the remaining claim but allowed the plaintiff until February 11, 2025, to amend and correct the deficiencies identified in the complaint. The plaintiff subsequently filed a second amended complaint on February 6, 2025. PCEC responded by filing a motion to dismiss on February 18, 2025, and a court hearing for this motion is scheduled for March 21, 2025. PCEC maintains that the allegations are baseless and has stated its intention to defend itself vigorously. Meanwhile, the Trustee’s independent investigation into the claims is ongoing.
Financial Performance of the Trust
For December 2024, the net profits calculation for the Developed Properties showed an operating income of approximately $0.4 million. Revenue from these properties amounted to approximately $2.5 million, while lease operating expenses, including property taxes, were around $2.1 million. Development costs totaled approximately $5,000. The average realized price for the Developed Properties was $67.07 per barrel of oil equivalent (Boe), compared to $66.16 per Boe in November 2024. The cumulative net profits deficit for the Developed Properties increased from $19.1 million in the prior month to $19.2 million.
The calculation for the 7.5% overriding royalty interest on the Remaining Properties, including Orcutt Diatomite and Orcutt Field, generated approximately $56,000 in revenue. The average realized price for the Remaining Properties was $64.11 per Boe in December, up from $62.60 per Boe in November. However, the cumulative net profits deficit for these properties increased from $114,000 in November to $164,000 in December.
Trust’s Debt and Financial Obligations
The monthly operating and service fees payable to PCEC amount to approximately $113,000, while the Trust’s estimated general and administrative expenses total around $150,000. Given that the Trust received only $56,000 from PCEC for the Remaining Properties, this created a financial shortfall of approximately $207,000.
PCEC had previously issued a $1 million letter of credit to the Trust for administrative expenses, but this amount has been fully drawn down as of March 31, 2021. Under the Trust Agreement, if additional funds beyond the letter of credit are required, PCEC is obligated to provide loans to cover these expenses. As a result, PCEC has been lending funds to the Trust via a promissory note to cover previous and current shortfalls, including the estimated $207,000 deficit for the Current Month.
As of the end of December 2024, the Trust owed PCEC approximately $9.8 million, which includes amounts borrowed, amounts drawn from the letter of credit, and accrued interest. Loans from PCEC must be repaid from future proceeds generated by the Net Profits Interests, the Royalty Interest, or proceeds from the potential sale of the Trust’s assets during its dissolution. Given the size of the Trust’s debt, it is highly unlikely that any proceeds will remain for distribution to unitholders.
Estimated Asset Retirement Obligations
PCEC has also provided updates regarding its estimated asset retirement obligations (ARO). In November 2019, PCEC informed the Trustee that it would begin deducting estimated ARO from the net profits interests associated with various oil fields, including West Pico, Orcutt Hill, Orcutt Hill Diatomite, East Coyote, and Sawtelle. These deductions are intended to cover plugging and abandonment costs required under California law.
PCEC enlisted third-party consultants, Moss Adams LLP, to assist in estimating ARO liabilities. On February 27, 2020, PCEC reported that its ARO estimate as of December 31, 2019, was $45.7 million, approximately $10 million lower than previous estimates. Specifically, the estimated ARO for the Developed Properties was determined to be $33.2 million, while the Remaining Properties had an estimated ARO of $12.5 million. These figures were adjusted downward from previous estimates due to updated market conditions and changes in California law.
PCEC continues to evaluate ARO on a quarterly basis. Since 2020, periodic reassessments have resulted in adjustments to estimated obligations, with the Developed Properties seeing an aggregate increase of $5.1 million in net ARO and the Remaining Properties experiencing an increase of approximately $288,000. These figures reflect changes in the timing and costs associated with future decommissioning obligations.
