Pacific Coast Oil Trust Announces No Cash Distribution for January 2025: Ongoing Legal and Financial Challenges
Pacific Coast Oil Trust, a royalty trust formed by Pacific Coast Energy Company LP (“PCEC”), has announced that it will not make any cash distribution to its unit holders of beneficial interest for the period ending January 31, 2025. This decision stems from the Trust’s calculation of net profits generated during November 2024, also referred to as the “Current Month,” as outlined in the Trust’s governing conveyance of net profits interests and overriding royalty interest (the “Conveyance”). Given the current financial position of the Trust and concerns regarding insufficient funds to meet its administrative expenses and its outstanding debt obligations, the likelihood of any future distributions remains highly unlikely.
The announcement marks the continuation of a difficult financial period for the Trust, as it has been struggling to generate sufficient revenue from its operations to cover its operational expenses. The Trust has previously stated that it was anticipating these challenges due to its limited revenue streams. According to the Trust’s agreement, since the annual cash proceeds from its net profits and overriding royalty interests totaled less than $2.0 million in 2020 and 2021, the Trust was required to dissolve and wind-up its operations. This process of dissolution is still ongoing, and it remains unclear whether there will be any proceeds from the sale of assets available to distribute to unit holders.
Legal and Regulatory Issues Surrounding Pacific Coast Energy Company
Adding to the Trust’s ongoing financial difficulties, Pacific Coast Energy Company (PCEC) is facing legal challenges that may further complicate its financial position. On October 23, 2024, a former employee of PCEC, Brendan Potyondy, filed a lawsuit against the company in the U.S. District Court for the Central District of California. Potyondy claims that PCEC retaliated against him for engaging in whistleblowing activities under federal and state laws. Specifically, Potyondy alleges that he reported violations of various laws to federal and state agencies, including the U.S. Securities and Exchange Commission (SEC), the California Occupational Safety and Health Administration (Cal/OSHA), the California Geologic Management Division, and the California Department of Fish and Wildlife.
One of the most serious claims in the lawsuit involves allegations that PCEC knowingly provided false data to the Trust’s trustee and its independent public accounting firm regarding the company’s operations. These claims center on the calculation of asset retirement obligations, which could have a significant impact on the financial health of the Trust and the ability to distribute funds to its unit holders. However, PCEC has consistently denied these allegations, insisting that the claims are without merit. The company has stated that it will vigorously defend against the accusations in court.
In a recent update to the case, on January 28, 2025, the Court granted PCEC’s motion to dismiss the remaining claims in Potyondy’s complaint. However, the Court has granted Potyondy until February 11, 2025, to file an amended complaint in an attempt to resolve the deficiencies identified by the Court in his initial filing. As of now, PCEC is maintaining that the allegations are unfounded, and the trustee has indicated that it is conducting an independent investigation into the matter.
Financial and Operational Overview
As for the Trust’s financial performance during the current month, the results were less than promising. For its developed properties, the Trust generated approximately $0.8 million in operating income. Revenues from these properties amounted to around $2.6 million, but this was offset by approximately $1.9 million in lease operating expenses, including property taxes, and a small development cost refund of $23,000 related to unused equipment. The average realized price for the developed properties was $66.16 per barrel of oil equivalent (Boe), which represented a slight decrease from the prior month’s realized price of $68.46 per Boe.
Despite the operating income generated from the developed properties, the cumulative net profits deficit for these properties has continued to grow, although it decreased slightly from approximately $19.3 million in the previous month to $19.1 million in the current month. This continuing deficit highlights the ongoing challenges that the Trust faces in terms of profitability.
In addition to the developed properties, the Trust also reported income from its 7.5% overriding royalty interest on the remaining properties, specifically from the Orcutt Diatomite and Orcutt Field properties. These properties generated approximately $56,000 in revenue during the current month. The average realized price for these properties was $62.60 per Boe, which was also lower than the previous month’s price of $65.63 per Boe. Similar to the developed properties, the cumulative net profits deficit for the remaining properties has also decreased slightly, from $139,000 in the prior month to $114,000 in the current month.
Financial Shortfalls and Outstanding Obligations
The Trust’s financial situation is made even more precarious by the ongoing shortfall between its revenues and its administrative expenses. The monthly operating and services fee owed to PCEC is approximately $113,000, while the Trust’s general and administrative expenses total about $190,000. This results in a significant shortfall of approximately $247,000 for the current month, as the Trust’s revenue from its properties does not come close to covering these costs.
In order to manage its cash flow issues, PCEC has provided the Trust with a $1 million letter of credit, which can be drawn upon if the Trust’s available cash reserves are insufficient to meet its expenses. However, as of March 31, 2021, the Trust has fully drawn down this letter of credit. As a result, PCEC has been forced to loan funds to the Trust under a promissory note to cover the shortfalls from previous months and to address the current month’s expected shortfall.
At present, the Trust owes PCEC approximately $9.4 million, which includes the full amount drawn from the letter of credit, amounts borrowed under the promissory note, and accrued interest. These loans will need to be repaid from any future proceeds from the Trust’s net profits and royalty interests or from the sale of the Trust’s assets as part of the ongoing dissolution process. However, as it stands, the Trust is unlikely to generate sufficient revenue in the short term to repay these loans and distribute funds to unit holders.
Sales Volumes and Prices
The following table provides an overview of the sales volumes and average prices for the Trust’s underlying properties during the current month:
| Underlying Properties | Sales Volumes (Boe) | Average Price (per Boe) |
|---|---|---|
| Developed Properties | 38,971 | $66.16 |
| Remaining Properties | 12,810 | $62.60 |
For the developed properties, the total sales volume amounted to 38,971 Boe, with an average price of $66.16 per Boe. The remaining properties sold 12,810 Boe, with an average price of $62.60 per Boe. Crude oil sales accounted for the majority of the sales volume in both cases.
Update on Asset Retirement Obligations
One of the key factors contributing to the financial challenges faced by the Trust is the ongoing issue of asset retirement obligations (ARO). These obligations relate to the estimated costs of decommissioning and restoring the properties after production activities have concluded. The Trust has been working closely with PCEC to assess and update the estimated ARO for its properties, which has a direct impact on the net profits interests and royalty income generated by the Trust. The current month’s net profits deficit figures reflect adjustments made based on these updated estimates.
