UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 2016 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission file number 1-8245
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NORTH EUROPEAN OIL ROYALTY TRUST
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(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (IRS Employer Identification Number)
Suite 19A, 43 West Front Street, Red Bank, N.J. 07701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 732-741-4008
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Units of Beneficial Interest New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
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[X] Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Accelerated filer X
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Non-accelerated filer Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
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As of April 29, 2016, the aggregate market value of outstanding units of
beneficial interest of the registrant held by non-affiliates of the
registrant was $85,624,073 on such date.
As of December 29, 2016, there were 9,190,590 units of beneficial interest
("units") of the registrant outstanding.
Documents Incorporated by Reference
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Items 10, 11, 12, 13 and 14 of Part III have been partially or wholly omitted
from this report and the information required to be contained therein is
incorporated by reference from the registrant's definitive proxy statement
for the 2016 Annual Meeting to be held on February 16, 2017.
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Table of Contents
Page
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PART I
Item 1. Business..................................................... 4
Item 1A. Risk Factors................................................. 8
Item 1B. Unresolved Staff Comments.................................... 10
Item 2. Properties................................................... 11
Item 3. Legal Proceedings............................................ 15
Item 4. Mine Safety Disclosures...................................... 15
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchase of Equity
Securities.................................................. 15
Item 6. Selected Financial Data...................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 28
Item 8. Financial Statements and Supplementary Data.................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
Item 9A. Controls and Procedures...................................... 39
Item 9B. Other Information............................................ 41
PART III
Item 10. Directors, Executive Officers and Corporate Governance....... 42
Item 11. Executive Compensation....................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 42
Item 13. Certain Relationships and Related Transactions, and Director
Independence................................................ 42
Item 14. Principal Accountant Fees and Services....................... 43
PART IV
Item 15. Exhibits and Financial Statement Schedules................... 43
Item 16. Form 10-K Summary............................................
Signatures............................................................. 44
Exhibit Index.......................................................... 45
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PART I
Item 1. Business.
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(a) General Development of Business.
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North European Oil Royalty Trust (the "Trust") is a grantor trust
which, on behalf of the owners of beneficial interest in the Trust (the "unit
owners"), holds overriding royalty rights covering gas and oil production in
certain concessions or leases in the Federal Republic of Germany. The rights
are held under contracts with local German exploration and development
subsidiaries of ExxonMobil Corp. ("ExxonMobil") and the Royal Dutch/Shell
Group of Companies ("Royal Dutch/Shell Group"). Under these contracts, the
Trust receives various percentage royalties on the proceeds of the sales of
certain products from the areas involved. At the present time, royalties
are received for sales of gas well gas, oil well gas, crude oil, condensate
and sulfur. See Item 2 of this Report for descriptions of the relationships
of these companies and certain of these contracts.
The royalty rights were received by the Trust from North European
Oil Company (the "Company") upon dissolution of the Company in September
1975. The Company was organized in 1957 as the successor to North European
Oil Corporation (the "Corporation"). The Trust is administered by trustees
(the "Trustees") under an Agreement of Trust dated September 10, 1975, as
amended (the "Trust Agreement").
Neither the Trust nor the Trustees on behalf of the Trust conduct
any active business activities or operations. The function of the Trustees
is to monitor, verify, collect, hold, invest and distribute the royalty
payments made to the Trust. Under the Trust Agreement, the Trustees make
quarterly distributions of the net funds received by the Trust on behalf of
the unit owners. Funds temporarily held by the Trust are invested in
interest bearing bank deposits, money market accounts, certificates of
deposit, U.S. Treasury Bills or other government obligations.
There has been no significant change in the principal operation or
purpose of the Trust during the past fiscal year.
As part of the Sarbanes-Oxley Act of 2002 ("SOX"), the Securities
and Exchange Commission (the "SEC") adopted rules implementing
legislation concerning governance matters for publicly held entities. The
Trust is complying with the requirements of the SEC and SOX and, at this
time, the Trustees have chosen not to request any relief from those
provisions based on the passive nature of the Trust but may do so in the
future. In that connection, the Trustees have directed that certain of the
additional statements and disclosures set forth or incorporated by reference
in this Report, which the SEC requires of corporations, be made even though
some of such statements and disclosures might not now or in the future be
required to be made by the Trust.
In addition, the New York Stock Exchange (the "NYSE"), where units
of beneficial interest of the Trust are listed for trading, has additional
corporate governance rules as set forth in Section 303A of the NYSE Listed
Company Manual. Most of the governance requirements promulgated by the NYSE
are not applicable to the Trust, which is a passive entity acting as a
royalty trust and holds only overriding royalty rights. The Trust does not
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engage in any operating or active business. The Trustees have, however,
chosen to constitute an Audit Committee and a Compensation Committee but
may not necessarily do so in the future.
(b) Financial Information about Segments.
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Since the Trust conducts no active business operations, an
analysis by segments is accordingly not applicable to the Trust. To the
extent that royalty income received by the Trust is attributable to sales
of different products, to sales from different geographic areas or to sales
by different operating companies, this information is set forth in Item 2 of
this Report and the Exhibit described in that Item 2.
(c) Narrative Description of Business.
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Under the Trust Agreement, the Trust conducts no active business
operations and is restricted to collection of income from royalty rights and
distribution to unit owners of the net income after payment of administrative
and related expenses.
The overriding royalty rights held by the Trust are derived from
contracts and agreements originally entered into by German subsidiaries of
the predecessor Corporation during the early 1930s. The Trust's primary
royalty rights are based on government granted concessions and remain in
effect as long as there are continued production activities and/or
exploration efforts by the operating companies. It is generally anticipated
that the operating companies will continue production where it remains
economically profitable for them to do so. In addition, the Trust holds
other royalty rights, which are based on leases which have passed their
original expiration dates. These leases remain in effect as long as there
is continued production or the lessor does not cancel the lease. Individual
lessors will normally not seek termination of the rights originally granted
because the leases provide for royalty payments to the lessors if sales of
oil or gas result from discoveries made on the leased land. Additionally,
termination by individual lessors would result in the escheat of mineral
rights to the applicable state.
Royalties are paid to the Trust on sales from production under
these leases and concessions by the operating companies on a regular monthly
or quarterly basis pursuant to the royalty agreements. The operating
companies make royalty payments to the Trust exclusively in Euros. As
promptly as possible after the funds are deposited in the Trust's bank
account in Germany, they are converted into U.S. dollars based upon the next
available Bloomberg fixing, which is currently set at 2:00 p.m. Frankfurt
time. Following this conversion to dollars, the royalties are transferred to
the Trust's bank account in the U.S. The Trust does not engage in activities
to hedge against currency risk and the fluctuations in the conversion rate
impact its financial results. However, since the actual royalty deposits are
held as Euros for such a limited time, the market risk with respect to these
deposits is small. The Trust has not experienced any difficulty in
effecting the conversion of Euros into U.S. dollars.
As the holder of overriding royalty rights, the Trust has no legal
ability, whether by contract or operation of law, to compel production.
Moreover, if an operator should determine to terminate production in any
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concession or lease area and to surrender the concession or lease, the
royalty rights for that area would thereby be terminated. Under certain
royalty agreements, the operating companies are required to advise the
Trust of any intention to surrender lease or concession rights. While the
Trust itself is precluded from undertaking any production activities,
possible residual rights might permit the Trust to take up a surrendered
concession or lease and attempt to retain a third-party operator to develop
such concession or lease.
The exploration for and the production of gas and oil is a
speculative business. The Trust has no means of ensuring continued income
from its royalty rights at either their present levels or otherwise. The
Trust has no role in any of the operating companies' decision-making
processes, such as gas pricing, gas sales or exploration, which can impact
royalty income. In addition, fluctuations in prices and supplies of gas
and oil and the effect these fluctuations might have on royalty income to
the Trust and on reserves net to the Trust cannot be accurately projected.
Finally, natural gas and crude oil are wasting assets. While known reserves
may increase as additional development adds quantities to the reserve
amount, the amount of known and unknown reserves is finite and will decline
over time. Given these factors, along with the uncertainty in worldwide and
local German economic conditions and the fact that the Trustees have no
information beyond that information which is generally available to the
public, the Trustees make no projections regarding future royalty income.
While Germany has laws relating to environmental protection, the
Trustees generally do not have detailed information concerning the present or
possible effect of such laws on operations in areas where the Trust holds
royalty rights on production and sale of products from those areas. However,
the Trustees were informed by the Trust's German consultant that on July 8,
2016, a hydraulic fracturing ("fracking") law was passed in Germany
permitting fracking in sandstone at any depth. The new law requires that an
environmental impact study be performed as well as requiring that permission
by the relevant water authority be granted to protect drinking water
supplies. Based upon an analysis of the details of this law, the Trust's
German consultant has informed the Trust that fracking will be permitted in
all current productive zones within the Oldenburg concession both due to the
depths involved and the nature of the productive zones. However, the
operating companies would still have to comply with all regulatory
requirements governing the use of fracking. Historically, the only productive
zone within the concession that required fracking has been the Carboniferous
zone. No Carboniferous wells are currently listed in the drilling schedule
through 2020.
Seasonal demand factors affect the income from royalty rights
insofar as they relate to energy demands and increases or decreases in
prices, but on average they are generally not material to the regular annual
income received under the royalty rights.
The Trust, in cooperation with a parallel royalty owner (Unitarian
Universalist Congregation at Shelter Rock), arranges for periodic
examinations of the books and records of the operating companies to verify
compliance with the computation provisions of the applicable agreements.
From time to time, these examinations disclose computational errors or
errors from inappropriate application of existing agreements and appropriate
adjustments are requested and made. As a result of the recent amendments to
the Trust's royalty agreements which effect pricing simplification, future
examinations by the Trust's German accountants will be simplified since these
examinations will be primarily limited to the verification of the gas
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quantities sold. Although these periodic examinations may also disclose
other matters that are subject to dispute between the parties, these disputes
have historically been resolved through negotiations.
(d) Financial Information about Geographic Areas.
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The Trust does not engage in any active business operations, and
its sources of income are the overriding royalty rights covering gas, sulfur
and oil production in certain areas in Germany and interest on the funds
temporarily invested by the Trustees. In Item 2 of this Report, there is a
schedule (by product, geographic area and operating company) showing the
royalty income received by the Trust during the fiscal year ended
October 31, 2016.
(e) Trustees and Executive Officers of the Trust.
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As specified in the Trust Agreement, the affairs of the Trust are
managed by not more than five individual Trustees who receive compensation
determined under that same agreement. One of the Trustees is designated as
Managing Trustee. Robert P. Adelman has served as Managing Trustee (non-
executive) since November 1, 2006. In addition, Samuel M. Eisenstat serves
as Chairman for the Audit and Compensation Committees, and Lawrence A. Kobrin
serves as Clerk to the Trustees (a role similar to that of a corporate
secretary). For these services, these three individuals receive additional
compensation.
Day-to-day matters are handled by the Managing Director, John R.
Van Kirk, who also serves as CEO and CFO. John R. Van Kirk has held the
position of Managing Director of the Trust since November 1990. The Managing
Director provides office space and services at cost to the Trust.
In addition to the Managing Director, the Trust has one
administrative employee in the United States, whose title is Administrator.
The Trust has retained the services of a consultant in Germany who has broad
experience in the petroleum industry and from whom it receives reports on a
regular basis. The Trust also retains an accounting firm and a legal firm
in Germany to advise and represent the Trust as needed. Because the Trust
has only two employees, employee relations or labor contracts are not
directly material to the business or income of the Trust. The Trustees have
no information concerning employee relations of the operating companies.
(f) Available Information.
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The Trust maintains a website at www.neort.com. The Trust's Annual
Reports, Form 10-K annual reports, Form 10-Q quarterly reports and the
Definitive Proxy Statements are available through the Trust's website as soon
as reasonably practicable after such reports are filed with or furnished to
the SEC. Press releases and tax letters are available through the website as
soon as practicable after release. The North European Oil Royalty Trust
Agreement (as amended), the Trust's Code of Conduct and Business Ethics, the
Trustees' Regulations and the Trust's Audit Committee Charter are also
available through the Trust's website. The Trust's website and the
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information contained in it and connected to it shall not be deemed
incorporated by reference into this Form 10-K.
Item 1A. Risk Factors.
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The results of operations and financial condition of the Trust are
subject to various risks. Some of these risks are described below, and you
should take such risks into account in evaluating the Trust or any investment
decision involving the Trust. This section does not describe all risks that
may be applicable to the Trust and it is intended only as a summary of
certain material risk factors. More detailed information concerning the risk
factors described below is contained in other sections of this Annual Report
on Form 10-K.
The Trust does not conduct any active business activities or operations and
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has no legal ability to compel production.
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The Trust holds overriding royalty rights only. It is a passive
entity and conducts no operations. It can exert no influence on the
operating companies that conduct exploration, drilling, production and sales
activities in the areas covered by the Trust's overriding royalty rights.
Thus, the Trust has no means of ensuring continued income from its
overriding royalty rights. The failure of an operator to conduct its
operations, discharge its obligations, deal with regulatory agencies or
comply with laws, rules and regulations, including environmental laws
and regulations, in a proper manner could have an adverse effect on the
net proceeds payable to the Trust. The Trust also has no right to remove
or replace an operator.
The current operating companies are under no obligation to
continue operations in the royalty areas. Natural gas is a wasting asset.
The production and sale of natural gas, from which the Trust derives its
royalties, reduces the amount of remaining proved producing reserves of
natural gas. If the operating companies do not perform additional
development projects which replace at least a portion of the current
production, the anticipated life of the Trust will not be extended and could
be shortened. Absent further additions to the amount of proved producing
reserves, production and sales will reach a point in the future where the
level of sales will no longer be commercially viable and production will
cease. Ultimately, the amount of known and unknown reserves within a
defined area, such as the Oldenburg concession, is finite and will decline
over time.
Trust reserve estimates depend on many assumptions that may prove to be
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inaccurate, and these inaccuracies may cause errors in the reserve estimates.
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The value of Trust units may depend in part on the reserves
attributable to the royalty areas. The calculations performed in the
process of estimating proved producing reserves are inherently uncertain.
The accuracy of any reserve estimate is a function of the quality of
available data, engineering interpretation and judgment, and the assumptions
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used regarding the quantities of recoverable natural gas and the future
prices of crude oil and natural gas.
The Trust currently receives quarterly reports from the operating
companies with respect to production and sales on either a well-by-well or an
area-wide basis. The Trust also receives annual reports from the operating
companies with respect to current and planned drilling and exploration
efforts. These reports are very limited in nature. The operating companies'
unified exploration and production venture, ExxonMobil Production Deutschland
GmbH ("EMPG"), which provides these reports to the Trust, continues to limit
the information flow to that which is required by German law, and the Trust
has no legal or contractual right to compel the issuance of additional
information. The Trust's inability to compel the delivery of detailed
information with respect to individual wells increases the possibility of
inaccuracy in the petroleum engineering consultant's estimates of reserves.
Actual production, revenues and expenditures by the operating
companies for the royalty areas, and therefore actual net proceeds payable to
the Trust, will vary from estimates and those variations could be material.
Additionally, while the moratorium on fracking has been lifted and there are
no wells currently in the drilling portfolio that require fracking, the
fracking law has mandated added regulatory steps with respect to all
drilling. The new law requires that an environmental impact study be
performed as well as requiring that permission by the relevant water
authority be granted to protect drinking water supplies. These additional
regulations will add costs to each well. When used, the process of fracking
adds significant costs to drilling. The operating companies will have to
evaluate these costs as part of their decision on whether or not to drill.
The effects of fluctuations in prices of gas and oil and changes in worldwide
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and local economic conditions on the royalty income paid to the Trust cannot
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be accurately projected.
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The Trust's distributions are highly dependent upon the prices
realized from the sale of natural gas and a decrease in such prices could
reduce the amount of cash distributions paid to unit owners.
Oil and natural gas prices and demand for these products can
fluctuate widely in response to a variety of factors that are beyond the
control of the Trust. Factors that contribute to these fluctuations include,
among others: (1) worldwide and German economic conditions and levels of
economic activity; (2) political and economic conditions in major oil
producing regions, especially in the Middle East and Russia; (3) weather
conditions; (4) the price of oil or natural gas imported into Germany; (5)
the level of consumer demand in Germany; (6) the increasing role of alternate
energy sources along with the German government's and European Union's role
in promoting those sources; and (7) German and European Union governmental
actions intended to broaden sources of energy supply.
When oil and natural gas prices decline, the Trust is affected in
two ways. First, net income from the royalty areas is reduced. Second,
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exploration and development activity by the operating companies on the
royalty areas may decline as some projects may become uneconomic and are
either delayed or eliminated. It is impossible to predict future oil and
natural gas price movements, and this, along with other factors, make
future cash distributions to unit owners impossible to predict.
In recent years, there has been a shift in the structure of
European gas supply contracts resulting in the decoupling of the link between
oil prices and gas prices. A comprehensive spot market has developed in
Europe with corresponding spot market prices for gas where the gas price is
not linked to oil prices. According to the Trust's accountants in Germany,
gas prices, in the overwhelming majority of contracts, are linked to spot
market prices on a specific exchange with a plus or minus factor included.
However, following the August 26, 2016 amendments to the royalty agreements
regarding the pricing simplification, neither the contractual price nor the
spot market price will be a determining factor in the calculation of
royalties payable to the Trust. As specified in the amendments, the Trust's
new pricing procedure now matches the German State royalty calculation basis
which is codified in the pertinent German State Royalty Code
(Niedersachsische Verordnung uber die Feldes- und die Forderabgabe). As this
pricing procedure is currently configured, the state assessment base for
natural gas is the average German Border Import gas Price (the "GBIP"). In
the royalty calculations for the Trust, the GBIP for the period corresponding
to the respective calendar quarter (adjusted by a percentage factor) will be
the price used in the relevant calculation of quarterly royalties payable.
In September following the end of a given calendar year, the average GBIP for
that year (adjusted by a percentage factor) will be the price used in the
relevant year-end royalty adjustments.
Changes in the dollar value of the Euro have an immediate impact on the Trust.
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For unit owners, changes in the dollar value of the Euro have an
immediate impact. This impact occurs at the time the royalties, which are
paid to the Trust in Euros, are converted into U.S. dollars based upon the
applicable exchange rate and transferred from Germany to the United States.
In relation to the dollar, a stronger Euro would yield more dollars and a
weaker Euro would yield less dollars.
Cyber security risks and cyber incidents at the Trust or the operating
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companies could adversely affect our business.
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Cyber incidents can result from deliberate attacks or unintentional
events. These incidents can include, but are not limited to, gaining
unauthorized access to digital systems for purposes of misappropriating
assets or sensitive information, corrupting data, or causing operational
disruption. The result of these incidents could include, but are not limited
to, disrupted operations, misstated financial data, liability for stolen
assets or information, increased cyber security protection costs, litigation
and reputational damage adversely affecting investor confidence.
Item 1B. Unresolved Staff Comments.
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None.
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Item 2. Properties.
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The properties of the Trust, which the Trust and Trustees hold
pursuant to the Trust Agreement on behalf of the unit owners, are overriding
royalty rights on sales of gas, sulfur and oil under certain concessions or
leases in the Federal Republic of Germany. The actual leases or concessions
are held either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German
operating subsidiary of ExxonMobil, or by Oldenburgische Erdolgesellschaft
("OEG"). As a result of direct and indirect ownership, ExxonMobil owns two-
thirds of OEG and the Royal Dutch/Shell Group of Companies owns one-third of
OEG. The Oldenburg concession (1,386,000 acres), covering virtually the
entire former Grand Duchy of Oldenburg and located in the German federal
state of Lower Saxony, provides 100% of the royalties received by the Trust.
BEB Erdgas und Erdol GmbH ("BEB"), a joint venture in which ExxonMobil and
the Royal Dutch/Shell Group each own 50%, administers the concession held by
OEG. In 2002, Mobil Erdgas and BEB formed EMPG to carry out all exploration,
drilling and production activities. All sales activities are still handled
by either Mobil Erdgas or BEB.
Vermilion Energy Inc. ("Vermilion"), a Canadian based international
oil and gas producer, entered into a Farm-In Agreement (the "Farm-In
Agreement") with Mobil Erdgas and BEB. The Farm-In Agreement specifies that
Vermilion has acquired an interest in various portions of a concession or
areas owned by Mobil Erdgas and BEB. Three of these licenses cover the three
northernmost areas of the Oldenburg concession. The Farm-In Agreement
commits Vermilion to financial participation at a 50% level in 11 gross
exploratory wells over the next five years. If Vermilion conducts any
successful drilling within the confines of the Oldenburg concession, sales of
that gas or oil would be subject to the relevant royalty contract. The
Trust's German consultant has confirmed for the Trust that Vermilion will
lead the development of its first well within the Oldenburg concession with a
possible start time in 2019. The well is tentatively located in the western
portion of the area designated Oldenburg-Land, the southernmost area of the
three areas within the concession subject to Vermilion's Farm-In Agreement.
Vermilion's well is intended to develop the Rotliegend (Red Sandstone)
formation, a previously undeveloped productive zone within the concession.
Under one set of rights covering the western part of the Oldenburg
concession (approximately 662,000 acres), the Trust receives a royalty
payment of 4% on gross receipts from sales by Mobil Erdgas of gas well gas,
oil well gas, crude oil and condensate (the "Mobil Agreement"). Under the
Mobil Agreement there is no deduction of costs prior to the calculation of
royalties from gas well gas and oil well gas, which together account for
approximately 99% of all the royalties under said agreement. Historically,
the Trust has received significantly greater royalty payments under the Mobil
Agreement (as compared to the OEG Agreement described below) due to the
higher royalty rate specified by that agreement.
The Trust is also entitled under the Mobil Sulfur Agreement to
receive a 2% royalty on gross receipts of sales of sulfur obtained as a
by-product of sour gas produced from the western part of Oldenburg. The
payment of the sulfur royalty is conditioned upon sales of sulfur by Mobil
Erdgas at a selling price above an agreed upon base price. This base price
is adjusted annually by an inflation index. When the average quarterly
selling price falls below the indexed base price, no sulfur royalties are
paid by Mobil Erdgas. Sulfur royalties under the Mobil Agreement totaled
($51,576), $78,094 and $375,614 during fiscal 2016, 2015 and 2014,
respectively. The 2016 figure includes negative adjustments from 2015, 2013,
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2012 and 2011 of $36,336, $43,087, $186,045 and $56,225, which more than
offset sulfur royalties payable. The 2015 figure includes negative
adjustments from 2014 and 2013 of $80,516 and $134,832, respectively. The
operating companies had improperly allocated eastern sulfur sales to the
Mobil Agreement during 2015, 2014, 2013, 2012 and 2011 resulting in the
overpayment of sulfur royalties.
Under another set of rights covering the entire Oldenburg
concession and pursuant to the agreement with OEG, the Trust receives
royalties at the rate of 0.6667% on gross receipts from sales by BEB of gas
well gas, oil well gas, crude oil, condensate and sulfur (removed during the
processing of sour gas) less a certain allowed deduction of costs (the "OEG
Agreement"). Under the OEG Agreement, 50% of the field handling and
treatment costs as reported for state royalty purposes are deducted from the
gross sales receipts prior to the calculation of the royalty to be paid to
the Trust.
On August 26, 2016, the Trust executed amendments to its existing
royalty agreements with OEG and Mobil establishing a new base for the
determination of gas prices upon which the Trust's royalties are determined.
This new base is set as the state assessment base for natural gas used by the
operating companies in their calculation of royalties payable to the State of
Lower Saxony. Currently, this change reflects a shift from the use of gas
ex-field prices ("contractual prices") to the prices calculated for the GBIP.
For simplification purposes, we will use "GBIP" when referring to the current
state assessment base.
The change to the GBIP is intended to be revenue neutral for the
Trust. Additionally, this change should reduce the scope and cost of the
accounting examination, eliminate ongoing disputes with OEG and Mobil
regarding sales to related parties, and reduce prior year adjustments to the
normally scheduled year-end reconciliation. The new pricing basis will also
eliminate certain costs (transportation and plant gas storage) that were
previously deductible prior to the royalty calculation under the agreement
with OEG.
Actual gas sales from the prior calendar quarter will be multiplied
by the average GBIP for a period starting two months earlier and will provide
the basis for royalty payments to the Trust during its fiscal quarter. The
average GBIP for the corresponding period of actual sales is not available
due to the delay in its calculation. In the final calculation of royalties
payable for calendar 2015, the average GBIP under the Mobil and OEG Royalty
Agreements was increased by 2% and 5%, respectively. For calendar 2016 and
forward, the average GBIP under the Mobil and OEG Royalty Agreements will be
increased by 1% and 3%, respectively. In March of the following calendar
year, an average GBIP for the prior calendar year (weighted on a monthly
basis by the respective volume of imported gas) is published. In September
of the following calendar year, EMPG will make a final reconciliation based
upon the published yearly average GBIP increased by the respective percentage
factor and the total volume of gas sold under the royalty agreements during
the prior calendar year.
The new basis for oil prices would be the published price from the
State Authority for Mining, Energy and Geology. There are no percentage
adjustments factored into the oil royalty calculation. There was no change
in the previous methodology used with regard to the determination of
royalties attributable to sales of sulfur.
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In addition to the Oldenburg area, the Trust also holds overriding
royalties at various rates on a number of currently non-producing leases of
various sizes in other areas of Germany. One of these leases, Grosses Meer,
was formerly active but provided no royalties during fiscal 2016, 2015 and
2014.
The following is a schedule of royalty income for the fiscal year
ended October 31, 2016 by product, geographic area and operating company:
By Product:
-----------
Product Royalty Income
------- --------------
Gas Well and Oil Well Gas $ 6,670,356
Sulfur $ 221,228
Oil $ 69,377
By Geographic Area:
-------------------
Area Royalty Income
---- --------------
Western Oldenburg $ 5,498,069
Eastern Oldenburg $ 1,462,892
Non-Oldenburg Areas $ 0
By Operating Company:
---------------------
Company Royalty Income
------- --------------
Mobil Erdgas (under the Mobil Agreement) $ 4,797,919
BEB (under the OEG Agreement) $ 2,163,042
Exhibit 99.1 to this Report is a report entitled Calculation of Cost
Depletion Percentage for the 2016 Calendar Year Based on the Estimate of
Remaining Proved Producing Reserves in the Northwest Basin of the Federal
Republic of Germany as of October 1, 2016 (the "Cost Depletion Report").
The Cost Depletion Report, dated November 30, 2016, was prepared by Ralph E.
Davis Associates, LLC, 711 Louisiana Street, Suite 3100, Houston, Texas 77002
("Davis Associates"). Davis Associates is an independent petroleum and
natural gas consulting organization specialized in analyzing hydrocarbon
reserves.
The Cost Depletion Report provides documentation supporting the
calculation of the cost depletion percentage for the 2016 calendar year
based on the use of certain production data and the estimated net proved
producing reserves as of October 1, 2016 for the primary area in which the
Trust holds overriding royalty rights. The cost depletion percentage is
prepared for the Trust's unit owners for tax reporting purposes. The cost
depletion percentage recommended by the Trust's independent petroleum and
natural gas consultants for calendar 2016 is 10.2769%. In order to permit
timely filing of the Cost Depletion Report and consistent with the practice
of the Trust in prior years, the information has been prepared for the 12-
month period ended September 30, 2016. While this is one month prior to the
end of the fiscal year of the Trust, the information available for production
- 14 -
and sales through the end of September is the most complete information
available at a date early enough to permit the timely preparation of the
various reports required. Unit owners are referred to the full text of the
Cost Depletion Report contained herein for further details.
The primary purpose of the Cost Depletion Report is the preparation
of the cost depletion percentage for use by unit owners in their own tax
reporting. The only information provided to the Trust that can be utilized
in the calculation of the cost depletion percentage is current and historical
production and sales of proved producing reserves. For the western half of
the Oldenburg Concession, the Trust received quarterly production and sales
information on a well-by-well basis. For the eastern half of the Oldenburg
Concession, the Trust receives cumulative quarterly production and sales
information on two general areas. These general areas encompass numerous
fields with varying numbers of wells. Pursuant to the arrangements under
which the Trust holds royalty rights and the fact that the Trust is not
considered an operating company within Germany, the Trust has no access to
the operating companies' proprietary information concerning producing field
reservoir data. The Trustees have been advised by their German counsel that
publication of such information is not required under applicable law in
Germany and that the royalty rights do not grant the Trust the right to
require or compel the release of such information. Past efforts to obtain
such information from the operating companies have not been successful.
The information made available to the Trust by the operating companies does
not include any of the following: reserve estimates, capitalized costs,
production cost estimates, revenue projections, producing field reservoir
data (including pressure data, permeability, porosity and thickness of
producing zone) or other similar information. While the limited information
available to the Trust permits the calculation of the cost depletion
percentage, it does not change the uncertainty with respect to the estimate
of proved producing reserves. In addition, it is impossible for the Trust or
its consultant to make estimates of proved undeveloped or probable future net
recoverable oil and gas by appropriate geographic areas.
The Trust has the authority to examine, but only for certain
limited purposes, the operating companies' sales and production from the
royalty areas. The Trust also has access to published materials in Germany
from W.E.G. (a German organization equivalent to the American Petroleum
Institute or the American Gas Association). The use of such statistical
information relating to production and sales necessarily involves
extrapolations and projections. Both Davis Associates and the Trustees
believe the use of the material available is appropriate and suitable for
preparation of the cost depletion percentage and the estimates described in
the Cost Depletion Report. The Trustees and Davis Associates believe this
report and these estimates to be reasonable and appropriate but assume that
these estimates may vary from statistical estimates which could be made if
reservoir production information (of the kind normally available to
producing companies in the United States) were available. The limited
information available makes it inappropriate to make projections or estimates
of proved or probable reserves of any category or class other than the
estimated net proved producing reserves described in the Cost Depletion
Report.
Attachment A of the Cost Depletion Report shows a schedule of
estimated net proved producing reserves of the Trust's royalty properties,
computed as of October 1, 2016 and a five year schedule of gas, sulfur and
oil sales for the twelve months ended September 30, 2016, 2015, 2014, 2013
and 2012 computed from quarterly sales reports of operating companies
received by the Trust during such periods.
- 15 -
Item 3. Legal Proceedings.
-----------------
The Trust is not a party to any pending legal proceedings.
Item 4. Mine Safety Disclosures.
-----------------------
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
--------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities.
--------------------------------------------------
The Trust's units of beneficial interest are listed for trading on
the New York Stock Exchange under the symbol NRT. Under the Trust Agreement,
the Trustees distribute to unit owners, on a quarterly basis, the net royalty
income after deducting expenses and reserving limited funds for anticipated
administrative expenses. As of November 30, 2016, there were 700 unit
owners of record.
The following table presents the high and low closing prices for
the quarterly periods ended in fiscal 2016 and 2015 as reported by the NYSE
as well as the cash distributions paid to unit owners by quarter for the past
two fiscal years.
Fiscal Year 2016
----------------
Low High Distribution
Closing Closing per
Quarter Ended Price Price Unit
------------- --------- --------- ------------
January 31, 2016 $ 5.89 $ 9.99 $0.16
April 30, 2016 $ 7.53 $ 9.68 $0.24
July 31, 2016 $ 8.15 $ 9.75 $0.15
October 31, 2016 $ 6.99 $ 8.79 $0.12
Fiscal Year 2015
----------------
Low High Distribution
Closing Closing per
Quarter Ended Price Price Unit
------------- --------- --------- ------------
January 31, 2015 $11.80 $18.88 $0.35
April 30, 2015 $11.66 $14.71 $0.33
July 31, 2015 $ 8.73 $14.14 $0.36
October 31, 2015 $ 9.29 $11.46 $0.23
- 16 -
The quarterly distributions to unit owners represent their
undivided interest in royalty payments from sales of gas, sulfur and oil
during the previous quarter. Each unit owner is entitled to recover a
portion of his or her investment in these royalty rights through a cost
depletion percentage. The calculation of this cost depletion percentage is
set forth in detail in Attachment B to the Cost Depletion Report attached as
Exhibit 99.1 to this Form 10-K.
The Cost Depletion Report has been prepared by Davis Associates
using the limited information described in Item 2 of this Report to which
reference is made. The Trustees believe that the calculations and
assumptions used in the Cost Depletion Report are reasonable according to
the facts and circumstances of available information. The cost depletion
percentage recommended by the Trust's independent petroleum and natural gas
consultants for calendar 2016 is 10.2769%. Specific details relative to the
Trust's income and expenses and cost depletion percentage as they apply to
the calculation of taxable income for the 2016 calendar year are included on
special removable pages in the 2016 Annual Report. Additionally, the tax
reporting information for 2016 is available on the Trust's website,
www.neort.com, in the section marked Tax Letters contained within the Tax
Information section.
The Trust does not maintain any compensation plans under which
units are authorized for issuance. The Trust did not make any repurchases of
Trust units during fiscal 2016, 2015 or 2014 and has never made such
repurchases.
- 17 -
Item 6. Selected Financial Data.
-----------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
SELECTED FINANCIAL DATA (CASH BASIS)
------------------------------------
FOR FIVE FISCAL YEARS ENDED OCTOBER 31, 2016
----------------------------------------------
2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- -----------
German gas,
sulfur
and oil
royalties
received $ 6,960,961 $12,390,575 $18,927,005 $21,546,298 $23,672,808
=========== =========== =========== =========== ===========
Net income $ 6,141,141 $11,580,673 $18,044,579 $20,635,306 $22,609,961
=========== =========== =========== =========== ===========
Net income
per unit (a) $0.67 $1.26 $1.96 $2.25 $2.46
===== ===== ===== ===== =====
Units of
beneficial
interest
outstanding
at end
of year (a) 9,190,590 9,190,590 9,190,590 9,190,590 9,190,590
Distributions
per unit
paid or to
be paid to
unit owners $0.67 $1.27 $1.95 $2.25 $2.46
===== ===== ===== ===== =====
Total assets
at year end $1,165,348 $2,192,866 $3,754,737 $4,918,491 $4,778,200
========== ========== ========== ========== ==========
(a) Net income per unit was calculated based on the number
of units outstanding at the end of the fiscal year.
- 18 -
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
-------------------------
Executive Summary
-----------------
The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all of the funds on hand after provision
is made for Trust expenses then anticipated.
The Trust does not engage in any business or extractive operations
of any kind in the areas over which it holds royalty rights and is precluded
from engaging in such activities by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The properties of the Trust are described in Item 2. Properties of
this Report. Of particular importance with respect to royalty income are the
two royalty agreements, the Mobil Agreement and the OEG Agreement. The Mobil
Agreement covers gas sales from the western part of the Oldenburg concession.
Under the Mobil Agreement, the Trust has traditionally received the majority
of its royalty income due to the higher royalty rate of 4%. The OEG Agreement
covers gas sales from the entire Oldenburg concession but the royalty rate of
0.6667% is significantly lower and gas royalties have been correspondingly
lower.
The operating companies pay monthly royalties to the Trust based
on their sales of natural gas, sulfur and oil. Of these three products,
natural gas provided approximately 96% of the total royalties in fiscal 2016.
The amount of royalties paid to the Trust is primarily based on four factors:
the amount of gas sold, the price of that gas, the area from which the gas is
sold and the exchange rate.
On approximately the 25th of the months of January, April, July and
October, the operating companies calculate the amount of gas sold during the
previous calendar quarter and determine the amount of royalties that were
payable to the Trust based on those sales. The pricing component to this
royalty calculation no longer conforms to the same period. Due to the delay
in the availability of the GBIP, the average GBIP for a three-month period
ending two months prior to the end of the relevant calendar quarter is used.
The average GBIP is increased by a percentage factor depending upon which
royalty agreement forms the underlying basis for the royalty calculation.
The respective royalty amount is divided into thirds and forms the monthly
royalty payments to the Trust (payable on the 15th of each month) for the
Trust's upcoming fiscal quarter. At the same time that the operating
companies determine the actual amount of royalties that were payable for the
prior calendar quarter, they look at the actual amount of royalties that were
paid to the Trust for that period and calculate the difference between what
was paid and what was payable. Additional amounts payable by the operating
companies would be paid immediately and any overpayment would be deducted
from the payment for the first month of the following fiscal quarter. In
March of the following calendar year, an average GBIP for the prior calendar
- 19 -
year (weighted on a monthly basis by the respective volume of imported gas)
is published. In September of each year, the operating companies make the
final determination of any necessary royalty adjustments for the prior
calendar year with a positive or negative adjustment made accordingly.
Currently, the Trust's German accountants review the royalty calculations on
a biennial basis.
There are two types of natural gas found within the Oldenburg
concession, sweet gas and sour gas. Sweet gas has little or no contaminants
and needs no treatment before it can be sold. Sour gas, in comparison, must
be processed at the Grossenkneten desulfurization plant before it can be
sold. The desulfurization process removes hydrogen sulfide and other
contaminants. The hydrogen sulfide in gaseous form is converted to sulfur in
a solid form and sold separately. As needed, EMPG, the operator of the
Grossenkneten desulfurization plant, conducts maintenance on the plant,
generally during the summer months when demand is lower. Historically, sour
gas production capacity during the period of maintenance work has been
reduced by approximately one-third. There was no maintenance conducted
during 2016. Maintenance was conducted from August 31, 2015 through October
13, 2015. The operating companies have informed the Trust that, to promote
greater efficiency and cost effectiveness, the production capacity of
Grossenkneten will be reduced beginning in 2017.
Under the Mobil and OEG Agreements, the gas is sold in one of three
ways: (1) directly on the spot market; (2) between Mobil Erdgas and BEB
(intra-company sales); or (3) directly to various distributors under
contracts (which delineate, among other provisions, the timing, manner,
volume and price of the gas sold). While the operating companies will
continue to sell gas in one of these three ways, the impact of the respective
pricing involved is no longer applicable to the Trust because, under the
amended royalty agreements, the price point, which is used as part of the
basis for the royalty calculations, is now the average GBIP.
The Trust's accountants in Germany have completed their examination
of the operating companies for 2013 and 2014 and all relevant adjustments
have been made to Trust royalties. Their next examination for the 2015-2016
period will be performed under the amended royalty agreements and will likely
commence in November 2017.
For unit owners, changes in the dollar value of the Euro have an
immediate impact. This impact occurs at the time the royalties, which are
paid to the Trust in Euros, are converted into U.S. dollars at the applicable
exchange rate and transferred from Germany to the United States. In relation
to the dollar, a stronger Euro would yield more dollars and a weaker Euro
would yield less dollars.
Seasonal demand factors affect the income from the Trust's royalty
rights insofar as they relate to energy demands and increases or decreases in
prices, but on average they are generally not material to the annual income
received under the Trust's royalty rights.
- 20 -
The Trust has no means of ensuring continued income from overriding
royalty rights at their present level or otherwise. The Trust's consultant
in Germany provides general information to the Trust on the German and
European economies and energy markets. This information provides a context
in which to evaluate the actions of the operating companies. The Trust's
consultant receives reports from EMPG with respect to current and planned
drilling and exploration efforts. However, EMPG and the operating companies
continue to limit the information flow to that which is required by German
law.
The low level of administrative expenses of the Trust limits the
effect of inflation on costs. Sustained price inflation would be reflected
in sales prices. Sales prices along with sales volumes form the basis on
which the royalties paid to the Trust are computed.
Results: Fiscal 2016 versus Fiscal 2015
----------------------------------------
For fiscal 2016, the Trust's gross royalty income decreased 43.82%
to $6,960,961 from $12,390,575 in fiscal 2015 continuing to reflect the
disruption in the energy market and the uncertainty of the world economy.
The decrease in royalty income is due to declines in gas sales, gas prices
and average exchange rates under both royalty agreements. The decrease in
the amount of royalty income resulted in the lower distributions. The total
distribution for fiscal 2016 was $0.67 per unit compared to $1.27 per unit
for fiscal 2015. As in prior years, the Trust receives adjustments from the
operating companies based on their final calculations of royalties payable
during the previous periods. During fiscal 2016, the combination of positive
and negative adjustments reduced royalty income by $381,886, the equivalent
of $0.0416 per unit. Due to the incorrect inclusion in prior years of
eastern sulfur sales in the royalty calculation under the Mobil Sulfur
Agreement, the combination of current year sulfur royalties and the negative
adjustment from prior years resulted in a net negative adjustment for fiscal
2016 of $51,576, the equivalent of $0.0056 per unit. During fiscal 2015, the
combination of positive and negative adjustments reduced royalty income by
$592,626, the equivalent of $0.0645 per unit. Due to the incorrect inclusion
in prior years of eastern sulfur sales in the royalty calculation under the
Mobil Sulfur Agreement, the combination of current year sulfur royalties and
the negative adjustment from prior years resulted in a net negative
adjustment for fiscal 2015 of $215,348, the equivalent of $0.0234 per unit.
Gas sales under the Mobil Agreement declined 12.83% to 25.043
Billion cubic feet ("Bcf") in fiscal 2016 from 28.729 Bcf in fiscal 2015.
Gas sales in the first three quarters of fiscal 2016 showed a decline from
the prior year's equivalent quarters. However, gas sales in the fourth
quarter of fiscal 2016 were higher than the prior year's equivalent quarter.
At least some of the increase in fourth quarter gas sales may be explained by
the partial shutdown of the Grossenkneten desulfurization plant for a
six-week period during the fourth quarter of fiscal 2015. Since the Trust
does not receive information about the decision-making process of the
operating companies, it is impossible to determine to what extent, if any,
which factors may have impacted gas sales. However, according to the Trust's
consultant in Germany, it is likely that some portion of the decline in gas
production is due to the normal reduction in well pressure that is
experienced over time. The suspension of all drilling activities during the
2015-2016 period likely has also impacted gas sales.
- 21 -
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet
------------------------------------------------------------------------------
Fiscal Quarter 2016 Gas Sales 2015 Gas Sales Percentage Change
-------------- ---------------- ---------------- -----------------
First 6.604 7.876 - 16.19%
Second 6.834 7.642 - 10.57%
Third 4.917 7.382 - 33.39%
Fourth 6.688 5.829 + 14.74%
-------------- ---------------- ---------------- -----------------
Fiscal Year Total 25.043 28.729 - 12.83%
Average prices for gas sold under the Mobil Agreement decreased
28.39% to 1.5870 Euro cents/kWh ("Ecents/kWh") in fiscal 2016 from 2.2162
Ecents/kWh in fiscal 2015.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour
-----------------------------------------------------------------------------
Fiscal Quarter 2016 Gas Prices 2015 Gas Prices Percentage Change
-------------- ----------------- ----------------- -----------------
First 1.8649 2.3538 - 20.77%
Second 1.5622 2.3212 - 32.70%
Third 1.5363 2.0017 - 23.25%
Fourth 1.3753 2.1662 - 36.51%
-------------- ----------------- ----------------- -----------------
Fiscal Year Avg. 1.5870 2.2162 - 28.39%
Converting gas prices into more familiar terms, using the average
exchange rate, yielded a price of $5.04 per thousand cubic feet ("Mcf"), a
30.19% decrease from fiscal 2015's average price of $7.22/Mcf. For fiscal
2016, royalties paid under the Mobil Agreement were converted and transferred
at an average Euro/dollar exchange rate of $1.1083, a decrease of 2.12%
from the average Euro/dollar exchange rate of $1.1323 for fiscal 2015.
Average Euro Exchange Rate under the Mobil Agreement
----------------------------------------------------------------------------
2016 Average 2015 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.0881 1.2127 - 10.27%
Second 1.1173 1.0754 + 3.90%
Third 1.1185 1.1113 + 0.65%
Fourth 1.1047 1.1301 - 2.25%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.1083 1.1323 - 2.12%
Excluding the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For fiscal 2016, the volume of gas sold
from western Oldenburg accounted for only 32.43% of the volume of all gas
sales. However, western Oldenburg gas royalties provided approximately
81.05% or $5,408,745 out of a total of $6,673,084 in overall Oldenburg gas
royalties.
Gas sales under the OEG Agreement decreased 12.21% to 77.213 Bcf
in fiscal 2016 from 87.952 Bcf in fiscal 2015. At least some portion of the
- 22 -
decline in overall gas sales is likely a result of EMPG's decision to suspend
all drilling activities during 2015-2016. Since the Trust does not receive
information about the decision-making process of the operating companies, it
is impossible to determine to what extent, if any, which factors may have
impacted gas sales. However, according to the Trust's consultant in Germany,
it is likely that some portion of the decline in gas production is due to the
normal reduction in well pressure that is experienced over time.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet
----------------------------------------------------------------------------
Fiscal Quarter 2016 Gas Sales 2015 Gas Sales Percentage Change
-------------- ---------------- ---------------- -----------------
First 20.507 23.497 - 12.73%
Second 20.434 23.137 - 11.68%
Third 17.520 22.590 - 22.44%
Fourth 18.752 18.728 + 0.13%
-------------- ---------------- ---------------- -----------------
Fiscal Year Total 77.213 87.952 - 12.21%
Average gas prices for gas sold under the OEG Agreement decreased
29.10% to 1.6264 Ecents/kWh in fiscal 2016 from 2.2939 Ecents/kWh in
fiscal 2015.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour
----------------------------------------------------------------------------
Fiscal Quarter 2016 Gas Prices 2015 Gas Prices Percentage Change
-------------- ----------------- ----------------- -----------------
First 1.9803 2.4808 - 20.17%
Second 1.5282 2.4128 - 36.66%
Third 1.5667 2.0401 - 23.20%
Fourth 1.4025 2.2187 - 36.79%
-------------- ----------------- ----------------- -----------------
Fiscal Year Avg. 1.6264 2.2939 - 29.10%
Converting gas prices into more familiar terms, using the average
exchange rate, yielded a price of $5.04/Mcf, a 30.86% decrease from fiscal
2015's average price of $7.29/Mcf. For fiscal 2016, royalties paid under
the OEG Agreement were converted and transferred at an average Euro/dollar
exchange rate of $1.1053, a decrease of 2.11% from the average Euro/dollar
exchange rate of $1.1291 for fiscal 2015.
Average Euro Exchange Rate under the OEG Agreement
----------------------------------------------------------------------------
2016 Average 2015 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.0874 1.1973 - 9.18%
Second 1.1171 1.0830 + 3.15%
Third 1.1159 1.1159 - 0.00%
Fourth 1.1068 1.1309 - 2.13%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.1053 1.1291 - 2.11%
Interest income for fiscal 2016 decreased 51.82% to $4,548 as
compared to $9,439 for fiscal 2015 reflecting the reduction in royalty
receipts. Trust expenses increased 0.61% to $824,367 in fiscal 2016 from
$819,341 in fiscal 2015 due to higher legal expenses, both domestic and
German, and higher German accounting expenses relating to the amendments to
the Mobil and OEG Royalty Agreements.
- 23 -
Results: Fiscal 2015 versus Fiscal 2014
----------------------------------------
For fiscal 2015, the Trust's gross royalty income decreased 34.53%
to $12,390,575 from $18,927,005 in fiscal 2014 continuing to reflect the
disruption in the energy market and the uncertainty of the world economy.
The decrease in royalty income is due to declines in gas sales, gas prices
and average exchange rates under both royalty agreements. The decrease in
the amount of royalty income resulted in the lower distributions. The total
distribution for fiscal 2015 was $1.27 per unit compared to $1.95 per unit
for fiscal 2014. As in prior years, the Trust receives adjustments from the
operating companies based on their final calculations of royalties payable
during the previous periods. During fiscal 2015 the combination of positive
and negative adjustments reduced royalty income by $592,626, the equivalent
of $0.0645 per unit. Due to the incorrect allocation in prior years of
eastern sulfur sales to royalty calculations under the Mobil Sulfur
Agreement, the combination of current year sulfur royalties and the negative
adjustment from prior years resulted in a net negative adjustment for fiscal
2015 of $215,348, the equivalent of $0.0234 per unit. During fiscal 2014,
the negative adjustments decreased royalty income by $52,676, the equivalent
of $0.0057 per unit.
Gas sales under the Mobil Agreement declined 7.84% to 28.729 Bcf
in fiscal 2015 from 31.172 Bcf in fiscal 2014. A significant portion of this
decline occurred during the fourth fiscal quarter and was likely caused by
the partial shutdown of the Grossenkneten desulfurization plant for a
six-week period. Since the Trust does not receive information about the
decision-making process of the operating companies, it is impossible to
determine to what extent, if any, which factors may have impacted gas sales.
However, according to the Trust's consultant in Germany, it is likely that
some portion of the decline in gas production is due to the normal reduction
in well pressure that is experienced over time.
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet
------------------------------------------------------------------------------
Fiscal Quarter 2015 Gas Sales 2014 Gas Sales Percentage Change
-------------- ---------------- ---------------- -----------------
First 7.876 8.108 - 2.86%
Second 7.642 7.651 - 0.12%
Third 7.382 7.738 - 4.60%
Fourth 5.829 7.675 -24.05%
-------------- ---------------- ---------------- -----------------
Fiscal Year Total 28.729 31.172 - 7.84%
Average prices for gas sold under the Mobil Agreement decreased
10.99% to 2.2162 Ecents/kWh in fiscal 2015 from 2.4899 Ecents/kWh in fiscal
2014.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour
-----------------------------------------------------------------------------
Fiscal Quarter 2015 Gas Prices 2014 Gas Prices Percentage Change
-------------- ----------------- ----------------- -----------------
First 2.3538 2.7458 -14.28%
Second 2.3212 2.6635 -12.85%
Third 2.0017 2.3661 -15.40%
Fourth 2.1662 2.1709 - 0.22%
-------------- ----------------- ----------------- -----------------
Fiscal Year Avg. 2.2162 2.4899 -10.99%
- 24 -
Converting gas prices into more familiar terms, using the average
exchange rate, yielded a price of $7.22/Mcf, a 25.18% decrease from fiscal
2014's average price of $9.65/Mcf. For fiscal 2015, royalties paid under
the Mobil Agreement were converted and transferred at an average Euro/dollar
exchange rate of $1.1323, a decrease of 16.12% from the average Euro/dollar
exchange rate of $1.3499 for fiscal 2014.
Average Euro Exchange Rate under the Mobil Agreement
-----------------------------------------------------------------------------
2015 Average 2014 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.2127 1.3597 -10.81%
Second 1.0754 1.3776 -21.94%
Third 1.1113 1.3577 -18.15%
Fourth 1.1301 1.2944 -12.69%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.1323 1.3499 -16.12%
Excluding the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For fiscal 2015, the volume of gas sold
from western Oldenburg accounted for only 32.66% of the volume of all gas
sales. However, western Oldenburg gas royalties provided approximately
79.32% or $9,289,836 out of a total of $11,711,215 in overall Oldenburg gas
royalties.
Gas sales under the OEG Agreement decreased 9.47% to 87.952 Bcf in
fiscal 2015 from 97.155 Bcf in fiscal 2014. A significant portion of this
decline occurred during the fourth fiscal quarter and was likely caused by
the partial shutdown of the Grossenkneten desulfurization plant for a six-
week period. Since the Trust does not receive information about the
decision-making process of the operating companies, it is impossible to
determine to what extent, if any, which factors may have impacted gas sales.
However, according to the Trust's consultant in Germany, it is likely that
some portion of the decline in gas production is due to the normal reduction
in well pressure that is experienced over time.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet
----------------------------------------------------------------------------
Fiscal Quarter 2015 Gas Sales 2014 Gas Sales Percentage Change
-------------- ---------------- ---------------- -----------------
First 23.497 25.467 - 7.74%
Second 23.137 24.355 - 5.00%
Third 22.590 24.194 - 6.63%
Fourth 18.728 23.139 -19.06%
-------------- ---------------- ---------------- -----------------
Fiscal Year Total 87.952 97.155 - 9.47%
- 25 -
Average gas prices for gas sold under the OEG Agreement decreased
10.47% to 2.2939 Ecents/kWh in fiscal 2015 from 2.5622 Ecents/kWh in
fiscal 2014.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour
----------------------------------------------------------------------------
Fiscal Quarter 2015 Gas Prices 2014 Gas Prices Percentage Change
-------------- ----------------- ----------------- -----------------
First 2.4808 2.7962 -11.28%
Second 2.4128 2.7096 -10.95%
Third 2.0401 2.4367 -16.28%
Fourth 2.2187 2.2803 - 2.70%
-------------- ----------------- ----------------- -----------------
Fiscal Year Avg. 2.2939 2.5622 -10.47%
Converting gas prices into more familiar terms, using the average
exchange rate, yielded a price of $7.29/Mcf, a 24.85% decrease from fiscal
2014's average price of $9.70/Mcf. For fiscal 2015, royalties paid under
the OEG Agreement were converted and transferred at an average Euro/dollar
exchange rate of $1.1291, a decrease of 16.41% from the average Euro/dollar
exchange rate of $1.3507 for fiscal 2014.
Average Euro Exchange Rate under the OEG Agreement
-----------------------------------------------------------------------------
2015 Average 2014 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.1973 1.3604 -11.99%
Second 1.0830 1.3774 -21.37%
Third 1.1159 1.3577 -17.81%
Fourth 1.1309 1.2891 -12.27%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.1291 1.3507 -16.41%
Interest income for fiscal 2015 decreased 49.59% to $9,439 as
compared to $18,724 for fiscal 2014 reflecting the reduction in royalty
receipts. Trust expenses decreased 9.08% to $819,341 in fiscal 2015 from
$901,150 in fiscal 2014 primarily due to the absence of accounting costs
associated with the biennial examination of the royalty calculations by the
German operating companies and the reduction in Trustees fees as specified
according to the provisions of the Trust Agreement.
Report on Exploration and Drilling
----------------------------------
The Trust's German consultant periodically contacts the
representatives of the operating companies to inquire about their planned and
proposed drilling and geophysical work and other general matters. The
following represents a summary of the most recent information the Trust's
German consultant received from representatives of EMPG. The Trust is not
able to confirm the accuracy of any of the information supplied by the
operating companies. In addition, the operating companies are not required
to take any of the actions outlined and, if they change their plans with
respect to any such actions, they are not obligated to inform the Trust.
After having suspended all drilling activities for 2015
and 2016 and with the continuing difficulties caused by
low energy prices worldwide, EMPG has slowed the pace of
- 26 -
its future drilling program. As recently as last spring,
EMPG's drilling program provided for four wells to be
drilled in 2017 followed by one well and one work-over
in 2018, two wells in 2019 and one well in 2020. The
new program calls for one well and one work-over in 2017,
three wells in 2018, two wells in 2019 and one well in
2020. Despite the lifting of the moratorium on fracking,
no Carboniferous wells are listed in the drilling program
through 2020.
During 2016, EMPG performed work-overs of five eastern
wells and one western well: Neerstedt Z-3, Doetlingen Z-12,
Goldenstedt Z-13 and Z-20, Hengstlage T-14 and Kneheim Z-3
(western). Workovers are conducted on older wells that for
various reasons have experienced a drop in production due
to a decline in pressure and can possibly benefit from
further developmental efforts. These reasons can include
the presence of formation debris, bacterial infestation and
formation water influx.
The work-over scheduled for 2017 will be on Visbek Z-16a,
a western Zechstein well. Visbek Z-16a suffered a severe
casing collapse six months after it began production and
was shut down in October 2013. While originally it was
planned to drill a new coiled tubing sidetrack, the
continuing low gas prices have made this choice uneconomical.
Instead, this work-over will involve an attempt to repair
the original casing. The new well listed for 2017 is
Hemmelte NW T-1 which is planned to develop a new area
of the sweet gas Bunter zone in western Oldenburg. This
well was initially planned as a dual purpose well tapping
both the Bunter and the deeper Zechstein zones but, due to
technical difficulties, was scaled back. A second well
to access the Zechstein zone at a later date was initially
mentioned but no further information has been forthcoming.
The three new wells listed for 2018 are Brettorf Z-2b,
Goldenstedt Z-12a M1 and Goldenstedt Z-25a M1. All these
wells are multilateral wells, are located in eastern
Oldenburg and are sour gas infill wells. Multilateral
wells take advantage of a single master well to draw from
multiple sidetracks. The primary advantage is the cost
saving in using a single borehole for more than one sidetrack.
The two new wells listed for 2019 are Doetlingen Z-3A
and Jeddeloh Z-1. Doetlingen Z-3A is intended to develop
the Zechstein zone in eastern Oldenburg. Jeddeloh Z-1 is
the first well being drilled in the Oldenburg concession
with Vermilion as the lead developer. The well is an
exploration well tentatively located in the western portion
of the area designated as Oldenburg-Land, the southernmost
area of the three areas within the concession subject to
Vermilion's Farm-In Agreement. Vermilion's well is intended
to develop the Rotliegend (Red Sandstone) formation, a
previously undeveloped productive zone within the concession.
Oldenburg-Land is a relatively undeveloped area of the
concession compared to the southern area of Muensterland-
Cloppenburg-Vechta where the majority of the wells
operated by EMPG are located.
- 27 -
The single new well listed for 2020 is Alhorn Z-3, another
sour gas well. Alhorn Z-3 is intended to reopen the old
Alhorn field, which had been plugged and abandoned in 1997.
No firm dates have been announced for any of the wells
described above. Information on wells that are not named
or are in preliminary planning stages is not divulged by EMPG.
Critical Accounting Policies
----------------------------
The financial statements, appearing subsequently in this Report,
present financial statement balances and financial results on a modified cash
basis of accounting, which is a comprehensive basis of accounting other than
accounting principles generally accepted in the United States ("GAAP basis").
Cash basis accounting is an accepted accounting method for royalty trusts
such as the Trust. GAAP basis financial statements disclose income as earned
and expenses as incurred, without regard to receipts or payments. The use of
GAAP would require the Trust to accrue for expected royalty payments. This
is exceedingly difficult since the Trust has very limited information on such
payments until they are received and cannot accurately project such amounts.
The Trust's cash basis financial statements disclose revenue when cash is
received and expenses when cash is paid. The one modification of the cash
basis of accounting is that the Trust accrues for distributions to be paid
to unit owners (those distributions approved by the Trustees for the Trust).
The Trust's distributable income represents royalty income received by the
Trust during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the use of
the modified cash basis provides a more meaningful presentation to unit
owners of the results of operations of the Trust and presents to the unit
owners a more accurate calculation of income and expenses for tax reporting
purposes.
Off-Balance Sheet Arrangements
------------------------------
The Trust has no off-balance sheet arrangements.
Contractual Obligations
-----------------------
As shown below, the Trust had no contractual obligations as of
October 31, 2016 other than the distribution announced on October 28, 2016
and payable to unit owners on November 30, 2016, as reflected in the
statement of assets, liabilities and trust corpus.
Payments Due by Period
----------------------
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
------------- ------------- ------- ------- ---------
Distributions
payable to
unit owners $1,102,871 $1,102,871 $0 $0 $0
- 28 -
This Report on Form 10-K may contain forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. Such statements address
future expectations and events or conditions concerning the Trust. Many
of these statements are based on information provided to the Trust by the
operating companies or by consultants using public information sources.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in any
forward-looking statements. These include:
- risks and uncertainties concerning levels of gas production
and gas sale prices, general economic conditions and currency
exchange rates;
- the ability or willingness of the operating companies to
perform under their contractual obligations with the Trust;
- potential disputes with the operating companies and the
resolution thereof; and
- the risk factors set forth above under Item 1A of this Report.
All such factors are difficult to predict, contain uncertainties
that may materially affect actual results, and are generally beyond the
control of the Trust. New factors emerge from time to time and it is not
possible for the Trust to predict all such factors or to assess the impact
of each such factor on the Trust. Any forward-looking statement speaks
only as of the date on which such statement is made, and the Trust does not
undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
The Trust does not engage in any trading activities with respect to
possible foreign exchange fluctuations. The Trust does not use any financial
instruments to hedge against possible risks related to foreign exchange
fluctuations. The market risk with respect to funds held in the Trust's
bank account in Germany is negligible because standing instructions at
the Trust's German bank require the bank to process conversions and transfers
of royalty payments as soon as possible following their receipt. The Trust
does not engage in any trading activities with respect to commodity price
fluctuations.
- 29 -
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
INDEX TO FINANCIAL STATEMENTS
------------------------------
Page Number
-----------
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Statements of Assets, Liabilities and
Trust Corpus as of October 31, 2016 and 2015 F-2
Statements of Revenue Collected and Expenses Paid
for the Fiscal Years Ended October 31, 2016,
2015 and 2014 F-3
Statements of Undistributed Earnings for the Fiscal
Years Ended October 31, 2016, 2015 and 2014 F-4
Statements of Changes in Cash and Cash Equivalents for
the Fiscal Years Ended October 31, 2016, 2015 and 2014 F-5
Notes to Financial Statements F-6 - F-9
- 30 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and the Unit Owners of
North European Oil Royalty Trust
We have audited the accompanying statements of assets, liabilities and trust
corpus of North European Oil Royalty Trust (the "Trust") as of October 31,
2016 and 2015, and the related statements of revenue collected and expenses
paid, undistributed earnings, and changes in cash and cash equivalents for
each of the years in the three-year period ended October 31, 2016. These
financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements have been prepared on the
modified cash basis of accounting, which is a comprehensive basis of
accounting other than U.S. generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and trust corpus of the
Trust as of October 31, 2016 and 2015, its revenue collected and expenses
paid, its undistributed earnings, and changes in its cash and cash
equivalents for each of the years in the three-year period ended October 31,
2016, on the basis of accounting described in Note 1.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Trust's internal control over
financial reporting as of October 31, 2016, based on criteria established in
Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated December 29, 2016 expressed an unqualified opinion.
/s/ WeiserMazars LLP
New York, NY
December 29, 2016
F-1
- 31 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
OCTOBER 31, 2016 AND 2015
-------------------------
ASSETS 2016 2015
------ ------------ ------------
Current assets --
Cash and cash equivalents $1,165,347 $2,192,865
Producing gas and oil royalty
rights, net of amortization
(Notes 1 and 2) 1 1
------------ ------------
Total Assets $1,165,348 $2,192,866
============ ============
LIABILITIES AND TRUST CORPUS
----------------------------
Current liabilities --
Distributions to be paid
to unit owners, paid
November 2016 and 2015 $1,102,871 $2,113,835
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 62,476 79,030
------------ ------------
Total Liabilities and Trust Corpus $1,165,348 $2,192,866
============ ============
The accompanying notes are
an integral part of these financial statements.
F-2
- 32 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2016, 2015 AND 2014
----------------------------------------------------------
2016 2015 2014
------------ ------------ ------------
Gas, sulfur and
oil royalties received $ 6,960,961 $12,390,575 $18,927,005
Interest income 4,458 9,439 18,724
------------ ------------ ------------
Trust Income 6,965,509 12,400,014 18,945,729
------------ ------------ ------------
Non-related party expenses (715,404) (732,209) (819,004)
Related party expenses (108,964) (87,132) (82,146)
------------ ------------ ------------
Trust expenses (824,368) (819,341) (901,150)
------------ ------------ ------------
Net income $ 6,141,141 $11,580,673 $18,044,579
============ ============ ============
Net income per unit $0.67 $1.26 $1.96
======= ======= =======
Distributions per unit paid
or to be paid to
unit owners $0.67 $1.27 $1.95
======= ======= =======
The accompanying notes are
an integral part of these financial statements.
F-3
- 33 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2016, 2015 AND 2014
----------------------------------------------------------
2016 2015 2014
------------ ------------ ------------
Balance, beginning of year $ 79,030 $ 170,406 $ 47,477
Net income 6,141,141 11,580,673 18,044,579
----------- ----------- ------------
6,220,171 11,751,079 18,092,056
Less:
Current year distributions
paid or to be paid
to unit owners 6,157,695 11,672,049 17,921,650
----------- ----------- -----------
Balance, end of year $ 62,476 $ 79,030 $ 170,406
============ ============ ============
The accompanying notes are
an integral part of these financial statements.
F-4
- 34 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2016, 2015 AND 2014
----------------------------------------------------------
2016 2015 2014
------------ ------------ ------------
Sources of Cash and
Cash Equivalents:
Gas, sulfur and
oil royalties received $ 6,960,961 $12,390,575 $18,927,005
Interest income 4,548 9,439 18,724
------------ ------------ ------------
6,965,509 12,400,014 18,945,729
------------ ------------ ------------
Uses of Cash and
Cash Equivalents:
Payment of Trust expenses 824,368 819,341 901,150
Distributions paid 7,168,659 13,142,544 19,208,333
------------ ------------ ------------
7,993,027 13,961,885 20,109,483
------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents during the year (1,027,518) (1,561,871) (1,163,754)
Cash and cash equivalents,
beginning of year 2,192,865 3,754,736 4,918,490
------------ ------------ ------------
Cash and cash equivalents,
end of year $ 1,165,347 $ 2,192,865 $ 3,754,736
============ ============ ============
The accompanying notes are
an integral part of these financial statements.
F-5
- 35 -
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
OCTOBER 31, 2016, 2015 AND 2014
-------------------------------
(1) Summary of significant accounting policies:
-------------------------------------------
Basis of accounting -
---------------------
The accompanying financial statements of North European Oil Royalty
Trust (the "Trust") are prepared in accordance with the rules and regulations
of the SEC. Financial statement balances and financial results are presented
on a modified cash basis of accounting, which is a comprehensive basis of
accounting other than accounting principles generally accepted in the United
States ("GAAP basis"). In the opinion of management, all adjustments that
are considered necessary for a fair presentation of these financial
statements, including adjustments of a normal, recurring nature, have been
included.
On a modified cash basis, revenue is earned when cash is received and
expenses are incurred when cash is paid. GAAP basis financial statements
disclose revenue as earned and expenses as incurred, without regard to
receipts or payments. The modified cash basis of accounting is utilized to
permit the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust during
the period plus interest income less any expenses incurred by the Trust, all
on a cash basis. In the opinion of the Trustees, the use of the modified
cash basis of accounting provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company (the
"Company") (see Note 2). The net book value of the royalty rights has been
reduced to one dollar ($1) in view of the fact that the remaining net book
value of royalty rights is de minimis relative to annual royalties received
and distributed by the Trust and does not bear any meaningful relationship to
the fair value of such rights or the actual amount of proved producing
reserves.
Federal and state income taxes -
--------------------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service.
The Trust has no state income tax obligations.
F-6
- 36 -
Cash and cash equivalents -
---------------------------
Cash and cash equivalents are defined as amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S. Treasury
bills with original maturities generally of three months or less from the
date of purchase. The investment options available to the Trust are limited
in accordance with specific provisions of the Trust Agreement. As of October
31, 2016, the uninsured amounts held in the Trust's U.S. bank accounts were
$906,704. In addition, the Trust held 9,875 Euros, the equivalent of
$10,820, in its German bank account at October 31, 2016.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at
the end of the period. As of October 31, 2016, 2015 and 2014, there were
9,190,590 units of beneficial interest outstanding.
New accounting pronouncements -
-------------------------------
The Trust is not aware of any recently issued, but not yet effective,
accounting standards that would be expected to have a significant impact on
the Trust's financial position or results of operations.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities of the
Company, including its royalty rights, were transferred to the Trust. The
Trust, on behalf of the owners of beneficial interest in the Trust, holds
overriding royalty rights covering gas and oil production in certain
concessions or leases in the Federal Republic of Germany. These rights are
held under contracts with local German exploration and development
subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of
Companies. Under these contracts, the Trust receives various percentage
royalties on the proceeds of the sales of certain products from the areas
involved. At the present time, royalties are received for sales of gas well
gas, oil well gas, crude oil, condensate and sulfur.
(3) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and services to the Trust at cost. For such office space and services,
the Trust reimbursed the Managing Director $28,559, $25,729 and $24,634 in
fiscal 2016, 2015 and 2014, respectively.
Lawrence A. Kobrin, a Trustee of the Trust, is a Senior Counsel at Cahill
Gordon & Reindel LLP, which serves as counsel to the Trust. For legal
services, the Trust paid Cahill Gordon & Reindel LLP $80,405, $61,403 and
$57,512 in fiscal 2016, 2015 and 2014, respectively.
F-7
- 37 -
(4) Employee benefit plan:
----------------------
The Trust has established a savings incentive match plan for employees
(SIMPLE IRA) that is available to both employees of the Trust, one of whom is
the Managing Director. The Trustees authorized the making of contributions
by the Trust to the accounts of employees, on a matching basis, of up to 3%
of cash compensation paid to each such employee for the 2016, 2015 and 2014
calendar years.
F-8
- 38 -
(5) Quarterly results (unaudited):
------------------------------
The tables below summarize the quarterly results and distributions of
the Trust for the fiscal years ended October 31, 2016 and 2015:
Fiscal 2016 by Quarter and Year
--------------------------------------------------------------
First Second Third Fourth Year
----------- ---------- ---------- ---------- -------------
Royalties
received $1,832,471 $2,333,670 $1,561,026 $1,233,794 $6,960,961
Net income $1,573,687 $2,100,364 $1,388,796 $1,078,294 $6,141,141
Net income
per unit $0.17 $0.23 $0.15 $0.12 $0.67
Distributions
paid or
to be paid $1,470,494 $2,205,742 $1,378,588 $1,102,871 $6,157,695
Distributions
per unit
paid or to
be paid to
unit owners $0.16 $0.24 $0.15 $0.12 $0.67
Fiscal 2015 by Quarter and Year
--------------------------------------------------------------
First Second Third Fourth Year
----------- ---------- ---------- ---------- -------------
Royalties
received $3,442,713 $3,238,135 $3,459,645 $2,250,082 $12,390,575
Net income $3,096,916 $3,074,495 $3,312,307 $2,096,955 $11,580,673
Net income
per unit $0.34 $0.33 $0.36 $0.23 $1.26
Distributions
paid or
to be paid $3,216,706 $3,032,895 $3,308,613 $2,113,835 $11,672,049
Distributions
per unit
paid or to
be paid to
unit owners $0.35 $0.33 $0.36 $0.23 $1.27
F-9
- 39 -
Item 9. Changes in and Disagreements with Accountants
---------------------------------------------
on Accounting and Financial Disclosure.
--------------------------------------
None.
Item 9A. Controls and Procedures.
-----------------------
Disclosure Controls and Procedures
----------------------------------
The Trust maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Trust is
recorded, processed, summarized, accumulated and communicated to its
management, which consists of the Managing Director, to allow timely
decisions regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
The Managing Director has performed an evaluation of the effectiveness of the
design and operation of the Trust's disclosure controls and procedures as of
October 31, 2016. Based on that evaluation, the Managing Director concluded
that the Trust's disclosure controls and procedures were effective as of
October 31, 2016.
Internal Control over Financial Reporting
-----------------------------------------
Part A. Management's Report on Internal Control over Financial
------------------------------------------------------
Reporting
---------
The Trust's management is responsible for establishing and
maintaining adequate internal control over financial reporting (as such term
is defined in Exchange Act Rule 13a-15(f)) for the Trust. There are inherent
limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of internal control may vary over
time. Management has evaluated the Trust's internal control over financial
reporting as of October 31, 2016. This assessment was based on criteria for
effective internal control over financial reporting described in the
standards promulgated by the Public Company Accounting Oversight Board and in
the Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that the Trust's internal control over
financial reporting was effective as of October 31, 2016. Management's
assessment of the effectiveness of our internal control over financial
reporting as of October 31, 2016 has been audited by WeiserMazars LLP, the
Trust's independent auditor, as stated in their report which follows.
- 40 -
Part B. Attestation Report of Independent Registered Public
---------------------------------------------------
Accounting Firm
---------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and the Unit Owners
of North European Oil Royalty Trust
We have audited North European Oil Royalty Trust's (the "Trust") internal
control over financial reporting as of October 31, 2016, based on criteria
established in Internal Control Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Trust's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Trust's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A trust's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A trust's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the assets of the trust; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the trust are being made only in accordance with
authorizations of management and trustees of the trust; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the trust's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
- 41 -
In our opinion, the Trust maintained, in all material respects, effective
internal control over financial reporting as of October 31, 2016, based on
criteria established in Internal Control Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the statements of assets,
liabilities and trust corpus as of October 31, 2016 and 2015, and the related
statements of revenue collected and expenses paid, undistributed earnings and
changes in cash and cash equivalents for each of the years in the three-year
period ended October 31, 2016 and our report dated December 29, 2016
expressed an unqualified opinion thereon.
/s/ WeiserMazars LLP
New York, NY
December 29, 2016
Part C. Changes in Internal Control over Financial Reporting
----------------------------------------------------
There have been no changes in the Trust's internal control over
financial reporting that occurred during the fourth quarter of fiscal 2016
that have materially affected, or are reasonably likely to materially affect,
the Trust's internal control over financial reporting.
Item 9B. Other Information.
-----------------
None.
- 42 -
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
------------------------------------------------------
Except as set forth below, the information required by this item
will be contained in the Trust's definitive Proxy Statement for its Annual
Meeting of Unit Owners to be held on February 16, 2017, to be filed pursuant
to Section 14 of the Securities Exchange Act of 1934, and is incorporated
herein by reference.
Code of Ethics
--------------
The Trustees have adopted a Code of Conduct and Business Ethics
(the "Code") for the Trust's Trustees and employees, including the Managing
Director. The Managing Director serves the roles of principal executive
officer and principal financial and accounting officer. A copy of the Code
is available without charge on request by writing to the Managing Director at
the office of the Trust. The Code is also available on the Trust's website,
www.neort.com.
All Trustees and employees of the Trust are required to read and
sign a copy of the Code annually. No waivers or exceptions to the Code have
been granted since the adoption of the Code. Any amendments or waivers to
the Code, to the extent required, will be disclosed in a Form 8-K filing of
the Trust after such amendment or waiver.
Item 11. Executive Compensation.
----------------------
The information required by this item will be contained in the
Trust's definitive Proxy Statement for its Annual Meeting of Unit Owners to
be held on February 16, 2017, to be filed pursuant to Section 14 of the
Securities Exchange Act of 1934, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
and Related Stockholder Matters.
-------------------------------
The information required by this item will be contained in the
Trust's definitive Proxy Statement for its Annual Meeting of Unit Owners to
be held on February 16, 2017, to be filed pursuant to Section 14 of the
Securities Exchange Act of 1934, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director
------------------------------------------------------------
Independence.
------------
The information required by this item will be contained in the
Trust's definitive Proxy Statement for its Annual Meeting of Unit Owners to
be held on February 16, 2017, to be filed pursuant to Section 14 of the
Securities Exchange Act of 1934, and is incorporated herein by reference.
- 43 -
Item 14. Principal Accountant Fees and Services.
--------------------------------------
The information required by this item will be contained in the
Trust's definitive Proxy Statement for its Annual Meeting of Unit Owners to
be held on February 16, 2017, to be filed pursuant to Section 14 of the
Securities Exchange Act of 1934, and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) The following is a list of the documents filed as part of this
Report:
1. Financial Statements
Index to Financial Statements for the Fiscal Years
Ended October 31, 2016, 2015 and 2014
Report of Independent Registered Public Accounting Firm
Statements of Assets, Liabilities and Trust Corpus as of
October 31, 2016 and 2015
Statements of Revenue Collected and Expenses Paid for the
Fiscal Years Ended October 31, 2016, 2015 and 2014
Statements of Undistributed Earnings for the Fiscal Years
Ended October 31, 2016, 2015 and 2014
Statements of Changes in Cash and Cash Equivalents for the
Fiscal Years Ended October 31, 2016, 2015 and 2014
Notes to Financial Statements
2. Exhibits
The Exhibit Index following the signature page lists all
exhibits filed with this Report or incorporated by reference.
Item 16. Form 10-K Summary.
-----------------
None.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Trust has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
Dated: December 29, 2016 By: /s/ John R. Van Kirk
--------------------------------------------
John R. Van Kirk, Managing Director
and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Dated: December 29, 2016 /s/ Robert P. Adelman
---------------------------------------
Robert P. Adelman, Managing Trustee
Dated: December 29, 2016 /s/ Samuel M. Eisenstat
--------------------------------
Samuel M. Eisenstat, Trustee
Dated: December 29, 2016 /s/ Lawrence A. Kobrin
-------------------------------
Lawrence A. Kobrin, Trustee
Dated: December 29, 2016 /s/ Willard B. Taylor
------------------------------
Willard B. Taylor, Trustee
Dated: December 29, 2016 /s/ Rosalie J. Wolf
----------------------------
Rosalie J. Wolf, Trustee
Dated: December 29, 2016 /s/ John R. Van Kirk
---------------------------------------
John R. Van Kirk, Managing Director
and Principal Accounting Officer
- 45 -
Exhibit Index
-------------
Exhibit Page
------- ----
(3.1) North European Oil Royalty Trust Agreement,
dated September 10, 1975, as amended through
February 13, 2008(incorporated by reference to
Exhibit 3.1 to Current Report on Form 8-K,
filed February 15, 2008. (File No. 0-8378)).
(3.2) Amended and Restated Trustees' Regulations,
amended and restated as of October 31, 2007
(incorporated by reference to Exhibit 3.1 to
Current Report on Form 8-K, filed November 2, 2007
(File No. 0-8378)).
(10.1) Agreement with OEG, dated April 2, 1979,
exhibit to Current Report on Form 8-K
filed May 11, 1979 (incorporated by
reference as Exhibit 1 to Current Report
on Form 8-K, filed May 11, 1979
(File No. 0-8378)).
(10.2) Agreement with Mobil Oil, A.G. concerning
sulfur royalty payment, dated March 30, 1979,
(incorporated by reference to Exhibit 3
to Current Report on Form 8-K, filed
May 11, 1979 (File No. 0-8378)).
(10.3) English language translation of Amendment
Agreement dated August 26, 2016 between
Oldenburgische Erdolgesellschaft mbH and
North European Oil Royalty Trust (incorporated
by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended
July 31, 2016 (File No. 1-8245)).
(10.4) English language translation of Amendment
Agreement dated August 26, 2016 between
Mobil Erdgas-Erdol GmbH and North European
Oil Royalty Trust (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarter ended July 31, 2016 (File No. 1-8245)).
(21) There are no subsidiaries of the Trust.
(31) Certification of Chief Executive Officer and Chief 47
Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
(32) Certification of Chief Executive Officer and 49
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- 46 -
(99.1) Calculation of Cost Depletion Percentage 50
for the 2016 Calendar Year Based on the Estimate
of Remaining Proved Producing Reserves in the
Northwest Basin of the Federal Republic of Germany
as of October 1, 2016 prepared by
Ralph E. Davis Associates, LLC
(99.2) Order Approving Settlement signed by
Vice Chancellor Jack Jacobs of the
Delaware Court of Chancery
(incorporated by reference as
Exhibit 99.2 to Current Report on
Form 8-K, filed February 26, 1996).