SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 2012 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 ___________ .
Commission file number 1-8245
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) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
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(Address of principal executive offices)
(732) 741-4008
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(Registrant's telephone number, including area code)
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
----- -----
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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Class Outstanding at April 30, 2012
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Units of Beneficial Interest 9,190,590
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements.
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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APRIL 30, 2012 AND OCTOBER 31, 2011
-----------------------------------
(Unaudited)
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2012 2011
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ASSETS
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Current assets - - Cash and
cash equivalents $ 6,365,478 $ 5,971,866
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
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Total Assets $ 6,365,479 $ 5,971,867
============ ============
LIABILITIES AND TRUST CORPUS
------------------------------
Current liabilities - - Distributions
to be paid to unit owners, paid
May 2012 and November 2011 $ 6,249,601 $ 5,881,977
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 115,877 89,889
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Total Liabilities and Trust Corpus $ 6,365,479 $ 5,971,867
============ ============
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED APRIL 30, 2012 AND 2011
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(Unaudited)
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2012 2011
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German gas, sulfur and oil
royalties received $ 6,441,635 $ 6,965,508
Interest income 11,433 1,301
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Trust Income $ 6,453,068 $ 6,966,809
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Non-related party expenses 170,754 267,708
Related party expenses (Note 3) 20,200 20,107
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Trust Expenses (190,954) (287,815)
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Net Income $ 6,262,114 $ 6,678,994
============ ============
Net income per unit $ .68 $ .73
====== ======
Distributions per unit paid or
to be paid to unit owners $ .68 $ .73
====== ======
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2012 AND 2011
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(Unaudited)
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2012 2011
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German gas, sulfur and oil
royalties received $12,979,896 $12,361,791
Interest income 21,557 3,684
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Trust Income $13,001,453 $12,365,475
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Non-related party expenses 588,272 537,894
Related party expenses (Note 3) 71,803 64,448
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Trust Expenses (660,075) (602,342)
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Net Income $12,341,378 $11,763,133
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Net income per unit $1.34 $1.28
====== ======
Distributions per unit paid or
to be paid to unit owners $1.34 $1.28
====== ======
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 2012 AND 2011
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(Unaudited)
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2012 2011
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Balance, beginning of period $ 89,889 $ 65,234
Net income 12,341,378 11,763,133
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12,431,267 11,828,367
Less:
Current year distributions paid
or to be paid to unit owners 12,315,390 11,763,955
------------ ------------
Balance, end of period $ 115,877 $ 64,412
============ ============
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2012 AND 2011
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(Unaudited)
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2012 2011
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Sources of cash and cash equivalents:
------------------------------------
German gas, sulfur and oil royalties $12,979,896 $12,361,791
Interest income 21,557 3,684
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13,001,453 12,365,475
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Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 660,075 602,342
Distributions paid 11,947,766 10,201,555
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12,607,841 10,803,897
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Net increase (decrease) in cash and
cash equivalents during the period 393,612 1,561,578
Cash and cash equivalents,
beginning of period 5,971,866 5,211,965
------------ ------------
Cash and cash equivalents,
end of period $ 6,365,478 $ 6,773,543
============ ============
The accompanying notes are an integral part
of these financial statements.
-8-
NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO FINANCIAL STATEMENTS
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(Unaudited)
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(1) Summary of significant accounting policies:
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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.
The results of any interim period are not necessarily indicative of the
results to be expected for the fiscal year. These financial statements
should be read in conjunction with the financial statements that were
included in the Trust's Annual Report on Form 10-K for the year ended
October 31, 2011 (the "2011 Form 10-K"). The Statements of Assets,
Liabilities and Trust Corpus included herein contain information from the
Trust's 2011 Form 10-K.
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.
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Cash and cash equivalents -
---------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S. Treasury
bills with original maturities 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 April 30,
2012, the uninsured amounts held in the Trust's U.S. bank accounts were
approximately $5,865,000. In addition, approximately $6,541 was held in the
Trust's German account at April 30, 2012.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at
the end of the period. As of both April 30, 2012 and 2011, 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.
Reclassifications -
-----------------
Certain amounts in the financial statements of prior periods have
been reclassified to conform to the current period presentation for
comparative purposes.
(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:
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John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. For such office space and
office services, the Trust reimbursed the Managing Director $3,476 and $3,800
in the second quarter of fiscal 2012 and 2011, respectively. For such office
space and office services, the Trust reimbursed the Managing Director $12,249
and $10,254 in the first six months of fiscal 2012 and 2011, respectively.
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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 the
second quarter of fiscal 2012 and 2011, the Trust paid Cahill Gordon &
Reindel LLP $16,724 and $16,307 for legal services, respectively. For the
first six months of fiscal 2012 and 2011, the Trust paid Cahill Gordon &
Reindel LLP $59,554 and $54,194 for legal services, respectively.
(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 the employees, on a matching
basis, of up to 3% of cash compensation paid to each employee effective for
the 2011 and 2012 calendar years.
(5) Subsequent Events:
------------------
With regard to the litigation described in the Notes to the Financial
Statements included in the Trust's Annual Report on Form 10-K for the year
ended October 31, 2011, the Trust was notified on May 9, 2012 that the
District Court in Hannover had dismissed the Trust's claims. The Trust
reviewed the court's judgment and, after consultation with its advisors,
has determined that it will not proceed with the litigation. The Trust
anticipates that, based on the German Statutory Fee Table, it will
be required to pay opposing counsel approximately Euros 44,000.
-11-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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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, 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 the ExxonMobil Corp. ("ExxonMobil"), or by
Oldenburgische Erdolgesellschaft ("OEG"). The Oldenburg concession is the
primary area from which the natural gas, sulfur and oil are extracted and
provides nearly 100% of all the royalties received by the Trust. The
Oldenburg concession (1,398,000 acres) covers virtually the entire former
Principality of Oldenburg and is located in the federal state of Lower Saxony.
In 2002, Mobil Erdgas and BEB Erdgas und Erdol GmbH ("BEB"), a joint
venture of ExxonMobil and the Royal Dutch/Shell Group of Companies, formed a
company ExxonMobil Production Deutschland GmbH ("EMPG") to carry out all
exploration, drilling and production activities. All sales activities are
still handled by the operating companies, either Mobil Erdgas or BEB.
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 94% of the total royalties. 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.
Effective with the Trust's third quarter of fiscal 2010, a new
royalty payment schedule was fully implemented. At 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. This amount forms the basis for royalty payments for the Trust's
upcoming fiscal quarter and for any adjustment for the prior calendar quarter.
For example, on January 25th the operating companies calculate gas sales and
attributable royalties payable for the months of October through December.
This amount is divided into thirds and forms the monthly royalty payments
-12-
(payable on the 15th of each month) to the Trust for its fiscal quarter
running from February through April. Continuing in this example, at the same
time that the operating companies determine the actual amount of royalties
that were payable for the months of October through December, they look at
the actual amount of royalties that were paid to the Trust during the months
of November through January and calculate the difference between what was
payable and what was paid. Additional amounts payable by the operating
companies would be paid immediately in January and any overpayment would be
deducted from the February payment. The operating companies continue their
calculations through the calendar year. In September of each year, the
operating companies make the final determination of any necessary royalty
adjustments for the prior calendar year. The Trust's German accountants
review the royalty calculations on a biennial basis and are currently
conducting their examination for the 2009-2010 period.
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. In recent years sweet gas has
assumed the role of swing producer. During periods of high demand, the
production of sweet gas is increased as necessary. During the summer months
sweet gas production is reduced due to a general decline in demand. Sour
gas, in comparison, must be processed at either the Grossenkneten or the
Norddeutsche Erdgas-Aufbereitungs GmbH ("NEAG") desulfurization plants 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. For efficiency purposes, the
desulfurization plants are operated at capacity on a continual basis. Any
excess production from the plants is stored in underground storage for higher
demand periods. As needed, the operators conduct maintenance on the plants,
generally during the summer months when demand is lower. If the operator is
consistent with past practice, overall production during this maintenance
period would be reduced by approximately one-third as the three units in the
desulfurization plant would each be shut down in sequence for approximately
two weeks.
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 this agreement. Historically,
as compared to the OEG Agreement described below, 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 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. In the first six months of fiscal 2012 and 2011, the Trust
received $425,001 and $318,061, respectively, in sulfur royalties under the
Mobil Agreement.
-13-
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, treatment
and transportation 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.
In 2008, NV Nederlandse Gasunie (the state owned Dutch gas
distribution company) completed the purchase BEB's North German gas
distribution and transmission network. As part of its normal biennial
examination of the operating companies, the Trust's German accountants, on
behalf of the Trust, completed their examination of the royalty payments for
2007-08. While the pipeline sale occurred in the latter half of 2008, the
accountants confirmed that transportation costs continued in accordance with
the authorized indexed flat rate throughout this period and that the method of
royalty calculation has not been affected. The Trust has not received any
indications that this pipeline sale would affect the method of royalty
calculations.
However, based on advice of its German counsel, and in order to
resolve a dispute with EMPG over the right of the Trust to receive royalties
on amounts received by BEB on the sale of the transmission pipeline system,
the Trust, along with the parallel royalty holder with a similar royalty
agreement, asserted a claim for royalties on the amounts received from such
sale. Efforts to resolve the claim were not successful. The parallel
royalty holder filed an action in the District Court of Hannover, Germany,
Civil Chamber against OEG, an affiliate of BEB. Subsequently, German counsel
advised the Trustees that on December 31, 2011 the prescription, or statute
of limitations, period for a claim would expire. Faced with this pending
expiration, and after unsuccessfully seeking a waiver of the statute of
limitations, the Trustees, on December 16, 2011, filed an application to join
as a party plaintiff to the complaint previously filed by the parallel
royalty holder. This joinder application was received by the court on
December 19, 2011 and is pending at law as of that date. On January 13,
2012, OEG filed a response to the complaint originally filed by the parallel
royalty holder. The Trust and parallel royalty holder's response was filed
and a hearing took place on March 14, 2012. In the original proceeding, the
Trust sought a royalty on sales proceeds in the amount of Euros 5.66 million.
On May 9, 2012, the Trust was notified that the District Court in Hannover had
dismissed the Trust's claims. The Trust reviewed the court's judgment and,
after consultation with its advisors, has determined that it will not proceed
with the litigation. The Trust anticipates that, based on the German
Statutory Fee Table, it will be required to pay opposing counsel approximately
Euros 44,000.
Under the Mobil and OEG Agreements, the gas is sold to various
distributors under long term contracts which delineate, among other
provisions, the timing, manner, volume and price of the gas sold. The
pricing mechanisms contained in these contracts include a delay factor of
three to six months and use the price of light heating oil in Germany as one
of the primary pricing components. Since Germany must import a large
percentage of its energy requirements, the U.S. dollar price of oil on the
international market has a significant impact on the price of light heating
oil and a delayed impact on the price of gas. The Trust does not have
access to the specific sales contracts under which gas from the Oldenburg
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concession is sold. Working under a confidentiality agreement with the
operating companies, the Trust's German accountant examines these contracts
periodically on behalf of the Trust to verify the correctness of application
of the Agreement formulas for the computation of royalty payments.
For unit owners, changes in the dollar value of the Euro have both
an immediate and long-term impact. The immediate impact is from the exchange
rate that is applied at the time the royalties, paid to the Trust in Euros,
are converted into U.S. dollars at the time of their transfer 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. The long-term
impact relates to the mechanism of gas pricing contained in the gas sales
contracts negotiated by the operating companies. These gas sales contracts
often use the price of German light heating oil as one of the primary pricing
factors by which the price of gas is determined. The price of German light
heating oil, which is a refined product, is largely determined by the price
of the imported crude oil from which it was refined. Oil on the international
market is priced in dollars. However, when oil is imported into Germany it
is purchased in Euros, and at this point the dollar value of the Euro becomes
relevant. A weaker Euro would buy less oil making that oil and the
subsequently refined light heating oil more expensive. A stronger Euro would
buy more oil making that oil and the subsequently refined light heating oil
less expensive. Because changes in the price of German light heating oil are
subsequently reflected in the price of gas through the gas sales contracts,
the dollar/Euro relationship can make the prices of gas higher or lower. The
changes in gas prices that result from changes in the prices of German light
heating oil are only reflected after a built-in delay of three to six months
as specified in the individual gas sales contracts.
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 Trust's royalty rights.
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 EMPG. In his position as consultant, he
receives reports from the operating companies with respect to current and
planned drilling and exploration efforts. However, the unified exploration
and production venture, EMPG, which provides the reports to the Trust's
consultant, continues 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 its financial prospects. Sustained price inflation,
which would be reflected in sales prices, along with sales volumes, form
the basis on which the royalties paid to the Trust are computed.
The impact of inflation or deflation on energy prices in Germany is delayed
by the use, in certain long-term gas sales contracts, of a delay factor of
three to six months prior to the application of any changes in light
heating oil prices to gas prices.
-15-
Results: Second Quarter Fiscal 2012 Versus Second Quarter Fiscal 2011
------------------------------------------------------------
For the second quarter of fiscal 2012, the Trust's net income was
$6,262,114, a decrease of 6.24% from the net income of $6,678,994 for the
second quarter of fiscal 2011. Total royalties received during the second
quarter of fiscal 2012 were derived from sales of gas, sulfur and oil from
the Trust's overriding royalty areas in Germany during the first calendar
quarter of 2012. These royalties were derived primarily from sale of gas
from the Trust's overriding royalty areas in Germany. A distribution of
68 cents per unit was paid on May 30, 2012 to owners of record as of
May 11, 2012.
Gas royalty income under both the Mobil and the OEG Agreements in
the second quarter of 2012 was lower in comparison to income received during
the second quarter of 2011 due to the combination of lower gas sales and
lower average exchange rates in the second quarter of 2012. The decrease
in total royalty income for the second quarter of fiscal 2012 in comparison
to the second quarter of fiscal 2011 did not result solely from the
previously mentioned factors, but also because of the impact of the receipt
in the second quarter of fiscal 2011 of two prior year adjustments and two
prior quarter sulfur payments totaling approximately $243,000. Additionally,
two positive adjusting payments were received during April 2011 which brought
the total amount of royalties received during the second quarter of fiscal
2011 to a level supported by the then current gas sales, gas prices and
exchange rates.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Ended 4/30/2012 Ended 4/30/2011 Change
-----------------------------------------------------------------------------
Total Royalties Received $6,441,635 $6,965,508 - 7.52%
Net Income $6,262,114 $6,678,994 - 6.24%
Distributions per Unit $0.68 $0.73 - 6.85%
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The amount of gas royalties payable to the Trust is based on four
primary factors: the amount of gas sold, the price of that gas, the area from
which the gas is sold and the exchange rate. Gas sales are measured in
billion cubic feet ("Bcf"). Gas prices are reported in Euro cents per
Kilowatt hour ("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf").
Average exchanges rates are based on cumulative royalty transfers
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Mobil Agreement Ended 4/30/2012 Ended 4/30/2011 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 9.632 11.057 - 12.89%
Gas Prices (Ecents/Kwh) 2.8708 2.5087 + 14.43%
Gas Prices ($/Mcf) $10.74 $10.06 + 6.76%
Average Exchange Rate 1.3024 1.3962 - 6.72%
Gas Royalties $4,137,430 $4,447,703 - 6.98%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 26.104 30.098 - 13.27%
Gas Prices (Ecents/Kwh) 3.0872 2.6826 + 15.08%
Gas Prices ($/Mcf) $11.24 $10.51 + 6.95%
Average Exchange Rate 1.3019 1.3989 - 6.93%
Gas Royalties $1,806,345 $1,959,645 - 7.82%
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-16-
If we exclude 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 the quarter just ended,
gas sales from western Oldenburg accounted for only 36.9% of all gas sales.
However, royalties on these gas sales provided approximately 80.19% of all
royalties attributable to gas sales from the Oldenburg concession.
Trust expenses for the second quarter of fiscal 2012 decreased
33.65%, or $96,861, to $190,954 from $287,815 in the second quarter of fiscal
2011. This decline in expenses is primarily due to a difference in the
timing of payments of the New York Stock Exchange annual fee and mailing
costs associated with the annual meeting, as well as reduced legal expenses.
Trust interest income received during the second quarter of fiscal 2012
increased to $11,434 in comparison to $1,301 received in the second quarter
of fiscal 2011 due to a shift to money market deposits.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2012, compared to that at fiscal year-end (October
31, 2011), shows an increase in assets due to the higher royalty receipts
during the second quarter of fiscal 2012.
Results: First Six Months of Fiscal 2012 Versus First Six Months of
----------------------------------------------------------
Fiscal 2011
-----------
Total royalties received during the first six months of fiscal 2012
were derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the fourth calendar quarter of 2011 and the
first calendar quarter of 2012. These royalties were derived primarily from
sale of gas from the Trust's overriding royalty areas in Germany. The
increase in total royalty income resulted from a minor negative adjustment of
approximately $42,000 during the first six months of fiscal 2012 in
comparison to significant negative adjustments totaling approximately
$981,000 during the first six months of fiscal 2011.
Six Months Six Months Percentage
Ended 4/30/2012 Ended 4/30/2011 Change
-----------------------------------------------------------------------------
Total Royalties Received $12,979,896 $12,361,791 + 5.00%
Net Income $12,341,378 $11,763,133 + 4.92%
Distributions per Unit $1.34 $1.28 + 4.69%
-----------------------------------------------------------------------------
Gas royalty income under both the Mobil and the OEG Agreements in
the first six months of fiscal 2012 was lower in comparison to gas royalty
income received during the first six months of fiscal 2011 due to the
combination of lower gas sales and lower average exchange rates in the first
six months of fiscal 2012.
-17-
Six Months Six Months Percentage
Mobil Agreement Ended 4/30/2012 Ended 4/30/2011 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 19.381 22.763 - 14.86%
Gas Prices (Ecents/Kwh) 2.8635 2.4401 + 17.35%
Gas Prices ($/Mcf) $10.70 $ 9.60 + 11.46%
Average Exchange Rate 1.3020 1.3727 - 5.15%
Gas Royalties $8,297,163 $8,737,116 - 5.04%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 54.291 60.310 - 9.98%
Gas Prices (Ecents/Kwh) 3.0007 2.6115 + 14.90%
Gas Prices ($/Mcf) $10.92 $10.03 + 8.87%
Average Exchange Rate 1.3023 1.3736 - 5.19%
Gas Royalties $3,653,970 $3,741,885 - 2.35%
-----------------------------------------------------------------------------
For the six months just ended, gas sales from western Oldenburg
accounted for only 35.70% of all gas sales. However, royalties on these gas
sales provided approximately 80.04% of all royalties attributable to gas
sales from the Oldenburg concession.
Trust expenses for the first six months of fiscal 2012 increased
9.58%, or $57,733, to $660,075 from $602,342 for the first six months of
fiscal 2011. This increase in expenses is primarily related to higher legal
expenses related to the German litigation, final costs associated with the
royalty examination and Trustees' fees calculated as specified under
provisions in the Trust Agreement. Trust interest income received during
the first six months of fiscal 2012 increased to $21,557 in comparison to
$3,684 received in the first six months of fiscal 2011 due to a shift to
money market deposits.
Report on Drilling and Geophysical Work
---------------------------------------
The Trust's German consultant, Alfred Stachel, met with
representatives of EMPG to inquire about drilling begun or
completed in the 2010-2011 period and planned and proposed drilling
and geophysical work for 2012 and beyond, as well as other general
matters. The following is a summary of Mr. Stachel's account of
the operating companies' responses to his inquiries. The Trust is
not able to confirm the accuracy of any of these findings or
responses. In addition, EMPG is not obligated 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.
EMPG has indicated that it will be conducting scheduled
maintenance work at the Grossenkneten desulfurization plant during
the period from September 4 to October 11, 2012. It is expected
that this will reduce sour gas processing during this period by
approximately one-third while the maintenance is being conducted.
The following is a description of wells completed during 2011.
Brettorf Z-2b, a sour gas Zechstein well, was intended to re-open
the Brettorf gas field, which had been shut-in since 2004. The
well underwent a production test at the end of 2011, which showed
-18-
an unstabilized low flow rate. It is currently shut-in awaiting
further considerations on how to proceed. Visbek Z-8a, a western
sour gas infill well, completed drilling in December 2011 and
entered production in January 2012.
EMPG has provided the following description of work planned for
2012. The operator is continuing to conduct interpretation of
previous seismic work to evaluate drilling prospects in different
fields in Oldenburg. Goldenstedt Z-21, a sour gas well, began
drilling in January 2012 and reached the top of the Zechstein
production zone in mid-March. Visbek Z-16a, a western sour gas
well, is scheduled to begin drilling in May 2012. The well site
for Goldenstedt Z-15, a sour gas well, has been prepared and it is
scheduled to begin drilling in August 2012. This well is intended
to serve two purposes. It will act as an infill well accessing the
Zechstein formation. The well will be further designated as
Goldenstedt Z-15a as it will be deepened by an additional 1,000
meters to explore the reservoir conditions in the Carboniferous
sweet gas formation. Goldenstedt Z-25, a sour gas well, is
scheduled to start drilling in the second half of 2012. Oythe Z-4,
a sweet gas well intended to access the Carboniferous formation,
is scheduled to start drilling in December 2012. This is the
seventh well in EMPG's Tight Gas Program.
Due to the late start of some of these wells, it is possible
drilling will continue into 2013. The only well EMPG has currently
scheduled for 2013 is Hemmelte NW T-1, a sweet gas well.
Construction of the well site has been completed. This is an
exploratory well intended to access the Bunter formation in western
Oldenburg. Originally intended as a dual well accessing both the
Bunter and Zechstein formations, the well was scaled back and a
separate well may potentially be drilled in later years to explore
the Zechstein formation.
The Trust has been notified by EMPG that there are currently
eight wells within EMPG's portfolio, five Zechstein and three
Carboniferous, which are planned for some time after 2013. Whether
these wells will be drilled is at the discretion of EMPG and will
depend upon results of earlier drilling and an evaluation of
economic circumstances.
-----------------------------------
-19-
This report on Form 10-Q 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:
1. risks and uncertainties concerning levels of gas production
and gas sale prices, general economic conditions and currency
exchange rates;
2. the ability or willingness of the operating companies to
perform under their contractual obligations with the Trust;
3. ongoing litigation and other potential disputes with the
operating companies and the resolution thereof; and
4. the risk factors set forth under Item 1A of the Trust's Annual
Report on Form 10-K for the year ended October 31, 2011.
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 1. Legal Proceedings.
-----------------
Except as set forth below, the Trust is not a party to any material
pending legal proceedings.
The Trust, in conjunction with a parallel royalty holder,
periodically engages German accountants to review the methods of calculation
of royalties used by EMPG and its affiliates. The accountants' report
covering the years 2007-2008 noted that in 2008, NV Nederlandse Gasunie (the
state owned Dutch gas distribution company) completed its purchase of the
interest held by BEB, an affiliate of EMPG, in the North German gas
distribution and transmission pipeline system. Based upon advice of its
German counsel, the Trust, along with the parallel royalty holder with a
similar royalty agreement, asserted a claim for royalties on the amounts
received from such sale. Efforts to resolve the claim were not successful.
The parallel royalty holder filed an action in the District Court of
Hannover, Germany, Civil Chamber against OEG, an affiliate of BEB.
Subsequently, German counsel advised the Trustees that on December 31, 2011
the prescription, or statute of limitations, period for a claim would
expire. In face of that pending expiration, and after unsuccessfully
seeking a waiver of the statute of limitations, the Trustees, on December 16,
2011, filed an application to join as a party plaintiff to the complaint
previously filed by the parallel royalty holder. This joinder application
was received by the court on December 19, 2011 and is pending at law as of
-20-
that date. On January 13, 2012, OEG filed a response to the complaint
originally filed by the parallel royalty holder. The Trust and parallel
royalty holder's response was filed and a hearing took place on March 14,
2012. In the original proceeding, the Trust sought a royalty on sales
proceeds in the amount of Euros 5.66 million. On May 9, 2012, the Trust was
notified that the District Court in Hannover had dismissed the Trust's
claims. The Trust reviewed the court's judgment and, after consultation
with its advisors, has determined that it will not proceed with the
litigation. The Trust anticipates that, based on the German Statutory Fee
Table, it will be required to pay opposing counsel approximately
Euros 44,000.
Item 3. 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. Market risk is negligible because standing instructions at
its 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 possible commodity price
fluctuations.
Item 4. 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 April 30, 2012. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of April 30, 2012.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation described above that
occurred during the second quarter of fiscal 2012 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
-21-
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits.
--------
Exhibit 31. Certification of Chief Executive Officer
Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32. Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
---------------------------------
(Registrant)
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: May 30, 2012