UNITED STATES
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, 2017 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
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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, 2017
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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, 2017 AND OCTOBER 31, 2016
-----------------------------------
(Unaudited)
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2017 2016
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ASSETS
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Current assets - - Cash and
cash equivalents $ 1,858,813 $ 1,165,347
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 1,858,814 $ 1,165,348
============ ============
LIABILITIES AND TRUST CORPUS
------------------------------
Current liabilities - - Distributions
to be paid to unit owners, to be
paid May 2017 and paid November 2016 $ 1,746,212 $ 1,102,871
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 112,601 62,476
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Total Liabilities and Trust Corpus $ 1,858,814 $ 1,165,348
============ ============
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, 2017 AND 2016
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(Unaudited)
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2017 2016
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Gas, sulfur and oil royalties received $ 1,918,830 $ 2,333,670
Interest income 786 1,695
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Trust Income 1,919,616 2,335,365
------------ ------------ ------------
Non-related party expenses (207,114) (205,310)
Related party expenses (Note 3) (12,593) (29,691)
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Trust Expenses (219,707) (235,001)
-------------- ------------ ------------
Net Income $ 1,699,909 $ 2,100,364
---------- ============ ============
Net income per unit $ .18 $ .23
====== ======
Distributions per unit paid or
to be paid to unit owners $ .19 $ .24
====== ======
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 SIX MONTHS ENDED APRIL 30, 2017 AND 2016
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(Unaudited)
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2017 2016
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Gas, sulfur and oil royalties received $ 3,643,516 $ 4,166,141
Interest income 1,576 2,795
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Trust Income 3,645,092 4,168,936
------------ ------------ ------------
Non-related party expenses (432,152) (440,653)
Related party expenses (Note 3) (38,014) (54,232)
------------ ------------
Trust Expenses (470,166) (494,885)
-------------- ------------ ------------
Net Income $ 3,174,926 $ 3,674,051
---------- ============ ============
Net income per unit $0.35 $0.40
====== ======
Distributions per unit paid or
to be paid to unit owners $0.34 $0.40
====== ======
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, 2017 AND 2016
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(Unaudited)
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2017 2016
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Balance, beginning of period $ 62,476 $ 79,030
Net income 3,174,926 3,674,051
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3,237,402 3,753,081
Less:
Current year distributions paid
or to be paid to unit owners 3,124,801 3,676,236
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Balance, end of period $ 112,601 $ 76,845
============ ============
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, 2017 AND 2016
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(Unaudited)
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2017 2016
----------------- ---------------
Sources of Cash and Cash Equivalents:
------------------------------------
Gas, sulfur and oil royalties received $ 3,643,516 $ 4,166,141
Interest income 1,576 2,795
------------ ------------
3,645,092 4,168,936
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Uses of Cash and Cash Equivalents:
---------------------------------
Payment of Trust expenses 470,166 494,885
Distributions paid 2,481,460 3,584,329
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2,951,626 4,079,214
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Net increase (decrease) in cash and
cash equivalents during the period 693,466 89,722
Cash and cash equivalents,
beginning of period 1,165,347 2,192,865
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Cash and cash equivalents,
end of period $ 1,858,813 $ 2,282,587
============ ============
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, 2016 (the "2016 Form 10-K"). The Statements of Assets,
Liabilities and Trust Corpus included herein contain information from the
Trust's 2016 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.
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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.
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 April
30, 2017, the uninsured amount held in the Trust's U.S. bank accounts was
$1,600,226. In addition, the Trust held Euros 9,875, the equivalent of
$10,759, in its German bank account at April 30, 2017.
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, 2017 and 2016, 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 office services to the Trust at cost. For such office space and
office services, the Trust reimbursed the Managing Director $6,232 and $7,557
in the second quarter of fiscal 2017 and 2016, respectively. For such office
space and office services, the Trust reimbursed the Managing Director $12,636
and $12,830 in the first six months of fiscal 2017 and 2016, 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 2017 and 2016, the Trust paid Cahill Gordon &
Reindel LLP $6,361 and $22,134 for legal services, respectively. For the
first six months of fiscal 2017 and 2016, the Trust paid Cahill Gordon &
Reindel LLP $25,378 and $41,402 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 have authorized the Trust to make
contributions to the accounts of the employees, on a matching basis, of up
to 3% of cash compensation paid to each employee effective for the 2017 and
2016 calendar years.
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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
currently provides 100% of all the royalties received by the Trust. The
Oldenburg concession (approximately 1,386,000 acres) covers virtually the
entire former Grand Duchy of Oldenburg and is located in the German 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.
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 effective as of January 1, 2016. The
Trust has been advised by its consultant in Germany that 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 drill 11 exploratory
wells over the next five years. Three of these wells will be drilled in
areas subject to the Trust's royalties. If a well in the area subject to the
Trust's royalties is a discovery, Vermillion's participation in the
production and sale will be 50%. Vermilion's participation in the
development of any well does not impact the Trust's royalty interest and the
sale of that gas or oil would be subject to the relevant royalty contract.
The Trust's German consultant has confirmed that Vermilion will lead the
development of its first well within the Oldenburg concession with a possible
start time in 2020. The planned well-site is located in the western portion
of the area designated Oldenburg-Land, the southernmost area of the three
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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.
Additionally, in accordance with the terms of the Farm-In Agreement,
Vermilion will drill two other wells within the Oldenburg concession, one in
Jeverland and one in Jade-Weser. No details concerning these wells are
available at this date.
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 93% of the cumulative royalty income received in
fiscal 2017. 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. This amount is divided into
thirds and forms the monthly royalty payments (payable on the 15th of each
month) to the Trust for its 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 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. 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 conducts maintenance on
the plant generally during the summer months when demand is lower. The
maintenance for 2017 was conducted during the period of March through mid-
April. 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. This reduction in capacity
should have no impact on the operator's ability to handle sour gas processing
at current levels of production. There is no major maintenance shutdown
planned for 2018.
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 accounted for
approximately 98% of the cumulative royalty income received under this
agreement in fiscal 2017. Historically, the Trust has received significantly
greater royalty payments under the Mobil Agreement, as compared to the OEG
-13-
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. In the first six months of fiscal 2017, the
Trust received $84,405 in sulfur royalties under the Mobil Sulfur Agreement.
In the first six months of fiscal 2016, the effects of negative adjustments,
which corrected a previous series of errors made by the operating companies,
resulted in net negative sulfur royalty income of $127,370.
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.
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. Vermilion is scheduled to participate in a new well to be drilled in
Grosses Meer but no details are available at this date.
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
German Border Import gas Price ("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), one half of
which 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. 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
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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. Required additions to royalty amounts already paid will
be paid immediately. Required deductions from royalty amounts already paid
will be deducted from the next royalty payment due.
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.
The Trust itself does not have access to the specific sales
contracts under which gas from the Oldenburg concession is sold. However,
working under a confidentiality agreement with the operating companies, the
Trust's German accountants will confirm that the volume of gas sales
corresponds to the amount reported under the sales contracts and that the
weighted GBIP was properly calculated and applied in the calculation of
royalties payable to the Trust. The Trust's accountants in Germany will
begin their examination of the operating companies for 2015 and 2016 in
November of 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.
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: Second Quarter of Fiscal 2017 Versus Second Quarter of Fiscal 2016
------------------------------------------------------------------
Total royalty income during the second quarter of fiscal 2017
was derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the first calendar quarter of 2017.
A distribution of 19 cents per unit will be paid on May 31, 2017 to owners of
-15-
record as of May 19, 2017. Comparisons of total royalty income received and
net income for the second quarter of fiscal 2017 and 2016 are shown below.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Ended 4/30/2017 Ended 4/30/2016 Change
-----------------------------------------------------------------------------
Total Royalty Income $1,918,830 $2,333,670 - 17.78%
Net Income $1,699,909 $2,100,364 - 19.07%
Distributions per Unit $0.19 $0.24 - 20.83%
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The decline in total royalty income between the second quarter of
fiscal 2017 and the second quarter of fiscal 2016 resulted primarily from
lower gas sales and lower average exchange rates under both the Mobil and OEG
Agreements as shown in the table below.
Total royalty income also reflects the inclusion of various
positive and negative adjustments that the operators made during the quarter,
including corrections from prior periods, as well as the inclusion of Mobil
sulfur royalties. There were no adjustments for the second quarter of fiscal
2017. By comparison, in the second quarter of fiscal 2016 the net amount of
such adjustments reduced total royalty income by $96,808. The Trust received
separate sulfur royalty payments under the Mobil Agreement of $42,984 and
$63,951 during the second quarters of fiscal 2017 and 2016, respectively.
The table below is intended to illustrate trends based on actual
gas sales in each quarter. Gas royalties shown in the table below are
determined based on the actual physical gas sales that occurred during the
first calendar quarter of 2017 and the average German Border Import gas Price
for the period of November 2016 through January 2017. No adjustments for
prior periods are reflected in the gas royalties.
Gas Data Providing Basis for Fiscal Quarter Royalties
-----------------------------------------------------------------------------
1st Calendar Qtr. 1st Calendar Qtr. Percentage
Mobil Agreement Ended 3/31/2017 Ended 3/31/2016 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf)(1) 5.934 6.834 - 13.17%
Gas Prices(2)(Ecents/Kwh)(3) 1.7434 1.5622 + 11.60%
Average Exchange Rate(4) 1.0625 1.1173 - 4.90%
Gas Royalties $1,255,366 $1,369,315 - 8.32%
Gas Prices ($/Mcf)(5) $5.29 $5.01 + 5.59%
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OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 18.885 20.434 - 7.58%
Gas Prices (Ecents/Kwh) 1.7779 1.5282 + 16.34%
Average Exchange Rate 1.0630 1.1171 - 4.84%
Gas Royalties $530,792 $487,877 + 8.80%
Gas Prices ($/Mcf) $5.29 $4.79 + 10.44%
-----------------------------------------------------------------------------
(1) Billion cubic feet (2) Gas prices derived from November-January period
(3) Euro cents per Kilowatt hour (4) Based on average exchange rates of
cumulative royalty transfers (5) Dollars per thousand cubic feet
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
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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 calendar quarter ended March
31, 2017, gas sales from western Oldenburg accounted for only 29.04% of all
gas sales from the Oldenburg concession. However, royalties on these gas
sales provided approximately 78.90%, or $1,408,707 out of $1,785,351, of all
royalties attributable to gas sales from the Oldenburg concession.
Trust expenses for the second quarter of fiscal 2017 decreased
6.51%, or $15,294, to $219,707 from $235,001 in the second quarter of fiscal
2016. This decrease in expenses reflects the absence of legal costs
resulting from the prior completion of the examination of the pricing method
proposed by the operating companies and the incorporation of the resulting
details in the amendments to the royalty agreements. Trust interest income
received during the second quarter of fiscal 2017 decreased to $786 in
comparison to $1,695 received in the second quarter of fiscal 2016 due to
reduced net income.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2017, compared to that at fiscal year-end (October
31, 2016), shows an increase in assets due to higher royalty receipts
during the second quarter of fiscal 2017.
Results: First Six Months of Fiscal 2017 Versus First Six Months of
----------------------------------------------------------
Fiscal 2016
-----------
Total royalty income during the first six months of fiscal 2017
was primarily derived from sales of gas, sulfur and oil from the Trust's
overriding royalty areas in Germany during the fourth calendar quarter of
2016 and the first calendar quarter of 2017. Comparisons of total royalty
income received and net income for the first six months of fiscal 2017 and
2016 are shown below.
Six Months Six Months Percentage
Ended 4/30/2017 Ended 4/30/2016 Change
-----------------------------------------------------------------------------
Total Royalty income $3,643,516 $4,166,141 - 12.54%
Net Income $3,174,926 $3,674,051 - 13.59%
Distributions per Unit $0.34 $0.40 - 15.00%
-----------------------------------------------------------------------------
The decline in total royalty income between first six months of
fiscal 2017 and the first six months of fiscal 2016 resulted primarily from
lower gas sales, lower gas prices and lower average exchange rates under both
the Mobil and OEG Agreements as shown in the table below.
Total royalty income also reflects the inclusion of various
positive and negative adjustments that the operators made during the quarter,
including corrections from prior periods, as well as the inclusion of Mobil
sulfur royalties. The net amount of such adjustments reduced royalties for
the first six months of fiscal 2017 by $17,625. By comparison, the net
amount of such adjustments reduced royalties for the first six months of
fiscal 2016 by $691,275. The Trust received separate sulfur royalty payments
under the Mobil Agreement of $84,405 and $194,324 during the first six months
of fiscal 2017 and 2016, respectively.
-17-
The table below is intended to illustrate trends based on actual
gas sales in each quarter. Gas royalties shown in the table below are
determined based on the actual physical gas sales that occurred during the
fourth calendar quarter of 2016 and the first calendar quarter of 2017 and
the average German Border Import gas Price for the period of August 2016
through January 2017. No adjustments for prior periods are reflected in the
gas royalties.
Gas Data Providing Basis for Six-Month Fiscal Period Royalties
-----------------------------------------------------------------------------
Six Months Six Months Percentage
Mobil Agreement Ended 3/31/2017 Ended 3/31/2016 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 12.423 13.438 - 7.55%
Gas Prices (Ecents/Kwh) 1.6049 1.7110 - 6.20%
Average Exchange Rate 1.0604 1.1017 - 3.75%
Gas Royalties $2,420,331 $2,908,016 - 16.77%
Gas Prices ($/Mcf) $4.87 $5.41 - 9.98%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 38.946 40.942 - 4.88%
Gas Prices (Ecents/Kwh) 1.6389 1.7545 - 6.59%
Average Exchange Rate 1.0611 1.0997 - 3.51%
Gas Royalties $996,960 $1,155,990 - 13.76%
Gas Prices ($/Mcf) $4.87 $5.42 - 10.15%
-----------------------------------------------------------------------------
For the six months ended 3/31/2017, gas sales from western Oldenburg
accounted for only 31.90% of all gas sales from the Oldenburg concession.
However, royalties on these gas sales provided approximately 79.98%, or
$2,718,250 out of $3,398,623, of all royalties attributable to gas sales from
the Oldenburg concession.
Trust expenses for the first six months of fiscal 2017 decreased
4.99%, or $24,719, to $470,166 from $494,885 for the first six months of
fiscal 2016. This decrease in expenses reflects the absence of legal costs
resulting from the prior completion of the examination of the pricing method
proposed by the operating companies and the incorporation of the resulting
details in the amendments to the royalty agreements. The decrease in
expenses also reflects the absence of current costs relating to the biennial
examination of the royalty statements by the Trust's German accountants
because 2017 is an alternate year. Trust interest income received during the
first six months of fiscal 2017 decreased to $1,576 in comparison to $2,795
received in the first six months of fiscal 2016 due to reduced net income.
-18-
Report on Drilling and Geophysical Work
---------------------------------------
The Trust's German consultant met with representatives
of ExxonMobil Production Gesellschaft ("EMPG") for technical
discussions regarding EMPG's future drilling and geophysical
work. The following is a summary of these discussions with
some additional comments from the Trust's German consultant.
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.
The Trust's German consultant advised the Trust that, in
these discussions, EMPG stated that the previous suspension
of drilling efforts for 2015-2016 would be extended through
2017. Continuing weak energy prices in combination with
increased German regulatory requirements have caused EMPG
to extend the drilling halt. Other than pushing start
dates back by a year, EMPG's drilling program has not
changed from details that were included in the Trust's
2016 Annual Report.
Despite the lifting of the moratorium on hydraulic
fracturing ("fracking") effective as of February 11, 2017,
EMPG has stated that fracking will not be used in the near
future. Since any further work in the Carboniferous zone
has been postponed until 2020 or later, there is no
immediate need to use fracking. EMPG's decision may have
resulted from a combination of its need to address
increased regulatory requirements relating to the use of
fracking as well as the hope that a delay in the drilling
of Carboniferous wells will permit a rise in gas prices to
help defray the higher costs associated with drilling in
the Carboniferous zone. In accordance with the fracking
provisions, it is the rock type not the depth that
determines whether fracking is permitted. Fracking is
allowed in sandstone at any depth but not in clay, coal
beds or shale.
The work-over scheduled for 2018 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. This work-over will
involve an attempt to repair the original casing.
The following is a list of wells planned for the years
2018-2020. EMPG has not assigned any specific start dates
to these wells. Hemmelte NW T-1 is planned to develop
a new area of the sweet gas Bunter zone in western
Oldenburg. The Bunter zone is generally characterized by
good porosity and permeability. The next three new wells
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. Doetlingen Z-3A is intended to develop
-19-
the Zechstein zone in eastern Oldenburg. Alhorn Z-3,
a western well, is intended to reopen the old Alhorn
field, which had been plugged and abandoned in 1997.
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 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. In addition to Vermilion's Jeddeloh well
in Oldenburg-Land, Vermilion is required under the
terms of its Farm-In Agreement to participate in the
drilling of three additional wells in areas subject
to the Trust's royalty interest. These three wells
will be located in the two northern areas of the
Oldenburg concession (Jeverland and Jade-Weser)
and in a separate lease, Grosses Meer.
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.
-----------------------------------
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. 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, 2016.
-20-
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 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. The market risk 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 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, 2017 based on the criteria for effective
internal control over financial reporting described in the standards
promulgated by the Public Company Accounting Oversight Board and the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of April 30, 2017.
There have been no changes in the Trust's internal control over
financial reporting identified in connection with the evaluation described
above that occurred during the second quarter of fiscal 2017 that have
materially affected or are reasonably likely to materially affect the Trust's
internal control over financial reporting.
-21-
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
-----------------
The Trust is not a party to any pending legal proceedings.
Item 4. Mine Safety Disclosure.
----------------------
Not applicable.
Item 6. Exhibits.
--------
Exhibit 31. Certification of Chief Executive Officer and
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, 2017