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, 2016 or
----------------
[ ] 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
----- -----
-2-
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, 2016
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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.
--------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
APRIL 30, 2016 AND OCTOBER 31, 2015
-----------------------------------
(Unaudited)
-----------
2016 2015
----------------- ----------------
ASSETS
--------
Current assets - - Cash and
cash equivalents $ 2,282,587 $ 2,192,865
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 2,282,588 $ 2,192,866
============ ============
LIABILITIES AND TRUST CORPUS
------------------------------
Current liabilities - - Distributions
to be paid to unit owners, to be
paid May 2016 and paid November 2015 $ 2,205,742 $ 2,113,835
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 76,845 79,030
------------ ------------
Total Liabilities and Trust Corpus $ 2,282,588 $ 2,192,866
============ ============
The accompanying notes are an integral part
of these financial statements.
-4-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 2016 AND 2015
--------------------------------------------------
(Unaudited)
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2016 2015
----------------- ----------------
Gas, sulfur and oil royalties received $ 2,333,670 $ 3,238,135
Interest income 1,695 2,239
------------ ------------
Trust Income 2,335,365 3,240,374
------------ ------------ ------------
Non-related party expenses (205,310) (150,219)
Related party expenses (Note 3) (29,691) (15,660)
------------ ------------
Trust Expenses (235,001) (165,879)
-------------- ------------ ------------
Net Income $ 2,100,364 $ 3,074,495
---------- ============ ============
Net income per unit $ .23 $ .33
====== ======
Distributions per unit paid or
to be paid to unit owners $ .24 $ .33
====== ======
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 2016 AND 2015
------------------------------------------------
(Unaudited)
-----------
2016 2015
----------------- ----------------
Gas, sulfur and oil royalties received $ 4,166,141 $ 6,680,848
Interest income 2,795 5,651
------------ ------------
Trust Income 4,168,936 6,686,499
------------ ------------ ------------
Non-related party expenses (440,653) (462,514)
Related party expenses (Note 3) (54,232) (52,574)
------------ ------------
Trust Expenses (494,885) (515,088)
-------------- ------------ ------------
Net Income $ 3,674,051 $ 6,171,411
---------- ============ ============
Net income per unit $0.40 $0.67
====== ======
Distributions per unit paid or
to be paid to unit owners $0.40 $0.68
====== ======
The accompanying notes are an integral part
of these financial statements.
-6-
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 2016 AND 2015
------------------------------------------------
(Unaudited)
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2016 2015
----------------- ----------------
Balance, beginning of period $ 79,030 $ 170,406
Net income 3,674,051 6,171,411
------------ ------------
3,753,081 6,341,817
Less:
Current year distributions paid
or to be paid to unit owners 3,676,236 6,249,601
------------ ------------
Balance, end of period $ 76,845 $ 92,216
============ ============
The accompanying notes are an integral part
of these financial statements.
-7-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE SIX MONTHS ENDED APRIL 30, 2016 AND 2015
----------------------------------------------------
(Unaudited)
-----------
2016 2015
----------------- ---------------
Sources of Cash and Cash Equivalents:
------------------------------------
Gas, sulfur and oil royalties received $ 4,166,141 $ 6,680,848
Interest income 2,795 5,651
------------ ------------
4,168,936 6,686,499
------------ ------------
Uses of Cash and Cash Equivalents:
---------------------------------
Payment of Trust expenses 494,885 515,088
Distributions paid 3,584,329 6,801,036
------------ ------------
4,079,214 7,316,124
------------ ------------
Net increase (decrease) in cash and
cash equivalents during the period 89,722 (629,625)
Cash and cash equivalents,
beginning of period 2,192,865 3,754,736
------------ ------------
Cash and cash equivalents,
end of period $ 2,282,587 $ 3,125,111
============ ============
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
-----------------------------
(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, 2015 (the "2015 Form 10-K"). The Statements of Assets,
Liabilities and Trust Corpus included herein contain information from the
Trust's 2015 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 -
---------------------------
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, 2016, the uninsured amount held in the Trust's U.S. bank accounts was
approximately $2,026,426. In addition, the Trust held Euros 9,983, the
equivalent of $11,432, in its German bank account at April 30, 2016.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at
the end of the period. As of both April 30, 2016 and 2015, 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 $7,557 and $6,954
in the second quarter of fiscal 2016 and 2015, respectively. For such office
space and office services, the Trust reimbursed the Managing Director $12,830
and $11,288 in the first six months of fiscal 2016 and 2015, respectively.
Lawrence A. Kobrin, a Trustee of the Trust, is a Senior Counsel at
Cahill Gordon & Reindel LLP, which serves as counsel to the Trust. For the
second quarter of fiscal 2016 and 2015, the Trust paid Cahill Gordon &
Reindel LLP $22,134 and $8,706 for legal services, respectively. For the
first six months of fiscal 2016 and 2015, the Trust paid Cahill Gordon &
Reindel LLP $41,402 and $41,286 for legal services, respectively.
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(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 2016 and
2015 calendar years.
-11-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
Executive Summary
-----------------
The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all of the funds on hand after provision
is made for Trust expenses then anticipated.
The Trust does not engage in any business or extractive operations
of any kind in the areas over which it holds royalty rights and is precluded
from engaging in such activities by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The properties of the Trust, 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 (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 Farm-In Agreement specifies that Vermilion has acquired an interest in
various portions of a concession or areas owned by Mobil Erdgas and BEB.
Three of these licenses cover the three northernmost areas of the Oldenburg
concession. The Farm-In Agreement commits Vermilion to financial
participation at a 50% level in 11 gross exploratory wells over the next five
years. If Vermilion conducts any successful drilling within the confines of
the Oldenburg concession, sales of that gas or oil would be subject to the
relevant royalty contract. It has been announced that Vermilion will lead
the development of its first well within the Oldenburg concession with a
possible start time in 2018. The well is tentatively located in the western
portion of the area designated Oldenburg-Land, the southernmost area of the
three areas within the concession subject to Vermilion's Farm-In Agreement.
The operating companies pay monthly royalties to the Trust based on
their sales of natural gas, sulfur and oil. Of these three products, natural
-12-
gas provided approximately 98% of the cumulative royalty income received in
fiscal 2016. The amount of royalties paid to the Trust is primarily based on
four factors: the amount of gas sold, the price of that gas, the area from
which the gas is sold, and the exchange rate.
On approximately the 25th of the months of January, April, July and
October, the operating companies calculate the amount of gas sold during the
previous calendar quarter and determine the amount of royalties that were
payable to the Trust based on those sales. 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. EMPG conducts maintenance on the plant
generally during the summer months when demand is lower. There is no
maintenance scheduled to be conducted during 2016. The operating companies
have informed the Trust that, to promote greater efficiency and cost
effectiveness, the production capacity of Grossenkneten will be reduced
beginning in 2017.
Under 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 99% of the cumulative royalty income received under this
agreement in fiscal 2016. Historically, the Trust has received significantly
greater royalty payments under the Mobil Agreement, as compared to the OEG
Agreement described below, due to the higher royalty rate specified by that
agreement.
The Trust is also entitled under the Mobil Sulfur Agreement to
receive a 2% royalty on gross receipts of sales of sulfur obtained as a by-
product of sour gas produced from the western part of Oldenburg. The payment
of the sulfur royalty is conditioned upon sales of sulfur by Mobil Erdgas at
a selling price above an agreed upon base price. This base price is adjusted
annually by an inflation index. In the first six months of fiscal 2015, the
Trust received $216,673 in sulfur royalties under the Mobil Sulfur Agreement.
However, the operating companies made an accounting error by including
eastern Oldenburg sulfur sales for the fourth quarter of 2011, all of 2012
and the first quarter of 2015 in the calculation of the western sulfur
royalties under the Mobil Sulfur Agreement. This error resulted in an
-13-
overpayment of sulfur royalties previously paid to the Trust and impacted the
amount of sulfur royalties received by the Trust in fiscal 2016. While the
Trust received a sulfur royalty payment during the second quarter of fiscal
2016, net sulfur royalty income under the Mobil Sulfur Agreement for the
first six months of fiscal 2016 was -$127,370 due to the operating companies'
error and correction. The entire adjustment correcting the error with
respect to Mobil sulfur royalties was included in the first quarter of fiscal
2016.
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.
Under the Mobil and OEG Agreements, the gas is sold in one of three
ways: (1) directly on the spot market; (2) between Mobil Erdgas and BEB
(intra-company sales); or (3) directly to various distributors under
contracts (which delineate, among other provisions, the timing, manner,
volume and price of the gas sold). While gas supply contracts have in the
past used the price of light heating oil in Germany as one of the primary
pricing components, we have been advised that the number of such contracts
now account for only a minor percentage of all Oldenburg gas sales. In
contrast, the price of gas sold on the spot market or sold between Mobil
Erdgas and BEB is largely determined by the quoted market price of gas then
trading as determined by supply and demand and has no relationship to the
price of oil.
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 review the spot market sales, the intra-company
sales and the contractual sales periodically on behalf of the Trust to verify
their correctness. The Trust's accountants in Germany are in the process of
completing their examination of the operating companies for 2013 and 2014.
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
-14-
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 2016 Versus Second Quarter of Fiscal 2015
------------------------------------------------------------------
Total royalties received during the second quarter of fiscal 2016
were derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the first calendar quarter of 2016.
A distribution of 24 cents per unit will be paid on May 25, 2016 to owners of
record as of May 13, 2016. Comparisons of total royalties received and net
income for the second quarter of fiscal 2016 and 2015 are shown below.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Ended 4/30/2016 Ended 4/30/2015 Change
-----------------------------------------------------------------------------
Total Royalties Received $2,333,670 $3,238,135 - 27.93%
Net Income $2,100,364 $3,074,495 - 31.68%
Distributions per Unit $0.24 $0.33 - 27.27%
-----------------------------------------------------------------------------
The decline in total royalties received between the second quarter
of fiscal 2016 and the second quarter of fiscal 2015 resulted from two
separate elements determining royalty income. The first element relates to
accounting adjustments that are derived by the over or underpayment of
royalties from prior quarters or years, which are required to reconcile
advanced estimated payments to actual results. The second element relates to
gas sales from the immediately preceding quarter and reflects changes in the
factors affecting gas royalties, namely gas sales, gas prices and the average
exchange rates.
With regard to the first element impacting total royalties
received, the net amount of such adjustments reduced royalties for the second
quarter of fiscal 2016 by $96,808. In addition, the Trust received separate
sulfur royalty payments of $63,951 under the Mobil Agreement. In comparison,
the net amount of such adjustments reduced royalties for the second quarter
of fiscal 2015 by $340,524. In addition, the Trust received separate sulfur
royalty payments of $216,673 under the Mobil Agreement. The impact of these
adjustments is reflected in the figures shown in the table above.
-15-
The table below is intended to illustrate the second element
affecting total royalties received by detailing the factors determining the
gas royalties payable from the preceding calendar quarter. Gas royalties are
based solely on the actual gas sales that occurred during the first calendar
quarter of 2016 and 2015 and do not reflect any adjustments for prior
periods.
Factors Determining Gas Royalties Payable
-----------------------------------------------------------------------------
1st Calendar Qtr. 1st Calendar Qtr. Percentage
Mobil Agreement Ended 3/31/2016 Ended 3/31/2015 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf)(1) 6.834 7.642 - 10.57%
Gas Prices (Ecents/Kwh)(2) 1.5622 2.3212 - 32.70%
Average Exchange Rate(3) 1.1173 1.0754 + 3.90%
Gas Royalties $1,369,315 $2,198,548 - 37.72%
Gas Prices ($/Mcf)(4) $ 5.01 $ 7.19 - 30.32%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 20.434 23.137 - 11.68%
Gas Prices (Ecents/Kwh) 1.5282 2.4128 - 36.66%
Average Exchange Rate 1.1171 1.0830 + 3.15%
Gas Royalties $ 487,877 $ 969,655 - 49.69%
Gas Prices ($/Mcf) $ 4.79 $ 7.33 - 34.65%
-----------------------------------------------------------------------------
(1) Billion cubic feet (2) Euro cents per Kilowatt hour
(3) Based on average exchange rates of cumulative royalty transfers
(4) 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
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, 2016, gas sales from western Oldenburg accounted for only 33.44% of all
gas sales. However, royalties on these gas sales provided approximately
80.87% of all royalties attributable to gas sales from the Oldenburg
concession.
Trust expenses for the second quarter of fiscal 2016 increased
41.67%, or $69,122, to $235,001 from $165,879 in the second quarter of fiscal
2015 due to increased legal costs associated with the biennial accounting
examination in Germany and the timing of payments for year-end mailing costs
and the NYSE fee. Trust interest income received during the second quarter
of fiscal 2016 decreased to $1,695 in comparison to $2,239 received in the
second quarter of fiscal 2015 due to reduced funds available for investment.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2016, compared to that at fiscal year-end (October
31, 2015), shows an increase in assets. Royalty receipts for the fourth
quarter of fiscal 2015 were reduced due to negative adjustments regarding the
operating companies' error with respect to Mobil sulfur royalties paid during
2013-2014. There were no corresponding adjustments during the second quarter
of fiscal 2016.
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Results: First Six Months of Fiscal 2016 Versus First Six Months of
----------------------------------------------------------
Fiscal 2015
-----------
Total royalties received during the first six months of fiscal 2016
were primarily derived from sales of gas, sulfur and oil from the Trust's
overriding royalty areas in Germany during the fourth calendar quarter of
2015 and the first calendar quarter of 2016. Comparisons of total royalties
received and net income for the first six months of fiscal 2016 and 2015 are
shown below.
Six Months Six Months Percentage
Ended 4/30/2016 Ended 4/30/2015 Change
-----------------------------------------------------------------------------
Total Royalties Received $ 4,166,141 $ 6,680,848 - 37.64%
Net Income $ 3,674,051 $ 6,171,411 - 40.47%
Distributions per Unit $0.40 $0.68 - 41.18%
-----------------------------------------------------------------------------
The decline in total royalties received between the first six
months of fiscal 2016 and the first six months of fiscal 2015 again resulted
from two separate elements determining royalty income. The first element
relates to accounting adjustments that are derived by the over or
underpayment of royalties from prior quarters or years, which are required to
reconcile advanced estimated payments to actual results. The second element
relates to gas sales from the immediately preceding six calendar month period
and reflects changes in the factors affecting gas royalties, namely gas
sales, gas prices and the average exchange rates.
With regard to the first element impacting total royalties
received, the net amount of such adjustments reduced royalties for the first
six months of fiscal 2016 by $691,275. In addition, the Trust received
separate sulfur royalty payments of $194,324 under the Mobil Agreement in the
same period. In comparison, the net amount of such adjustments reduced
royalties for the first six months of fiscal 2015 by $761,793. In addition,
the Trust received separate sulfur royalty payments of $216,673 under the
Mobil Agreement in the same period. The impact of these adjustments is
reflected in the figures shown in the table above.
-17-
The table below is intended to illustrate the second element
affecting total royalties received by detailing the factors determining the
gas royalties payable from the preceding six calendar months. Gas royalties
are based solely on the actual gas sales that occurred during the six
calendar months ended 3/31/2016 and 3/31/2015 and do not reflect any
adjustments for prior periods.
Factors Determining Gas Royalties Payable
-----------------------------------------------------------------------------
Six Months Six Months Percentage
Mobil Agreement Ended 3/31/2016 Ended 3/31/2015 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 13.438 15.519 - 13.41%
Gas Prices (Ecents/Kwh) 1.7110 2.3367 - 26.78%
Average Exchange Rate 1.1017 1.1454 - 3.82%
Gas Royalties $2,908,016 $4,776,482 - 39.12%
Gas Prices ($/Mcf) $ 5.41 $ 7.69 - 29.65%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 40.942 46.634 - 12.21%
Gas Prices (Ecents/Kwh) 1.7545 2.4471 - 28.30%
Average Exchange Rate 1.0997 1.1417 - 3.68%
Gas Royalties $1,155,990 $2,099,052 - 44.93%
Gas Prices ($/Mcf) $ 5.42 $ 7.83 - 30.78%
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For the six months ended 3/31/2016, gas sales from western Oldenburg
accounted for only 32.82% of all gas sales. However, royalties on these gas
sales provided approximately 79.42% of all royalties attributable to gas
sales from the Oldenburg concession.
Trust expenses for the first six months of fiscal 2016 decreased
3.92%, or $20,203, to $494,885 from $515,088 for the first six months of
fiscal 2015. This decrease in expenses is due to lower Trustee fees as
specified in the Trust Agreement. Trust interest income received during the
first six months of fiscal 2016 decreased to $2,795 in comparison to $5,651
received in the first six months of fiscal 2015 due to reduced funds
available for investment.
-18-
Report on Drilling and Geophysical Work
---------------------------------------
The Trust has received a report on exploration and
drilling which was submitted by ExxonMobil Production
Gesellschaft ("EMPG") to the Authority for Mining, Energy
and Geology. The following is a summary of this report
reflecting 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.
In its report, EMPG confirmed that they do not expect
to conduct any drilling activities in 2016. EMPG has
prepared a list of the currently named wells in its
portfolio for the period 2017 2020. No Carboniferous wells
are included in the list; however, there are four
Carboniferous wells still listed with a "hold" status in
EMPG's tight gas portfolio (Oythe Z-4 and Goldenstedt Z-24,
Z-26 and Z-27). The Carboniferous zone is the only zone for
which fracking is considered necessary to access sufficient
reserves in order to make the well economically productive.
Due to the ongoing fracking moratorium, further evaluation
of the Carboniferous zone has been postponed. The Trust's
German consultant does not expect fracking to be available
for conventional gas development until late 2017 at the
earliest.
EMPG has announced that two wells will be drilled in
the fourth quarter of 2017. The western exploratory well,
Hemmelte NW T-1, is intended to evaluate the sweet gas
Bunter zone. This well's approval process along with the
environmental study have been started. The second well is
Brettorf Z-2b, which is a Zechstein sour gas well located
in eastern Oldenburg. If the initial sidetrack is
successful, a second sidetrack will be drilled and the well
will become a multilateral well. As is customary with
Zechstein wells, the well will likely be acidized to
improve flow rate and accelerate production.
The additional six currently named wells in EMPG's
portfolio are as follows. The external approval processes
for these wells have not yet begun.
Doetlingen Z-3a is scheduled to be drilled in the
eastern portion of Oldenburg as a Zechstein sour gas well.
This will be the third sidetrack out of an existing well
and it is hoped that it will restore production capacity
in this field and access the remaining reserves.
No start date has been set.
Goldenstedt Z-12a M-1 is scheduled to be a
multilateral well with two sidetracks out of the existing
borehole. This well is another eastern Zechstein sour
gas well. No start date has been set.
-19-
Goldenstedt Z-25 M-1 is being evaluated as a
potential multilateral well with two sidetracks out of
the existing borehole. This well is another eastern
Zechstein sour gas well. No start date has been set.
Visbek Z-16a is a western Zechstein sour gas well
that is scheduled as a second sidetrack to restore
production that was suspended following a casing
collapse in October 2013. No start date has been set.
Ahlhorn Z-3 is a western Zechstein sour gas well
intended to re-open the Ahlhorn field that had been shut
down in 1997. EMPG's internal approval process has been
completed and the well will likely be presented to the
Mining Authority for its approval in 2016. No start
date has been set.
The final well in EMPG's list of named wells is
Jeddeloh Z-1. The geological work and drilling of this
well is under the lead management of Vermilion and will
be its first well within the Oldenburg concession.
The well is scheduled to be drilled in the western half
of an unexplored portion of the Oldenburg-Land area.
The well is intended to develop the Rotliegend
("Red Sandstone") zone, which is a sweet gas zone.
While this well will be the first attempt to exploit
this zone within the concession, the Rotliegend zone
has been an extremely productive zone across northern
Germany and the Netherlands.
-----------------------------------
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, 2015.
-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.
During the quarter ended April 30, 2016, the Trust completed the
process of implementing the criteria for effective internal control over
financial reporting established in the Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO 2013").
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, 2016 based on the criteria for effective
internal control over financial reporting described in the standards
promulgated by the Public Company Accounting Oversight Board and in COSO
2013. Based on that evaluation, the Managing Director concluded that the
Trust's disclosure controls and procedures were effective as of April 30,
2016.
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 2016 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 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 27, 2016