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, 2011 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
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-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, 2011
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Units of Beneficial Interest 9,190,590
-3-
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, 2011 AND OCTOBER 31, 2010
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(Unaudited)
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2011 2010
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ASSETS
Current assets - - Cash and
cash equivalents $6,773,543 $5,211,965
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
---------- ----------
Total Assets $6,773,544 $5,211,966
========== ==========
LIABILITIES AND TRUST CORPUS
Current liabilities - - Distributions
to be paid to unit owners, paid
May 2011 and November 2010 $6,709,131 $5,146,731
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 64,412 65,234
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Total Liabilities and Trust Corpus $6,773,544 $5,211,966
========== ==========
The accompanying notes are an integral part
of these financial statements.
-4-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED APRIL 30, 2011 AND 2010
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(Unaudited)
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2011 2010
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German gas, sulfur and oil
royalties received $6,965,508 $4,926,049
----------- -----------
Interest income 1,301 2,277
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Trust expenses (287,815) (309,625)
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Net income $6,678,994 $4,618,701
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Net income per unit $0.73 $0.50
===== =====
Distributions per unit paid or
to be paid to unit owners $0.73 $0.51
===== =====
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, 2011 AND 2010
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(Unaudited)
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2011 2010
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German gas, sulfur and oil
royalties received $12,361,791 $ 9,820,458
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Interest income 3,684 2,458
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Trust expenses (602,342) (587,924)
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Net income $11,763,133 $ 9,234,992
=========== ===========
Net income per unit $1.28 $1.00
===== =====
Distributions per unit paid or
to be paid to unit owners $1.28 $1.01
===== =====
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, 2011 AND 2010
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(Unaudited)
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2011 2010
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Balance, beginning of period $ 65,234 $ 93,773
Net income 11,763,133 9,234,992
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11,828,367 9,328,765
Less:
Current year distributions paid
or to be paid to unit owners 11,763,955 9,282,496
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Balance, end of period $ 64,412 $ 46,269
=========== ===========
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, 2011 AND 2010
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(Unaudited)
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2011 2010
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Sources of cash and cash equivalents:
------------------------------------
German gas, sulfur and oil royalties $12,361,791 $ 9,820,458
Interest income 3,684 2,458
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12,365,475 9,822,916
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Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 602,342 587,924
Distributions paid 10,201,555 8,087,719
----------- -----------
10,803,897 8,675,643
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Net increase (decrease) in cash and
cash equivalents during the period 1,561,578 1,147,273
Cash and cash equivalents,
beginning of period 5,211,965 3,586,197
----------- -----------
Cash and cash equivalents,
end of period $ 6,773,543 $ 4,733,470
============ ============
The accompanying notes are an integral part
of these financial statements.
-8-
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
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").
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, 2010. The Statements of Assets, Liabilities and Trust Corpus
included herein contain information from the Trust's 2010 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 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.
-9-
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, 2011, the uninsured amounts held in the Trust's U.S. bank accounts were
approximately $6,075,000. In addition, approximately $7,306 was held in the
Trust's German account at April 30, 2011.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at the
end of the period. At April 30, 2011 and 2010, 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 Exxon Mobil 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 $3,800 and
$5,900 in the second quarter of fiscal 2011 and 2010, respectively. For such
office space and office services, the Trust reimbursed the Managing Director
$10,254 and $12,072 in the first six months of fiscal 2011 and 2010,
respectively.
-10-
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 2011 and 2010, the Trust paid Cahill Gordon &
Reindel LLP $16,307 and $50,768 for legal services, respectively. For the
first six months of fiscal 2011 and 2010, the Trust paid Cahill Gordon &
Reindel LLP $54,194 and $65,373 for legal services, respectively.
(4) Employee Benefit Plan:
----------------------
The Trust established a savings incentive match plan for employees
(SIMPLE IRA) that is available to all employees of the Trust, including 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 2010 and
2011 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 any such involvement 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 Exxon Mobil Corp. ("Exxon Mobil"), 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 major portions of the 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 Exxon Mobil 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 92% of the total royalties in the quarter just
ended. The amount of royalties paid 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.
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
-12-
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 (payable on the 15th of each month) to the Trust for its fiscal
quarter running from February through April. As part of these same
calculations on January 25th, the operating companies determine any
difference between the amount of royalties payable and the amount of
royalties paid for the months of October through December. Any underpayment
of royalties would be made immediately after the calculation. Any
overpayment of royalties would be deducted from the Trust's February royalty
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, with the next examination scheduled to
begin in October 2011 covering calendar years 2009 and 2010.
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. On the
other hand, sour gas must be processed at either the Grossenkneten or
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.
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,
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. The Trust received no sulfur royalties under
the Mobil Agreement in the first or second quarter of fiscal 2010 or the
first quarter of fiscal 2011. However, upon review, Mobil Erdgas determined
that sulfur prices exceeded the threshold level since the third quarter of
fiscal 2010 and, accordingly, it should have paid sulfur royalties to the
Trust for these periods. The Trust received a make-up payment of $156,337
for the third and fourth quarters of fiscal 2010 as well as a payment of
$161,723 for the first quarter of fiscal 2011.
-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. NV Nederlandse Gasunie (the state owned Dutch gas distribution
company) has completed the purchase of 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 have recently 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 will continue to monitor the situation.
Intermittently, the Trust receives small amounts of royalties from
a private lease area, Grosses Meer, outside the Oldenburg concession. No
royalties based on gas sales from Grosses Meer were paid to the Trust in the
first or second quarters of either fiscal 2010 or 2011.
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. Because 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 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. Since 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
-14-
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 not material to the regular annual income
received under the 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. In
his position as consultant, he receives reports from EMPG 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.
Results: Second Quarter Fiscal 2011 Versus Second Quarter Fiscal 2010
------------------------------------------------------------
For the second quarter of fiscal 2011, the Trust's net income was
$6,678,994, an increase of 44.61% from the net income of $4,618,701 for the
second quarter of fiscal 2010. Gross royalties received for the second
quarter of fiscal 2011 were $6,965,508, an increase of 41.40% as compared to
$4,926,049 for the second quarter of fiscal 2010. A distribution of
73 cents per unit was paid on May 25, 2011 to owners of record as of
May 13, 2011. The distribution for the second fiscal quarter is primarily
comprised of royalties derived from sales of gas.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from which
the gas is sold and the exchange rate. Gas sales are measured in billion
cubic feet ("Bcf"). Gas prices are reported in Euro cents per Kilowatt hour
("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf"). Royalty income
under both the Mobil and the OEG Agreements in the second quarter of 2011 was
higher than the second quarter of 2010 primarily due to the substantial
increases in gas prices. While the average value of the Euro relative to the
dollar was higher than the second quarter of fiscal 2010, its impact on
royalty income was minor. Gas sales during the second quarter of fiscal 2011
were either virtually flat or showed a slight decline and had only a minor
impact on royalty income as compared to the second quarter of fiscal 2010.
-15-
-----------------------------------------------------------------------------
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Mobil Agreement Ended 4/30/2011 Ended 4/30/2010 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 11.057 11.331 - 2.42%
Gas Prices (Ecents/Kwh) 2.5087 1.9035 +31.79%
Gas Prices ($/Mcf) $10.06 $ 7.44 +35.22%
Average Euro Value $1.3962 $1.3586 + 2.77%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 30.098 30.083 + 0.05%
Gas Prices (Ecents/Kwh) 2.6826 2.0857 +28.62%
Gas Prices ($/Mcf) $10.51 $ 7.83 +34.23%
Average Euro Value $1.3989 $1.3403 + 4.37%
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 36.74% of all gas
sales. However, royalties on these gas sales provided approximately 80.80%
or $5,151,920 out of a total of $6,376,424 in Oldenburg royalties
attributable to gas.
Interest income was minimal due to the low interest rates
applicable during the period. Per the terms of the Trust Agreement, funds
temporarily held by the Trust are invested in certificates of deposit or U.S.
Treasury Bills. Trust expenses for the second quarter of fiscal 2011
decreased 7.04% or $21,810 to $287,815 in comparison to the prior year's
equivalent period. This decline in expenses is primarily due to a
difference in the timing of payments covering insurance costs and reduced
legal expenses.
The current Statements of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2011, compared to that at fiscal year-end (October 31,
2010), shows an increase in assets due to the higher royalty receipts during
the second quarter of fiscal 2011.
Results: First Six Months of Fiscal 2011 Versus First Six Months of
----------------------------------------------------------
Fiscal 2010
-----------
For the six month period, the Trust's net income was $11,763,133,
an increase of 27.38% from the net income of $9,234,992 for last year's
equivalent period. Gross royalties received for the first six months of
fiscal 2011 were $12,361,791, an increase of 25.88% as compared to $9,820,458
for the first six months of fiscal 2010. These royalties were derived
primarily from sale of gas from the Trust's overriding royalty areas in
Germany. For the six month period ended April 30, 2011, total distributions
were equal to $1.28 per unit compared to total distributions of $1.01 for
the first six months of fiscal 2010.
-16-
Substantial increases in gas prices offset both lower gas sales
and lower average exchange rates, resulting in significant increases in
royalty revenue for the six months just ended under both the Mobil and the
OEG Agreements.
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Six Months Six Months Percentage
Mobil Agreement Ended 4/30/2011 Ended 4/30/2010 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 22.763 23.192 - 1.85%
Gas Prices (Ecents/Kwh) 2.4401 1.7734 +37.59%
Gas Prices ($/Mcf) $ 9.60 $ 7.15 +34.27%
Average Euro Value $1.3727 $1.4018 - 2.08%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 60.310 60.700 - 0.64%
Gas Prices (Ecents/Kwh) 2.6115 1.9996 +30.60%
Gas Prices ($/Mcf) $10.03 $ 7.78 +28.92%
Average Euro Value $1.3736 $1.3886 - 1.08%
For the six months just ended, gas sales from western Oldenburg
accounted for only 37.74% of all gas sales. However, royalties on these gas
sales provided approximately 81.04% or $9,397,380 out of a total of
$11,596,033 in Oldenburg royalties attributable to gas.
Interest income was lower reflecting the continuing low interest
rates applicable during the period and the reduced sums available for
investment. Trust expenses for the six month period increased 2.45% or
$14,418 to $602,342 in comparison to the prior year's equivalent period.
This increase in expenses is primarily related to higher Trustees' fees
calculated as specified under provisions in the Trust Agreement.
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 2009-2010 period and planned and proposed
drilling and geophysical work for 2011 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 August 30 to September 30, 2011. This
will reduce sour gas processing during this period by
approximately one third while the maintenance is being
conducted. Since sweet gas wells are traditionally not in
production during the low demand summer period, the impact is
an overall production decline of approximately one third.
-17-
Beyond the seemingly normal use of hydraulic fracturing
treatments ("fracking") following the drilling stage on
the Carboniferous wells, EMPG has employed fracking in
a sour gas Zechstein well, Goldenstedt Z-17, for the first
time. Zechstein wells traditionally undergo an acidizing
treatment to open the limestone strata and improve flow
rates. After the fracking was completed, the well exhibited
a significantly improved flow rate, which should ultimately
result in higher production rates and an improved recovery
factor. Not all Zechstein wells may be candidates for fracking.
EMPG is continuing with its evaluation of drilling prospects
within the Oldenburg concession. Following the six wells
drilled during 2009-2010 an additional three wells are planned
for 2011 and six wells for 2012-2013. There are eight wells
within the portfolio for the period beyond 2013 but as yet are
not included in the operating companies' budget. The study of
the potential benefits of fracking within the sweet gas Bunter
wells is continuing but with no results so far.
The following is a description of wells begun, completed or
planned for the 2009-2010 period. Goldenstedt Z-10a, a
Carboniferous well, had four individual fracking treatments
and entered production in March 2010, with better than
expected wellhead pressure and has experienced no change since
that point. Goldenstedt Z-23, a Carboniferous well, completed
drilling in February 2010. While originally scheduled for
five individual fracking treatments in July 2010, this plan
was subsequently delayed and adjusted. Fourteen individual
fracking treatments were conducted in November 2010 and the
well entered production as a successful result with a very
high wellhead pressure. Goldenstedt Z-16a, after a massive
acidizing treatment in May 2010, entered production with
high flow rate. The two sour gas work-over wells,
Hengstlage-N Z8 and Hengstlage-N Z-5a, entered production
in March and April 2010. Cappeln Z-3a, the final well begun
during 2010, is another Carboniferous well. This well
underwent seven fracking treatments and entered production
in March 2011. Despite a low flow rate the extremely high
wellhead pressure should ensure a satisfactory overall
production rate.
Brettorf Z-2b, a sour gas Zechstein well, is scheduled to
start drilling in May 2011. The Brettorf gas field has been
shut-in since 2004 so this attempt is not without some risk
but represents an attempt to reinvigorate an existing field
with the advent of new technology. Oythe Z-4 is the seventh
Carboniferous well and has been scheduled to start drilling
in July 2011. The final well scheduled for 2011 is
Goldenstedt Z-21, another sour gas Zechstein well. This well
has a drilling start date of September 2011.
-----------------------------------
-18-
This report on Form 10-Q contains forward looking statements
concerning business, financial performance and financial condition of 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 uncertainties concerning
future drilling and development plans, levels of gas production and gas
prices, general economic conditions and currency exchange rates and the risks
described in Item 1A, "Risk Factors," in the Trust's Annual Report on
Form 10-K for the fiscal year ended October 31, 2010. Actual results and
events may vary significantly from those discussed in the forward-looking
statements.
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, 2011. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of April 30, 2011.
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 2011 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
-19-
PART II -- OTHER INFORMATION
----------------------------
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 26, 2011