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, 2013 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, 2013
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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, 2013 AND OCTOBER 31, 2012
-----------------------------------
(Unaudited)
-----------
2013 2012
----------------- ----------------
ASSETS
--------
Current Assets - - Cash and
cash equivalents $ 5,984,106 $ 4,778,199
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 5,984,107 $ 4,778,200
============ ============
LIABILITIES AND TRUST CORPUS
------------------------------
Current Liabilities - - Distributions
to be paid to unit owners, paid
May 2013 and November 2012 $ 5,881,978 $ 4,687,200
Trust Corpus (Notes 1 and 2) 1 1
Undistributed earnings 102,128 90,999
------------ ------------
Total Liabilities and Trust Corpus $ 5,984,107 $ 4,778,200
============ ============
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, 2013 AND 2012
--------------------------------------------------
(Unaudited)
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2013 2012
----------------- ----------------
Gas, sulfur and oil
royalties received $ 6,048,364 $ 6,441,635
Interest income 8,612 11,433
------------ ------------
Trust Income $ 6,056,976 $ 6,453,068
------------ ------------ ------------
Non-related party expenses $ 194,023 $ 170,754
Related party expenses (Note 3) 20,408 20,200
------------ ------------
Trust Expenses $ (214,431) $ (190,954)
-------------- ------------ ------------
Net Income $ 5,842,545 $ 6,262,114
---------- ============ ============
Net income per unit $ .64 $ .68
====== ======
Distributions per unit paid or
to be paid to unit owners $ .64 $ .68
====== ======
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, 2013 AND 2012
------------------------------------------------
(Unaudited)
-----------
2013 2012
----------------- ----------------
Gas, sulfur and oil
royalties received $11,844,198 $12,979,896
Interest income 15,535 21,557
------------ ------------
Trust Income $11,859,733 $13,001,453
------------ ------------ ------------
Non-related party expenses $ 502,291 $ 588,272
Related party expenses (Note 3) 41,887 71,803
------------ ------------
Trust Expenses $ (544,178) $ (660,075)
-------------- ------------ ------------
Net Income $11,315,555 $12,341,378
---------- ============ ============
Net income per unit $1.23 $1.34
====== ======
Distributions per unit paid or
to be paid to unit owners $1.23 $1.34
====== ======
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, 2013 AND 2012
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(Unaudited)
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2013 2012
----------------- ----------------
Balance, beginning of period $ 90,999 $ 89,889
Net income 11,315,555 12,341,378
------------ ------------
11,406,554 12,431,267
Less:
Current year distributions paid
or to be paid to unit owners 11,304,426 12,315,390
------------ ------------
Balance, end of period $ 102,128 $ 115,877
============ ============
The accompanying notes are an integral part
of these financial statements.
-7-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 2013 AND 2012
----------------------------------------------------
(Unaudited)
-----------
2013 2012
----------------- ---------------
Sources of cash and cash equivalents:
------------------------------------
Gas, sulfur and oil royalties $11,844,198 $12,979,896
Interest income 15,535 21,557
------------ ------------
11,859,733 13,001,453
------------ ------------
Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 544,178 660,075
Distributions paid 10,109,648 11,947,766
------------ ------------
10,653,826 12,607,841
------------ ------------
Net increase (decrease) in cash and
cash equivalents during the period 1,205,907 393,612
Cash and cash equivalents,
beginning of period 4,778,199 5,971,866
------------ ------------
Cash and cash equivalents,
end of period $ 5,984,106 $ 6,365,478
============ ============
The accompanying notes are an integral part
of these financial statements.
-8-
NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO THE 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, 2012 (the "2012 Form 10-K"). The Statements of Assets,
Liabilities and Trust Corpus included herein contain information from the
Trust's 2012 Form 10-K.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company (the
"Company") (see Note 2). The net book value of the royalty rights has been
reduced to one dollar ($1) in view of the fact that the remaining net book
value of royalty rights is de minimis relative to annual royalties received
and distributed by the Trust and does not bear any meaningful relationship
to the fair value of such rights or the actual amount of proved producing
reserves.
Federal and state income taxes -
--------------------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service. The
Trust has no state income tax obligations.
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Cash and cash equivalents -
---------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S. Treasury
bills with original maturities 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, 2013, the uninsured amounts held in the Trust's U.S. bank
accounts were approximately $5,730,000. In addition, approximately $6,209
was held in the Trust's German account at April 30, 2013.
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, 2013 and 2012, 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 $3,270 and $3,476
in the second quarter of fiscal 2013 and 2012, respectively. For such office
space and office services, the Trust reimbursed the Managing Director $10,168
and $12,249 in the first six months of fiscal 2013 and 2012, 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 2013 and 2012, the Trust paid Cahill Gordon &
Reindel LLP $17,138 and $16,724 for legal services, respectively. For the
first six months of fiscal 2013 and 2012, the Trust paid Cahill Gordon &
Reindel LLP $31,719 and $59,554 for legal services, respectively.
-10-
(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 2013 and
2012 calendar years.
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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 (1,398,000 acres) covers virtually the entire former
Principality 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.
The operating companies pay monthly royalties to the Trust based on
their sales of natural gas, sulfur and oil. Of these three products, natural
gas provided approximately 94% of the cumulative royalty income received in
fiscal 2013. 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.
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 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
-12-
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.
There are two types of natural gas found within the Oldenburg
concession, sweet gas and sour gas. Sweet gas has little or no contaminants
and needs no treatment before it can be sold. In recent years sweet gas has
assumed the role of swing producer. During periods of high demand, the
production of sweet gas is increased as necessary. During the summer months
sweet gas production is reduced due to a general decline in demand. Sour
gas, in comparison, must be processed at either the Grossenkneten or the
Norddeutsche Erdgas-Aufbereitungs GmbH ("NEAG") desulfurization plants before
it can be sold. The desulfurization process removes hydrogen sulfide and
other contaminants. The hydrogen sulfide in gaseous form is converted to
sulfur in a solid form and sold separately. For efficiency purposes, the
desulfurization plants are operated at capacity on a continual basis. Any
excess production from the plants is stored in underground storage for higher
demand periods. As needed, the operators conduct maintenance on the plants,
generally during the summer months when demand is lower. If the operator is
consistent with past practice, overall production during this maintenance
period would be reduced by approximately one-third as the three units in the
desulfurization plant would each be shut down in sequence for approximately
two weeks.
Under one set of rights covering the western part of the Oldenburg
concession (approximately 662,000 acres), the Trust receives a royalty payment
of 4% on gross receipts from sales by Mobil Erdgas of gas well gas, oil well
gas, crude oil and condensate (the "Mobil Agreement"). Under the Mobil
Agreement, there is no deduction of costs prior to the calculation of
royalties from gas well gas and oil well gas, which together account for
approximately 98% of the cumulative royalty income received under this
agreement in fiscal 2013. 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. In the first six months of fiscal 2013 and 2012, the Trust
received $178,479 and $425,001, respectively, in sulfur royalties under the
Mobil Agreement.
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.
-13-
Under the Mobil and OEG Agreements, the gas is sold to various
distributors under long term contracts which delineate, among other
provisions, the timing, manner, volume and price of the gas sold. The
pricing mechanisms contained in these contracts include a delay factor of
three to six months and use the price of light heating oil in Germany as one
of the primary pricing components. Since Germany must rely on imports to
meet the majority of its energy demands, oil prices on the international
market (in U.S. dollars) have a significant impact on the price of light
heating oil in Germany and a delayed impact on the price of gas.
Additionally, there are efforts underway to decouple the linkage between oil
prices and gas prices. Through 2010 based upon the royalty examination
conducted by the Trust's accountants in Germany, the basic structure of the
gas supply contracts had not changed and such decoupling, as of that point,
had not occurred. The Trust itself 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 accountants review these contracts periodically on behalf of
the Trust to verify the correctness of application of the Agreement formulas
for the computation of royalty payments. The Trust's accountants in Germany
have concluded their examination of the operating companies for 2009 and 2010
and no substantive errors were identified.
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
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 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. In his position
as consultant, he receives reports from EMPG with respect to current and
planned drilling and exploration efforts. However, EMPG and the operating
-14-
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 its costs. 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 of Fiscal 2013 Versus Second Quarter of Fiscal 2012
------------------------------------------------------------------
For the second quarter of fiscal 2013, the Trust's net income was
$5,842,545, a decrease of 6.7% from the net income of $6,262,114 for the
second quarter of fiscal 2012. Total royalties received during the second
quarter of fiscal 2013 were derived from sales of gas, sulfur and oil from
the Trust's overriding royalty areas in Germany during the first calendar
quarter of 2013. These royalties were derived primarily from sale of gas
from the Trust's overriding royalty areas in Germany. A distribution of
64 cents per unit was paid on May 29, 2013 to owners of record as of
May 17, 2013.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Ended 4/30/2013 Ended 4/30/2012 Change
-----------------------------------------------------------------------------
Total Royalty Income $6,048,364 $6,441,635 - 6.11%
Net Income $5,842,545 $6,262,114 - 6.70%
Distributions per Unit $0.64 $0.68 - 5.88%
-----------------------------------------------------------------------------
Gas royalties under both the Mobil and the OEG Agreements for the
second quarter of fiscal 2013 were lower than gas royalties for the second
quarter of fiscal 2012. This decline was due primarily to lower gas prices
under both royalty agreements as well as lower gas sales under the higher
royalty rate Mobil Agreement in the second quarter of fiscal 2013.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Mobil Agreement Ended 4/30/2013 Ended 4/30/2012 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf)(1) 8.656 9.632 - 10.13%
Gas Prices (Ecents/Kwh)(2) 2.4352 2.8708 - 15.17%
Average Exchange Rate(3) 1.3105 1.3024 + 0.62%
Gas Royalties $3,175,013 $4,137,430 - 23.26%
Gas Prices ($/Mcf)(4) $ 9.17 $10.74 - 14.62%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 26.508 26.104 + 1.55%
Gas Prices (Ecents/Kwh) 2.9002 3.0872 - 6.06%
Average Exchange Rate 1.3105 1.3019 + 0.66%
Gas Royalties $1,698,860 $1,806,345 - 5.95%
Gas Prices ($/Mcf) $10.65 $11.24 - 5.25%
-----------------------------------------------------------------------------
(1) Billion cubic feet (2) Euro cents per Kilowatt hour
(3) Based on average exchanges rates of cumulative royalty transfers
(4) Dollars per thousand cubic feet
-15-
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 second quarter of fiscal 2013,
gas sales from western Oldenburg accounted for only 32.66% of all gas sales.
However, royalties on these gas sales provided approximately 78.8% of all
royalties attributable to gas sales from the Oldenburg concession.
Trust expenses for the second quarter of fiscal 2013 increased
12.29%, or $23,477, to $214,431 from $190,954 in the second quarter of fiscal
2012 due primarily to a difference in the timing of payments for mailing
costs associated with the annual meeting. Trust interest income received
during the second quarter of fiscal 2013 decreased to $8,612 in comparison to
$11,433 received in the second quarter of fiscal 2012 due to reduced funds
available for investment.
The current Statements of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2013, compared to that at fiscal year-end (October
31, 2012), shows an increase in assets due to the higher royalty receipts
during the second quarter of fiscal 2013.
Results: First Six Months of Fiscal 2013 Versus First Six Months of
----------------------------------------------------------
Fiscal 2012
-----------
Total royalties received during the first six months of fiscal 2013
were derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the fourth calendar quarter of 2012 and the
first calendar quarter of 2013. These royalties were derived primarily from
sale of gas from the Trust's overriding royalty areas in Germany.
Six Months Six Months Percentage
Ended 4/30/2013 Ended 4/30/2012 Change
-----------------------------------------------------------------------------
Total Royalty Income $11,844,198 $12,979,896 - 8.75%
Net Income $11,315,555 $12,341,378 - 8.31%
Distributions per Unit $1.23 $1.34 - 8.21%
-----------------------------------------------------------------------------
Gas royalties under both the Mobil and the OEG Agreements for the
first six months of fiscal 2013 were lower in comparison to gas royalties for
the first six months of fiscal 2012 due to the combination of lower gas sales
and gas prices in the first six months of fiscal 2013.
-16-
Six Months Six Months Percentage
Mobil Agreement Ended 4/30/2013 Ended 4/30/2012 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 17.554 19.381 - 9.43%
Gas Prices (Ecents/Kwh) 2.7021 2.8635 - 5.64%
Average Exchange Rate 1.3135 1.3020 + 0.88%
Gas Royalties $7,155,704 $8,297,163 - 13.76%
Gas Prices ($/Mcf) $10.19 $10.70 - 4.77%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 53.625 54.291 - 1.23%
Gas Prices (Ecents/Kwh) 2.9690 3.0007 - 1.06%
Average Exchange Rate 1.3093 1.3023 + 0.54%
Gas Royalties $3,503,261 $3,653,970 - 4.12%
Gas Prices ($/Mcf) $10.88 $10.92 - 0.37%
-----------------------------------------------------------------------------
For the six months just ended, gas sales from western Oldenburg
accounted for only 32.73% of all gas sales. However, royalties on these gas
sales provided approximately 78.08% of all royalties attributable to gas
sales from the Oldenburg concession.
Trust expenses for the first six months of fiscal 2013 decreased
17.56%, or $115,897, to $544,178 from $660,075 for the first six months of
fiscal 2012. This decrease in expenses is primarily due to the prior
conclusion of the German litigation, which reduced legal expenses, and the
prior conclusion of the royalty examination, which reduced accounting
expenses. Trust expenses were further reduced by the lower Trustee fees
calculated as specified under provisions in the Trust Agreement. Trust
interest income received during the first six months of fiscal 2013 decreased
to $15,535 in comparison to $21,557 received in the first six months of
fiscal 2012 due to reduced funds available for investment.
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 2011-2012 period and planned and proposed drilling
and geophysical work for 2013 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 month of June 2013. It is expected that this will reduce sour
gas processing during this period by approximately one-third while
the maintenance is being conducted.
The following is a description of wells completed during 2011-
2012. Brettorf Z-2b, a sour gas Zechstein well, was intended to
-17-
re-open the Brettorf gas field, which had been shut-in since 2004.
The well underwent a production test at the end of 2011, which
showed an unstabilized low flow rate. It is currently shut-in
awaiting further consideration with possible acidizing treatment
under discussion. Visbek Z-8a, a western sour gas infill well,
completed drilling in December 2011 and entered production in
January 2012 with an initial stabilized production that showed
further improvement in 2013. Goldenstedt Z-21, a sour gas well in
eastern Oldenburg, completed drilling in April 2012 and has entered
production with a good flow rate. Goldenstedt Z-15a, another sour
gas infill well in eastern Oldenburg, was intended to serve two
purposes. Its primary purpose was to increase gas recovery within
the Zechstein reservoir but it was also deepened by another 1,000
meters to explore the Carboniferous strata below. The potential
for this zone was confirmed with possible development set for the
future. Access to the Carboniferous zone was then plugged and the
well was completed in November 2012 as a Zechstein producer and
entered production in early 2013. Visbek Z-16a, a western sour gas
infill well, successfully completed drilling in August 2012 with a
start of production in March 2013.
EMPG has provided the following description of work planned for
2013. EMPG is continuing to conduct interpretation of previous
seismic work to evaluate drilling prospects in different fields
within the Oldenburg concession. The concession is comprised of
four sub-concessions: Jeverland and Jade-Weser in the north,
Oldenburg in the center and Munsterland in the south. EMPG has
begun investigating the possibility of drilling an exploratory gas
well within the Oldenburg sub-concession to evaluate the Rotliegend
("Red sandstone") formation located above the Carboniferous.
Outside the Oldenburg concession the Rotliegend formation has been
a very productive gas bearing zone but this is the first mention of
this formation within the concession.
EMPG has been pursuing a drilling program to exploit the
Carboniferous zone, the deepest zone within the concession. This
zone required the use of fracking in order to yield sufficient
recovery rates to make these wells profitable. Since the middle of
2011, no fracking treatments have been carried out in Germany due
to the Mining Authority's refusal to provide the required approvals.
This seems to be a direct reaction to the general public rejection
of fracking. As a result the development of the Carboniferous zone
has been put on hold and EMPG has shifted drilling activities. For
2013 three sour gas infill wells are planned, two in the eastern and
one in the western half of the concession. Goldenstedt Z-25, an
eastern well, successfully completed drilling in January 2013 and
production is scheduled to start in April 2013. Goldenstedt Z-34,
the second eastern well, is scheduled to start drilling in the
fourth quarter of 2013. Visbek Z-9b, the western well, is scheduled
to start drilling in August 2013.
Beyond drilling and seismic work, EMPG conducts ongoing
maintenance. Over the past ten years a large number of eastern
sweet gas wells in the Hengstlage field have been plagued by
declining productivity due to salt precipitation within the
perforated sections of piping. EMPG has installed a fresh water
treatment system to flush out the salt constricting the flow of gas
and restore productivity.
-18-
EMPG has two wells currently scheduled for 2014. The first is
Hemmelte NW T-1, a sweet gas well scheduled for drilling in mid-
2014. Construction of the well site has been completed. This is an
exploratory well intended to access the Bunter formation in western
Oldenburg. Originally intended as a dual well accessing both the
Bunter and Zechstein formations, the well was scaled back and a
separate well may potentially be drilled in later years to explore
the Zechstein formation. The second well is Goldenstedt Z-33, an
eastern sour gas infill well, scheduled for some time in 2014.
The Trust has been notified by EMPG that there are currently a
further six wells within EMPG's portfolio for 2014 and beyond, two
Zechstein and four Carboniferous wells. The drilling of the
Carboniferous wells will not proceed until the lifting of the
moratorium on fracking. However, whether these wells will be
drilled is still at the discretion of EMPG and will depend upon
results of earlier drilling and an evaluation of economic
circumstances.
-----------------------------------
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, 2012.
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.
-19-
Item 1. Legal Proceedings.
-----------------
The Trust is not a party to any pending legal proceedings. The
previous litigation commenced by the Trust in Germany against the operating
companies (See 2011 Annual Report on Form 10-K) was concluded after an
adverse district court ruling in May 2012 from which the Trust, after
consultation with its local counsel, decided not to appeal.
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, 2013. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of April 30, 2013.
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 2013 that have
materially affected or are reasonably likely to materially affect the
Trust's internal control over financial reporting.
-20-
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 30, 2013