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, 2008 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
-------------------------------------------------------------
(Address of principal executive offices)
(732) 741-4008
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
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Indicate by check mark whether the registrant 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
----- -----
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
----- -----
Class Outstanding at April 30, 2008
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Units of Beneficial Interest 9,190,590
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PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements.
--------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
April 30, 2008 AND OCTOBER 31, 2007
-----------------------------------
2008 2007
----------------- ----------------
(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 9,074,525 $ 5,912,620
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 9,074,526 $ 5,912,621
============ ============
Current liabilities - - Distributions
to be paid to unit owners $ 9,006,778 $ 5,881,978
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 67,747 30,642
------------ ------------
Total Liabilities and Trust Corpus $ 9,074,526 $ 5,912,621
============ ============
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED APRIL 30, 2008 AND 2007
--------------------------------------------------
2008 2007
-------------- --------------
(unaudited)
German gas, sulfur and oil
royalties received $ 9,360,976 $ 7,544,543
Interest income 26,979 57,210
Trust expenses (338,549) (268,312)
------------ ------------
Net income $ 9,049,406 $ 7,333,441
============ ============
Net income per unit $ .98 $ .80
====== ======
Distributions per unit to be paid
to unit owners $ .98 $ .80
====== ======
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
------------------------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 30, 2008 AND 2007
-------------------------------------------------
2008 2007
----------------- -----------------
(unaudited)
German gas, sulfur and oil
royalties received $16,576,059 $16,027,930
Interest income 60,334 110,903
Trust expenses (607,662) (545,206)
------------ ------------
Net income $16,028,731 $15,593,627
============ ============
Net income per unit $1.74 $1.70
====== ======
Distributions per unit paid or
to be paid to unit owners $1.74 $1.69
====== ======
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE SIX MONTHS ENDED APRIL 31, 2008 AND 2007
------------------------------------------------
2008 2007
----------------- ----------------
(unaudited)
Balance, beginning of period $ 30,642 $ 35,590
Net income 16,028,731 15,593,627
------------ ------------
16,059,373 15,629,217
Less:
Current year distributions paid or
to be paid to unit owners 15,991,626 15,532,097
------------ ------------
Balance, end of period $ 67,747 $ 97,120
============ ============
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, 2008 AND 2007
------------------------------------------------
2008 2007
----------------- ---------------
(unaudited)
Sources of cash and cash equivalents:
------------------------------------
German gas, sulfur and oil royalties $16,576,059 $16,027,930
Interest income 60,334 110,903
------------ ------------
16,636,393 16,138,833
------------ ------------
Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 607,662 545,206
Distributions paid 12,866,826 15,348,285
------------ ------------
13,474,488 15,893,491
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Net increase (decrease) in cash and
cash equivalents during the period 3,161,905 245,342
Cash and cash equivalents,
beginning of period 5,912,620 7,204,250
------------ ------------
Cash and cash equivalents,
end of period $ 9,074,525 $ 7,449,592
============ ============
The accompanying notes are an integral part
of these financial statements.
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NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
(1) Summary of significant accounting policies:
------------------------------------------
Basis of Accounting -
-------------------
The accompanying financial statements of North European Oil Royalty
Trust (the "Trust") present financial statement balances and
financial results 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"). Cash basis
financial statements disclose revenue when cash is received and
expenses when cash is paid. GAAP basis financial statements disclose
income 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.
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.
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.
From time to time, the amounts deposited in the Trust's bank accounts
may exceed the federally insured limit.
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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, 2008 and 2007, there
were 9,190,590 units of beneficial interest outstanding.
(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, distillate and sulfur.
(3) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and services to the Trust at cost. For such office space and
office services, the Trust reimbursed the Managing Director $4,824 and
$3,134 in the second quarter of fiscal 2008 and 2007, respectively.
For such office space and office services, the Trust reimbursed the
Managing Director $13,746 and $10,763 in the first six months of
fiscal 2008 and 2007, respectively.
As of January 1, 2007, Lawrence A. Kobrin, a Trustee of the Trust, was
named Senior Counsel at Cahill Gordon & Reindel LLP which serves as
counsel to the Trust. Prior to such time, Mr. Kobrin was a partner
at Cahill Gordon & Reindel LLP. For the second quarter of fiscal
2008 and 2007, the Trust paid Cahill Gordon & Reindel LLP $28,687
and $8,732 for legal services, respectively. For the first six
months of fiscal 2008 and 2007, the Trust paid Cahill Gordon &
Reindel LLP $85,379 and $40,607 for legal services, respectively.
As of November 1, 2006, John H. Van Kirk, the former Managing Trustee
of the Trust and the father of John R. Van Kirk, was named to the
position of Founding Trustee Emeritus. For his service in such
capacity, he earned $2,500 in each of the second quarters of fiscal
2008 and 2007 and $5,000 in the first six months of fiscal 2008 and
2007.
(4) Employee Benefit Plan:
---------------------
The Trust has 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 as of January 1, 2008.
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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. 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 ExxonMobil Corp. ("ExxonMobil"), or by
Oldenburgische Erdolgesellschaft ("OEG"). 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 provides approximately 98% of the total royalties. 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. The Oldenburg concession is the primary area from which the
natural gas, sulfur and oil are extracted and provides nearly 100% of all the
royalties received by the Trust. The Oldenburg concession (1,398,000 acres)
covers virtually the entire former Principality of Oldenburg and is located
in the federal state of Lower Saxony.
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 due to the higher royalty rate specified by that 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
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receipts prior to the calculation of the royalty to be paid to the Trust.
On November 23, 2007, N.V. Nederlandse Gasunie (the state owned Dutch gas
distribution company) announced that it had reached an agreement with BEB
regarding the purchase by Gasunie of BEB's North German gas distribution and
transmission network. Preliminary informal discussions with OEG personnel
indicate that the pipeline sale should not affect the method of royalty
calculations. The Trust is continuing discussions with the operator both to
obtain a formal confirmation that the sale will not affect the method of
royalty calculation and to fully understand the impact, if any, of the
pipeline sale on future royalty income.
The Trust also receives small amounts of royalties from a private lease
area, Grosses Meer, outside the Oldenburg concession. The German authorities
have requested that the operating companies conduct a reservoir analysis to
determine whether the royalties are being properly allocated based on the
locations of the gas reserves. Until such time as this issue is settled, the
payment of royalties from Grosses Meer has been suspended. For fiscal 2007,
total royalties from Grosses Meer received by the Trust were less than
$80,000.
The gas is sold to various distributors under long-term contracts which
delineate, among other provisions, the timing, manner, volume and price of
the gas sold. The pricing mechanisms contained in these contracts include a
delay factor of three to six months and use the price of light heating oil in
Germany as one of the primary pricing components. Since Germany must import
a large percentage of its energy requirements, the U.S. dollar price of oil
on the international market has a significant impact on the price of light
heating oil and a delayed impact on the price of gas. The Trust itself does
not have access to the specific sales contracts under which gas from the
Oldenburg concession is sold. These contacts are reviewed periodically on
behalf of the Trust by Ernst & Young AG to verify the correctness of
application of the Agreement formulas for the computation of royalty
payments.
For unit owners, changes in the 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 dollars at the time of their transfer from Germany to the United States.
A higher exchange rate would yield more dollars and a lower exchange rate
fewer dollars. The long-term impact relates to the mechanism of gas pricing.
Since oil on the international market is priced in dollars, a weaker Euro
would mean that oil imported into Germany is more expensive. A stronger Euro
would mean that oil imported into Germany is less expensive. These changes in
the price of oil in Germany are subsequently reflected in the price of light
heating oil, which is used as a component in the calculation of gas prices in
the contracts under which the gas is sold. The changes in German domestic
light heating oil prices are in turn reflected in gas prices with a built-in
delay of three to six months.
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 current
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
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position as consultant, he receives reports from the operating companies with
respect to current and planned drilling and exploration efforts. However,
the unified exploration and production venture, EMPG, which provides the
reports to the Trust's consultant, continues to limit the information flow
to that which is required by German law.
The relatively low level of administrative expenses of the Trust limits
the effect of inflation on its financial prospects. Continued price
inflation would be reflected in sales prices, which 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.
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 the funds on hand after provision is made for
Trust expenses then anticipated.
Results: Second Quarter of Fiscal 2008 Versus Second Quarter of Fiscal 2007
---------------------------------------------------------------------------
For the second quarter of fiscal 2008, the Trust's net income was
$9,049,406, an increase of 23.40% from the net income of $7,333,441 for the
second quarter of fiscal 2007. Royalties received for the second quarter of
fiscal 2008 were $9,360,976, an increase of 24.1% as compared to $7,544,543
for the second quarter of fiscal 2007. These royalties were derived from
sales of gas, sulfur and oil from the Trust's overriding royalty areas in
Germany during the first calendar quarter of 2008. A distribution of 98
cents per unit was paid on May 28, 2008 to owners of record as of
May 16, 2008.
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. For the second quarter of fiscal
2008, a combination of higher gas prices and higher average exchange rates
under both the Mobil and the OEG Agreements more than offset the decline in
gas sales and resulted in the increase in the amount of royalties received.
For the quarter just ended, the average price of gas sold under the
Mobil Agreement increased 14.66% to 2.2876 Eurocents/Kwh ("Ecents/Kwh") from
1.9950 Ecents/Kwh in the second quarter of fiscal 2007. Based on the
transfer from Germany of royalties received under the Mobil Agreement, the
average value of the Euro for the quarter just ended increased 15.10% to a
dollar equivalent of $1.5333 from $1.3321 for the second quarter of fiscal
2007. For the quarter just ended, under the Mobil Agreement gas sales
decreased 18.22% to 14.004 billion cubic feet ("Bcf") from 17.125 Bcf in the
second quarter of fiscal 2007. Converting the average gas prices using the
average exchange rate into more familiar terms yields an average gas price
under this agreement of $10.10 per thousand cubic feet ("Mcf") compared to
$7.64/Mcf for the second quarter of fiscal 2007.
For the quarter just ended, the average price of gas sold under the
OEG Agreement increased 3.35% to 2.3809 Ecents/Kwh from 2.3038 Ecents/Kwh in
the second quarter of fiscal 2007. Based on the transfer from Germany of
royalties received under the OEG Agreement, the average value of the Euro for
the quarter just ended increased 16.06% to a dollar equivalent of $1.5432
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from $1.3297 for the second quarter of fiscal 2007. For the quarter just
ended, under the OEG Agreement gas sales decreased 16.88% to 33.680 Bcf from
40.518 Bcf in the second quarter of fiscal 2007. Converting the average gas
prices using this average exchange rate into more familiar terms yields an
average gas price under this agreement of $10.33/Mcf compared to $8.60/Mcf
for the second quarter of fiscal 2007.
For the quarter just ended, Trust interest income decreased 52.84% to
$26,979 from $57,210 in the second quarter of fiscal 2007, reflecting both
the reduced funds available for investment and the decline in interest rates
applicable during the period. Trust expenses for the second quarter of
fiscal 2008 increased 26.18% or $70,237 to $338,549 primarily due to costs
associated with the biennial review of the German operating companies.
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at April 30, 2008, compared to that at fiscal year end (October 31,
2007), shows an increase in assets due to the higher royalty receipts during
the second quarter of fiscal 2008 compared to the fourth quarter of fiscal
2007.
Results: First Six Months of Fiscal 2008 Versus
First Six Months of Fiscal 2007
------------------------------------------------
For the six month period, the Trust's net income was $16,028,731, an
increase of 2.79% from the net income of $15,593,627 for last year's
equivalent period. Royalties received for the first six months of fiscal
2008 were $16,576,059, an increase of 3.4% as compared to $16,027,930 for the
first six months of fiscal 2007. These royalties were derived from sales of
gas, sulfur and oil from the Trust's overriding royalty areas in Germany
during the fourth calendar quarter of 2007 and the first calendar quarter of
2008. For the six month period ended April 30, 2008 total distributions were
equal to $1.74 per unit compared to total distributions of $1.69 for the
first six months of fiscal 2007.
For the first six months of fiscal 2008, a combination of higher gas
prices under the Mobil Agreement and higher average exchange rates under both
the Mobil and OEG Agreements more than offset the lower gas prices under the
OEG Agreement and the decline in gas sales under both agreements and resulted
in the increase in the amount of royalties received.
For the six months just ended, the average price of gas sold under the
Mobil Agreement increased 2.53% to 2.1867 Ecents/Kwh from 2.1327 Ecents/Kwh
in the first six months of fiscal 2007. Based on the transfer from Germany
of royalties received under the Mobil Agreement, the average value of the
Euro for the six months just ended increased 14.00% to a dollar equivalent of
$1.5025 from $1.3180 for the first six months of fiscal 2007. For the six
months just ended, under the Mobil Agreement gas sales decreased 18.43% to
28.255 Bcf from 34.637 Bcf in the first six months of fiscal 2007.
Converting the average gas prices using this average exchange rate into more
familiar terms yields an average gas price under this agreements of $9.46/Mcf
compared to $8.08/Mcf for the first six months of fiscal 2007.
For the six months just ended, the average price of gas sold under the
OEG Agreement decreased 2.91% to 2.2851 Ecents/Kwh from 2.3536 Ecents/Kwh in
the first six months of fiscal 2007. Based on the transfer from Germany of
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royalties received under the OEG Agreement, the average value of the Euro for
the quarter just ended increased 14.50% to a dollar equivalent of $1.5075
from $1.3166 for the first six months of fiscal 2007. For the six months
just ended, under the OEG Agreement gas sales decreased 17.09% to 68.395 Bcf
from 82.493 Bcf in the first six months of fiscal 2007. Converting the
average gas prices using this average exchange rate into more familiar
terms yields an average gas price under this agreement of $9.69/Mcf compared
to $8.70/Mcf for the first six months of fiscal 2007.
Interest income for the six month period declined 45.60% to $60,334 from
$110,903 in the first six months of fiscal 2007, reflecting the decreased
funds available for investment and the decrease in interest rates applicable
during the period. Trust expenses for the six month period increased 11.46%
or $62,456 to $607,662 in comparison to the prior year's equivalent period
primarily due to costs associated with the biennial review of the German
operating companies.
Report on Drilling and Geophysical Work
---------------------------------------
The Trust's German consultant, Alfred Stachel, met with representatives
of the operating companies recently to inquire about planned and proposed
drilling and geophysical work for 2008 and beyond and 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, the operating
companies are not obligated to take any of the actions outlined and, if they
change their plans with respect to any such actions, they are not obligated
to inform the Trust.
The operating companies reported to Mr. Stachel that the drilling
program is being continued with three wells (all located in eastern
Oldenburg) planned for calendar 2008. Goldenstedt Z-7a, which had already
found gas in the Carboniferous zone but had encountered a technical problem
when the drill string became lodged and could not be extricated, resumed
drilling in March 2008. The third sidetrack for this well will re-drill the
reservoir section and will be the second well completed with the intention of
exploiting the tight Carboniferous gas zone. The Carboniferous zone is a
sweet gas zone located below the Zechstein (sour gas) zone. Due to the
nature of this zone, the horizontal deviations along with multiple hydraulic
fracturing treatments are normally required to increase production to an
economic level. Following the completion of the drilling of Goldenstedt
Z-7a, the drilling rig will be moved to the second well, Varnhorn Z-7a, which
will further explore the Carboniferous zone and is scheduled to begin
drilling in June 2008. If Varnhorn Z-7a tests positive for gas, additional
work comprised of individual hydraulic fracturing treatments will be
conducted along its horizontal length before it enters production. The final
well for 2008 is Sage Z-5, which is planned to delineate the existing gas
field and improve gas recovery from the Zechstein zone. Sage Z-5 is a new
well site and has not been finalized as to location. This well will be
drilled as a slanted borehole with a horizontal reservoir section of 1,500
meters. Drilling is tentatively scheduled to begin in the fall of 2008.
In addition to these wells planned for 2008, 3 additional wells
(Goldenstedt Z-10 and Z-23 and Cappeln Z-6) are in the early planning stages
to develop additional areas of the Carboniferous zone, and 4 infill wells
(Quadmoor Z-5, Visbek Z-16a, Brinkholz Z-5 and Goldenstedt Z-16a) are under
consideration to further develop the Zechstein (sour gas) zone. Since the
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Zechstein zone is characterized by low porosity, these infill wells have the
potential of developing new reserves that could not be reached by existing
wells. A final well, Hemmelte NW T 1, is also in the early planning stages
for some point beyond 2008, perhaps mid 2009. While this well was initially
intended to explore both the Bunter (sweet gas) and Zechstein zones, it has
been scaled back to just the Bunter zone. A later separate well will be
drilled to access the deeper Zechstein zone. Since the planning for all
these wells is in its earliest stages and the availability of drilling rigs
in Germany is limited, this drilling program will likely be spread over
several years.
The processing and interpretation of earlier seismic work covering the
Quadmoor, Rechterfeld, Sagermeer, Brinkholz, Goldenstedt, Visbek and Oythe
fields is continuing. Additionally, the operators plan to complete reservoir
models for Goldenstedt, Visbek, Quadmoor, Woestendollen, Rechterfeld,
Varnhorn, Doetlingen, Brinkholz, Brettorf and Neerstedt. This work provides
detailed information regarding depth, location and extent of potential gas
bearing structures and provides insight into how best to develop the
available reserves within these fields through further drilling, including
infill, exploratory and horizontal.
According to the long-term inspection and maintenance schedule, a four
week period of maintenance work has been scheduled for the Grossenkneten
desulfurization plant from May 23 to June 26, 2008. During this period,
normal operations and thru-put of the plant are normally reduced by
approximately one-third.
-----------------------------------
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 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,
2007. 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.
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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, 2008. Based on that evaluation, the Managing Director
concluded that the Trust's disclosure controls and procedures were effective
as of April 30, 2008.
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 2008 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
Part II -- OTHER INFORMATION
----------------------------
Item 5. Submission of Matters to a Vote of Security Holders.
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The Annual Meeting of Unit Owners was held on February 13, 2008.
The results of the voting for the election of Trustees and two
amendments to the Trust Agreement are set forth in the Trust's 10-Q
for the first quarter of fiscal 2008, which was filed on
February 28, 2008.
Item 6. Exhibits.
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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
-17-
SIGNATURE
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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, 2008