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, 2014 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, 2014
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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, 2014 AND OCTOBER 31, 2013
-----------------------------------
(Unaudited)
-----------
2014 2013
----------------- ----------------
ASSETS
--------
Current assets - - Cash and
cash equivalents $ 5,183,367 $ 4,918,490
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 5,183,368 $ 4,918,491
============ ============
LIABILITIES AND TRUST CORPUS
------------------------------
Current liabilities - - Distributions
to be paid to unit owners, paid
May 2014 and November 2013 $ 5,146,730 $ 4,871,013
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 36,637 47,477
------------ ------------
Total Liabilities and Trust Corpus $ 5,183,368 $ 4,918,491
============ ============
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 THREE MONTHS ENDED APRIL 30, 2014 AND 2013
--------------------------------------------------
(Unaudited)
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2014 2013
----------------- ----------------
Gas, sulfur and oil royalties $ 5,346,449 $ 6,048,364
Interest income 5,120 8,612
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Trust Income $ 5,351,569 $ 6,056,976
------------ ------------ ------------
Non-related party expenses $ 191,139 $ 194,023
Related party expenses (Note 3) 20,429 20,408
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Trust Expenses $ (211,568) $ (214,431)
-------------- ------------ ------------
Net Income $ 5,140,001 $ 5,842,545
---------- ============ ============
Net income per unit $ .56 $ .64
====== ======
Distributions per unit paid or
to be paid to unit owners $ .56 $ .64
====== ======
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, 2014 AND 2013
------------------------------------------------
(Unaudited)
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2014 2013
----------------- ----------------
Gas, sulfur and oil royalties $10,641,982 $11,844,198
Interest income 10,036 15,535
------------ ------------
Trust Income $10,652,018 $11,859,733
------------ ------------ ------------
Non-related party expenses $ 515,300 $ 502,291
Related party expenses (Note 3) 37,909 41,887
------------ ------------
Trust Expenses $ (553,209) $ (544,178)
-------------- ------------ ------------
Net Income $10,098,809 $11,315,555
---------- ============ ============
Net income per unit $1.10 $1.23
====== ======
Distributions per unit paid or
to be paid to unit owners $1.10 $1.23
====== ======
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, 2014 AND 2013
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(Unaudited)
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2014 2013
----------------- ----------------
Balance, beginning of period $ 47,477 $ 90,999
Net income 10,098,809 11,315,555
------------ ------------
10,146,286 11,406,554
Less:
Current year distributions paid
or to be paid to unit owners 10,109,649 11,304,426
------------ ------------
Balance, end of period $ 36,637 $ 102,128
============ ============
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, 2014 AND 2013
----------------------------------------------------
(Unaudited)
-----------
2014 2013
----------------- ---------------
Sources of Cash and Cash Equivalents:
------------------------------------
Gas, sulfur and oil royalties $10,641,982 $11,844,198
Interest income 10,036 15,535
------------ ------------
10,652,018 11,859,733
------------ ------------
Uses of Cash and Cash Equivalents:
---------------------------------
Payment of Trust expenses 553,209 544,178
Distributions paid 9,833,932 10,109,648
------------ ------------
10,387,141 10,653,826
------------ ------------
Net increase (decrease) in cash and
cash equivalents during the period 264,877 1,205,907
Cash and cash equivalents,
beginning of period 4,918,490 4,778,199
------------ ------------
Cash and cash equivalents,
end of period $ 5,183,367 $ 5,984,106
============ ============
The accompanying notes are an integral part
of these financial statements.
-8-
NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
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(1) Summary of significant accounting policies:
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Basis of accounting -
---------------------
The accompanying financial statements of North European Oil Royalty Trust
(the "Trust") are prepared in accordance with the rules and regulations of
the SEC. Financial statement balances and financial results are presented on
a modified cash basis of accounting, which is a comprehensive basis of
accounting other than accounting principles generally accepted in the United
States ("GAAP basis"). In the opinion of management, all adjustments that are
considered necessary for a fair presentation of these financial statements,
including adjustments of a normal, recurring nature, have been included.
On a modified cash basis, revenue is earned when cash is received and
expenses are incurred when cash is paid. GAAP basis financial statements
disclose revenue as earned and expenses as incurred, without regard to
receipts or payments. The modified cash basis of accounting is utilized
to permit the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust during
the period plus interest income less any expenses incurred by the Trust, all
on a cash basis. In the opinion of the Trustees, the use of the modified
cash basis of accounting provides a more meaningful presentation of the
results of operations of the Trust to unit owners.
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, 2013 (the "2013 Form 10-K"). The Statements of Assets,
Liabilities and Trust Corpus included herein contain information from the
Trust's 2013 Form 10-K.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company (the
"Company") (see Note 2). The net book value of the royalty rights has been
reduced to one dollar ($1) in view of the fact that the remaining net book
value of royalty rights is de minimis relative to annual royalties received
and distributed by the Trust and does not bear any meaningful relationship
to the fair value of such rights or the actual amount of proved producing
reserves.
Federal and state income taxes -
--------------------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service. The
Trust has no state income tax obligations.
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Cash and cash equivalents -
---------------------------
Cash and cash equivalents are defined as amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S. Treasury
bills with original maturities generally of three months or less from the
date of purchase. The investment options available to the Trust are limited
in accordance with specific provisions of the Trust Agreement. As of April
30, 2014, the uninsured amounts held in the Trust's U.S. bank accounts were
$4,930,324. In addition, $11,535 was held in the Trust's German account at
April 30, 2014.
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, 2014 and 2013, there were
9,190,590 units of beneficial interest outstanding.
New Accounting Pronouncements -
-----------------------------
The Trust is not aware of any recently issued, but not yet effective,
accounting standards that would be expected to have a significant impact
on the Trust's financial position or results of operations.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities of the
Company, including its royalty rights, were transferred to the Trust. The
Trust, on behalf of the owners of beneficial interest in the Trust, holds
overriding royalty rights covering gas and oil production in certain
concessions or leases in the Federal Republic of Germany. These rights are
held under contracts with local German exploration and development
subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of
Companies. Under these contracts, the Trust receives various percentage
royalties on the proceeds of the sales of certain products from the areas
involved. At the present time, royalties are received for sales of gas well
gas, oil well gas, crude oil, condensate and sulfur.
(3) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. For such office space and
office services, the Trust reimbursed the Managing Director $6,688 and $3,270
in the second quarter of fiscal 2014 and 2013, respectively. For such office
space and office services, the Trust reimbursed the Managing Director $11,087
and $10,168 in the first six months of fiscal 2014 and 2013, 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 2014 and 2013, the Trust paid Cahill Gordon &
Reindel LLP $13,741 and $17,138 for legal services, respectively. For the
first six months of fiscal 2014 and 2013, the Trust paid Cahill Gordon &
Reindel LLP $26,822 and $31,719 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 2014 and
2013 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 96% of the cumulative royalty income received in
fiscal 2014. 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. Sour gas, in comparison, must
be processed at the Grossenkneten desulfurization plant before it can be
sold. The desulfurization process removes hydrogen sulfide and other
contaminants. The hydrogen sulfide in gaseous form is converted to sulfur
in a solid form and sold separately. For efficiency purposes, the
desulfurization plant is operated at capacity on a continual basis. As
needed, the operators conduct maintenance on the plant 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 98% of the cumulative royalty income received under this
agreement in fiscal 2014. 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 2014 and 2013, the Trust
received $91,580 and $178,479, 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.
Under the Mobil and OEG Agreements, the gas is sold either to
various distributors under long-term contracts (which delineate, among other
provisions, the timing, manner, volume and price of the gas sold) or the gas
is sold at the spot market prices. The pricing mechanisms contained in
these long-term 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. With respect to gas sold under the long-
term contracts, these customers have recently been able, to a certain extent,
-13-
to force the operating companies to accept spot market prices for portions of
the contractual sales. As a consequence the linkage between oil prices and
gas prices appears to be weakening. Gas sold at spot market prices is sold
indirectly via intra-company sales to the open market. The pricing for those
intra-company sales is based on at the quoted market price of gas.
The Trust itself does not have access to the specific sales
contracts under which gas from the Oldenburg concession is sold. However,
working under a confidentiality agreement with the operating companies, the
Trust's German accountants review both the contractual sales, direct spot
market and intra-company sales periodically on behalf of the Trust to verify
their correctness. The Trust's accountants in Germany have completed their
examination of the operating companies for 2011 and 2012. There are certain
open items that remain under discussion, and further information will be
available pending resolution.
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 some of 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
price of gas higher or lower. The changes in gas prices that result from
changes in the price 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 the Trust's consultant, he receives reports from EMPG with respect to
current and planned drilling and exploration efforts. However, EMPG and the
operating companies continue to limit the information flow to that which is
required by German law.
The low level of administrative expenses of the Trust limits the
effect of inflation on costs. Sustained price inflation would be reflected in
sales prices. Sales prices along with sales volumes form the basis on which
-14-
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 2014 Versus Second Quarter of Fiscal 2013
------------------------------------------------------------------
For the second quarter of fiscal 2014, the Trust's net income was
$5,140,001, a decrease of 12.02% from the net income of $5,842,545 for the
second quarter of fiscal 2013. Total royalties received during the second
quarter of fiscal 2014 were derived from sales of gas, sulfur and oil from
the Trust's overriding royalty areas in Germany during the first calendar
quarter of 2014. These royalties were derived primarily from sale of gas
from the Trust's overriding royalty areas in Germany. A distribution of
56 cents per unit was paid on May 28, 2014 to owners of record as of
May 15, 2014.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Ended 4/30/2014 Ended 4/30/2013 Change
-----------------------------------------------------------------------------
Total Royalty Income $5,346,449 $6,048,364 - 11.61%
Net Income $5,140,001 $5,842,545 - 12.02%
Distributions per Unit $0.56 $0.64 - 12.50%
-----------------------------------------------------------------------------
The decline in total royalty income between the second quarters of
fiscal 2014 and 2013 was due primarily to lower gas sales under both the Mobil
and OEG Agreements. Under the Mobil Agreement, higher average gas prices and
higher average exchange rates offset the decline in gas sales in the second
quarter of fiscal 2014. Under the OEG royalty agreement, lower gas sales and
lower average gas prices offset higher average exchange rates resulting in the
reduced gas royalties in the second quarter of fiscal 2014.
2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage
Mobil Agreement Ended 4/30/2014 Ended 4/30/2013 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf)(1) 7.651 8.656 - 11.61%
Gas Prices (Ecents/Kwh)(2) 2.6635 2.4352 + 9.38%
Average Exchange Rate(3) 1.3776 1.3105 + 5.12%
Gas Royalty Income $3,225,728 $3,175,013 + 1.60%
Gas Prices ($/Mcf)(4) $10.54 $ 9.17 + 14.94%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 24.355 26.508 - 8.12%
Gas Prices (Ecents/Kwh) 2.7096 2.9002 - 6.57%
Average Exchange Rate 1.3774 1.3105 + 5.10%
Gas Royalty Income $1,487,638 $1,698,860 - 12.43%
Gas Prices ($/Mcf) $10.47 $10.65 - 1.69%
-----------------------------------------------------------------------------
(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 2014,
gas sales from western Oldenburg accounted for only 31.42% of all gas sales.
However, royalties on these gas sales provided approximately 78.57% of all
royalties attributable to gas sales from the Oldenburg concession.
Trust expenses for the second quarter of fiscal 2014 decreased
1.34%, or $2,863, to $211,568 from $214,431 in the second quarter of fiscal
2013 due primarily to reduced German legal expenses. Trust interest income
received during the second quarter of fiscal 2014 decreased to $5,120 in
comparison to $8,612 received in the second quarter of fiscal 2013 due to
reduced funds available for investment.
The current Statements of Assets, Liabilities and Trust Corpus of
the Trust at April 30, 2014, compared to that at fiscal year-end (October
31, 2013), shows an increase in assets due to the higher royalty receipts
during the second quarter of fiscal 2014.
Results: First Six Months of Fiscal 2014 Versus First Six Months of
----------------------------------------------------------
Fiscal 2013
-----------
Total royalties received during the first six months of fiscal 2014
were derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the fourth calendar quarter of 2013 and the
first calendar quarter of 2014. These royalties were derived primarily from
sale of gas from the Trust's overriding royalty areas in Germany.
Six Months Six Months Percentage
Ended 4/30/2014 Ended 4/30/2013 Change
-----------------------------------------------------------------------------
Total Royalty Income $10,641,982 $11,844,198 -10.15%
Net Income $10,098,809 $11,315,555 -10.75%
Distributions per Unit $1.10 $1.23 -10.57%
-----------------------------------------------------------------------------
Gas royalties under both the Mobil and the OEG Agreements for the
first six months of fiscal 2014 were lower in comparison to gas royalties for
the first six months of fiscal 2013 due primarily to lower gas sales in the
first six months of fiscal 2014.
-16-
Six Months Six Months Percentage
Mobil Agreement Ended 4/30/2014 Ended 4/30/2013 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 15.759 17.554 - 10.23%
Gas Prices (Ecents/Kwh) 2.7058 2.7021 + 0.14%
Average Exchange Rate 1.3685 1.3135 + 4.19%
Gas Royalty Income $6,705,072 $7,155,704 - 6.30%
Gas Prices ($/Mcf) $10.64 $10.19 + 4.42%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 49.822 53.625 - 7.09%
Gas Prices (Ecents/Kwh) 2.7539 2.9690 - 7.24%
Average Exchange Rate 1.3685 1.3093 + 4.52%
Gas Royalty Income $3,092,505 $3,503,261 - 11.72%
Gas Prices ($/Mcf) $10.57 $10.88 - 2.85%
-----------------------------------------------------------------------------
For the six months just ended, gas sales from western Oldenburg
accounted for only 31.63% of all gas sales. However, royalties on these gas
sales provided approximately 78.81% of all royalties attributable to gas
sales from the Oldenburg concession.
Trust expenses for the first six months of fiscal 2014 increased
1.66%, or $9,031, to $553,209 from $544,178 for the first six months of
fiscal 2013. This increase in expenses is primarily due to billing associated
with efforts by the Trust's German accountants on the biennial royalty
examination. Trust interest income received during the first six months of
fiscal 2014 decreased to $10,036 in comparison to $15,535 received in the
first six months of fiscal 2013 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 2013-2014 period and planned and proposed
drilling and geophysical work for 2014 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 not be conducting
scheduled maintenance work at the Grossenkneten desulfurization
plant during the summer months of 2014. As such, sour gas
processing during this period will not be affected.
The following is a description of wells completed during
2013. Brettorf Z-2b, a sour gas Zechstein well, was intended
to 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. There have been
-17-
no plans made as yet to improve the production rate but it
has continued to produce at the relatively slow rate of 2.2
million cubic feet per day. As a result the well was
reclassified as a discovery in October 2013. Visbek Z-16a,
a western sour gas infill well, successfully completed
drilling in August 2012 with a start of production in April
2013 with a good flow rate of 6.7 million cubic feet per day.
However production was shut down in October 2013 due to a
severe casing collapse. EMPG is planning a new sidetrack but
no firm date has been announced as yet. Goldenstedt Z-15a is
a sour gas infill well in eastern Oldenburg. The well
entered production in early 2013 with an initial flow rate of
10.4 million cubic feet per day. As of December 2013 this
flow rate had increased to 13.4 million cubic feet per day.
Goldenstedt Z-25, an eastern well, successfully completed
drilling in January 2013 and production began in April 2013
at a very low flow rate that was mixed with technical water
lost during the drilling process. As of March 2014 the
production rate has reached 1.3 million cubic feet but still
is mixed with technical water. EMPG is evaluating treatment
possibilities to improve the production rate. Visbek Z-9b,
the western well, entered production in February 2014 but
was producing only pure formation water with no gas present
and must at this time be considered a failure.
EMPG has provided the following description of work planned
for 2014. 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
is in the process of updating the structural depth map of the
Oldenburg sub-concession based upon the improved
interpretation of the 2D seismic lines. EMPG has also
announced the preparation of the drilling project Ahlhorn
Z-3, which contemplates a re-opening of the Ahlhorn gas
field that had been plugged and abandoned in 1997.
We have previously disclosed the presence of a moratorium
on fracking in Germany. The government is in the process
of modifying this moratorium to allow the fracking of
so-called "deep wells." All the currently productive zones
within the Oldenburg concession can only be accessed by "deep
wells," which go to depths below 2,500 meters. The Trust's
consultant anticipates that it will take some time to prepare
the sets of regulations and procedures that will govern the
use of fracking for these wells.
EMPG has two wells currently scheduled for 2014. The first
well is Goldenstedt Z-34, an eastern sour gas infill well,
scheduled to begin drilling in March 2014. The second is
Hemmelte NW T-1, a sweet gas well located in western
Oldenburg. Construction of the well site has been completed.
This is an exploratory well intended to access the Bunter
formation in western Oldenburg. The start of drilling is
scheduled for the end of 2014 or the beginning of 2015.
The Trust has been notified by EMPG that there are currently
a further six wells within EMPG's portfolio for 2015 and
beyond, two Zechstein and four Carboniferous wells. The
drilling of the Carboniferous wells will not proceed until
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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. While these wells
have been or are being planned, no budgetary funds have been
set aside by the operators.
-----------------------------------
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, 2013.
All such factors are difficult to predict, contain uncertainties
that may materially affect actual results, and are generally beyond the
control of the Trust. New factors emerge from time to time and it is not
possible for the Trust to predict all such factors or to assess the impact
of each such factor on the Trust. Any forward-looking statement speaks only
as of the date on which such statement is made, and the Trust does not
undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Trust does not engage in any trading activities with respect to
possible foreign exchange fluctuations. The Trust does not use any financial
instruments to hedge against possible risks related to foreign exchange
fluctuations. The market risk is negligible because standing instructions at
the Trust's German bank require the bank to process conversions and transfers
of royalty payments as soon as possible following their receipt. The Trust
does not engage in any trading activities with respect to possible commodity
price fluctuations.
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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, 2014. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of April 30, 2014.
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 2014 that have
materially affected or are reasonably likely to materially affect the
Trust's internal control over financial reporting.
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
-----------------
The Trust is not a party to any pending legal proceedings.
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
-20-
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 29, 2014