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 July 31, 2016 or
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[ ] 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 July 31, 2016
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Units of Beneficial Interest 9,190,590
-3-
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements.
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JULY 31, 2016 AND OCTOBER 31, 2015
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(Unaudited)
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2016 2015
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ASSETS
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Current assets - - Cash and
cash equivalents $ 1,465,641 $ 2,192,865
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 1,465,642 $ 2,192,866
============ ============
LIABILITIES AND TRUST CORPUS
------------------------------
Current liabilities - - Distributions
to be paid to unit owners, to be paid
August 2016 and paid November 2015 $ 1,378,588 $ 2,113,835
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 87,053 79,030
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Total Liabilities and Trust Corpus $ 1,465,642 $ 2,192,866
============ ============
The accompanying notes are an integral part
of these financial statements.
-4-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED JULY 31, 2016 AND 2015
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(Unaudited)
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2016 2015
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Gas, sulfur and oil royalties received $ 1,561,026 $ 3,459,645
Interest income 1,204 2,248
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Trust Income $ 1,562,230 $ 3,461,893
------------ ------------ ------------
Non-related party expenses (147,022) (133,380)
Related party expenses (Note 3) (26,412) (16,206)
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Trust Expenses (173,434) (149,586)
-------------- ------------ ------------
Net Income $ 1,388,796 $ 3,312,307
---------- ============ ============
Net income per unit $ .15 $ .36
====== ======
Distributions per unit paid or
to be paid to unit owners $ .15 $ .36
====== ======
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2016 AND 2015
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(Unaudited)
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2016 2015
----------------- ----------------
Gas, sulfur and oil royalties received $ 5,727,167 $10,140,493
Interest income 3,999 7,899
------------ ------------
Trust Income $ 5,731,166 $10,148,392
------------ ------------ ------------
Non-related party expenses (587,675) (595,894)
Related party expenses (Note 3) (80,644) (68,780)
------------ ------------
Trust Expenses (668,319) (664,674)
-------------- ------------ ------------
Net Income $ 5,062,847 $ 9,483,718
---------- ============ ============
Net income per unit $0.55 $1.03
====== ======
Distributions per unit paid or
to be paid to unit owners $0.55 $1.04
====== ======
The accompanying notes are an integral part
of these financial statements.
-6-
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2016 AND 2015
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(Unaudited)
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2016 2015
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Balance, beginning of period $ 79,030 $ 170,406
Net income 5,062,847 9,483,718
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5,141,877 9,654,124
Less:
Current year distributions paid
or to be paid to unit owners 5,054,824 9,558,214
------------ ------------
Balance, end of period $ 87,053 $ 95,910
============ ============
The accompanying notes are an integral part
of these financial statements.
-7-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2016 AND 2015
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(Unaudited)
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2016 2015
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Sources of Cash and Cash Equivalents:
------------------------------------
Gas, sulfur and oil royalties received $ 5,727,167 $10,140,493
Interest income 3,999 7,899
------------ ------------
5,731,166 10,148,392
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Uses of Cash and Cash Equivalents:
---------------------------------
Payment of Trust expenses 668,319 664,674
Distributions paid 5,790,071 9,833,931
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6,458,390 10,498,605
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Net increase (decrease) in cash and
cash equivalents during the period (727,224) (350,213)
Cash and cash equivalents,
beginning of period 2,192,865 3,754,736
------------ ------------
Cash and cash equivalents,
end of period $ 1,465,641 $ 3,404,523
============ ============
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
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(Unaudited)
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(1) Summary of significant accounting policies:
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Basis of accounting -
---------------------
The accompanying financial statements of North European Oil Royalty Trust
(the "Trust") are prepared in accordance with the rules and regulations of
the SEC. Financial statement balances and financial results are presented on
a modified cash basis of accounting, which is a comprehensive basis of
accounting other than accounting principles generally accepted in the United
States ("GAAP basis"). In the opinion of management, all adjustments that are
considered necessary for a fair presentation of these financial statements,
including adjustments of a normal, recurring nature, have been included.
On a modified cash basis, revenue is earned when cash is received and
expenses are incurred when cash is paid. GAAP basis financial statements
disclose revenue as earned and expenses as incurred, without regard to
receipts or payments. The modified cash basis of accounting is utilized
to permit the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust during
the period plus interest income less any expenses incurred by the Trust, all
on a cash basis. In the opinion of the Trustees, the use of the modified
cash basis of accounting provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
The results of any interim period are not necessarily indicative of the
results to be expected for the fiscal year. These financial statements
should be read in conjunction with the financial statements that were
included in the Trust's Annual Report on Form 10-K for the year ended
October 31, 2015 (the "2015 Form 10-K"). The Statements of Assets,
Liabilities and Trust Corpus included herein contain information from the
Trust's 2015 Form 10-K.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company (the
"Company") (see Note 2). The net book value of the royalty rights has been
reduced to one dollar ($1) in view of the fact that the remaining net book
value of royalty rights is de minimis relative to annual royalties received
and distributed by the Trust and does not bear any meaningful relationship
to the fair value of such rights or the actual amount of proved producing
reserves.
Federal and state income taxes -
--------------------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service. The
Trust has no state income tax obligations.
-9-
Cash and cash equivalents -
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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 July 31,
2016, the uninsured amount held in the Trust's U.S. bank accounts was
$1,214,381. In addition, the Trust held Euros 9,875, the equivalent of
$11,023, in its German bank account at July 31, 2016.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at
the end of the period. As of both July 31, 2016 and 2015, there were
9,190,590 units of beneficial interest outstanding.
New accounting pronouncements -
-----------------------------
The Trust is not aware of any recently issued, but not yet effective,
accounting standards that would be expected to have a significant impact
on the Trust's financial position or results of operations.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities of the
Company, including its royalty rights, were transferred to the Trust. The
Trust, on behalf of the owners of beneficial interest in the Trust, holds
overriding royalty rights covering gas and oil production in certain
concessions or leases in the Federal Republic of Germany. These rights are
held under contracts with local German exploration and development
subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of
Companies. Under these contracts, the Trust receives various percentage
royalties on the proceeds of the sales of certain products from the areas
involved. At the present time, royalties are received for sales of gas well
gas, oil well gas, crude oil, condensate and sulfur.
(3) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. For such office space and
office services, the Trust reimbursed the Managing Director $6,041 and $5,417
in the third quarter of fiscal 2016 and 2015, respectively. For such office
space and office services, the Trust reimbursed the Managing Director $18,871
and $16,705 in the first nine months of fiscal 2016 and 2015, respectively.
Lawrence A. Kobrin, a Trustee of the Trust, is a Senior Counsel at
Cahill Gordon & Reindel LLP, which serves as counsel to the Trust. For the
third quarter of fiscal 2016 and 2015, the Trust paid Cahill Gordon &
Reindel LLP $20,371 and $10,789 for legal services, respectively. For the
first nine months of fiscal 2016 and 2015, the Trust paid Cahill Gordon &
Reindel LLP $61,773 and $52,075 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 2016 and
2015 calendar years.
(5) Subsequent event:
-----------------
On August 26, 2016 North European Oil Royalty Trust executed amendments
to its existing royalty agreements with Oldenburgische Erdolgesellschaft mbH
and Mobil Erdgas-Erdol GmbH establishing a new base for the determination of
both gas and oil prices upon which the Trust's royalties are determined.
This change reflects a shift from the use of gas and oil ex-field prices
("contractual prices") to the prices calculated for the respective public
assessment base ("German border import prices") and now matches the German
State royalty calculation basis which is codified in the pertinent German
State Royalty Code (Niedersachsische Verordnung uber die Feldes- und die
Forderabgabe). Full details regarding this event are described later in this
Form 10-Q in Part II, Item 5 on page 21 and the relevant exhibits on pages 23
and 24.
-11-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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Executive Summary
-----------------
The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all of the funds on hand after provision
is made for Trust expenses then anticipated.
The Trust does not engage in any business or extractive operations
of any kind in the areas over which it holds royalty rights and is precluded
from engaging in such activities by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The properties of the Trust, which the Trust and Trustees hold
pursuant to the Trust Agreement on behalf of the unit owners, are overriding
royalty rights on sales of gas, sulfur and oil under certain concessions or
leases in the Federal Republic of Germany. The actual leases or concessions
are held either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German
operating subsidiary of the ExxonMobil Corp. ("ExxonMobil"), or by
Oldenburgische Erdolgesellschaft ("OEG"). The Oldenburg concession is the
primary area from which the natural gas, sulfur and oil are extracted and
provides nearly 100% of all the royalties received by the Trust. The
Oldenburg concession (approximately 1,386,000 acres) covers virtually the
entire former Grand Duchy of Oldenburg and is located in the German federal
state of Lower Saxony.
In 2002, Mobil Erdgas and BEB Erdgas und Erdol GmbH ("BEB"), a joint
venture of ExxonMobil and the Royal Dutch/Shell Group of Companies, formed a
company, ExxonMobil Production Deutschland GmbH ("EMPG"), to carry out all
exploration, drilling and production activities. All sales activities are
still handled by the operating companies, either Mobil Erdgas or BEB.
Vermilion Energy Inc. ("Vermilion"), a Canadian based international
oil and gas producer, entered into a Farm-In Agreement (the "Farm-In
Agreement") with Mobil Erdgas and BEB effective as of January 1, 2016.
The Trust has been advised by EMPG that the Farm-In Agreement specifies that
Vermilion has acquired an interest in various portions of a concession or
areas owned by Mobil Erdgas and BEB, including the three northernmost areas
of the Oldenburg concession. The Farm-In Agreement commits Vermilion to
financial participation at a 50% level in 11 gross exploratory wells over the
next five years. If Vermilion conducts any successful drilling within the
confines of the Oldenburg concession, sales of that gas or oil would be
subject to the relevant royalty contract. It has been announced that
Vermilion will lead the development of its first well within the Oldenburg
concession with a possible start time in 2018. The well is tentatively
located in the western portion of the area designated Oldenburg-Land, the
southernmost area of the three areas within the concession subject to
Vermilion's Farm-In Agreement.
-12-
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 97% of the cumulative royalty income received in
the first nine months of fiscal 2016. The amount of royalties paid to the
Trust is primarily based on four factors: the amount of gas sold, the price
of that gas, the area from which the gas is sold, and the exchange rate.
On approximately the 25th of the months of January, April, July and
October, the operating companies calculate the amount of gas sold during the
previous calendar quarter and determine the amount of royalties that were
payable to the Trust based on those sales. This amount is divided into
thirds and forms the monthly royalty payments (payable on the 15th of each
month) to the Trust for its upcoming fiscal quarter. At the same time that
the operating companies determine the actual amount of royalties that were
payable for the prior calendar quarter, they look at the actual amount of
royalties that were paid to the Trust for that period and calculate the
difference between what was paid and what was payable. Additional amounts
payable by the operating companies would be paid immediately and any
overpayment would be deducted from the payment for the first month of the
following fiscal quarter. In September of each year, the operating companies
make the final determination of any necessary royalty adjustments for the
prior calendar year with a positive or negative adjustment made accordingly.
The Trust's German accountants review the royalty calculations on a biennial
basis.
There are two types of natural gas found within the Oldenburg
concession, sweet gas and sour gas. Sweet gas has little or no contaminants
and needs no treatment before it can be sold. Sour gas, in comparison, must
be processed at the Grossenkneten desulfurization plant before it can be
sold. The desulfurization process removes hydrogen sulfide and other
contaminants. The hydrogen sulfide in gaseous form is converted to sulfur
in a solid form and sold separately. EMPG conducts maintenance on the plant
generally during the summer months when demand is lower. There is no
maintenance scheduled to be conducted during 2016. The operating companies
have informed the Trust that, to promote greater efficiency and cost
effectiveness, the production capacity of Grossenkneten will be reduced
beginning in 2017.
Under one set of rights covering the western part of the Oldenburg
concession (approximately 662,000 acres), the Trust receives a royalty payment
of 4% on gross receipts from sales by Mobil Erdgas of gas well gas, oil well
gas, crude oil and condensate (the "Mobil Agreement"). Under the Mobil
Agreement, there is no deduction of costs prior to the calculation of
royalties from gas well gas and oil well gas, which together accounted for
approximately 99% of the cumulative royalty income received under this
agreement in the first nine months of fiscal 2016. Historically, the Trust
has received significantly greater royalty payments under the Mobil
Agreement, as compared to the OEG Agreement described below, due to the
higher royalty rate specified by that agreement.
The Trust is also entitled under the Mobil Sulfur Agreement to
receive a 2% royalty on gross receipts of sales of sulfur obtained as a by-
product of sour gas produced from the western part of Oldenburg. The payment
of the sulfur royalty is conditioned upon sales of sulfur by Mobil Erdgas at
a selling price above an agreed upon base price. This base price is adjusted
annually by an inflation index. In the first nine months of fiscal 2015, the
Trust received $291,196 in sulfur royalties under the Mobil Sulfur Agreement.
However, the operating companies made an accounting error by including
eastern Oldenburg sulfur sales for the fourth quarter of 2011, all of 2012
-13-
and the first quarter of 2015 in the calculation of the western sulfur
royalties under the Mobil Sulfur Agreement. This error resulted in an
overpayment of sulfur royalties previously paid to the Trust and impacted
the amount of sulfur royalties received by the Trust in fiscal 2016. As a
consequence, net sulfur royalty income under the Mobil Sulfur Agreement for
the first nine months of fiscal 2016 was -$127,370 due to the operating
companies' error and correction. The entire adjustment correcting the error
with respect to Mobil sulfur royalties was included in the first quarter of
fiscal 2016. The payment of the Mobil sulfur royalty for the third fiscal
quarter has been delayed due to an outstanding negative adjustment related to
total royalties for the third quarter of fiscal 2016 that has not yet been
applied.
Under another set of rights covering the entire Oldenburg
concession and pursuant to the agreement with OEG, the Trust receives
royalties at the rate of 0.6667% on gross receipts from sales by BEB of gas
well gas, oil well gas, crude oil, condensate and sulfur (removed during the
processing of sour gas) less a certain allowed deduction of costs (the "OEG
Agreement"). Under the OEG Agreement, 50% of the field handling, treatment
and transportation costs, as reported for state royalty purposes, are
deducted from the gross sales receipts prior to the calculation of the
royalty to be paid to the Trust.
Under the Mobil and OEG Agreements, the gas is sold in one of three
ways: (1) directly on the spot market; (2) between Mobil Erdgas and BEB
(intra-company sales); or (3) directly to various distributors under
contracts (which delineate, among other provisions, the timing, manner,
volume and price of the gas sold). While gas supply contracts have in the
past used the price of light heating oil in Germany as one of the primary
pricing components, we have been advised that the number of such contracts
now account for only a minor percentage of all Oldenburg gas sales.
In contrast, the price of gas sold on the spot market or sold between Mobil
Erdgas and BEB is largely determined by the quoted market price of gas then
trading as determined by supply and demand and has no relationship to the
price of oil.
The Trust itself does not have access to the specific sales
contracts under which gas from the Oldenburg concession is sold. However,
working under a confidentiality agreement with the operating companies, the
Trust's German accountants review both the contractual sales and 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 2013 and 2014 and have detailed
both positive and negative adjustments which, in the aggregate, amount to a
negative adjustment of Euros 130,000 in accordance with EMPG's assessment.
The Trust is disputing the correctness of this assessment but it is likely
some negative adjustment may be matched against royalty income in the Trust's
fourth fiscal quarter.
For unit owners, changes in the dollar value of the Euro have an
immediate impact. This impact occurs at the time the royalties, which are
paid to the Trust in Euros, are converted into U.S. dollars at the applicable
exchange rate and transferred from Germany to the United States. In relation
to the dollar, a stronger Euro would yield more dollars and a weaker Euro
would yield less dollars.
-14-
Seasonal demand factors affect the income from the Trust's royalty
rights insofar as they relate to energy demands and increases or decreases
in prices, but on average they are generally not material to the annual
income received under the Trust's royalty rights.
The Trust has no means of ensuring continued income from overriding
royalty rights at their present level or otherwise. The Trust's consultant
in Germany provides general information to the Trust on the German and
European economies and energy markets. This information provides a context
in which to evaluate the actions of the operating companies. The Trust's
consultant receives reports from EMPG with respect to current and planned
drilling and exploration efforts. However, EMPG and the operating companies
continue to limit the information flow to that which is required by German
law.
The low level of administrative expenses of the Trust limits the
effect of inflation on costs. Sustained price inflation would be reflected
in sales prices. Sales prices along with sales volumes form the basis on
which the royalties paid to the Trust are computed.
-15-
Results: Third Quarter of Fiscal 2016 Versus Third Quarter of Fiscal 2015
----------------------------------------------------------------
Total royalties received during the third quarter of fiscal 2016
were primarily derived from sales of gas, sulfur and oil from the Trust's
overriding royalty areas in Germany during the second calendar quarter of
2016. A distribution of 15 cents per unit will be paid on August 31, 2016 to
owners of record as of August 19, 2016. Comparisons of total royalties
received and net income for the third quarter of fiscal 2016 and 2015 are
shown below.
-----------------------------------------------------------------------------
3rd Fiscal Quarter 3rd Fiscal Quarter Percentage
Ended 7/31/2016 Ended 7/31/2015 Change
-----------------------------------------------------------------------------
Total Royalties Received $1,561,026 $3,459,645 - 54.88%
Net Income $1,388,796 $3,312,307 - 58.07%
Distributions per Unit $0.15 $0.36 - 58.33%
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The decline in total royalties received between the third quarter
of fiscal 2016 and the third quarter of fiscal 2015 resulted from three
separate elements determining royalty income. The first element relates to
accounting adjustments that are derived from the over or underpayment of
royalties from prior quarters or years which are required to reconcile
advanced estimated payments to actual results. The second element relates to
sulfur royalty payments under the Mobil Agreement. The third element relates
to gas sales from the immediately preceding calendar quarter and reflects
changes in the factors affecting gas royalties, namely gas sales, gas prices
and the average exchange rates.
With regard to the first element impacting total royalties received,
the net amount of such adjustments reduced royalties for the third quarter of
fiscal 2016 by $407,560. In comparison, in the third quarter of fiscal 2015,
the net amount of such adjustments reduced royalties by $35,346. The impact
of these adjustments is reflected in the figures shown in the table above.
With regard to the second element impacting total royalties
received, the Trust did not receive a separate sulfur royalty payment under
the Mobil Agreement in the third quarter of fiscal 2016. In comparison,
in the third quarter of fiscal 2015, the Trust received a separate sulfur
royalty payment of $74,523. The impact of these sulfur payments is reflected
in the figures shown in the table above.
-16-
The table below is intended to illustrate the third element
affecting total royalties received by detailing the factors determining the
gas royalties payable from the preceding calendar quarter. Gas royalties are
based solely on the actual gas sales that occurred during the second calendar
quarters of 2016 and 2015 and do not reflect any adjustments for prior
periods.
-----------------------------------------------------------------------------
Factors Determining Gas Royalties Payable
-----------------------------------------------------------------------------
2nd Calendar Quarter 2nd Calendar Quarter Percentage
Mobil Agreement Ended 6/30/2016 Ended 6/30/2015 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf)(1) 4.916 7.382 - 33.41%
Gas Prices (Ecents/Kwh)(2) 1.5363 2.0017 - 23.25%
Average Exchange Rate(3) 1.1185 1.1113 + 0.65%
Gas Royalties $969,471 $1,884,107 - 48.54%
Gas Prices ($/Mcf)(4) $4.93 $6.38 - 22.73%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 17.520 22.591 - 22.45%
Gas Prices (Ecents/Kwh) 1.5667 2.0401 - 23.20%
Average Exchange Rate 1.1159 1.1159 0.00%
Gas Royalties $408,480 $ 796,230 - 48.70%
Gas Prices ($/Mcf) $4.89 $6.38 - 23.35%
-----------------------------------------------------------------------------
(1) Billion cubic feet
(2) Euro cents per Kilowatt hour
(3) Based on average exchange rates of cumulative royalty transfers
(4) Dollars per thousand cubic feet
Excluding the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For the calendar quarter ended June 30,
2016, gas sales from western Oldenburg accounted for only 28.06% of all gas
sales. However, royalties on these gas sales provided approximately 83.49%
of all royalties attributable to gas sales from the Oldenburg concession.
Trust expenses for the third quarter of fiscal 2016 increased
15.94% or $23,848 to $173,434 in comparison to $149,586 for the third quarter
of fiscal 2015. The increase was due to higher domestic legal and German
accounting expenses regarding a dispute about a possible error by EMPG in the
Trust's royalty calculation and a new pricing proposal by EMPG upon which the
Trust's royalty calculation would be based. Trust interest income received
during the third quarter of fiscal 2016 decreased to $1,204 in comparison to
$2,248 received in the third quarter of fiscal 2015 due to reduced funds
available for investment.
The current Statements of Assets, Liabilities and Trust Corpus of
the Trust at July 31, 2016, compared to that at fiscal year-end (October 31,
2015), shows a decrease in assets due to lower royalty receipts during the
third quarter of fiscal 2016.
-17-
Results: First Nine Months of Fiscal 2016 Versus First Nine Months of
------------------------------------------------------------
Fiscal 2015
-----------
Total royalties received during the first nine months of fiscal 2016
were primarily derived from sales of gas, sulfur and oil from the Trust's
overriding royalty areas in Germany during the fourth calendar quarter of 2015
and the first and second calendar quarters of 2016. Comparisons of total
royalties received and net income for the first nine months of fiscal 2016
and 2015 are shown below.
-----------------------------------------------------------------------------
Nine Months Nine Months Percentage
Ended 7/31/2016 Ended 7/31/2015 Change
-----------------------------------------------------------------------------
Total Royalties Received $5,727,167 $10,140,493 - 43.52%
Net Income $5,062,847 $ 9,483,718 - 46.62%
Distributions per Unit $0.55 $1.04 - 47.12%
-----------------------------------------------------------------------------
The decline in total royalties received between the first nine
months of fiscal 2016 and the first nine months of fiscal 2015 resulted from
three separate elements determining royalty income. The first element relates
to accounting adjustments that are derived from the over or underpayment of
royalties from prior quarters or years which are required to reconcile
advanced estimated payments to actual results. The second element relates to
sulfur royalty payments under the Mobil Agreement. The third element relates
to gas sales from the immediately preceding nine calendar month period and
reflects changes in the factors affecting gas royalties, namely gas sales,
gas prices and the average exchange rates.
With regard to the first element impacting total royalties
received, the net amount of such adjustments reduced royalties for the first
nine months of fiscal 2016 by $369,582. In comparison, in the first nine
months of fiscal 2015, the net amount of such adjustments reduced royalties
by $761,793. This fiscal 2015 amount included a negative adjustment of
$561,584 for 2013. The impact of these adjustments is reflected in the
figures shown in the table above.
With regard to the second element impacting total royalties
received, the Trust received a series of negative adjustments with respect
to sulfur royalty payments that, in combination with actual sulfur royalty
payments, represented a reduction in overall royalties of $127,370 under the
Mobil Sulfur Agreement in the first nine months of fiscal 2016.
In comparison, the Trust received sulfur royalty payments totaling $291,196
in the first nine months of fiscal 2015. The impact of these sulfur payments
is reflected in the figures shown in the table above.
-18-
The table below is intended to illustrate the third element
affecting total royalties received by detailing the factors determining the
gas royalties payable from the preceding nine calendar months. Gas royalties
are based solely on the actual gas sales that occurred during the nine
calendar months ended 6/30/2016 and 6/30/2015 and do not reflect any
adjustments for prior periods.
-----------------------------------------------------------------------------
Factors Determining Gas Royalties Payable
-----------------------------------------------------------------------------
Nine Months Nine Months Percentage
Mobil Agreement Ended 6/30/2016 Ended 6/30/2015 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 18.355 22.900 - 19.85%
Gas Prices (Ecents/Kwh) 1.6642 2.2289 - 25.34%
Average Exchange Rate 1.1058 1.1355 - 2.62%
Gas Royalties $3,877,487 $6,660,589 - 41.78%
Gas Prices ($/Mcf) $5.28 $ 7.27 - 27.37%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 58.461 69.225 - 15.55%
Gas Prices (Ecents/Kwh) 1.6984 2.3143 - 26.61%
Average Exchange Rate 1.1039 1.1345 - 2.70%
Gas Royalties $1,564,470 $2,895,282 - 45.96%
Gas Prices ($/Mcf) $5.26 $ 7.36 - 28.53%
-----------------------------------------------------------------------------
For the nine months ended 6/30/2016, gas sales from western
Oldenburg accounted for only 31.40% of all gas sales. However, royalties on
these gas sales provided approximately 80.49% of all royalties attributable
to gas sales from the Oldenburg concession.
Trust expenses for the first nine months of fiscal 2016 increased
0.55% or $3,645 to $668,319 in comparison to $664,674 for the prior fiscal
year's equivalent period. This increase in expenses is due to higher
accounting costs associated with the biennial examination by the Trust's
German accountants of the royalty payments. Trust interest income received
during the first nine months of fiscal 2016 decreased to $3,999 in comparison
to $7,899 received in the first nine months of fiscal 2015 due to reduced
funds available for investment.
-----------------------------------
-19-
This report on Form 10-Q may contain forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. Such statements address
future expectations and events or conditions concerning the Trust. Many of
these statements are based on information provided to the Trust by the
operating companies or by consultants using public information sources.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in any
forward-looking statements. These include:
1. risks and uncertainties concerning levels of gas production
and gas sale prices, general economic conditions and currency
exchange rates;
2. the ability or willingness of the operating companies to
perform under their contractual obligations with the Trust;
3. potential disputes with the operating companies and the
resolution thereof; and
4. the risk factors set forth under Item 1A of the Trust's Annual
Report on Form 10-K for the year ended October 31, 2015.
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.
-20-
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 July 31, 2016 based on the criteria for effective
internal control over financial reporting described in the standards
promulgated by the Public Company Accounting Oversight Board and the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of July 31, 2016.
There have been no changes in the Trust's internal control over
financial reporting identified in connection with the evaluation described
above that occurred during the third quarter of fiscal 2016 that have
materially affected or are reasonably likely to materially affect the
Trust's internal control over financial reporting.
-21-
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
-----------------
The Trust is not a party to any pending legal proceedings.
Item 5. Other Information.
-----------------
On August 26, 2016 North European Oil Royalty Trust (the "Trust")
executed amendments to its existing royalty agreements with
Oldenburgische Erdolgesellschaft mbH ("OEG") and Mobil Erdgas-Erdol
GmbH ("Mobil") (the "Amendment Agreements") establishing a new base
for the determination of both gas and oil prices upon which the
Trust's royalties are determined. This change reflects a shift
from the use of gas and oil ex-field prices ("contractual prices")
to the prices calculated for the respective public assessment base
("German border import prices") and now matches the German State
royalty calculation basis which is codified in the pertinent German
State Royalty Code (Niedersachsische Verordnung uber die Feldes-
und die Forderabgabe).
The change to the German border import prices is intended to be
revenue neutral for the Trust. Additionally, this change should
reduce the scope and cost of the accounting examination, eliminate
ongoing disputes with OEG and Mobil regarding sales to related
parties, and reduce prior year adjustments to the normally
scheduled year-end reconciliation. The new pricing basis will also
eliminate certain costs (transportation and plant gas storage) that
were previously deductible prior to the royalty calculation under
the agreement with OEG.
The foregoing description is qualified in its entirety by the
English language translation of the Amendment Agreements, which are
attached hereto as Exhibit 10.1 and 10.2 and are incorporated
herein by reference. Although the English translations are
intended to be as accurate as possible, the definitive texts are
the original German versions.
-22-
Item 6. Exhibits.
--------
Exhibit 10.1. English language translation of Amendment
Agreement dated August 26, 2016 between
Oldenburgische Erdolgesellschaft mbH and North
European Oil Royalty Trust.
Exhibit 10.2. English language translation of Amendment
Agreement dated August 26, 2016 between Mobil
Erdgas-Erdol GmbH and North European Oil
Royalty Trust.
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
August 30, 2016