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, 2021 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
(Exact Name of Registrant
as Specified in its Charter)
Delaware
22-2084119
State
or Other Jurisdiction of
I.R.S. Employer Identification No.
Incorporation
or Organization
5 N. Lincoln Street, Keene, N.H.
03431
Address of Principal Executive Offices
Zip Code
(732) 741-4008
(Registrant's Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each
class
Trading Symbol(s) Name of each exchange on which
registered
Units
of Beneficial Interest NRT
New York Stock Exchange
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 ___
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File
required to be submitted 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 X No ___
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated
filer," "smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
|
Non-accelerated filer
X
Smaller reporting company X
|
Emerging growth company
|
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ___
No X
9,190,590 Units of Beneficial Interest Outstanding as
of April 30, 2021
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
STATEMENTS OF ASSETS, LIABILITIES
AND TRUST CORPUS (NOTE 1)
APRIL 30, 2021 AND OCTOBER 31, 2020
(Unaudited)
|
2021
|
2020
|
ASSETS
|
|
|
Current assets --
Cash and cash equivalents
|
$1,408,439
|
$649,585
|
|
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2)
|
1
|
1
|
|
Total Assets
|
$1,408,440
|
$649,586
|
|
|
LIABILITIES AND TRUST CORPUS
|
|
|
Current liabilities -- Distributions
to be paid to unit owners,
paid May 2021 and November 2020
|
$1,286,682
|
$183,811
|
|
Trust corpus (Notes 1 and 2)
|
1
|
1
|
|
Undistributed earnings
|
121,757
|
465,774
|
|
Total Liabilities and
Trust Corpus
|
$1,408,440
|
$649,586
|
The accompanying notes are an integral part
of these financial statements.
STATEMENTS OF REVENUE COLLECTED
AND EXPENSES PAID (NOTE 1)
FOR THE THREE MONTHS ENDED APRIL 30, 2021 AND 2020
(Unaudited)
|
2021
|
2020
|
Gas, sulfur and oil royalties received
|
$1,400,159
|
$1,275,824
|
Interest income
|
102
|
578
|
Trust Income
|
$1,400,261
|
$1,276,402
|
|
Non-related party expenses
|
(191,258)
|
(225,143)
|
Related party expenses (Note 3)
|
(10,556)
|
(9,357)
|
Trust Expenses
|
(201,814)
|
(234,500)
|
|
Net Income
|
$1,198,447
|
$1,041,902
|
|
Net income per unit
|
$0.13
|
$0.11
|
Distributions per unit paid or
to be paid to unit owners
|
$0.14
|
$0.11
|
The accompanying notes are an integral part
of these financial statements.
STATEMENTS OF REVENUE COLLECTED
AND EXPENSES PAID (NOTE 1)
FOR THE SIX MONTHS ENDED APRIL 30, 2021 AND 2020
(Unaudited)
|
2021
|
2020
|
Gas, sulfur and oil royalties received
|
$1,683,598
|
$2,301,789
|
Interest income
|
185
|
2,473
|
Trust Income
|
$1,683,783
|
$2,304,262
|
|
Non-related party expenses
|
(342,748)
|
(481,004)
|
Related party expenses (Note 3)
|
(30,746)
|
(33,619)
|
Trust Expenses
|
(373,494)
|
(514,623)
|
|
Net Income
|
$1,310,289
|
$1,789,639
|
|
Net income per unit
|
$0.14
|
$0.19
|
Distributions per unit paid or
to be paid to unit owners
|
$0.18
|
$0.19
|
The accompanying notes are an integral part
of these financial statements.
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
FOR THE SIX MONTHS ENDED APRIL 30, 2021 AND 2020
(Unaudited)
|
2021
|
2020
|
Balance, beginning of period
|
$465,774
|
$120,399
|
Net income
|
1,310,289
|
1,789,639
|
|
1,776,063
|
1,910,038
|
Less:
|
|
|
Current year distributions
paid or to be paid to unit owners
|
1,654,306
|
1,746,212
|
Balance, end of period
|
$121,757
|
$163,826
|
The accompanying notes are an integral part
of these financial statements.
STATEMENTS OF CHANGES IN CASH
AND CASH EQUIVALENTS (NOTE 1)
FOR THE SIX MONTHS ENDED
APRIL 30, 2021 AND 2020
(Unaudited)
|
2021
|
2020
|
Sources of Cash and Cash
Equivalents:
|
|
|
Gas, sulfur and oil royalties received
|
$1,683,598
|
$2,301,789
|
Interest income
|
185
|
2,473
|
|
1,683,783
|
2,304,262
|
Uses of Cash and Cash
Equivalents:
|
|
|
Payment of Trust expenses
|
373,494
|
514,623
|
Distributions paid
|
551,435
|
2,205,741
|
|
924,929
|
2,720,364
|
Net increase (decrease) in cash and
cash equivalents during the period
|
758,854
|
(416,102)
|
Cash and cash equivalents,
beginning of period
|
649,585
|
1,590,893
|
Cash and cash equivalents,
end of period
|
$1,408,439
|
$1,174,791
|
The accompanying notes are an integral part
of these financial statements.
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") 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, 2020
(the "2020 Form 10-K"). The Statements of Assets, Liabilities and Trust
Corpus included herein contain information from the Trust's 2020 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.
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, 2021, the uninsured amount held in the Trust's U.S. bank
accounts was $1,146,562. In addition, the Trust held Euros 9,870, the
equivalent of $11,877, in its German bank account at April 30, 2021.
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, 2021 and 2010, there were 9,190,590 units of beneficial interest
outstanding.
New accounting
pronouncements -
The Trust is not aware of any
recently issued, but not yet effective,
accounting standards that would be expected to have a significant impact
on the Trust's financial position or results of operations.
(2) Formation of the Trust:
The Trust was formed on
September 10, 1975. As of September 30, 1975, the Company was
liquidated and the remaining assets and liabilities of the
Company, including its royalty rights, were transferred to the Trust. The
Trust, on behalf of the owners of beneficial interest in the Trust, holds
overriding royalty rights covering gas and oil production in certain
concessions or leases in the Federal Republic of Germany. These rights
are held under contracts with local German exploration and development
subsidiaries of ExxonMobil Corporation 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, is reimbursed by the Trust for office expenses at
cost. For such office expenses, the Trust reimbursed the Managing Director
$1,756 and $2,562 in the second quarter of fiscal 2021 and 2020, respectively.
For such office expenses, the Trust reimbursed the Managing Director $3,971
and $2,562 in the first six months of fiscal 2021 and 2020, 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 2021 and 2020, the
Trust paid Cahill Gordon & Reindel LLP $8,800 and $6,795 for legal services,
respectively. For the first six months of fiscal 2021 and 2020, the Trust
paid Cahill Gordon & Reindel LLP $26,775 and $31,057 for legal services,
respectively.
(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 for the 2021 and 2020
calendar years.
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 Corporation ("ExxonMobil"), or by
Oldenburgische Erdolgesellschaft ("OEG"). The Oldenburg concession
is the primary area from which the natural gas, sulfur and oil are
extracted and currently provides 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.
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 91% of the cumulative royalty income received in fiscal
2021. 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 or about the 25th of the
months of January, April, July and October, the operating companies
determine the amount of royalties that were payable to the Trust based
on applicable sales during the relevant period. This amount is paid
out to the Trust in three monthly installments as royalty payments
(payable on or about the 15th of each month) during its upcoming fiscal
quarter. In addition, the operating companies review the actual amount
of royalties that were paid to the Trust for that period and calculate
the difference between the amounts paid and the amounts payable. Any
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 underpayment or overpayment of royalties for the prior
calendar year. The Trust's independent accountants based in Germany
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 less treatment before it can
be sold. Sour gas, in comparison, must be processed at the Grossenkneten
desulfurization plant which commenced operations in 1972. The
desulfurization process removes hydrogen sulfide and other contaminants
before the "clean" gas can be sold. The hydrogen sulfide in gaseous form
is converted to sulfur in a solid form and sold separately. With full
operation of the plant's two remaining parallel processing units ("trains"),
raw gas input capacity stands at approximately 400 million cubic feet
("MMcf") per day. As needed, EMPG conducts maintenance on the plant
generally during the summer months when demand is lower. For a 10-week
period during the summer of 2020, Grossenkneten was completely shut down.
Major renovation work was conducted between August 21 to October 13, 2020
with lead-up and finalization work being added to the respective ends of
the period. This refurbishment must be undertaken every 10 years and is
monitored by an independent third-party inspector that must certify on the
successful completion of all the required work with regard to the safety of
operations. The work necessitated an expansion in the number of employees
by about 800 employees and technicians for the duration and included the
installation of a new gas and heat exchanger with a cost of approximately
Euros 500,000. Following this most recent refurbishment, ExxonMobil has
stated that beginning Spring 2021 it will be conducting a sour gas study
through the end of 2021. All cost aspects from drilling through processing
with ongoing maintenance from the wellhead to pipelines to final processing
at Grossenkneten will be evaluated in light of current sour gas reserves and
possible additions to reserves through new wells or sidetracks from existing
wells. This analysis will be matched with anticipated future gas prices and
the return on investment to determine the most economical course of action.
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 half of fiscal 2021. 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 six months of fiscal 2021, the Trust
received $101,678 in sulfur royalties under the Mobil Sulfur Agreement.
In the first six months of fiscal 2020, the Trust received $107,524 in
sulfur royalties under the Mobil Sulfur 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 and treatment 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.
On August 26, 2016, the Mobil
and OEG Agreements were amended establishing a new base for the
determination of gas prices upon which the Trust's royalties are
calculated. This new base is set as the state assessment base for
natural gas used by the operating companies in their calculation of
royalties payable to the State of Lower Saxony. This change reflects a
shift from the use of gas ex-field prices ("contractual prices") to the
prices calculated for the German Border Import gas Price ("GBIP"). The
average GBIP used under the Mobil and OEG Royalty Agreements has been
and will continue to be increased by 1% and 3%, respectively, for the
royalty calculations.
The change to the GBIP was
intended to be revenue neutral for the Trust in comparison to the previous
pricing methodology. Additionally, this change was intended to 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 pricing
basis has eliminated certain costs (transportation and plant gas storage)
that were previously deductible prior to the royalty calculation under the
OEG Agreement.
For unit owners, changes in the
currency exchange rate between the U.S. Dollar and 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 promptly transferred from Germany to the Trust's bank account
in the United States. In relation to the U.S. Dollar, a stronger Euro would
yield more U.S. Dollars and a weaker Euro would yield less U.S. Dollars.
The Trust continues to engage a
consultant in Germany who provides general information to the Trust on the
German and European economies and energy markets. The 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, and the Trust is not
able to confirm the accuracy of any of the information supplied by EMPG or the
operating companies.
Results: Second Quarter of Fiscal 2021 versus
Second Quarter of Fiscal 2020
Total royalty income received
during the second quarter of fiscal 2021 was derived from sales of gas,
sulfur and oil from the Trust's overriding royalty areas in Germany during
the first calendar quarter of 2021. A distribution of 14 cents per unit was
paid on May 26, 2021 to owners of record as of May 14, 2021. Comparisons of
total royalty income received and net income for the second quarter of fiscal
2021 and 2020 are shown below.
|
2nd Fiscal Quarter
Ended 4/30/2021
|
2nd Fiscal Quarter
Ended 4/30/2020
|
Percentage Change
|
Total Royalty Income
|
$1,400,159
|
$1,275.824
|
+9.75%
|
Net Income
|
$1,198,447
|
$1,041,902
|
+15.02%
|
Distribution per Unit
|
$0.14
|
$0.11
|
+27.27%
|
The increase in total royalty
income for the second quarter of fiscal 2021 in comparison to the second
quarter of fiscal 2020 resulted primarily from the absence of any negative
adjustments carried forward from the prior quarter. Details regarding gas
prices, gas sales, gas royalties and average exchange rates under both the
Mobil and OEG Agreements are shown in the table below.
Total royalty income includes
positive and negative adjustments that the operators made during the
quarter based upon their corrected royalty calculations for the prior
periods, as well as the inclusion of Mobil sulfur royalties. In the
second quarter of fiscal 2021, total royalty income was not affected
because there were no prior period adjustments, but was increased by Mobil
sulfur royalties of $36,411. In the second quarter of fiscal 2020, total
royalty income was reduced by negative prior period adjustments totaling
$137,944 and was increased by Mobil sulfur royalties of $31,105.
The table below is intended to
illustrate trends based on actual gas sales in each quarter. Gas
royalties shown in the table below are determined based on the actual
physical gas sales that occurred during the first calendar quarter of
2021 and the average German Border Import gas Price for the period of
November 2020 through January 2021. No adjustments for prior periods
are reflected in the gas royalties
Quarterly Gas Data Providing Basis for Fiscal
Quarter Royalties
Mobil Agreement
|
1st Calendar
Quarter Ended
3/31/2021
|
1st Calendar
Quarter Ended
3/31/2020
|
Percentage
Change
|
Gas Sales (Bcf)
1
|
4.354
|
4.624
|
-5.84%
|
Gas Prices2
(Ecents/Kwh)3
|
1.5395
|
1.6349
|
-5.84%
|
Average Exchange Rate4
|
1.2020
|
1.0943
|
+9.84%
|
Gas Royalties
|
$921,896
|
$946,174
|
-2.57%
|
Gas Prices ($/Mcf)5
$5.29
|
$5.12
|
+3.32%
|
|
OEG Agreement
|
Gas Sales (Bcf)
|
14.495
|
15.266
|
-5.05%
|
Gas Prices (Ecents/Kwh)
|
1.5700
|
1.6672
|
-5.83%
|
Average Exchange Rate
|
1.2022
|
1.0955
|
+9.74%
|
Gas Royalties Payable
|
$383.843
|
$393,001
|
-2.33%
|
Gas Prices ($/Mcf)
|
$5.27
|
$5.10
|
+3.33%
|
|
Footnotes
|
1. Billion cubic
feet
|
2. Gas prices
derived from November-January period
|
3. Euro cents per
kilowatt hour
|
4. Based on average
Euro/dollar exchange rates of cumulative royalty transfers
|
5. 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 March 31,
2021, gas sales from western Oldenburg accounted for only 30.04% of all
gas sales from the Oldenburg concession. However, royalties on these
gas sales provided approximately 79.43%, or $1,037,082 out of $1,305,617,
in Oldenburg royalties attributable to gas.
Trust expenses for the second
quarter of fiscal 2021 decreased 13.94%, or $32,686, to $201,814 from
$234,500 in the second quarter of fiscal 2020. The decrease in expenses
reflects reduced Trustee fees as specified by the Trust Agreement, reduced
printing costs related to the changed format for the annual report, lower
meeting and travel expenses resulting from the change to virtual meetings
during the pandemic-imposed restriction period, and the shift in the
timing of the payment relating to the biennial examination of the royalty
statements by the Trust's German accountants. Trust interest income
received in the second quarter of fiscal 2021 decreased to $102 in
comparison to $578 received in the second quarter of fiscal 2020 due to
lower interest rates and lower net income.
The current Statement of Assets,
Liabilities and Trust Corpus of the Trust at April 30, 2021, compared to
that at fiscal year-end (October 31, 2020), shows an increase in assets
due to higher royalty receipts during the second quarter of fiscal 2021.
Results: First Six Months of Fiscal 2021 versus
First Six Months of Fiscal 2020
Total royalty income
during the first six months of fiscal 2021 was primarily derived from
sales of gas, sulfur and oil from the Trust's overriding royalty areas
in Germany during the fourth calendar quarter of 2020 and the first
calendar quarter of 2021. Comparisons of total royalty income
received and net income for the first six months of
fiscal 2021 and 2020 are shown below.
|
Six Months
Ended 4/30/2021
|
Six Months
Ended 4/30/2020
|
Percentage Change
|
Total Royalty Income
|
$1,683,598
|
$2,301,789
|
-26.86%
|
Net Income
|
$1,310,289
|
$1,789,639
|
-26.78%
|
Distribution per Unit
|
$0.18
|
$0.19
|
-5.26%
|
The decrease in total royalty
income for the first six months of fiscal 2021 in comparison to the first
six months of fiscal 2020 resulted from lower gas prices and lower
gas sales under both the
Mobil and OEG Agreements as shown in the table below.
Total royalty income includes
positive and negative adjustments that the operators made during the
quarter based upon their corrected royalty calculations for the prior
periods, as well as the inclusion of Mobil sulfur royalties. During the
first six months of fiscal 2021, total royalty income was reduced by
negative prior period adjustments totaling $538,651 and was increased by
Mobil sulfur royalties of $101,678. During the first six months of fiscal
2020, total royalty income was reduced by negative prior period adjustments
totaling $388,634 and was increased by Mobil sulfur royalties of $70,378.
The table below is intended to
illustrate trends based on actual gas sales in each quarter. Gas
royalties shown in the table below are determined based on the actual
physical gas sales that occurred during the fourth calendar quarter of 2020
and the first calendar quarter of 2021 and the average German Border Import
gas Price for the period of August 2020 through January 2021. No adjustments
for prior periods are reflected in the gas royalties.
Gas Data Providing Basis for Six-Month Fiscal
Period Royalties
Mobil Agreement
|
Six Months
Ended 3/31/2021
|
Six Months
Ended 3/31/2020
|
Percentage
Change
|
Gas Sales (Bcf)
|
7.577
|
9.507
|
-20.30%
|
Gas Prices(Ecents/Kwh)
|
1.3925
|
1.4908
|
-6.59%
|
Average Exchange Rate
|
1.2055
|
1.1019
|
+9.40%
|
Gas Royalties
|
$1,454,024
|
$1,790,082
|
-18.77%
|
Gas Prices ($/Mcf)
|
$4.80
|
$4.71
|
+1.91%
|
|
OEG Agreement
|
Gas Sales (Bcf)
|
26.116
|
31.292
|
-16.54%
|
Gas Prices (Ecents/Kwh)
|
1.4135
|
1.5211
|
-7.07%
|
Average Exchange Rate
|
1.2056
|
1.1028
|
+9.32%
|
Gas Royalties
|
$577,109
|
$725,243
|
-20.43%
|
Gas Prices ($/Mcf)
|
$4.75
|
$4.68
|
+1.50%
|
For the six months ended
3/31/2021, gas sales from western Oldenburg accounted for only 29.01%
of all gas sales from the Oldenburg concession. However, royalties on
these gas sales provided approximately 79.90%, or $1,622,317 out of
$2,030,530, of all royalties attributable to gas sales from the
Oldenburg concession.
Trust expenses for the first
six months of fiscal 2021 decreased 27.42%, or $141,129, to $373,494
from $514,623 for the first six months of fiscal 2020. The decrease in
expenses reflects the lower insurance costs, reduced Trustee fees as
specified by the Trust Agreement, reduced printing costs, lower meeting
and travel expenses resulting from the change to virtual meetings during
the pandemic-imposed restriction period, and the shift in the timing of
the payment relating to the biennial examination of the royalty statements
by the Trust's German accountants. Trust interest income received during
the first six months of fiscal 2021 decreased to $185 in comparison to
$2,473 received in the first six months of fiscal 2020 due to lower net
income and lower interest rates.
Report on Drilling and Geophysical Work
The Trust's German consultant has been in contact with representatives
of ExxonMobil Production Gesellschaft ("EMPG") for technical discussions
regarding EMPG's future drilling and geophysical work. The following is
a summary of these discussions with some additional comments from the
Trust's German consultant. The Trust is not able to confirm the accuracy
of any of the information supplied by the operating companies. 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 Trust's German consultant advised the Trust that, in these
discussions, EMPG has indicated that it will not be drilling any wells
during 2021. The impact of Covid-19 on gas prices and gas demand continues
to impact the decision-making process regarding drilling new wells and
sidetracking from existing wells.
Alhorn Z-3, a western sour gas well, was intended to reopen the Alhorn
field previously closed in 1997. There is no start date for this well. The
three sidetracks, two western and one eastern, previously scheduled to be
drilled in conjunction with Alhorn Z-3 have also been postponed with no
starting date. All of these sidetracks were intended to access further
areas of the Zechstein zone and provide additional input for the
Grossenkneten desulfurization plant.
There were four Carboniferous sweet gas wells (Oythe Z-4 and Goldenstedt
Z-24, Z-26 and Z-27) listed in EMPG's tight gas portfolio. However, due to
the additional state requirements, political difficulties associated with the
required use of fracking and the timing of the results of the economic
evaluation process, only one well was tentatively planned and it had no
starting date. The status of the other three wells is not known.
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:
- risks and uncertainties concerning
levels of gas production and gas sale prices, general economic
conditions and currency exchange rates;
- the ability or willingness of the
operating companies to perform under their contractual
obligations with the Trust;
- potential disputes with the operating
companies and the resolution thereof; and
- the effect of the novel coronavirus
identified as "COVID-19" on our financial results.
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 is a smaller
reporting company as defined by Rule 12b-2 of the Securities Exchange Act
of 1934, as amended, and are not required to provide the information
required under this item.
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, 2020
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 April 30, 2021.
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 2020 that have materially affected or are
reasonably likely to materially affect the Trust's internal control
over financial reporting. We are continually monitoring and assessing
the COVID-19 situation on our internal controls to minimize the impact
on their design and operating effectiveness.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Trust is not a party
to any pending legal proceedings.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds..
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosure.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit 31.
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NORTH EUROPEAN OIL
ROYALTY TRUST
(Registrant)
/s/
John R. Van Kirk
John R. Van Kirk
Managing Director
May 28, 2021
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