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, 2022 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, 2022
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
STATEMENTS OF ASSETS, LIABILITIES
AND TRUST CORPUS (NOTE 1)
APRIL 30, 2022 AND OCTOBER 31, 2021
(Unaudited)
|
2022 |
2021 |
|---|
| ASSETS |
|
|
| Current assets --
Cash and cash equivalents |
$3,736,894 |
$1,409,437 |
|
| Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) |
1 |
1 |
|
| Total Assets |
$3,736,895 |
$1.409,438 |
|
|
| LIABILITIES AND TRUST CORPUS
|
|
|
| Current liabilities -- Distributions
to be paid to unit owners,
paid May 2022 and November 2021
|
$3,492,424 |
$1,286,683 |
|
| Trust corpus (Notes 1 and 2)
|
1 |
1 |
|
| Undistributed earnings
|
244,470
|
122,754
|
|
| Total Liabilities and
Trust Corpus |
$3,736,895 |
$1,409,438 |
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, 2022 AND 2021
(Unaudited)
|
2022 |
2021 |
| Gas, sulfur and oil royalties received |
$3,773,568 |
$1,400,159 |
| Interest income |
388 |
102 |
| Trust Income |
$3,773,956 |
$1,400,261 |
| |
| Non-related party expenses |
(211,975) |
(191,258) |
| Related party expenses (Note 3) |
(2,013) |
(10,556) |
| Trust Expenses |
(213,988) |
(201,814) |
| |
| Net Income |
$3,559,968
|
$1,198,447
|
| |
| Net income per unit |
$0.39 |
$0.13 |
| Distributions per unit paid or
to be paid to unit owners |
$0.38 |
$0.14 |
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, 2022 AND 2021
(Unaudited)
|
2022 |
2021 |
| Gas, sulfur and oil royalties received |
$6,320,107 |
$1,683,598 |
| Interest income |
625 |
185 |
| Trust Income |
$6,320,732 |
$1,683,783 |
| |
| Operating expenses |
(391,416) |
(342,748) |
| Related party expenses (Note 3) |
(17,529) |
(30,746) |
| Trust Expenses |
(408,945) |
(373,494) |
| |
| Net Income |
$5,911,787
|
$1,310,289
|
| |
| Net income per unit |
$0.64 |
$0.14 |
| Distributions per unit paid or
to be paid to unit owners |
$0.63 |
$0.18 |
The accompanying notes are an integral part
of these financial statements.
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
FOR THE SIX MONTHS ENDED APRIL 30, 2022 AND 2021
(Unaudited)
|
2022 |
2021 |
|---|
| Balance, beginning of period |
$122,754 |
$465,774 |
| Net income |
5,911,787 |
1,310,289 |
|
6,034,541 |
1,776,063 |
| Less: |
|
|
| Current year distributions
paid or to be paid to unit owners |
5,790,071 |
1,654,306 |
| Balance, end of period |
$244,470
|
$121,757
|
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, 2022 AND 2021
(Unaudited)
|
2022 |
2021 |
| Sources of Cash and Cash
Equivalents: |
|
|
| Gas, sulfur and oil royalties received |
$6,320,107 |
$1,683,598 |
| Interest income |
625 |
185 |
|
6,320,732 |
1,683,783 |
| Uses of Cash and Cash
Equivalents: |
|
|
| Payment of Trust expenses |
408,945 |
373,494 |
| Distributions paid |
3,584,330 |
551,435 |
|
3,993,275 |
924,929 |
| Net increase (decrease) in cash and
cash equivalents during the period |
2,327,457 |
758,854 |
| Cash and cash equivalents,
beginning of period |
1,409,437 |
649,585 |
| Cash and cash equivalents,
end of period |
$3,736,894
|
$1,408,439
|
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, 2021
(the "2021 Form 10-K"). The Statements of Assets, Liabilities and Trust
Corpus included herein contain information from the Trust's 2021 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, 2022, the uninsured amount held in the Trust's U.S. bank
accounts was $3,476,350. In addition, the Trust held Euros 10,000, the
equivalent of $10,544, in its German bank account at April 30, 2022.
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, 2022 and 2021, 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 $2,013 and $1,756 in the second quarter of fiscal 2022 and 2021,
respectively. For such office expenses, the Trust reimbursed the Managing
Director $3,939 and $3,971 in the first six months of fiscal 2022 and 2021,
respectively.
As of December 31, 2021, a
Trustee of the Trust fully retired from Cahill Gordon & Reindel LLP,
which serves as counsel to the Trust. Therefore, he is no longer
considered a related party and payments to Cahill Gordon & Reindel LLP
are no longer considered to be payments to a related party but instead are
included in operating expenses. For the second quarter of fiscal 2022 and
2021, the Trust paid Cahill Gordon & Reindel LLP $0 and $8,800 as a related
party for legal services, respectively. For the first six months of fiscal
2022 and 2021, the Trust paid Cahill Gordon & Reindel LLP $13,590 and
$26,775 as a related party 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 2022 and 2021
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 94% of the cumulative royalty income received in fiscal
2022. 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 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. With full operation of the plant's two
remaining parallel processing units ("trains"), raw gas input capacity
stands at approximately 400 million cubic feet per day. As needed, EMPG
conducts maintenance on the plant generally during the summer months
when demand is lower. EMPG conducted the required independently monitored
10-year major refurbishment of Grossenkneten during a ten-week period in
the summer and fall of 2020. ExxonMobil stated that beginning in Spring
2021 it would be conducting a sour gas study, which was expected to be
ongoing 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 would be evaluated in light of current
sour gas reserves and possible additions to reserves through new wells or
sidetracks from existing wells. This analysis would be matched with
anticipated future gas prices and the return on investment to determine
the most economical course of action. The Trust has not yet seen the
results of this study.
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 2022. 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 2022,
the Trust received $130,135 in sulfur royalties under the Mobil Sulfur
Agreement. In the first six months of fiscal 2021, the Trust received
$101,678 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.
In 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
change reflects a shift 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. 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.
The Trust had previously disclosed
that to the best of its knowledge the Farm-In Agreement between Vermilion
Energy Inc. and Mobil Erdgas and BEB had expired due to Vermilion's failure
to meet its drilling commitments within the Oldenburg Concession. Due to the
efforts of the Trust's consultant in Germany, the Trust was informed by EMPG
that Vermilion's drilling obligation in the Oldenburg area has been halted for
the time being due to difficulties obtaining the required permits, and that
Vermilion may or may not mature other prospects in the central and northern
parts of the Oldenburg Concession in the future.
Results: Second Quarter of Fiscal 2022 versus
Second Quarter of Fiscal 2021
Total royalty income received during
the second quarter of fiscal 2022 was derived from sales of gas, sulfur and oil
from the Trust's overriding royalty areas in Germany during the first calendar
quarter of 2022. A distribution of 38 cents per unit was paid on May 25, 2022
to owners of record as of May 13, 2022. Comparisons of total royalty income
received and net income for the second quarter of fiscal 2022 and 2021 are
shown below.
|
2nd Fiscal Quarter
Ended 4/30/2022 |
2nd Fiscal Quarter
Ended 4/30/2021 |
Percentage Change |
| Total Royalty Income |
$3,773,568 |
$1,400,159 |
+169.51% |
| Net Income |
$3,559,968 |
$1,198,447 |
+197.05% |
| Distribution per Unit |
$0.38 |
$0.14 |
+171.43% |
The increase in total
royalty income for the second quarter of fiscal 2022 in comparison
to the second quarter of fiscal 2021 resulted primarily from the
increase in gas prices. 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 2022, total royalty income was not affected because there
were no prior period adjustments, but was increased by Mobil sulfur
royalties of $70,618. In the second quarter of fiscal 2021, total
royalty income was also not affected because there were no prior period
adjustments, but was increased by Mobil sulfur royalties of $36,411.
The following table is
intended to illustrate trends based on actual gas sales in each
quarter. Gas royalties are determined based
on the actual physical gas sales that occurred during the first
calendar quarter of 2022 and the average German Border Import gas Price
for the period of November 2021 through January 2022. 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
3/31/2022 |
1st Calendar
Quarter Ended
3/31/2021 |
Percentage
Change |
|---|
Gas Sales (Bcf)
1 |
3.605 |
4.354 |
-17.20% |
Gas Prices2
(Ecents/Kwh)3 |
5.1442 |
1.5395 |
+234.15% |
Average Exchange Rate4 |
1.0883 |
1.2020 |
-9.46% |
| Gas Royalties |
$2,307,437 |
$921,896 |
+150.29% |
Gas Prices ($/Mcf)5
| $16.00 |
$5.29 |
+202.46% |
| |
| OEG Agreement |
|---|
| Gas Sales (Bcf) |
13.123 |
14.495 |
-9.47% |
| Gas Prices (Ecents/Kwh) |
5.2460 |
1.5700 |
+234.14% |
| Average Exchange Rate |
1.0867 |
1.2022 |
-9.61% |
| Gas Royalties Payable |
$1,257,976 |
$383.843 |
+227.73% |
| Gas Prices ($/Mcf) |
$15.90 |
$5.27 |
+201.71% |
|
| 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,
2022, gas sales from western Oldenburg accounted for only 27.47% of all
gas sales from the Oldenburg concession. However, royalties on these gas
sales provided approximately 74.42%, or $2,653,914 out of $3,566,356, in
Oldenburg royalties attributable to gas.
Trust expenses for the second
quarter of fiscal 2022 increased 6.03%, or $12,174, to $213,988 from
$201,814 in the second quarter of fiscal 2021. The increase in expenses
reflects higher Trustee fees as specified by the Trust Agreement and
higher listing fees on the New York Stock Exchange. Trust interest income
received in the second quarter of fiscal 2022 increased to $388 in
comparison to $102 received in the second quarter of fiscal 2021 due to
higher net income.
The current Statement of Assets,
Liabilities and Trust Corpus of the Trust at April 30, 2022, compared to
that at fiscal year-end (October 31, 2021), shows an increase in assets
due to higher royalty receipts during the second quarter of fiscal 2022.
Results: First Six Months of Fiscal 2022 versus
First Six Months of Fiscal 2021
Total royalty income
during the first six months of fiscal 2022 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 2021 and the first
calendar quarter of 2022. Comparisons of total royalty income
received and net income for the first six months of
fiscal 2022 and 2021 are shown below.
|
Six Months
Ended 4/30/2022 |
Six Months
Ended 4/30/2021 |
Percentage Change |
| Total Royalty Income |
$6,320,107 |
$1,683,598 |
+275.39% |
| Net Income |
$5,911,787 |
$1,310,289 |
+351.18% |
| Distribution per Unit |
$0.63 |
$0.18 |
+250.00% |
The increase in total
royalty income for the first six months of fiscal 2022 in comparison
to the first six months of fiscal 2021 resulted from higher gas prices
under both the Mobil and OEG Agreements. 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 2022, total royalty income was not
affected because there were no prior period adjustments, but was
increased by Mobil sulfur royalties of $130,135. 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.
The following table is
intended to illustrate trends based on actual gas sales in each quarter.
Gas royalties are determined based on the actual physical gas sales
that occurred during the fourth calendar quarter of 2021 and the first
calendar quarter of 2022 and the average German Border Import gas Price
for the period of August 2021 through January 2022. 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 3/31/2022 |
Six Months
Ended 3/31/2021 |
Percentage
Change |
|---|
Gas Sales (Bcf) |
7.710 |
7.577 |
+1.76% |
Gas Prices(Ecents/Kwh) |
4.0341 |
1.3925 |
+189.70% |
Average Exchange Rate |
1.1034 |
1.2055 |
-8.47% |
| Gas Royalties |
$3,926,184 |
$1,454,024 |
+170.02% |
Gas Prices ($/Mcf)
| $12.73 |
$4.80 |
+165.21% |
| |
| OEG Agreement |
|---|
| Gas Sales (Bcf) |
27.093 |
26.116 |
+3.74% |
| Gas Prices (Ecents/Kwh) |
4.1493 |
1.4135 |
+193.55% |
| Average Exchange Rate |
1.1012 |
1.2056 |
-8.66% |
| Gas Royalties |
$2,036,945 |
$577,109 |
+252.96% |
| Gas Prices ($/Mcf) |
$12.75 |
$4.75 |
+168.42% |
For the six months ended
3/31/2022, gas sales from western Oldenburg accounted for only 28.46%
of all gas sales from the Oldenburg concession. However, royalties
on these gas sales provided approximately 75.48%, or $4,501,469 out
of $5,963,974, of all royalties attributable to gas sales from the
Oldenburg concession.
Trust expenses for the
first six months of fiscal 2022 increased 9.49%, or $35,451, to
$408,945 from $373,494 for the first six months of fiscal 2021.
The increase in expenses reflects the higher Trustee fees as specified
by the Trust Agreement, higher listing fees for the New York Stock
Exchange and 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 2022 increased to $625 in comparison to $185 received
in the first six months of fiscal 2021 due to higher net income.
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 2022. Instead, EMPG has been and is continuing to conduct extensive
work-overs of existing wells to address any factors that are limiting the
flow of gas to the wellhead. One common cause of difficulty results from
the buildup of liquids in the wellbore. One solution to this problem
requires the injection of foam agents, which permit the problematic liquids
to be more easily extracted. Additional work-overs are conducted via
reservoir stimulation through acid treatments, pumping and mechanical
cleaning of valves and wellheads. All together at current count, EMPG has
conducted 224 different work-over efforts in 2021.
It should be noted that these discussions took place before the
invasion of Ukraine by Russia and that political events may alter previous
decisions at both corporate and governmental levels. The invasion has not
yet had a direct material impact on the Trust. However, Russia is a key
supplier of Germany's energy needs. The impact of the invasion on the
price of oil and natural gas and its supply to Germany, and Europe as a
whole, are uncertain.
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
- political and economic uncertainty arising from Russia's invasion of Ukraine.
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 is 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, 2022
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, 2022.
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 2022 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 27, 2022
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