-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, URxH9mH5j+mi7Ge8nFFMRRKF138jWSqvG0aAjSSvnwpKvooR00q6c3Iza2B3BagA 5LfSlTZ4DA3KJ6C/EBzG4Q== 0000072633-09-000015.txt : 20090529 0000072633-09-000015.hdr.sgml : 20090529 20090529092207 ACCESSION NUMBER: 0000072633-09-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20090430 FILED AS OF DATE: 20090529 DATE AS OF CHANGE: 20090529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH EUROPEAN OIL ROYALTY TRUST CENTRAL INDEX KEY: 0000072633 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 222084119 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08245 FILM NUMBER: 09859107 BUSINESS ADDRESS: STREET 1: P O BOX 456 STREET 2: 43 WEST FRONT STREET SUITE 19-A CITY: RED BANK STATE: NJ ZIP: 07701 BUSINESS PHONE: 7327414008 MAIL ADDRESS: STREET 1: P O BOX 456 STREET 2: 43 WEST FRONT STREET SUITE 19-A CITY: RED BANK STATE: NJ ZIP: 07701 10-Q 1 tenq2q09.txt 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, 2009 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 of organization) (I.R.S. Employer I.D. No.) Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701 ------------------------------------------------------------- (Address of principal executive offices) (732) 741-4008 ---------------------------------------------------- (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 ----- ----- -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 ----- ----- Non-accelerated filer Smaller reporting company ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----- ----- Class Outstanding at April 30, 2009 - ---------------------------- ------------------------------ Units of Beneficial Interest 9,190,590 -3- PART I -- FINANCIAL INFORMATION ------------------------------- Item 1. Financial Statements. -------------------- STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1) ----------------------------------------------------------- April 30, 2009 AND OCTOBER 31, 2008 ------------------------------------- 2009 2008 ------------- ------------ (Unaudited) Current assets - - Cash and cash equivalents $9,285,565 $9,524,529 Producing gas and oil royalty rights, net of amortization (Notes 1 and 2) 1 1 ---------- ---------- Total Assets $9,285,566 $9,524,530 ========== ========== Current liabilities - - Distributions to be paid to unit owners, paid May 2009 and November 2008 $9,098,684 $9,466,308 Trust corpus (Notes 1 and 2) 1 1 Undistributed earnings 186,881 58,221 ---------- ---------- Total Liabilities and Trust Corpus $9,285,566 $9,524,530 ========== ========== The accompanying notes are an integral part of these financial statements. -4- STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1) ---------------------------------------------------------- FOR THE THREE MONTHS ENDED APRIL 30, 2009 AND 2008 -------------------------------------------------- 2009 2008 ------------ ------------ (Unaudited) German gas, sulfur and oil royalties received $9,424,837 $9,360,976 ----------- ----------- Interest income 197 26,979 ----------- ----------- Trust expenses ( 302,134) ( 338,549) ----------- ----------- Net income $9,122,900 $9,049,406 =========== =========== Net income per unit $0.99 $0.98 ===== ===== Distributions per unit to be paid to unit owners $0.99 $0.98 ===== ===== The accompanying notes are an integral part of these financial statements. -5- STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1) ---------------------------------------------------------- FOR THE SIX MONTHS ENDED APRIL 30, 2009 AND 2008 ------------------------------------------------ 2009 2008 ------------ ------------ (Unaudited) German gas, sulfur and oil royalties received $19,605,816 $16,576,059 ----------- ----------- Interest income 9,648 60,334 ----------- ----------- Trust expenses ( 646,095) ( 607,662) ----------- ----------- Net income $18,969,369 $16,028,731 =========== =========== Net income per unit $2.06 $1.74 ===== ===== Distributions per unit to be paid to unit owners $2.05 $1.74 ===== ===== The accompanying notes are an integral part of these financial statements. -6- STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1) --------------------------------------------- FOR THE SIX MONTHS ENDED APRIL 30, 2009 AND 2008 ------------------------------------------------ 2009 2008 ------------- ------------- (Unaudited) Balance, beginning of period $ 58,221 $ 30,642 Net income 18,969,369 16,028,731 ----------- ----------- 19,027,590 16,059,373 Less: Current year distributions paid or to be paid to unit owners 18,840,709 15,991,626 ----------- ----------- Balance, end of period $ 186,881 $ 67,747 =========== =========== The accompanying notes are an integral part of these financial statements. -7- STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1) ----------------------------------------------------------- FOR THE SIX MONTHS ENDED APRIL 30, 2009 AND 2008 ------------------------------------------------ 2009 2008 ------------- ------------- (Unaudited) Sources of cash and cash equivalents: - ------------------------------------ German gas, sulfur and oil royalties $19,605,816 $16,576,059 Interest income 9,648 60,334 ----------- ----------- 19,615,464 16,636,393 ----------- ----------- Uses of cash and cash equivalents: - --------------------------------- Payment of Trust expenses 646,095 607,662 Distributions paid 19,208,333 12,866,826 ----------- ---------- 19,854,428 13,474,488 ----------- ---------- Net increase (decrease) in cash and cash equivalents during the period (238,964) 3,161,905 Cash and cash equivalents, beginning of period 9,524,529 5,912,620 ----------- ---------- Cash and cash equivalents, end of period $ 9,285,565 $ 9,074,525 ============ ========== The accompanying notes are an integral part of these financial statements. -8- NORTH EUROPEAN OIL ROYALTY TRUST -------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Unaudited) ----------- (1) Summary of significant accounting policies: ------------------------------------------- Basis of Accounting - --------------------- The accompanying financial statements of North European Oil Royalty Trust ("the Trust") present financial statement balances and financial results on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States ("GAAP basis"). 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. Producing gas and oil royalty rights - -------------------------------------- The rights to certain gas and oil royalties in Germany were transferred to the Trust at their net book value by North European Oil Company (the "Company") (see Note 2). The net book value of the royalty rights has been reduced to one dollar ($1) in view of the fact that the remaining net book value of royalty rights is de minimis relative to annual royalties received and distributed by the Trust and does not bear any meaningful relationship to the fair value of such rights or the actual amount of proved producing reserves. Federal income taxes - ---------------------- The Trust, as a grantor trust, is exempt from federal income taxes under a private letter ruling issued by the Internal Revenue Service. Cash and cash equivalents - --------------------------- Included in cash and cash equivalents are amounts deposited in bank accounts and amounts invested in certificates of deposit and U. S. Treasury bills with original maturities of three months or less from the date of purchase. The amounts deposited in the Trust's bank accounts are covered under the FDIC's Temporary Liquidity Guarantee Program. -9- 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, 2009 and 2008, there were 9,190,590 units of beneficial interest outstanding. (2) Formation of the Trust: ----------------------- The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were transferred to the Trust. The Trust, on behalf of the owners of beneficial interest in the Trust, holds overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal Republic of Germany. These rights are held under contracts with local German exploration and development subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of Companies. Under these contracts, the Trust receives various percentage royalties on the proceeds of the sales of certain products from the areas involved. At the present time, royalties are received for sales of gas well gas, oil well gas, crude oil, 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 $6,021 and $4,824 in the second quarter of fiscal 2009 and 2008, respectively. For such office space and office services, the Trust reimbursed the Managing Director $11,800 and $13,746 in the first six months of fiscal 2009 and 2008, respectively. As of January 1, 2007, Lawrence A. Kobrin, a Trustee of the Trust, was named Senior Counsel at Cahill Gordon & Reindel LLP which serves as counsel to the Trust. Prior to such time, Mr. Kobrin was a partner at Cahill Gordon & Reindel LLP. For the second quarter of fiscal 2009 and 2008, the Trust paid Cahill Gordon & Reindel LLP $34,703 and $28,687 for legal services, respectively. For the first six months of fiscal 2009 and 2008, the Trust paid Cahill Gordon & Reindel LLP $67,732 and $85,379 for legal services, respectively. As of November 1, 2006, John H. Van Kirk, the former Managing Trustee of the Trust and the father of John R. Van Kirk, was named to the position of Founding Trustee Emeritus. For his service in such capacity, he earned $2,500 in the second quarter of fiscal 2009 and 2008 and $5,000 in the first six months of fiscal 2009 and 2008. John H. Van Kirk, who served as President of North European Oil Royalty Corporation and North European Oil Company from 1954-1975 and as Managing Trustee of the Trust from 1975-2006, passed away on February 25, 2009. -10- (4) Employee Benefit Plan: ---------------------- As of January 1, 2008, the Trust established a savings incentive match plan for employees (SIMPLE IRA) that is available to all employees of the Trust, including the Managing Director. The Trustees have authorized the Trust to make contributions to the accounts of the employees, on a matching basis, of up to 3% of cash compensation paid to each employee effective for the 2009 calendar year. -11- 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. The Trust does not engage in any business or extractive operations of any kind in the areas over which it holds royalty rights and is precluded from any such involvement by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust. The properties of the Trust, which the Trust and Trustees hold pursuant to the Trust Agreement on behalf of the unit owners, are overriding royalty rights on sales of gas, sulfur and oil under certain concessions or leases in the Federal Republic of Germany. The actual leases or concessions are held either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German operating subsidiary of the ExxonMobil Corp. ("ExxonMobil"), or by Oldenburgische Erdolgesellschaft ("OEG"). In 2002, Mobil Erdgas and BEB Erdgas und Erdol GmbH ("BEB"), a joint venture of ExxonMobil and the Royal Dutch/Shell Group of Companies, formed a company ExxonMobil Production Deutschland GmbH ("EMPG") to carry out all exploration, drilling and production activities. All sales activities are still handled by the operating companies, either Mobil Erdgas or BEB. The operating companies pay monthly royalties to the Trust based on their sales of natural gas, sulfur and oil. Of these three products, natural gas provides approximately 98% of the total royalties. The amount of royalties paid to the Trust is based on four primary factors: the amount of gas sold, the price of that gas, the area from which the gas is sold and the exchange rate. The Oldenburg concession is the primary area from which the natural gas, sulfur and oil are extracted and provides nearly 100% of all the royalties received by the Trust. The Oldenburg concession (1,398,000 acres) covers virtually the entire former Principality of Oldenburg and is located in the federal state of Lower Saxony. Under one set of rights covering the western part of the Oldenburg concession (approximately 662,000 acres), the Trust receives a royalty payment of 4% on gross receipts from sales by Mobil Erdgas of gas well gas, oil well gas, crude oil and condensate (the "Mobil Agreement"). Under the Mobil Agreement, there is no deduction of costs prior to the calculation of royalties from gas well gas and oil well gas, which together account for approximately 99% of all the royalties under this agreement. Historically, the Trust has received significantly greater royalty payments under the Mobil Agreement due to the higher royalty rate specified by that agreement. The Trust is also entitled under the Mobil Agreement to receive a 2% royalty on gross receipts of sales of sulfur obtained as a by-product of sour gas produced from the western part of Oldenburg. The payment of the sulfur royalty is conditioned upon sales of sulfur by Mobil Erdgas at a selling price above an agreed upon base price. This base price is adjusted annually by an inflation index. The Trust had received no sulfur royalties under this agreement for over ten years until the second quarter of fiscal -12- 2008. From that point forward, the average selling price for sulfur again exceeded the indexed base price and the payment of sulfur royalties under the Mobil Agreement resumed. In the first quarter of fiscal 2009 the Trust received $244,874 in sulfur royalties under the Mobil Agreement. However, the average selling price for sulfur has once again dropped below the indexed base price and no royalties based on sulfur sales were received under the Mobil Agreement in the second quarter of fiscal 2009. 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. NV Nederlandse Gasunie (the state owned Dutch gas distribution company) has completed the purchase of BEB's North German gas distribution and transmission network. Preliminary informal discussions with OEG personnel indicate that the pipeline sale should not affect the method of royalty calculation. The Trust is seeking a formal confirmation that the sale will not affect the method of royalty calculation. The Trust also receives small amounts of royalties from a private lease area, Grosses Meer, outside the Oldenburg concession. The German authorities have requested that the operating companies conduct a reservoir analysis to determine whether the royalties are being properly allocated based on the locations of the gas reserves. During the period in which the operating companies conducted this analysis, the payment of royalties to the Trust was suspended. While this issue of allocation of royalties has been resolved, the final accounting of royalties due the Trust has not been completed and no royalties based on gas sales from Grosses Meer have been paid to the Trust during fiscal 2009. The Trust received $37,612 in royalties from Grosses Meer in the first six months of fiscal 2008 and since then has received no further royalties. The gas is sold to various distributors under long-term contracts which delineate, among other provisions, the timing, manner, volume and price of the gas sold. The pricing mechanisms contained in these contracts include a delay factor of three to six months and use the price of light heating oil in Germany as one of the primary pricing components. Since Germany must import a large percentage of its energy requirements, the U.S. dollar price of oil on the international market has a significant impact on the price of light heating oil and a delayed impact on the price of gas. The Trust does not have access to the specific sales contracts under which gas from the Oldenburg concession is sold. Working under a confidentiality agreement with the operating companies, the Trust's German accountant reviews these contracts periodically on behalf of the Trust to verify the correctness of application of the Agreement formulas for the computation of royalty payments. For unit owners, changes in the value of the Euro have both an immediate and long-term impact. The immediate impact is from the exchange rate that is applied at the time the royalties, paid to the Trust in Euros, are converted into dollars at the time of their transfer from Germany to the United States. A higher exchange rate would yield more dollars and a lower exchange rate fewer dollars. The long-term impact relates to the mechanism of gas pricing. Since oil on the international market is priced in dollars, a weaker Euro would mean that oil imported into Germany is more expensive. -13- A stronger Euro would mean that oil imported into Germany is less expensive. These changes in the price of oil in Germany are subsequently reflected in the price of light heating oil, which is used as a component in the calculation of gas prices in the contracts under which the gas is sold. The changes in German domestic light heating oil prices are in turn reflected in gas prices with a built-in delay of three to six months. Seasonal demand factors affect the income from royalty rights insofar as they relate to energy demands and increases or decreases in prices, but on average they are not material to the regular annual income received under the royalty rights. The Trust has no means of ensuring continued income from overriding royalty rights at their present level or otherwise. The Trust's consultant in Germany provides general information to the Trust on the German and European economies and energy markets. This information provides a context in which to evaluate the actions of the operating companies. In his position as consultant, he receives reports from the operating companies with respect to current and planned drilling and exploration efforts. However, the unified exploration and production venture, EMPG, which provides the reports to the Trust's consultant, continues to limit the information flow to that which is required by German law. The relatively low level of administrative expenses of the Trust limits the effect of inflation on its financial prospects. Continued price inflation, which would be reflected in sales prices, along with sales volumes form the basis on which the royalties paid to the Trust are computed. The impact of inflation or deflation on energy prices in Germany is delayed by the use, in certain long-term gas sales contracts, of a delay factor of three to six months prior to the application of any changes in light heating oil prices to gas prices. As mandated by the Trust Agreement, distributions of income are made on a quarterly basis. These distributions, as determined by the Trustees, constitute substantially all the funds on hand after provision is made for Trust expenses then anticipated. Results: Second Quarter Fiscal 2009 Versus Second Quarter Fiscal 2008 ------------------------------------------------------------ For the second quarter of fiscal 2009, the Trust's net income was $9,122,900, an increase of 0.81% from the net income of $9,049,406 for the second quarter of fiscal 2008. Gross royalties received for the second quarter of fiscal 2009 were $9,424,837, an increase of 0.68% as compared to $9,360,976 for the second quarter of fiscal 2008. A distribution of 99 cents per unit was paid on May 27, 2009 to owners of record as of May 15, 2009. The distribution for the second fiscal quarter is primarily comprised of royalties derived from sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the first calendar quarter of 2009. As in prior years, the Trust receives adjustments from the operating companies based on their final calculations of royalties payable during the previous calendar year. As an adjustment for the prior calendar year, the Trust received the equivalent of $0.0862 and $0.1090 per unit during the second quarters of fiscal 2008 and 2009, respectively. In addition, the 99 cent distribution includes a one-time adjustment covering the period 2005- 2007. During their examination the Trust's German accountants discovered errors related to calculation discrepancies in the determination -14- of average gas prices. Following the required recalculation, the Trust received the equivalent of $0.1013 per unit as an adjustment. The amount of royalties paid to the Trust is based on four primary factors: the amount of gas sold, the price of that gas, the area from which the gas is sold and the exchange rate. Gas sales are measured in billion cubic feet ("Bcf"). Gas prices are reported in Euro cents per Kilowatt hour ("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf"). The primary factor affecting royalty revenue for the quarter just ended was the increase in gas prices under both the Mobil and the OEG Agreements. However, in comparison to the second quarter of fiscal 2008, the lower average Euro exchange rate and the lower gas sales combined to offset the increase in prices and reduce the royalties paid during the quarter under the Mobil Agreement. For royalties paid under the OEG Agreement, the impact of the lower average Euro exchange rate and the reduced gas sales was not as significant and the amount of dollar royalties paid under this agreement increased over the prior year's equivalent quarter. Factors Affecting Royalties Paid under the Mobil Agreement ---------------------------------------------------------- 2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage Ended 4/30/2009 Ended 4/30/2008 Change --------------- --------------- ---------- Gas Sales (Bcf) 12.839 14.004 - 8.32% Gas Prices (Ecents/Kwh) 2.7105 2.2876 +18.49% Gas Prices ($/Mcf) $10.24 $10.10 + 1.36% Average Euro Value $1.3117 $1.5333 -14.45% If we exclude 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 quarter just ended, gas sales from western Oldenburg accounted for only 39.61% of all gas sales. However, royalties on these gas sales provided approximately 81.93% or $7,639,330 out of a total of $9,341,551 in Oldenburg royalties attributable to gas. Factors Affecting Royalties Paid under the OEG Agreement -------------------------------------------------------- 2nd Fiscal Qtr. 2nd Fiscal Qtr. Percentage Ended 4/30/2009 Ended 4/30/2008 Change --------------- --------------- ---------- Gas Sales (Bcf) 32.416 33.680 - 3.75% Gas Prices (Ecents/Kwh) 3.1818 2.3809 +33.64% Gas Prices ($/Mcf) $11.60 $10.33 +12.29% Average Euro Value $1.2987 $1.5432 -15.84% Interest income was minimal due to the substantial decline in interest rates applicable during the period. Per the terms of the Trust Agreement, funds temporarily held by the Trust are invested in certificates of deposit or U.S. Treasury Bills. Trust expenses for the second quarter of fiscal 2009 declined 10.76% or $36,415 to $302,134 in comparison to the prior year' equivalent period. This decline in expenses is primarily due to the -15- timing of payments of costs related to the examination of the German operating companies' royalty payments. This examination is conducted every other year. The current Statement of Assets, Liabilities and Trust Corpus of the Trust at April 30, 2009, compared to that at fiscal year-end (October 31, 2008), shows a decline in assets due to the lower royalty receipts during the second quarter of fiscal 2009. Results: First Six Months of Fiscal 2009 Versus First Six Months of ---------------------------------------------------------- Fiscal 2008 ----------- For the six month period, the Trust's net income was $18,969,369, an increase of 18.35% from the net income of $16,028,731 for last year's equivalent period. Gross royalties received for the first six months of fiscal 2009 were $19,605,816, an increase of 18.28% as compared to $16,576,059 for the first six months of fiscal 2008. These royalties were derived from sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the fourth calendar quarter of 2008 and the first calendar quarter of 2009. For the six month period ended April 30, 2009, total distributions were equal to $2.05 per unit compared to total distributions of $1.74 for the first six months of fiscal 2008. The primary factor affecting royalty revenue for the six months just ended was the increase in average gas prices under both the Mobil and OEG Agreements. These higher average gas prices more than offset declines in average exchange rates and gas sales under both royalty agreements. Factors Affecting Royalties Paid under the Mobil Agreement ---------------------------------------------------------- Six Months Six Months Percentage Ended 4/30/2009 Ended 4/30/2008 Change --------------- --------------- ---------- Gas Sales (Bcf) 26.537 28.255 - 6.08% Gas Prices (Ecents/Kwh) 2.9560 2.1867 +35.18% Gas Prices ($/Mcf) $11.31 $ 9.46 +19.52% Average Euro Value $1.3277 $1.5025 -11.64% If we exclude 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 six months just ended, gas sales from western Oldenburg accounted for only 39.75% of all gas sales. However, royalties on these gas sales provided approximately 81.86% or $15,536,338 out of a total of $18,979,868 in Oldenburg royalties attributable to gas. -16- Factors Affecting Royalties Paid under the OEG Agreement -------------------------------------------------------- Six Months Six Months Percentage Ended 4/30/2009 Ended 4/30/2008 Change --------------- --------------- ---------- Gas Sales (Bcf) 66.767 68.395 - 2.38% Gas Prices (Ecents/Kwh) 3.3152 2.2851 +45.08% Gas Prices ($/Mcf) $12.28 $ 9.69 +26.79% Average Euro Value $1.3199 $1.5075 -12.44% Interest income was significantly lower reflecting the decline in interest rates applicable during the period. Interest income for the six month period decreased 84.01%% to $9,648 from $60,334 in the first six months of fiscal 2008. Trust expenses for the six month period increased 6.32% or $38,433 to $646,095 in comparison to the prior year' equivalent period. This increase in expenses is primarily related to higher legal costs incurred in connection with the biennial examination of the German operating companies' royalty payments and the timing of insurance payments. Report on Drilling and Geophysical Work The Trust's German consultant, Alfred Stachel, met with representatives of the operating companies recently to inquire about planned and proposed drilling and geophysical work for 2009 and beyond and for other general matters. The following is a summary of Mr. Stachel's account of the operating companies' responses to his inquiries. The Trust is not able to confirm the accuracy of any of these findings or responses. In addition, the operating companies are not obligated to take any of the actions outlined and, if they change their plans with respect to any such actions, they are not obligated to inform the Trust. The operating companies have indicated that there will be no maintenance conducted at the Grossenkneten or NEAG desulfurization plants during 2009. This will allow uninterrupted sour gas processing during the summer months when traditionally sour gas processing was reduced by one-third for a six week period. An important part of the exploration process involves the interpretation of the geological information obtained through seismic studies and prior drilling itself. The interpretation of this information hopefully yields not only the locations of additional reserves for future development but detailed information for drilling purposes. With the decline in gas production experienced over the last several years the operating companies have instituted an ongoing evaluation of the Oldenburg Concession. The results of this evaluation are represented by a combination of exploratory wells, development wells (both extension and production wells) and replacement wells the operating companies have planned for this year and beyond. Extension wells represent an attempt to extend the boundaries of an existing field. Production wells are an attempt to exploit areas within a field that have not been tapped by existing wells. Additionally, the operating companies will be re-drilling two existing wells that have suffered casing collapses in order to resume production. If successful, these efforts should combine to increase overall production capacity. In an effort to maintain access to sufficient sour gas reserves to allow continuous utilization at the desulfurization plants, the operating companies have nine wells already drilling or under preparation. All these wells will explore the Zechstein (sour gas) zone within the Oldenburg -17- concession. Four wells are scheduled to be drilled in 2009. Quaadmoor Z-5 started drilling in February. Hengstlage-N Z-8 and Sage Z-5 started drilling in March. Hengstlage-N Z-5a has a planned start date scheduled for the fall. In addition to these wells, five other sour gas wells (Visbek Z-16a, Brinkholz Z-5, Goldenstedt Z-16a, Rechterfeld Z-5 and Sagermeer Z-9a) are planned for the next several years. All nine of these wells are infill wells, which means that they will be drilling within the broad outlines of field boundaries. While it is possible that these wells may discover new areas previously untapped, it is also possible that they will tap existing reservoirs. If this happens, the recovery rate of the two wells exploiting that reservoir may improve slightly but the accelerated rate of decline would deplete the reservoir faster. In addition to the four sour gas wells planned for 2009, the operating companies have indicated that they plan to drill two additional wells, Goldenstedt Z-10a and Z-23, in 2009. These two wells are intended to develop the tight gas Carboniferous (sweet gas) zone. Goldenstedt Z-10a is scheduled to start drilling in May with Z-23 to follow late in the year. Goldenstedt Z-10a will be sidetracked from an existing borehole. Goldenstedt Z-23 will be drilled from a new location to explore a new reservoir. Cappeln Z-3a, the final well to be drilled in the initial drilling phase that resulted from the operating companies' study of the Carboniferous zone, will most likely be drilled before the end of 2010. Exploitation of the Carboniferous zone requires extended-reach horizontal wells, massive hydraulic fracturing and highly sophisticated multi-reservoir completion techniques. The costs and complexities of these wells make them more susceptible to economic factors that might cause their postponement or even cancellation. However, the State of Lower Saxony has acknowledged these costs and has set the royalty rate it assesses for tight gas wells at 9% for 2009 as compared to 36% for normal gas wells. The final well, Hemmelte NW T-1, has a planned start date for drilling of early 2010. The construction of the well-site has already been completed. This western well is intended to tap the sweet gas Bunter zone in a previously unexplored area. Geological and technical planning work is still being conducted to finalize the specific drilling plans. ----------------------------------- This report on Form 10-Q contains forward looking statements concerning business, financial performance and financial condition of the Trust. Many of these statements are based on information provided to the Trust by the operating companies or by consultants using public information sources. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements. These include uncertainties concerning levels of gas production and gas prices, general economic conditions and currency exchange rates and the risks described in Item 1A, "Risk Factors," in the Trust's Annual Report on Form 10-K for the fiscal year ended October 31, 2008. Actual results and events may vary significantly from those discussed in the forward-looking statements. -18- 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 its German bank require the bank to process 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. 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, 2009. Based on that evaluation, the Managing Director concluded that the Trust's disclosure controls and procedures were effective as of April 30, 2009. There have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that occurred during the second quarter of fiscal 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. -19- PART II -- OTHER INFORMATION ---------------------------- Item 5. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- The Annual Meeting of Unit Owners was held on February 10, 2009. The results of the voting for the election of Trustees are set forth in the Trust's 10-Q for the first quarter of fiscal 2009 filed on February 26, 2009 and are incorporated herein by reference. Item 6. Exhibits. -------- Exhibit 31. Certification of Chief Executive Officer 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 Dated: May 28, 2009 EX-31 2 x31-0528.txt - 20 - Exhibit 31 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, John R. Van Kirk, certify that: 1. I have reviewed this Quarterly Report on Form 10-K of North European Oil Royalty Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and - 21 - 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 28, 2009 /s/ John R. Van Kirk ---------------------- John R. Van Kirk Managing Director (Chief Executive Officer and Chief Financial Officer) EX-32 3 x32-0528.txt - 22 - Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. Section 1350(a) and (b)), the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended April 30, 2009 of North European Oil Royalty Trust ("Trust") fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Dated: May 28, 2009 /s/ John R. Van Kirk --------------------- John R. Van Kirk Managing Director (Chief Executive Officer and Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----