# North European Oil Royalty Trust: Form 10-Q for the period ended Jan 31, 2020

- Company: [North European Oil Royalty Trust](/companies/nrt.md) (CIK 72633)
- Form: 10-Q
- Filed: 2020-02-27
- Accepted by EDGAR: Feb 27, 2020, 11:23 ET
- Period: 2020-01-31
- Accession: 0000072633-20-000008
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/72633/000007263320000008/tenq1q20.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/72633/000007263320000008/

## Management's discussion and analysis

As filed, 16,404 characters.

#### 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 90% of the cumulative royalty income received in fiscal 2020. 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, 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. EMPG has advised the Trust's consultant in Germany that EMPG plans to conduct maintenance at the Grossenkneten desulfurization plant during the summer of 2020.

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 98% of the cumulative royalty income received under this agreement in fiscal 2020. 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 quarter of fiscal 2020, the Trust received $39,273 in sulfur royalties under this agreement. In the first quarter of fiscal 2019, the Trust received $54,796 in sulfur royalties under this 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.

Vermilion Energy Inc. ("Vermilion"), a Canadian based international oil and gas producer, entered into a Farm-In Agreement (the "Farm-In Agreement") with Mobil Erdgas and BEB effective as of January 1, 2016. The Farm-In Agreement does not impact the Trust's royalty interests. The Trust has been advised by its consultant in Germany that, based on the consultant's conversations with EMPG employees and other sources, Vermilion has acquired an interest in various portions of a concession or areas owned by Mobil Erdgas and BEB pursuant to the Farm-In Agreement. The Farm-In Agreement committed Vermilion to financial participation at a 50% level in 11 exploratory wells over the five years ending 2020. Initially, Vermilion stated that would drill a single well in each of the central and two northern areas of the Oldenburg concession. Vermilion's participation in the development of any well and the sale of that gas, sulfur or oil would be subject to the relevant royalty contract.

Vermilion's first planned well was tentatively to be located in the western portion of the area designated Oldenburg-Land. Both the initial consideration to develop the Rotliegend ("Red Sandstone") formation and the secondary consideration to develop the deeper Carboniferous formation have been postponed and at this time the well has no start date. The two additional wells specified in the Farm-In Agreement for Jeverland and Jade-Weser have neither names nor start dates. Without re-negotiation the Farm-In Agreement expires at the end of 2020.

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: First Quarter of Fiscal 2020 versus First Quarter of Fiscal 2019

Total royalty income received during the first quarter of fiscal 2020 was derived from sales of gas, sulfur and oil from the Trust's overriding royalty areas in Germany during the fourth calendar quarter of 2019. The distribution of $0.08 per unit was paid on February 26, 2020 to owners of record as of February 14, 2020. Comparisons of total royalty income and net income for the first quarter of fiscal 2020 and 2019 are shown below.

|  | 1st Fiscal Quarter Ended 1/31/2020 | 1st Fiscal Quarter Ended 1/31/2019 | Percentage Change |
| --- | ---: | ---: | ---: |
| Total Royalty Income | $1,025,965 | $2,303,000 | -55.45% |
| Net Income | $747,737 | $2,037,785 | -63.31% |
| Distribution per Unit | $0.08 | $0.22 | -63.64% |

The decrease in total royalty income between the first quarter of fiscal 2020 and the first quarter of fiscal 2019 resulted from the lower gas prices, gas sales and average exchange rates under both the Mobil and OEG Agreements. Of these three factors, the impact of the lower gas prices was the most significant.

Total royalty income also reflects the inclusion of various positive and negative adjustments that the operators made during the quarter, including corrections from prior periods, as well as the inclusion of Mobil sulfur royalties. In the first quarter of fiscal 2020, total royalties were reduced by negative adjustments of $388,634 and Mobil sulfur royalties amounted to $39,273. By comparison, in the first quarter of fiscal 2019 total royalties were unaffected since there were no negative adjustments and $54,796 in Mobil sulfur royalties were received.

The table below is intended to illustrate trends based on actual gas sales in each fiscal 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 2019 and the average German Border Import gas Price for the period of August through October 2019. No adjustments for prior periods are reflected in the gas royalties.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | --- | ---: | ---: | ---: | --- | ---: | ---: | ---: | --- | ---: | ---: | ---: |
| **Mobil Agreement** | **4th Calendar Quarter Ended 12/30/2019** | **4th Calendar Quarter Ended 12/31/2018** | **Percentage Change** | Gas Sales (Bcf) 1 | 4.884 | 5.535 | -11.76% | Gas Prices2 (Ecents/Kwh)3 | 1.3550 | 2.0582 | - 34.17% | Average Exchange Rate4 | 1.1105 | 1.1349 | - 2.15% |
| Gas Royalties | $843,908 | $1,484,635 | -43.16% | Gas Prices ($/Mcf)5 | $4.32 | $6.71 | - 35.62% |  |  |  |  |  |  |  |  |
| **OEG Agreement** |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Sales (Bcf) | 16.026 | 17.536 | -8.61% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Prices (Ecents/Kwh) | 1.3818 | 2.0989 | - 34.17% |  |  |  |  |  |  |  |  |  |  |  |  |
| Average Exchange Rate | 1.1115 | 1.1352 | - 2.09% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Royalties | $332,242 | $649,180 | -48.82% |  |  |  |  |  |  |  |  |  |  |  |  |
| Gas Prices ($/Mcf) | $4.28 | $6.66 | - 35.74% |  |  |  |  |  |  |  |  |  |  |  |  |

### Quarterly Gas Data Providing Basis for Fiscal Quarter Royalties

### Footnotes

1\. Billion cubic feet

2\. Gas prices derived from August-October 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 first quarter of fiscal 2020, gas sales from western Oldenburg accounted for only 30.47% of all gas sales from the Oldenburg concession. However, royalties on these gas sales provided approximately 80.32% or $743,836 out of a total of $926,081 in Oldenburg royalties attributable to gas.

Trust expenses for the first quarter of fiscal 2020 increased 4.68% or $12,522 to $280,123 from $267,601 for the first quarter of fiscal 2019. The increase in expenses reflects the costs relating to the biennial examination of the royalty statements by the Trust's German accountants.

The current Statements of Assets, Liabilities and Trust Corpus of the Trust at January 31, 2020, compared to that at fiscal year-end (October 31, 2019), shows a decrease in assets due to lower royalty receipts during the first quarter of fiscal 2020.

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; and
- potential disputes with the operating companies and the resolution thereof.

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.

## Market risk

As filed, 191 characters.

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.

## Controls and procedures

As filed, 1,379 characters.

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 January 31, 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 January 31, 2020.

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 first quarter of fiscal 2020 that have materially affected or are reasonably likely to materially affect the Trust's internal control over financial reporting.

Filed Feb 27, 2020.
Source: SEC EDGAR, the filing index for accession 0000072633-20-000008. Last ingested by Listed: Nov 11, 2026, 01:52 ET. No prices; not investment advice.