Annual Report (cid:21)(cid:19)(cid:21)(cid:19)
North
European
Oil
Royalty
Trust
ATTENTION:
PLEASE RETAIN
CRITICAL TAX INFORMATION ENCLOSED
In light of public health concerns related to the Coronavirus (COVID-19) outbreak, and to help protect
the health and well-being of the Trust’s Unit Owners, employees and representatives, the Annual
Meeting of North European Oil Royalty Trust will be held on Wednesday, February 17, 2021, in the
Thoreau Room at the Courtyard Marriott, 75 Railroad St., Keene, N.H. (near the Managing Director’s
office) at 11:00 a.m.
Owners who cannot attend in person may observe the annual meeting and ask questions during the
question period by using the following Zoom link, https://us02web.zoom.us/j/89100592013. When
you enter the meeting, you will be muted. At the start of the question period if you wish to pose a
question, please click on the “Participants” button at the bottom of the Zoom screen. A window
will open to the right. Click on the “…” at the bottom of the window and click “Raise Hand.” You
will then be called on to unmute yourself and pose their question.
Unit owners are urged to vote by proxy in the manner provided in the proxy card.
Table of Contents
Report to Unit Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2
Description of Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-7
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . 9-10
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11-12
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-15
Disclosure Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal Control over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trustees, Administration and Important Contacts . . . . . . . . . . . . . . . . . . . . . . .
2020 Tax Letter (Removable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-22
16
16
17
IMPORTANT TAX INFORMATION
For your convenience, the information necessary to prepare
your 2020 tax return is included in the removable
“2020 Tax Letter” on Pages 19 through 22.
Please note that there will be no separate mailing of the tax letter.
The 2020 Tax Letter is also available at the Trust’s website, www.neort.com.
Report to Unit Owners:
FOURTH QUARTER 2020
Net income for the Trust for the fourth quarter of fiscal 2020 was $218,649, a decrease of
85.58% from net income of $1,516,063 for the fourth quarter of fiscal 2019. The Trust receives nearly
all of its royalties under two royalty agreements. The Mobil Agreement is the 4% royalty rate
agreement covering gas sales from the western half of a concession in the Federal Republic of
Germany (the “Oldenburg concession”). The OEG Agreement is the 0.6667% royalty rate agreement
covering gas sales from the entire Oldenburg concession. Total royalties under the Mobil Agreement,
including sulfur royalties under the 2% Mobil Sulfur Agreement, for the fourth quarter of fiscal 2020
were reduced by negative adjustments from prior periods of ($483,809), as compared to negative
adjustments totaling ($74,991) for the fourth quarter of fiscal 2019. Total royalties under the OEG
Agreement for the fourth quarter of fiscal 2020 were reduced by negative adjustments from prior
periods of ($213,393), as compared to negative adjustments of ($24,364) for the fourth quarter of fiscal
2019. Net income in the fourth quarter of 2020 was lower than the fourth quarter of 2019 due to the
impact of these prior period adjustments as well as declines in both gas prices and gas sales. Gas sales
were lower due the combination of reduced demand resulting from the economic impact of COVID-19
and the complete shutdown of Grossenkneten for its 10-year maintenance program from September 8
to October 13, 2020. The relevant details for the fourth quarters of fiscal 2020 and 2019 for gas sales
under the Mobil and OEG Agreements are shown in the table below.
Quarterly Gas Data Providing Basis for Fiscal Quarter Royalties
3rd Calendar Quarter
Ended 9/30/2019
3rd Calendar Quarter
Ended 9/30/2020
Percentage
Change
Mobil Agreement:
Gas Sales (Bcf1)
Gas Prices2 (Ecents/kWh3)
Average Exchange Rate4
Gas Royalties
OEG Agreement:
Gas Sales (Bcf)
Gas Prices (Ecents/kWh)
Average Exchange Rate
Gas Royalties
3.186
0.9255
1.1761
$395,791
10.601
0.9438
1.1730
$97,128
4.881
1.4612
1.1004
$901,077
16.205
1.4901
1.0989
$369,501
-34.73%
-36.66%
+ 6.88%
-56.08%
-34.58%
-36.66%
+ 6.74%
-73.71%
1Billion cubic feet
4Based on average Euro/dollar exchange rates of cumulative royalty transfers
2Gas prices derived from May-July period
3Euro cents per Kilowatt hour
FISCAL 2020 REPORT
For fiscal 2020, the Trust’s total royalty income decreased 51.47% to $4,050,017 from
$8,344,712 in fiscal 2019. The decrease in royalty income was the result of a combination of factors
including the economic impact of COVID-19, lower gas sales and gas prices and the difference in the
amount of adjustments between fiscal 2020 and 2019. As in prior years, the Trust receives information
concerning adjustments from the operating companies based on their final calculations of royalties
payable during the previous periods as well as other required adjustments. During fiscal 2020 and
2019, these adjustments decreased royalty income by $653,916 and increased royalty income by
- 1 -
$225,450, respectively. During fiscal 2020 and 2019, Mobil sulfur royalties totaled $71,280 and
$150,157, respectively. The total distribution for fiscal 2020 was $0.32 per unit compared to $0.82 per
unit for fiscal 2019.
The Trust’s German consultant periodically contacts the representatives of the operating
companies to inquire about their planned and proposed drilling and geophysical work and other general
matters. The following represents a summary of the most recent information the Trust’s German
consultant received from representatives of the operating companies’ unified exploration and
production venture, ExxonMobil Production Deutschland GmbH (“EMPG”). 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 required 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. Information on wells that
are not named or are in preliminary planning stages is not divulged by EMPG.
Doetlingen Z-3A, which had ceased production in 2013, was plugged and abandoned in
2020. Varenesch Z-1 as well as Varnhorn Z-5 and Z-10 have been secured and are
awaiting final plugging and abandonment.
Varnhorn Z-2 underwent a workover and several stimulation jobs to optimize
performance. The surface facilities of two Carboniferous wells, Goldenstedt Z-9 and Z-
23, had suffered heavy corrosion and suspended production for four weeks during May-
June 2020.
Ahlhorn Z-3, a sour gas exploration/re-development well, has been postponed
indefinitely due to budget reasons and low gas prices. While preliminary permit
requests had been filed with the Mining Authority in October 2019, it is unclear
whether drilling will commence in 2021. If drilling is started, the project duration is
estimated by EMPG to be about one year. This well will attempt to reactivate the
Ahlhorn field which was abandoned in 1997.
Based on the limited information available, Graves & Co. Consulting LLC, the Trust’s
petroleum consultant (“Graves & Co.”), has prepared and submitted their report on the cost depletion
percentage applicable to Trust unit owners for calendar 2020. The 2020 cost depletion percentage of
16.5776% and related tax information is contained in the removable "2020 Tax Letter" on Pages 19
through 22 of this report. The calculation of the cost depletion percentage is based on Graves & Co.’s
estimate of remaining net proved producing reserves as of October 1, 2020. (The complete text of the
report is available in the Trust’s 2020 Report on Form 10-K as exhibit 99.1.) The report indicates that
net Trust gas reserves decreased 26.64% to 4.524 Bcf from 6.430 Bcf on net sales for 2020 of 0.940
Bcf and a negative reserve adjustment of 0.966 Bcf.
December 30, 2020
Respectfully submitted,
John R. Van Kirk
Managing Director
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Description of Trust Assets
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 the Oldenburg
concession. The Oldenburg concession covers approximately 1,386,000 acres, is located in the German
federal state of Lower Saxony, and is the area from which natural gas, sulfur and oil are extracted. The
Oldenburg concession currently provides 100% of all the royalties received by the Trust. The Oldenburg
concession is held by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German operating subsidiary of
ExxonMobil, and by Oldenburgische Erdolgesellschaft ("OEG"). BEB Erdgas und Erdol GmbH
(“BEB”), a joint venture in which ExxonMobil and the Royal Dutch/Shell Group each own 50%,
administers the concession held by OEG. In 2002, Mobil Erdgas and BEB formed EMPG to carry out all
exploration, drilling and production activities. All sales activities upon which the calculation of royalties
is based are still handled by either Mobil Erdgas or BEB (the “operating companies”).
Under the Mobil Agreement 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. Under the Mobil Agreement there is
no deduction of costs prior to the calculation of royalties from gas well gas and oil well gas. 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 an agreement with Mobil Erdgas 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 “Mobil Sulfur Agreement”). 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 adjusted annually by an
inflation index. When the average quarterly selling price falls below the indexed base price, no sulfur
royalties are paid. Sulfur royalties under the Mobil Agreement totaled $71,280 and $150,157 during
fiscal 2020 and 2019, respectively.
Under the OEG Agreement covering the entire Oldenburg concession, 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 less a certain allowed deduction of costs. 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.
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. As of the date of this report,
no drilling or development work within the Oldenburg concession has been done by Vermilion, and the
Trust is unaware of any potential extension of the Farm-In Agreement beyond 2020.
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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 operating companies pay 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 total royalties in fiscal 2020.
The amount of royalties paid to the Trust is primarily based on four factors: the amount of gas sold, the
area from which the gas is sold, the price of that gas and the exchange rate. For purposes of the royalty
calculation, the determination of the gas price is explained in detail in the following two paragraphs.
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”). For
royalty calculations, the average GBIP used under the Mobil and OEG Royalty Agreements has been and
will continue to be increased by 1% and 3%, respectively.
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.
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, which is sold separately. With full operation of the
two units, 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. As part of the regular 10-year scheduled maintenance, Grossenkneten underwent an overhaul from
September 8, 2020 through October 13, 2020. During this time the plant was completely shut down and
no sour gas was processed. Since sour gas accounts for 75% of overall gas sales and 98% of western gas
sales, this shutdown significantly impacted royalty income during the fourth quarter of fiscal 2020 and
will likely impact royalty income during the upcoming first quarter of fiscal 2021.
- 4 -
The Trust has no means of ensuring continued income from overriding royalty rights at their
present level or otherwise. The Trust’s consultant in Germany provides general information to the Trust
on the German and European economies and energy markets. This information provides a context in
which to evaluate the actions of the operating companies. The Trust's consultant receives reports from
EMPG with respect to current and planned drilling and exploration efforts. However, EMPG and the
operating companies continue to limit the information flow to that which is required by German law, and
the Trust is not able to confirm the accuracy of any of the information supplied by EMPG or the operating
companies.
The Trust has previously distributed information regarding the negative adjustment of Euros
444,931 that is being carried over to the first quarter of fiscal 2021. Given the level of expected royalty
payments for the first quarter of fiscal 2021 based upon the prior calendar quarter’s actual royalties paid,
the Trust anticipates the royalties for the first quarter of fiscal 2021 will be almost completely offset by
this negative adjustment. It is possible that the anticipated royalties for the first quarter of fiscal 2021
may be increased by a positive end of quarter royalty adjustment in January; however, the two-week total
shutdown of the Grossenkneten desulfurization plant in early October may reduce the potential for such a
positive adjustment. No assurances with respect to any positive end of quarter royalty adjustment can be
given at this time.
Results: Fiscal 2020 versus Fiscal 2019
For fiscal 2020, the Trust’s gross royalty income decreased 51.47% to $4,050,017 from
$8,344,712 in fiscal 2019. The decrease in the amount of royalty income resulted in the lower
distribution. The total distribution for fiscal 2020 was $0.32 per unit compared to $0.82 per unit for fiscal
2019. Gas prices and gas sales under both royalty agreements declined significantly while the average
exchange rates were only down slightly. The royalty income attributable to gas sales under the Mobil
Agreement in fiscal 2020 decreased by $2,084,772 as compared to fiscal 2019. Royalty income
attributable to gas sales under the OEG Agreement in fiscal 2020 decreased by $1,108,806 as compared to
fiscal 2019.
As in prior years, the Trust receives adjustments from the operating companies based on their final
calculations of royalties payable during the previous periods. During fiscal 2020, the adjustments based
on royalties payable for 2017, 2018 and 2019 decreased royalty income by $653,916. During fiscal 2019,
the adjustments based on royalties payable for 2018 increased royalty income by $225,450. In fiscal 2020
and 2019, Mobil sulfur royalties totaled $71,280 and $150,157, respectively.
Gas sales under the Mobil Agreement decreased 15.86% to 17.259 Billion cubic feet (“Bcf”) in
fiscal 2020 from 20.513 Bcf in fiscal 2019. The most significant factor resulting in the decrease in gas
sales for 2020 was the negative impact of COVID-19 on the German, European and global economies. In
addition, according to the Trust’s consultant in Germany, it is likely that some portion of the decline in
gas production is due to the normal reduction in well pressure that is experienced over time.
- 5 -
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet
Percentage Change
- 11.76%
- 10.99%
- 6.87%
- 34.73%
- 15.86%
2020 Gas Sales
4.884
4.624
4.565
3.186
17.259
2019 Gas Sales
5.535
5.195
4.902
4.881
20.513
Fiscal Quarter
First
Second
Third
Fourth
Fiscal Year Total
Average prices for gas sold under the Mobil Agreement decreased 30.10% to 1.3185 Euro cents
per kilowatt hour (“€cents/kWh”) in fiscal 2020 from 1.8862 €cents/kWh in fiscal 2019.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour
Fiscal Quarter
First
Second
Third
Fourth
Fiscal Year Average
2020 Average
Gas Prices
1.3550
1.6349
1.2326
0.9255
1.3185
2019 Average
Gas Prices
2.0582
2.1250
1.8620
1.4612
1.8862
Percentage Change
- 34.17%
- 23.06%
- 33.80%
- 36.66%
- 30.10%
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of
$4.21 per thousand cubic feet (“Mcf”), a 30.76% decrease from fiscal 2019’s average price of $6.08/Mcf.
For fiscal 2020, royalties paid under the Mobil Agreement were converted and transferred at an average
Euro/U.S. dollar exchange rate of $1.1145, a decrease of 0.73% from the average Euro/U.S. dollar
exchange rate of $1.1227 for fiscal 2019.
Average Euro Exchange Rate under the Mobil Agreement
Fiscal Quarter
First
Second
Third
Fourth
Fiscal Year Average
2020 Average
Euro Exchange Rate
1.1105
1.0943
1.1143
1.1761
1.1145
2019 Average
Euro Exchange Rate
1.1349
1.1267
1.1202
1.1004
1.1227
Percentage Change
- 2.15%
- 2.88%
- 0.53%
+ 6.88%
- 0.73%
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
fiscal 2020, the volume of gas sold from western Oldenburg accounted for only 30.91% of the volume of
all gas sales. However, western Oldenburg gas royalties provided approximately 81.43% or $3,100,714
out of a total of $3,807,678 in overall Oldenburg gas royalties.
Gas sales under the OEG Agreement decreased 16.55% to 55.841 Bcf in fiscal 2020 from 66.912
Bcf in fiscal 2019. The most significant factor resulting in the decrease in gas sales for 2020 was the
- 6 -
negative impact of COVID-19 on the German, European and global economies. In addition, according to
the Trust’s consultant in Germany, it is likely that some portion of the decline in gas production is due to
the normal reduction in well pressure that is experienced over time.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet
Fiscal Quarter
First
Second
Third
Fourth
Fiscal Year Total
2020 Gas Sales
16.026
15.266
13.948
10.601
55.841
2019 Gas Sales
17.536
16.851
16.320
16.205
66.912
Percentage Change
- 8.61%
- 9.41%
- 14.53%
- 34.58%
- 16.55%
Average gas prices for gas sold under the OEG Agreement decreased 29.91% to 1.3458
€cents/kWh in fiscal 2020 from 1.9200 €cents/kWh in fiscal 2019.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour
Fiscal Quarter
First
Second
Third
Fourth
Fiscal Year Average
2020 Average
Gas Prices
1.3818
1.6672
1.2570
0.9438
1.3458
2019 Average
Gas Prices
2.0989
2.1670
1.8988
1.4901
1.9200
Percentage Change
- 34.17%
- 23.06%
- 33.80%
- 36.66%
- 29.91%
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of
$4.18/Mcf, a 30.56% decrease from fiscal 2019’s average price of $6.02/Mcf. For fiscal 2020, royalties
paid under the OEG Agreement were converted and transferred at an average Euro/U.S. dollar exchange
rate of $1.1114, a decrease of 0.99% from the average Euro/U.S. dollar exchange rate of $1.1225 for
fiscal 2019.
Average Euro Exchange Rate under the OEG Agreement
Fiscal Quarter
First
Second
Third
Fourth
Fiscal Year Average
2020 Average
Euro Exchange Rate
1.1115
1.0955
1.1141
1.1730
1.1114
2019 Average
Euro Exchange Rate
1.1352
1.1267
1.1187
1.0989
1.1225
Percentage Change
- 2.09%
- 2.77%
- 0.41%
+ 6.74%
- 0.99%
Interest income for fiscal 2020 of $2,853 decreased from interest income of $14,451 for fiscal
2019 due to reduced royalty income and lower interest rates in effect. Trust expenses decreased $14,591,
or 1.87%, to $766,507 in fiscal 2020 from $781,098 in fiscal 2019 due to the reduced office expenses
associated with the conversion to a virtual office and reduced Trustees’ fees as specified in the provisions
of the Trust Agreement.
- 7 -
Critical Accounting Policies
The financial statements, appearing subsequently in this Report, 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”).
Cash basis accounting is an accepted accounting method for royalty trusts such as the Trust. GAAP basis
financial statements disclose income as earned and expenses as incurred, without regard to receipts or
payments. The use of GAAP would require the Trust to accrue for expected royalty payments. This is
exceedingly difficult since the Trust has very limited information on such payments until they are
received and cannot accurately project such amounts. The Trust’s cash basis financial statements
disclose revenue when cash is received and expenses when cash is paid. The one modification of the cash
basis of accounting is that the Trust accrues 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 provides a more
meaningful presentation to unit owners of the results of operations of the Trust and presents to the unit
owners a more accurate calculation of income and expenses for tax reporting purposes.
___________________________________________________________
This Annual Report 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:
(cid:120)
(cid:120)
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;
(cid:120) potential disputes with the operating companies and the resolution thereof; and
(cid:120)
the effects of the novel coronavirus identified as “COVID-19” on our financial results.
All such factors are difficult to predict, contain uncertainties that may materially affect actual
results, and are generally beyond the control of the Trust. New factors emerge from time to time and it is
not possible for the Trust to predict all such factors or to assess the impact of each such factor on the
Trust. Any forward-looking statement speaks only as of the date on which such statement is made, and
the Trust does not undertake any obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and the Unit Owners of
North European Oil Royalty Trust
Opinion on the Financial Statements
We have audited the accompanying statements of assets, liabilities and trust corpus of North European Oil
Royalty Trust (the “Trust”) as of October 31, 2020 and 2019, and the related statements of revenue
collected and expenses paid, undistributed earnings, and changes in cash and cash equivalents for each of
the two years in the period ended October 31, 2020, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of October 31, 2020 and 2019, and its revenue collected and
expenses paid, and changes in its cash and cash equivalents for each of the two years in the period ended
October 31, 2020, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
- 9 -
Basis of Accounting
As described in Note 1, these financial statements have been prepared on the modified cash basis of
accounting, which is a comprehensive basis of accounting other than accounting principles generally
accepted in the United States of America.
Mazars USA LLP
We have served as the Trust’s auditor since 2006.
New York, NY
December 30, 2020
- 10 -
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
OCTOBER 31, 2020 AND 2019
Current assets - - Cash and cash equivalents
ASSETS
2020
2019
$649,585
$1,590,893
Producing gas and oil royalty rights, net of amortization (Notes 1 and 2)
1
1
Total Assets
$649,586
$1,590,894
LIABILITIES AND TRUST CORPUS
2020
2019
Current liabilities - - Distributions to be paid to
unit owners, paid November 2020 and 2019
Trust corpus (Notes 1 and 2)
Undistributed earnings
Total Liabilities and Trust Corpus
$183,811
$1,470,494
1
1
465,774 120,399
$649,586
$1,590,894
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2020 AND 2019
Gas, sulfur and oil royalties received
Interest income
Trust Income
Non-related party expenses
Related party expenses (Note 3)
Trust Expenses
Net Income
Net income per unit
Distributions per unit paid or to be paid to unit owners
2020
2019
$4,050,017 $8,344,712
2,853 14,451
$4,052,870 $8,359,163
($715,490)
($703,351)
(51,017)
(77,747)
($766,507)
($781,098)
$3,286,363 $7,578,065
$0.36
$0.32
$0.82
$0.82
The accompanying notes are an integral part of these financial statements.
- 11 -
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2020 AND 2019
Balance, beginning of year
Net income
Less:
Current year distributions paid or
to be paid to unit owners
Balance, end of year
2020
2019
$120,399
$78,618
3,286,363
7,578,065
$3,406,762 $7,656,683
2,940,988
7,536,284
$465,774
$120,399
NORTH EUROPEAN OIL ROYALTY TRUST
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
FOR THE FISCAL YEARS ENDED OCTOBER 31, 2020 AND 2019
Sources of Cash and Cash Equivalents:
Gas, sulfur and oil royalties received
Interest income
Uses of Cash and Cash Equivalents:
Payment of Trust expenses
Distributions paid
2020
2019
$4,050,017
$8,344,712
2,853 14,451
$4,052,870
$8,359,163
$766,507
$781,098
4,227,671 7,444,379
$4,994,178 $8,225,477
Net increase (decrease) in cash and cash equivalents during the year
(941,308) 133,686
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
1,590,893 1,457,207
$649,585 $1,590,893
The accompanying notes are an integral part of these financial statements.
- 12 -
NORTH EUROPEAN OIL ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2020 AND 2019
(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 Trust receives adjustments from the operating companies based on their final calculations
of royalties payable during the prior periods, including the immediately preceding calendar quarter.
Negative adjustments are carried over to the succeeding quarter. A negative adjustment of Euros
444,931 from the fourth quarter of fiscal 2020 will be carried over and offset against future royalty
revenue received in the first quarter of fiscal 2021.
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 and also under a private letter ruling issued by the Internal
Revenue Service, is exempt from federal income taxes. The Trust has no state income tax obligations.
- 13 -
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 October 31, 2020, the uninsured
amounts held in the Trust’s U.S. bank accounts were $387,960. In addition, the Trust held Euros
9,977, the equivalent of $11,626, in its German bank account at October 31, 2020.
Net income per unit -
Net income per unit is based upon the number of units outstanding at the end of the period. As
of October 31, 2020 and 2019, there were 9,190,590 units of beneficial interest outstanding.
New accounting pronouncements –
The Trust is not aware of any recently issued, but not yet effective, accounting standards that
would be expected to have a significant impact on the Trust’s financial position or results of
operations.
(2) Formation of the Trust:
The Trust was formed on September 10, 1975. As of September 30, 1975, the Company was
liquidated and the remaining assets and liabilities of the Company, including its royalty rights, were
transferred to the Trust. The Trust, on behalf of the owners of beneficial interest in the Trust, holds
overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal
Republic of Germany. These rights are held under contracts with local German exploration and
development subsidiaries of ExxonMobil Corp. and the Royal Dutch/Shell Group of Companies.
Under these contracts, the Trust receives various percentage royalties on the proceeds of the sales of
certain products from the areas involved. At the present time, royalties are received for sales of gas
well gas, oil well gas, crude oil, condensate and sulfur.
(3) Related party transactions:
John R. Van Kirk, the Managing Director of the Trust, provides office services to the Trust at
cost. For such office services, the Trust reimbursed the Managing Director $4,020 and $26,166 in
fiscal 2020 and 2019, respectively.
Lawrence A. Kobrin, a Trustee of the Trust, is no longer a partner of the firm but remains a
Senior Counsel at Cahill Gordon & Reindel LLP, which serves as counsel to the Trust. For legal
services, the Trust paid Cahill Gordon & Reindel LLP $46,997 and $51,581 in fiscal 2020 and 2019,
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
authorized the making of contributions by the Trust to the accounts of employees, on a matching basis,
of up to 3% of cash compensation paid to each such employee for the 2020 and 2019 calendar years.
- 14 -
(5) Quarterly results (unaudited):
The tables below summarize the quarterly results and distributions of the Trust for the fiscal
years ended October 31, 2020 and 2019:
Fiscal 2020 by Quarter and Year
First
Second
Third
Fourth
Year
Royalties received
$1,025,965
$1,275,824
$1,399,614
$348,614
$4,050,017
Net income
$747,737
$1,041,902
$1,278,075
$218,649
$3,286,363
Net income per unit
$0.08
$0.11
$0.14
$0.02
$0.36
Distributions paid
or to be paid
$735,247
$1,010,965
$1,010,965
$183,811
$2,940,988
Distributions per unit
paid or to be paid
to unit owners
$0.08
$0.11
$0.11
$0.02
$0.32
Fiscal 2019 by Quarter and Year
First
Second
Third
Fourth
Year
Royalties received
$2,303,000
$2,235,350
$2,146,227
$1,660,135
$8,344,712
Net income
$2,037,785
$2,001,753
$2,022,464
$1,516,063
$7,578,065
Net income per unit
$0.22
$0.22
$0.22
$0.16
$0.82
Distributions paid
or to be paid
$2,021,930
$2,021,930
$2,021,930
$1,470,494
$7,536,284
Distributions per unit
paid or to be paid
to unit owners
$0.22
$0.22
$0.22
$0.16
$0.82
- 15 -
Disclosure 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
October 31, 2020. Based on that evaluation, the Managing Director concluded that the Trust’s
disclosure controls and procedures were effective as of October 31, 2020.
Internal Control over Financial Reporting
Part A. Management’s Report on Internal Control over Financial Reporting
The Trust’s management is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) for the Trust.
There are inherent limitations in the effectiveness of any internal control, including the possibility of
human error and the circumvention or overriding of controls. Accordingly, even effective internal
controls can provide only reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary over time.
Management has evaluated the Trust’s internal control over financial reporting as of October 31, 2020.
This assessment was based on criteria for effective internal control over financial reporting described
in the standards promulgated by the Public Company Accounting Oversight Board and in the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this evaluation, management concluded that the Trust’s
internal control over financial reporting was effective as of October 31, 2020.
- 16 -
[This Page Intentionally Left Blank]
- 17 -
NORTH EUROPEAN OIL ROYALTY TRUST
Managing Director
John R. Van Kirk
Office of the
Managing Director
PO Box 187
5 N. Lincoln St.
Keene, NH 03431
Tel: (732) 741-4008
E-Mail: neort@neort.com
Website: www.neort.com
Petroleum and Natural
Gas Consultants
Graves and Co.
Consulting, LLC
2777 Allen Parkway
Suite 1200
Houston, TX 77019
Counsel
Cahill Gordon & Reindel
32 Old Slip
New York, NY 10005
Auditors
Mazars USA LLP
135 West 50th Street
New York, NY 10020
Transfer Agent
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Tel: (800) 937-5449
(718) 921-8200
E-Mail: help@astfinancial.com
Website: www.astfinancial.com
Trustees
Robert P. Adelman
Managing Trustee,
Director or Trustee
of various profit
and non-profit
companies
Ahron H. Haspel
Audit Comm. Chairman
Member of the Board
of Directors of
Hanover Bank Corp.
Lawrence A. Kobrin
Clerk to the Trustees,
Senior Counsel,
Cahill Gordon &
Reindel LLP
Nancy J. Prue
A Director of the
National Assoc. of
Petroleum Investment
Analysts
Willard B. Taylor
Of Counsel, Sullivan
and Cromwell LLP
A copy of the Trust’s Form 10-K Annual Report for fiscal 2020 as filed with the Securities
and Exchange Commission will be sent upon written request to John R. Van Kirk, Managing
Director, P.O. Box 187, Keene, New Hampshire 03431. In addition to the 2020 10-K, other
pertinent filings and documents are available on the Trust’s website. www.neort.com
-(cid:3)1(cid:27) -
North European Oil Royalty Trust
P.O. Box 187
Keene, New Hampshire 03431
(732) 741-4008
IMPORTANT – 2020 TAX LETTER
RETAIN THIS LETTER FOR PREPARATION OF YOUR
2020 INCOME TAX RETURNS
E
R
E
H
T
U
O
R
A
E
T
January 1, 2021
To the Current and Former Unit Owners of
North European Oil Royalty Trust:
There are three parts to the tax letter. PART ONE applies to all unit owners. PART TWO
applies to unit owners who have held their units for the entire year. PART THREE applies to unit owners
who have held their units for only a portion of the year.
The following is provided to assist current and former unit owners of North European Oil Royalty
Trust (the “Trust”) to prepare their personal income tax returns for the tax year ended December 31, 2020.
This letter serves to assist Owners, and their tax professionals, in determining the accurate and true
income from the Trust for income tax reporting purpose. Further, this letter is for informational purposes
and neither the Trust nor Trust employees intend, nor may it be construed, for this letter to serve as either
legal or tax advice. It is recommended that you seek the advice of your trusted tax professional or
attorney should you require further guidance.
PART ONE – ALL UNIT OWNERS
To determine your proportional and, therefore, reportable, share of Trust income you must first
know how many Trust units you owned during 2020, the periods during which you owned the units, and
the cost or tax basis of the units. The information contained in this letter is applicable to those unit
owners who held their units for either the entire year or only a portion of the year. Please note that Trust
distributions are not dividends and should not be included on your income tax return as dividend income.
The Trust is considered a “grantor trust” for federal income tax purposes and each unit owner is
deemed a “grantor” of the Trust. As such, unit owners realize income, in proportion to the owned units,
when royalty income is paid to the Trust. Further, unit owners may deduct, from income, a proportional
share of Trust expenses. Because realization of proportional Trust income and expenses is a time sensitive
inquiry, you should not use the amount of quarterly Trust distributions received for income tax reporting
purposes. Additionally, you should disregard the amounts listed on any 2020 Form 1099-Misc you receive
from your broker or other nominee. The listed amounts are incomplete because they do not include your
proportional share of Trust expenses and/or the cost depletion allowance.
Income and expenses should be reported on Federal Income Tax Form 1040, Schedule E.
Royalty income is generally considered portfolio income under the passive loss rules enacted by the Tax
Reform Act of 1986. Under Part I, Income or Loss from Rental Real Estate and Royalties, under Line 1b
the type of property is royalties. Royalty income should be entered on Line 4, expenses should be entered
on Line 19 as "miscellaneous Trust expenses" and the cost depletion deduction should be entered on Line
18. Some tax preparation computer programs ask for a tax identification number. North European Oil
Royalty Trust's tax identification number is 22-2084119.
- 19 -
A unit owner may be entitled to cost depletion for tax reporting purposes. At the outset, in the first
year of ownership, the unit owner’s cost or tax basis for the units is the basis for computing cost depletion.
In each subsequent year, the basis for computing cost depletion is that original cost less the cumulative
amount of depletion previously taken.
The Trust retains Graves & Co. Consulting, LLC, of Houston, Texas, a petroleum engineering
company, to calculate the cost depletion percentage each year. The cost depletion percentage is
calculated based upon computations of proved producing reserves estimated in accordance with accepted
engineering analytical principles. Graves & Co. Consulting, LLC has recommended an annual cost
depletion percentage of 16.5776% for the 2020 calendar year.
The IRS periodically changes the format for Schedule E (including the line numbers and
descriptions), and may do so even after the date of this letter, so please make certain you follow the Form
1040 Schedule E directions carefully and enter the information on the correct lines.
The Trust’s royalty income represents income from Germany. Although Germany does not tax
the royalty income received by the Trust, this information should be considered if you have available
foreign tax credits from other sources.
The Trust will submit this letter and the listing of unit owners during 2020 to the Internal
Revenue Service. This list will contain names, addresses and tax ID or Social Security Numbers. You
may wish to attach a copy of this letter to your tax returns.
This letter does not constitute legal or tax advice. Neither the Trust nor its employees may
offer tax or legal advice relevant to your unique situation. The Trust recommends that you direct any
questions to your tax advisor or attorney.
PART TWO – OWNERSHIP OF UNITS FOR THE ENTIRE YEAR
A. If you owned all your units for the entire year, you would calculate your royalty income
by multiplying the number of units you owned by $0.3789. On Federal Income Tax Form 1040,
Schedule E, royalty income should be entered on Line 4.
B. If you owned all your units for the entire year, you would calculate your expenses by
multiplying the number of units you owned by $0.0732. On Federal Income Tax Form 1040, Schedule
E, expenses should be entered on Line 19 as "miscellaneous Trust expenses."
C. If you owned all your units for the entire year, you would calculate your cost depletion
deduction by multiplying your cost basis or adjusted cost basis by .165776. On the Federal Income
Tax Form 1040, Schedule E, your cost depletion deduction should be entered on Line 18.
PART THREE – OWNERSHIP OF UNITS FOR A PARTIAL YEAR
If you owned your units for only a portion of the year, you should use the charts and instructions
on the following pages to determine your royalty income, royalty expenses and cost depletion deduction.
- 20 -
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C. If you owned your units for only a portion of the year you must prorate the depletion percentage to
reflect your period of ownership. In the same way that you calculated your royalty income per unit,
place your finger on the Royalty Income per Unit Chart on the first month in the left-hand column
during which you owned your units and slide your finger to the right until you reach the column
showing the last month during which you owned your units. This figure should be divided by
$0.3789. The resulting figure is then multiplied by .165776 to yield the prorated depletion
percentage. Multiply this prorated depletion percentage by your cost basis or adjusted cost basis to
calculate your cost depletion deduction. Your cost depletion deduction should be entered on Line 18
on the Federal Income Tax Form 1040, Schedule E.
This letter does not constitute legal or tax advice. Neither the Trust nor its employees may
offer tax or legal advice relevant to your unique situation. If you dispose of some or all of your Trust
units, you should consult your tax advisor as to the tax consequence of that disposition. The Trust
recommends that you direct any questions to your tax advisor or attorney.
Most sincerely yours,
John R. Van Kirk
Managing Director
- 22 -