NRT

Business Context and Reporting Period

Company: North European Oil Royalty Trust (NRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 2021
Business Model: Passive fixed investment trust holding overriding royalty rights on gas, sulfur, and oil production in the Oldenburg concession, Germany. The Trust receives royalties from operating subsidiaries of ExxonMobil and Royal Dutch/Shell, pays expenses, and distributes net funds to unit owners. It does not engage in extraction operations.

Key Financial Metrics

Note: Financial statements are prepared on a modified cash basis. The Trust has no debt and is exempt from federal income taxes.

Material Changes vs. Prior Period

• Revenue Decline: Total royalty income decreased by 72.37% ($742,526) compared to Q1 2020. Net income fell by 85.04%.
• Primary Drivers: The decline is attributed to lower gas sales volumes and lower gas prices under both the Mobil and OEG Agreements. Lower gas sales were the more significant factor.
• Gas Sales Data: Under the Mobil Agreement, gas sales dropped 34.03% (3.222 Bcf vs 4.884 Bcf). Under the OEG Agreement, sales dropped 27.48% (11.622 Bcf vs 16.026 Bcf).
• Price and Exchange Rates: Gas prices (Ecents/Kwh) decreased by approximately 11.92%. The average Euro/USD exchange rate increased by ~9.10%, partially offsetting the revenue decline.
• Expense Reduction: Trust expenses decreased by 38.71% ($108,443) due to lower insurance costs, reduced Trustee fees, virtual meeting expenses, and timing shifts in biennial accounting examinations.
• Unusual Items: Royalties were reduced by negative adjustments of $538,651 related to prior period corrections. Conversely, Mobil sulfur royalties increased by $65,267 due to corrections for Q1 and Q4 calendar 2020.

Outlook, Risks, and Management Commentary

• Operational Status: A five-week shutdown of the Grossenkneten desulfurization plant continued for the first 13 days of the quarter, contributing to lower gas sales.
• Drilling Activity: Due to continuing low gas prices, the Ahlhorn Z-3 drilling project has been postponed until prices recover. No new gas well drilling is scheduled through 2021.
• Third-Party Interests: Vermilion Energy Inc. holds a Farm-In interest in portions of the concession but has not conducted drilling or development work within the Oldenburg concession as of the report date.
• Risks: Key risks include volatility in gas production levels and prices, general economic conditions, currency exchange rate fluctuations (Euro vs. USD), and the ability of operating companies to perform contractual obligations. The Trust notes that the impact of COVID-19 continues to affect financial results.
• Guidance: The Trust does not provide specific forward-looking financial guidance, noting that interim results are not necessarily indicative of full-year results.

Investor Verification Checklist

• Revenue Volatility: Verify the sensitivity of future distributions to German gas prices and sales volumes, given the 72% revenue drop.
• Drilling Delays: Confirm the status of the Ahlhorn Z-3 project and any potential impact on long-term production reserves.
• Accounting Basis: Note that financials are on a modified cash basis, not GAAP, which affects the timing of revenue and expense recognition.
• Currency Exposure: Monitor the Euro/USD exchange rate, as royalties are paid in Euros and converted to USD, directly impacting unit distributions.
• Operator Dependence: Assess the reliance on ExxonMobil and Shell subsidiaries for production data and royalty payments, as the Trust has limited ability to verify operational data independently.