NRT

Business Context and Reporting Period

Company: North European Oil Royalty Trust (NRT)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended October 31, 2021
Business Model: NRT is a passive grantor trust holding overriding royalty rights on gas, oil, and sulfur production in the Oldenburg concession in Germany. It receives royalties from operating subsidiaries of ExxonMobil and Royal Dutch/Shell Group. The Trust conducts no active operations, holds no debt, and distributes net income quarterly to unit owners.

Key Financial Metrics

Liquidity: The Trust held $1,409,437 in cash and cash equivalents as of October 31, 2021. It maintains a minimal balance of 10,000 Euros in Germany for expenses before converting the remainder to U.S. dollars.

Material Changes vs. Prior Period

• Revenue Growth: Gross royalty income increased 13.64% to $4.60 million, driven primarily by higher gas prices and a stronger Euro exchange rate, despite a decline in gas sales volumes.
• Gas Sales Volume: Sales under the primary Mobil Agreement decreased 8.33% (15.821 Bcf vs. 17.259 Bcf), and OEG Agreement sales decreased 3.39%. Declines were attributed to the ongoing impact of COVID-19 on European economies and natural well pressure reduction.
• Gas Prices: Average gas prices under the Mobil Agreement rose 20.71% to 1.5915 Euro cents/kWh. In U.S. dollar terms, the average price increased 28.98% to $5.43/Mcf.
• Exchange Rates: The average Euro/U.S. dollar exchange rate increased 7.06% to $1.1932, boosting the dollar value of Euro-denominated royalties.
• Expense Reduction: Trust expenses decreased 18.27% to $626,494 due to reduced trustee fees, lower legal and insurance costs, and the absence of biennial accounting examination costs in 2021.
• Adjustments: Royalty income was reduced by $696,189 in fiscal 2021 due to negative adjustments from prior period calculations (specifically 2020).

Outlook, Risks, and Management Commentary

• Production Outlook: The operating company (EMPG) has not planned new wells for calendar year 2022. Optimization studies ("The Sour Gas Study") are ongoing to improve efficiency, and the Grossenkneten processing plant is expected to operate on one train to reduce costs.
• Reserves: The Trust relies on finite, depleting reserves. The cost depletion percentage for calendar 2021 was calculated at 17.7008%. The Trust cannot estimate proved undeveloped reserves due to limited data access from operators.
• Key Risks:
  • Passive Nature: The Trust has no control over production decisions, pricing, or exploration. If operators terminate production, royalty rights terminate.
  • Currency Risk: Royalties are received in Euros and converted to USD; fluctuations directly impact financial results. The Trust does not hedge currency risk.
  • Regulatory/Environmental: German fracking laws and environmental regulations could impact production volumes if operators fail to comply.
  • Market Conditions: Income is highly sensitive to global gas prices and economic demand.
• Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP, to better reflect distributable income for tax reporting.

Investor Verification Checklist

• Gas Price Trends: Verify current German Border Import Gas Prices (GBIP) and their correlation to the Trust's royalty calculations.
• Exchange Rates: Monitor the Euro/U.S. dollar exchange rate, as it significantly impacts net income per unit.
• Production Volumes: Confirm if the decline in gas sales volumes is stabilizing or continuing due to well depletion or economic factors.
• Operator Activity: Review updates on EMPG's "Sour Gas Study" and any potential changes to the Grossenkneten plant operations.
• Cost Depletion: Review the annual Cost Depletion Report (Exhibit 99.1) for tax reporting implications regarding the 17.7008% depletion rate.