Business Context and Reporting Period
Company: North European Oil Royalty Trust (NRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2019
Business Model: Passive fixed investment trust holding overriding royalty rights on gas, sulfur, and oil production in the Oldenburg concession in Germany. The Trust receives royalties from operating subsidiaries of ExxonMobil and Royal Dutch/Shell (via BEB) and distributes substantially all net income to unit owners. It does not engage in extraction operations.
Key Financial Metrics
| Metric | Q2 2019 (3 Months) | Q2 2018 (3 Months) | YTD 2019 (6 Months) | YTD 2018 (6 Months) |
|---|---|---|---|---|
| Total Royalty Income | $2,235,350 | $2,054,020 | $4,538,350 | $3,824,261 |
| Trust Income (Net of Expenses) | $2,001,753 | $1,820,337 | $4,039,538 | $3,315,423 |
| Net Income Per Unit | $0.22 | $0.20 | $0.44 | $0.36 |
| Distributions Per Unit | $0.22 | $0.19 | $0.44 | $0.36 |
| Total Assets | $2,096,227 | $1,457,208 | (Balance Sheet Data) | |
| Cash and Cash Equivalents | $2,096,226 | $1,457,207 | ||
| Trust Expenses | $238,797 | $234,826 | $506,398 | $511,452 |
Liquidity: The Trust held $2,096,226 in cash and cash equivalents as of April 30, 2019. There is no debt reported on the balance sheet.
Material Changes vs. Prior Period
- Revenue Growth: Total royalty income increased 8.83% in Q2 2019 and 18.67% for the six-month period compared to the prior year. This was driven primarily by higher gas prices (up ~16-20% in Euro cents/kWh) and increased gas sales volumes under the OEG Agreement, partially offset by a weaker Euro exchange rate (down ~8.8%).
- Net Income: Net income rose 9.97% in Q2 and 21.84% YTD. The YTD increase was further aided by the absence of negative prior-period adjustments that reduced royalties in the first six months of 2018.
- Expenses: Q2 expenses increased slightly (1.69%) due to accelerated accounting payments and higher NYSE fees. YTD expenses decreased 0.99% due to the absence of biennial German accounting examination costs and lower legal fees.
- Sulfur Royalties: Sulfur royalties under the Mobil Agreement increased significantly, totaling $107,524 for the six months ended April 30, 2019, compared to $46,458 in the prior year period.
Outlook, Risks, and Management Commentary
- Drilling Activity: Operating companies (EMPG) plan to drill two wells in 2019 (Brettorf Z-2b M-1 and Doetlingen Z-3a) using coiled tubing technology. A wildcat well (Hemmelte NW T-1) was cancelled. The Alhorn Z-3 well was delayed to late 2020.
- Vermilion Energy: Vermilion Energy Inc. entered a Farm-In Agreement and is expected to lead the development of the Jeddeloh Z-1 exploration well in 2020. This well targets the Carboniferous zone rather than the originally planned Rotliegend formation.
- Processing Capacity: The Grossenkneten desulfurization plant capacity was reduced by one-third. A complete shutdown is scheduled for September 2020, with reduced capacity for two weeks prior and post-shutdown.
- Risks:
- Currency: Royalties are paid in Euros; a weaker Euro reduces USD distributions.
- Production: Income depends on gas volumes and prices, which are outside the Trust's control.
- Operational: Reliance on third-party operators (ExxonMobil/Shell) to perform drilling and maintenance.
- Regulatory: Political difficulties regarding fracking in Germany have postponed several tight gas projects until 2022-2023.
Investor Verification Checklist
- Gas Price Trends: Verify current German Border Import gas Price (GBIP) trends, as this is the primary driver of royalty revenue.
- Exchange Rates: Monitor the EUR/USD exchange rate, as it directly impacts the dollar value of distributions.
- Drilling Schedule: Confirm the status of the 2019 drilling projects (Brettorf and Doetlingen) and the 2020 Vermilion-led well (Jeddeloh Z-1).
- Plant Maintenance: Track the impact of the scheduled September 2020 shutdown of the Grossenkneten desulfurization plant on sour gas processing and sulfur royalties.
- Accounting Exam: Note that the biennial German accounting examination for 2017 and 2018 is scheduled to begin in November 2019, which may result in future royalty adjustments.