NRT - North European Oil Royalty Trust: A Play On Gas Scarcity

2023-10-02 05:40:51 ET

Summary

• North European Oil Royalty Trust gets paid royalties by operators in fields in Oldenburg.
• Gas prices have come down YoY, but we think there is an upside case on gas going into the winter.
• However, NRT is quite exotic and is in the dark on the underlying performance and sustainability of the entities paying them royalties.
• There are more straightforward assets out there in the general E&P space that offer more stable performance and offer better risk-reward.

North European Oil Royalty Trust (NRT) owns rights to royalties from a concession of oil and gas extraction in Oldenburg. Their performance this year was negatively impacted by YoY price declines and some maintenance projects that hit volumes. We think that run-rate incomes understate the potential picture as we approach winter, but still see other oil and gas plays as more attractive from a risk reward perspective due to structural issues and also better commodity mixes than NRT which is gas focused. We pass on NRT.

Recent Updates

The three month run-rates look like this:

And the key KPIs are the following:

Gas prices and volumes from the two operating entities that extract from their Oldenburg concession are the main drivers of performance of the trust.

YoY gas prices have declined from their Ukraine-invasion peaks, where hoarding and speculation was most rampant. Volumes were hit at NRT due to some maintenance projects on the trains at one of the operating entities, but there has also been a permanent hit in the form of the shutdown of one of the trains at one of the two operating entities that pay them royalties from Oldenburg. The maintenance of one of the two trains at EMPG plus the shutdown of the other meant that for a month from the end of June there was no throughput at all from EMPG - so that was for one-third of the quarter.

Next quarter could be affected by less volumes from the smaller concession due to the permanent decommissioning of one of the two trains. We think that the effect might be around -10% in sales of gas from the smaller OEG agreement. Note that management thinks the remaining train can handle the throughput though, so maybe there won't be permanent effects, but we are accounting for some.

Bottom Line

One of the problems with this Trust is that what management thinks might not matter. The Trust discloses clearly in its filings that it is not entitled to any privileged information from the companies that operate on its concession, and important infrastructure could be shut down rather suddenly, without that much prior notice. There is not really any way to know the health of the underlying operations, nor their standing with local regulators and inspectors, and you cannot rely much on continued support of Germany for these local gas assets even though they are in dire need of gas. They are often in the dark about the performance of operators at Oldenburg, but at least the only issues that have appeared are at the less important operating entity.

This leads to the upside case, which is that the run-rate performance may understate what could be coming as we enter winter. A cold winter would be difficult for Europe, and there'd likely be another scramble for gas. That could create hoarding dynamics again that may trigger massive increases in gas prices to the benefit of NRT which collects a fixed percentage on gross sales of gas produced from the Oldenburg concession.

However, current run-rates imply about a 10x PE if you were to annualize them. While the addition of extreme income from gas scarce months at some point in the winter would bring that PE down, there are plenty of E&P and other oil and gas securities out there that offer similar yields with better commodity mix, including oil which is doing really well and is durably supported, at valuations that currently undercut NRT at run-rates. This is quite an exotic security, and should be approached with some caution. If an entity were to stop operating, it would create lots of immediate challenges, and repairing those royalty streams would be political and difficult.

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