Executive Summary / Key Takeaways

• North European Oil Royalty Trust ($NRT) is a passive grantor trust offering investors exposure to gas, sulfur, and oil royalties from the Oldenburg concession in Germany, operated by subsidiaries of ExxonMobil and Shell, without the operational risks or capital requirements of traditional E&P companies.
• Recent financial results for the second quarter and first six months of fiscal 2025 show increased royalty income and net income, driven primarily by higher average gas prices and favorable Euro/USD exchange rates, despite lower gas sales volumes from the key western Oldenburg area.
• The Trust's income is highly sensitive to fluctuations in German gas prices, the Euro/USD exchange rate, and the operational decisions and performance of the operating companies, including the critical sour gas processing plant.
• While offering a unique, low-cost structure and high gross margins due to its non-operational nature, NRT faces inherent risks from the depleting nature of its underlying assets and its complete reliance on third-party operators who have indicated no new drilling through 2025.
• The Trust's investment appeal centers on its potential for consistent, albeit variable, quarterly distributions derived directly from royalty income, making it a play on European energy prices and currency dynamics rather than E&P growth.

A Unique Structure in the Energy Landscape

North European Oil Royalty Trust, established in 1975 following the liquidation of North European Oil Company, occupies a distinct niche within the energy sector. Unlike traditional exploration and production (E&P) companies that actively drill, extract, and sell hydrocarbons, NRT is a passive grantor trust. Its sole purpose is to hold overriding royalty rights on gas, sulfur, and oil production from specific concessions in the Federal Republic of Germany, primarily the vast Oldenburg concession in Lower Saxony.

This passive structure is foundational to NRT's business model and investment profile. The Trust does not engage in any operational activities – no drilling, no production, no sales. Instead, it receives royalty income from the operating companies responsible for these activities, pays its minimal expenses, and distributes substantially all remaining funds to its unit owners quarterly. This model eliminates the need for significant capital expenditures or investments typically associated with the energy industry, resulting in a lean cost structure.

The royalty rights are held under long-standing contracts with German subsidiaries of global energy giants, ExxonMobil Corporation (XOM) and the Royal Dutch/Shell Group of Companies (SHEL). Specifically, Mobil Erdgas-Erdol GmbH (ExxonMobil) and Oldenburgische Erdolgesellschaft (OEG), administered by BEB Erdgas und Erdol GmbH (a joint venture of ExxonMobil and Shell), are the operators responsible for extraction and sales from the Oldenburg concession, which currently generates 100% of NRT's royalties.

Royalties are derived from sales of gas well gas, oil well gas, crude oil, condensate, and sulfur. Natural gas is the dominant contributor, accounting for approximately 92% of cumulative royalty income in fiscal 2025. The amount of royalty income received is primarily determined by four factors: the volume of gas sold, the price of that gas, the specific area within the concession from which it is sold, and the prevailing Euro/U.S. Dollar exchange rate.

A key aspect of the royalty agreements is the differentiated rate structure. The Mobil Agreement, covering the western part of the Oldenburg concession (approximately 662,000 acres), provides a 4% royalty on gross receipts from gas and oil sales, with no deduction for costs related to gas. In contrast, the OEG Agreement, covering the entire concession, yields a lower 0.67% royalty on gross receipts, but allows for a deduction of 50% of field handling and treatment costs. This difference in rates means that gas sales from the western Oldenburg area, despite representing a smaller portion of total sales volume (around 29-30% in recent periods), contribute the vast majority of gas royalties (approximately 78-82% in recent periods) due to the significantly higher effective royalty rate under the Mobil Agreement.

Recent amendments to the Mobil and OEG Agreements shifted the basis for gas price determination to the German Border Import gas Price (GBIP), with small upward adjustments (1% for Mobil, 3% for OEG). This change was intended to simplify accounting, reduce disputes over related party sales, and minimize prior year adjustments, while also eliminating certain previously deductible costs under the OEG Agreement.

Operational Realities and Reliance on Operator Technology

As a passive trust, NRT's operational reality is entirely dependent on the activities of the operating companies, primarily ExxonMobil Production Deutschland GmbH (EMPG), which handles exploration, drilling, and production. The Trust has no control over these operations and relies on information provided by the operators, the accuracy of which it cannot confirm.

The production process involves both sweet gas, requiring minimal treatment, and sour gas, which necessitates processing at the Grossenkneten desulfurization plant to remove contaminants like hydrogen sulfide, yielding sulfur as a valuable by-product. The plant currently operates with a single remaining processing unit capable of handling approximately 200 million cubic feet of raw gas input. The continued operation of this plant is critical, as sour gas constitutes a significant portion of overall gas sales (71%) and western gas sales (97%). Any future shutdown could materially impact royalty income.

EMPG has indicated that it has not scheduled any new gas well drilling through 2025. Instead, the operator plans to focus on workovers of existing wells, maintenance of installations, and small stimulation measures. These activities are aimed at maximizing performance and production from existing wells and mitigating production decline. The reliance on existing wells without new development poses a risk of faster asset depletion, a factor explicitly highlighted by the Trust.

Regarding technological differentiation, NRT itself possesses none. Its income stream is entirely contingent on the extraction and processing technologies employed by its operating partners, ExxonMobil and Shell subsidiaries. While these global energy companies undoubtedly utilize advanced techniques in exploration, drilling, and processing (such as the desulfurization process at Grossenkneten), the Trust receives limited, unconfirmed information on their specific, quantifiable details regarding technological advantages, performance metrics (like extraction efficiency rates, cost per unit, or R&D targets), or how these compare to broader industry benchmarks. The shift to the GBIP pricing basis is a contractual/commercial change rather than a technological one. Therefore, NRT's exposure to technological advancements or limitations is indirect, flowing through the operators' decisions and capabilities, about which the Trust receives limited, unconfirmed information.

Financial Performance Reflecting External Factors

NRT's financial performance is a direct reflection of the volumes produced by the operators, the prices realized for those products, and the Euro/USD exchange rate, filtered through its fixed royalty rates and minimal expense structure. The financial statements, prepared on a modified cash basis (recognizing revenue when cash is received and expenses when paid), provide a clear picture of the cash flow available for distribution.

For the second quarter of fiscal 2025 (ended April 30, 2025), total royalty income increased by 10.7% to $2.47 million compared to $2.23 million in the same period of fiscal 2024. Net income saw a commensurate increase of 11.2%, rising to $2.26 million from $2.03 million. This growth was primarily attributed to higher average gas prices and a higher average Euro/USD exchange rate during the quarter. The quarter's royalty income also included a positive contribution from Mobil sulfur royalties ($57,240) and a smaller negative adjustment carryover from prior periods under the OEG agreement ($45,000) compared to the prior year ($214,362 negative adjustment).

Looking at the first six months of fiscal 2025, total royalty income increased by 12.0% to $2.98 million compared to $2.66 million in the prior year period. Net income for the six months rose by 15.1% to $2.55 million from $2.21 million. The drivers for the six-month improvement were similar: higher average gas prices under both the Mobil and OEG agreements, higher Mobil sulfur royalties ($127,442 vs. $68,205), and a lower residual negative balance from prior periods impacting the second quarter.

Despite the increase in income, gas sales volumes from the critical western Oldenburg area declined by 11.5% in the first calendar quarter of 2025 compared to the prior year quarter, and by 6.1% for the six months ended March 31, 2025. This highlights the sensitivity of NRT's income to price and exchange rate movements, which can offset or amplify volume changes.

Trust expenses remain relatively low due to the passive nature of the business. Expenses for the second quarter of fiscal 2025 increased by 6.7% to $229,519, primarily reflecting the timing of payments for the biennial royalty examination in Germany. However, for the first six months, expenses decreased slightly by 1.1% to $463,484, reflecting reduced costs associated with the biennial examination compared to the prior year period. Interest income increased in both periods due to higher cash balances held by the Trust.

The balance sheet reflects the Trust's simple structure, with assets primarily consisting of cash and cash equivalents ($3.62 million at April 30, 2025, up from $1.63 million at October 31, 2024) and royalty rights valued nominally at $1. Liabilities mainly consist of distributions to be paid to unit owners ($1.84 million at April 30, 2025). The increase in cash is intended to reserve for present and future liabilities.

Competitive Positioning: A Different Animal

Comparing NRT to traditional E&P companies like ExxonMobil, Occidental Petroleum (OXY), APA Corporation (APA), Devon Energy (DVN), and EOG Resources (EOG) requires acknowledging their fundamentally different business models. While these companies are NRT's operators and, in a broader sense, competitors in the energy market, NRT does not compete with them for reserves, production, or market share in the traditional sense.

NRT's competitive advantage lies in its unique, passive structure, which translates into a significantly lower cost base and exceptionally high gross margins. With no exploration, development, or production expenses, NRT's TTM Gross Profit Margin stands at a remarkable 100.00%, far exceeding the gross margins of integrated majors like ExxonMobil (~23%) or independent producers like Occidental Petroleum (~36%), APA Corporation (~44%), Devon Energy (~60%), and EOG Resources (~76%). This lean structure also contributes to high Operating and Net Profit Margins (TTM Operating Margin: 88.07%, TTM Net Margin: 88.04%), although direct comparison to the operating margins of active E&P companies is complex due to differing cost structures.

However, this passive nature also represents NRT's primary competitive disadvantage. The Trust has no control over production volumes, operational efficiency, or technological adoption. It is entirely reliant on the operators' decisions regarding drilling, maintenance, and technology, about which it receives limited information. In contrast, companies like ExxonMobil, Occidental Petroleum, APA Corporation, Devon Energy, and EOG Resources actively invest in technology, optimize operations for efficiency (e.g., achieving higher extraction rates or lower costs per unit, or R&D targets), and control their own growth trajectories through exploration and development spending. While specific quantifiable technological comparisons for NRT's operators versus other E&P firms are not readily available, the general industry trend is towards continuous improvement in extraction techniques and cost reduction, areas NRT cannot directly influence.

Furthermore, NRT's revenue is concentrated in a single geographic area and dependent on the specific products extracted from that concession. This contrasts sharply with the geographical and product diversification of major integrated companies like ExxonMobil or even larger independents, which provides them with greater resilience to regional market fluctuations or operational issues at a single site.

Indirect competition from renewable energy sources also poses a long-term challenge to the overall demand for the hydrocarbons NRT derives royalties from. While this affects all fossil fuel producers, NRT's lack of diversification into alternative energy sources, unlike some of its larger operator partners, means it has no strategic avenue to mitigate this risk internally.

In essence, NRT competes not on operational prowess or technological leadership, but on the appeal of a direct, high-margin income stream tied to the underlying resource value and market prices, minus minimal trust expenses. Its value proposition is simplicity and direct cash flow distribution, contrasting with the complex operational, technological, and growth-oriented strategies of its larger E&P counterparts.

Outlook and Risks

The near-term outlook for NRT's royalty income is tied to the factors that drove recent performance: gas prices in Germany, the Euro/USD exchange rate, and the operators' production levels. The shift to the GBIP pricing basis provides a more transparent and potentially less volatile pricing mechanism compared to previous arrangements.

However, the operator's stated plan of no new drilling through 2025 is a significant factor. While workovers and maintenance are intended to mitigate decline, the underlying assets are depleting. Without new development, production volumes are likely to decrease over time, which would negatively impact royalty income unless offset by significantly higher prices or favorable exchange rates.

The potential for a future shutdown of the Grossenkneten sour gas processing plant represents a material operational risk beyond NRT's control. Given the high percentage of sour gas in total sales, such an event could severely curtail royalty income.

Other risks highlighted by the Trust include general economic conditions, the ability and willingness of the operating companies to fulfill their contractual obligations, potential disputes with operators, and political and economic uncertainty, particularly arising from the war in Ukraine and its impact on European energy markets. While the war has contributed to higher energy prices in the past, the long-term implications for European gas demand, supply sources, and regulatory environment remain uncertain.

The Trust's distribution policy is to pay out substantially all funds on hand quarterly, after reserving for anticipated expenses. The recent increase in the Q2 FY2025 distribution to $0.20 per unit (from $0.04 in Q1 FY2025 and matching Q2 FY2024) reflects the improved royalty income in the preceding calendar quarter due to higher prices and reduced negative adjustments. Future distributions will continue to fluctuate based on the volatile factors influencing royalty income.

Conclusion

North European Oil Royalty Trust offers investors a unique, passive exposure to European gas and oil royalties. Its core investment thesis rests on the generation of high-margin income from overriding royalty rights, which are then largely distributed to unit owners. The recent financial results for the second quarter and first six months of fiscal 2025 demonstrate the Trust's sensitivity to market dynamics, with higher gas prices and favorable exchange rates driving increased royalty income and net income, despite declining volumes from key production areas.

While NRT benefits from a remarkably lean cost structure and avoids the significant capital outlays and operational complexities of traditional E&P companies, it faces inherent limitations and risks. The depleting nature of its assets, coupled with the operators' current plan of no new drilling, poses a long-term challenge to production volumes. Furthermore, the Trust is entirely dependent on the operational performance and decisions of third-party operators and is exposed to volatile commodity prices, currency exchange rates, and geopolitical factors beyond its control. The potential for disruption at the critical sour gas processing plant remains a notable operational vulnerability.

For investors seeking a direct, high-yield income stream tied to European energy prices and currency fluctuations, NRT presents a compelling, albeit specialized, opportunity. However, the investment carries significant risks related to asset depletion, operator reliance, and market volatility. The Trust's future performance and ability to maintain distributions will hinge on the delicate balance between potentially declining production volumes and the offsetting impacts of energy prices, exchange rates, and the continued operational integrity of the underlying assets and infrastructure managed by its operating partners.