North European Oil Royalty: Expect One Last Big Dividend Check (NYSE:NRT)

European natural gas prices are normalizing, and so is the share price of North European Oil Royalty Trust (NYSE:NRT). The TTF natural gas price has decreased to just 70-75 EUR per MWh, and I expect the German cross-border price to be slightly lower.

This means the position in NRT has actually done its job as it has protected investors against a high natural gas bill. The share price is still about 20% higher than where it was trading at when the previous article was published, and we have already collected an additional 8-9% in dividends. Due to the lag in the timing of realizing natural gas prices and actually paying out the quarterly earnings, the perverse result is that the biggest dividend check likely still has to come. The timing of the royalty payments is explained in the Trust’s SEC filings:

On or about the 25th of the months of January, April, July and October of each year, the operating companies determine the amount of royalties that are payable to the Trust based on applicable sales during the relevant period. This amount is paid out to the Trust in three monthly installments as royalty payments (payable on or about the 15th of each month) during its upcoming fiscal quarter. In addition, the operating companies review the actual amount of royalties that were paid to the Trust for that period and calculate the difference between the amounts paid and the amounts payable. Any additional amounts payable by the operating companies would be paid immediately and any overpayment would be deducted from the payment for the first month of the following fiscal quarter. In September of each year, the operating companies make the final determination of any necessary underpayment or overpayment of royalties for the prior calendar year. The Trust’s independent accountants based in Germany review the royalty calculations on a biennial basis.

The November dividend was based on the natural gas price for the months of May-June-July. That was, on average, 20,500 EUR per TJ. Divided by 277.8 (277.8 MWh in a TJ) results in an average natural gas price of approximately 74 EUR per MWh.

Which means the $0.76 quarterly dividend actually is a pretty good proxy for the future using lower natural gas prices for a longer period of time.

The German ministry has now also disclosed its domestic prices for August-September-October, which will be the basis for the February dividend. While the numbers don’t match up for 100%, I do dare to say the margin of error is pretty narrow (less than 10%).

We see the average price for those three months was 115 EUR per MWh. This would indicate the next quarterly dividend could be as high as $1.20, so I think aiming for $1 is not outrageous.

It will also most likely be the last fat dividend check. I think going forward, and assuming the natural gas price remains above 50 EUR per MWh with peaks in the winter, we should expect the quarterly dividend to remain elevated above $0.50 and it will likely move between $0.50 and $0.75. The following image shows the TTF Futures price for delivery in December of this year (quoted in EUR per MWh).

As a comparison. The 2022 February dividend was also based on the August-September-October natural gas price. During those three months in 2021, the average natural gas price was approximately 32 EUR per MWh. And based on those natural gas prices, NRT paid a quarterly dividend of $0.25.

The royalty company will still act as a natural hedge for your natural gas bill if you live in Europe. The one thing I am a little bit disappointed about is that the chaotic natural gas market in 2022 did not result in the operators of the gas fields getting permits to drill new wells. That is a pity, and it means we should not expect growth and rather a natural decline in annual production rates.

The annual report did contain an interesting note though. The reserves have actually increased thanks to some maintenance work on the existing wells.

This means the current reserve life index has jumped to just over 11 years. As there is a natural decline in the production rate, the gas fields will likely produce for much longer than that, but at a lower rate. In any case, this is a positive update as it means the trust will likely continue to produce well into the 2030s.

There was one negative element: one of the natural gas processing plants will be taken offline in 2023 due to stricter environmental regulations. The remaining processing plant should be able to handle the anticipated volumes but if that sole plant has to be shut down for a few weeks per year for annual maintenance, there may be a certain variation in the quarterly production volumes (and thus dividend).

Investment Thesis

Due to the lower natural gas prices in Europe, North European Oil Royalty Trust is a HOLD for the dividend yield, but I recently took profits and sold the entire position earlier this week. I would consider re-establishing a long position on share price weakness, but I’m in no rush.