North European Oil Royalty Stock: Bright Outlook for Beaten-Down 39.5%-Yielder
April 15, 2024
Why NRT Stock’s Distribution Is Expected to Rise
Stocks with variable distributions tend to get overlooked by investors. That’s because investors don’t really like the idea of dividends that aren’t reliable, nor—as in the case with energy stocks like North European Oil Royalty Trust (NYSE:NRT)—the idea of dividends whose amounts are tied to oil and natural gas prices.
Things are certainly looking up for energy stocks and oil prices, though, despite a slow start to 2024.
Brent crude oil, which is from oil fields in the North Sea, entered 2024 trading around $77.00 per barrel, with analysts taking a bearish stance on crude oil at the time.
In January, Citi Research cut its Brent oil price forecast for 2024 to $74.00 per barrel and cut its forecast for 2025 to just $60.00 per barrel. (Source: “Citi Lowers 2024 Brent Price Forecast to $74 per Barrel,” Reuters, January 12, 2024.)
However, increased geopolitical risks, production cuts by the Organization of the Petroleum Exporting Countries (OPEC+), and limitations on Russia’s exports have been sending oil prices considerably higher. Since the start of the year, Brent crude oil has soared by almost 18% to more than $90.00 per barrel (as of this writing).
Crude oil prices are expected to climb even higher, with Morgan Stanley (NYSE:MS) predicting that Brent crude oil will hit $94.00 per barrel in the third quarter of this year. Meanwhile, JPMorgan Chase & Co (NYSE:JPM) forecasts that crude oil could hit $100.0 per barrel by the end of this summer. (Source: “Morgan Stanley Hikes Its Summer Oil Price Forecast to $94,” OilPrice.com, April 9, 2024.)
While plenty of energy stocks have been riding the wave of higher oil and gas prices, there are some that haven’t experienced the same kind of growth. This includes North European Oil Royalty stock.
The Keene, New Hampshire-based company conducts no active business operations; it’s restricted to collecting income from royalty rights and paying distributions to its unitholders.
The trust “holds overriding royalty rights covering gas and oil production in certain concessions or leases in the Federal Republic of Germany.” (Source: “Form 10-K: North European Oil Royalty Trust,” U.S. Securities And Exchange Commission, last accessed April 9, 2024.)
The royalty rights are held under contracts with German exploration and development subsidiaries of Exxon Mobil Corp (NYSE:XOM) and the Royal Dutch/Shell Group of Companies.
The Oldenburg concession in Lower Saxony currently provides 100% of North European Oil Royalty Trust’s royalties. That concession covers about 1.39 million acres. The trust also holds royalties for the sale of gas well gas, oil well gas, crude oil, condensate, and sulfur.
Royalty Payments Expected to Be Higher in 2nd Fiscal Quarter
For its fiscal 2024 first quarter (ended January 31), North European Oil Royalty reported total royalty income of $424,910, a 95.6% drop from $9.77 million in the same period of its fiscal 2023. (Source: “North European Oil Royalty Trust Announces the Net Income for the First Quarter of Fiscal 2024,” North European Oil Royalty Trust, February 15, 2024.)
Perhaps not surprisingly, the company’s net income took a hit, too, falling by 98.1% year-over-year to $179.0 million in the quarter.
In February, the trust reduced NRT stock’s distribution per unit by 95% to $0.05, from $1.00 in February 2023. Moreover, the company didn’t pay a distribution in the previous quarter. (Source: “NRT Dividend History,” Nasdaq, last accessed April 9, 2024.)
As of this writing, North European Oil Royalty Trust’s distribution of $0.05 per unit translates to a forward yield of 39.55%.
According to management, gas prices experienced a prolonged decline starting in the second quarter of the trust’s fiscal 2023. The company also had to offset a series of overpayments by operating companies. (Source: North European Oil Royalty Trust, February 15, 2024. op. cit.)
Since the first quarter of the trust’s fiscal 2024, gas prices applicable to its royalty calculations have stabilized. Management expected the bulk of the overpayments from 2023 to be fully offset by mid-February.
As a result, the company didn’t expect its scheduled royalty payments in March and April to be negatively affected by carryover adjustments. Furthermore, the trustees expect a higher distribution in the second quarter of calendar year 2024, compared to the first quarter.
North European Oil Royalty Stock Rallying in 2024
Brent crude oil prices have been volatile over the past year, as have North European Oil Royalty Trust’s share price and distributions. When times are good, investors reward NRT units with higher prices; when the company skips a distribution, investors punish them.
As you can see in the chart below, NRT stock tumbled in early November 2023. That’s because the company announced on October 31 that there would be no distribution in the fourth quarter of the calendar year. In 2022, North European Oil Royalty stock paid a fourth-quarter distribution of $0.74 per unit.
Even though North European Oil Royalty Trust had previously disclosed that it wouldn’t be paying a fourth-quarter dividend, investors sent NRT stock 40% lower in the days following the October 31 announcement.
North European Oil Royalty units fell even further in the closing months of 2023, which followed the decline in the price of Brent crude oil.
It’s been a different story in 2024, with Brent crude oil’s price rallying by 18% year-to-date (as of this writing). The price of NRT units has responded favorably, going up by 28% in the same period and 40% over the last month. North European Oil Royalty units are down by 35% year-over-year, though.
Chart courtesy of StockCharts.com
The Lowdown on North European Oil Royalty Trust
North European Oil Royalty stock isn’t so much a contrarian play as one that’s more geared to patient investors. As just mentioned, NRT units have gone down over the last year but have gone up since the start of 2024.
Moreover, with Brent crude oil prices expected to climb significantly throughout 2024, North European Oil Royalty Trust’s royalty payments should rise—along with NRT stock’s distributions and unit price.
That said, income investors will still want to pay close attention to Brent crude oil prices, since they directly affect North European Oil Royalty’s financial performance. And as we’ve seen, the sentiment for crude oil can change overnight.
