North European Oil Royalty Trust (NYSE:NRT) is a U.S.-based trust that owns overriding royalty rights in oil and natural gas projects located in Germany. This trust was established in 1975 and the royalty contracts it owns are with some of the world's largest oil companies including Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A). Investors should take comfort in the fact that this trust has been operating for decades, and that its royalty contracts are with well-established oil companies. Another huge positive is that it offers investors a generous yield of about 10.4%.
The North European Oil Royalty Trust receives royalties from German subsidiaries of the Exxon Mobil and Royal Dutch Shell which it then uses to pay shareholders a quarterly dividend. These royalties are based on the sale of natural gas, oil and sulfur. On February 14, 2014, the trust announced first quarter results. It reported total royalty income at $5,295,533 and net income was $4,958,808. This resulted in a distribution of 54 cents per share for the quarter. The current annual dividend of around $2.16 per share provides a yield of about 10.4%.
With no debt on the balance sheet and nearly $5 million in cash, shareholders are not exposed to the potential downside risk that can come with companies that use leverage. As detailed in the financial results above, the trust also keeps administrative expenses to a minimum which allows shareholders to reap the benefits. Since the royalties paid to the trust can fluctuate depending on the price of oil and natural gas, there is some potential downside risk (as well as upside potential), based on these prices. New drilling could boost production and reserves in the future and that could lead to higher payouts to shareholders in the future.
This trust is relatively small and not as well known as some dividend payers, which makes it a bit of a hidden gem with its high yield. Morgan Stanley (NYSE:MS) appears bullish and it is one of the largest institutional owners of the North European Oil Royalty Trust with a stake of nearly 3%.
The recent tensions between Russia and Ukraine has created fears that natural gas supplies could be cut off. Russia supplies a significant amount of natural gas to Europe and in particular to Germany. As many investors know, Germany has decided to turn away from nuclear power after the incident in Japan. This means Germany is more reliant than ever on natural gas and that is one reason why it does not want to get into slapping sanctions on Russia. Putin could simply retaliate by cutting off natural gas supplies to Europe which would cripple the economy. These issues highlight the importance of the natural gas supplies that are based in Germany, and that is a potential upside catalyst for the Northern European Oil Royalty Trust. Rising natural gas prices can boost current financial results as well as the value of reserves. The tensions between Russia and Ukraine have already caused a spike in natural gas prices and there have even been reports of hoarding. A New York Times article points out that this supply of natural gas gives Putin influence and that it has been used as leverage in the past (and again now); it states:
This week, Gazprom, Russia's state-run natural gas company, said it would no longer provide gas at a discount rate to Ukraine, a move reminiscent of more serious Russian cutoffs of natural gas to Ukraine and elsewhere in Europe in 2006, 2008 and 2009.
With a debt free balance sheet, prime royalty contracts, a long-standing history of operations, and a yield of 10.4%, this is an ideal pick for income investors to consider. Furthermore, it looks cheap now as it trades well below the 52-week high of $26.76 and for just about 10 times earnings. The tensions over Russia and Ukraine are already boosting natural gas prices which should benefit this trust and become an additional upside catalyst.
Here are some key points for North European Royalty Trust:
Current share price: $21.24
The 52-week range is $18.44 to $26.76
Annual dividend: $2.16 per share, which yields 10.4%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long NRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.