The question nobody's asked here is this: what does it mean to be indoctrinated into the cult of Nerull?
It appears you're using the Greyhawk or the D&D Pantheon which is polytheistic. So, it probably doesn't mean that they think Nerull is the only god or the only authority. As I see it, that leaves two options:
1. Nerull is the hater of life. Indoctrinated into his perspective, these children also hate life. Those who showed promise were groomed to wield his powers and have probably already helped out by holding down the sacrifices on Nerull's grim altar and learning how to command his undead soldiers. They're probably at least apprentice level clerics of Nerull. The others are fanatical soldiers of Nerull awaiting the opportunity to die and return as Undead if they are judged worthy.
In this case, there are a few things that stand out. First, the "children" have probably already committed or been accomplices to unspeakable crimes. How could they be trained to offer sacrifices of living flesh to Nerull without having prisoners, slaves, and other children who resisted the brainwashing in order to practice on? They're guilty of crimes worthy of death. And if a lone paladin were to remain and attempt to train them in the paths of light and goodness, he'd probably just get a knife in his back while he slept. Since rehabilitation is not an option in this case, the party has two choices available to them: 1. Turn this group of juvenile Nerull cultists loose on the surrounding community. 2. Inflict appropriate punishment for their crimes--that is to say, kill them.
There is another possibility though:
2. Every cult needs loyal soldiers.
They were indoctrinated to obey their elders in the cult and were being trained as an elite cadre of soldiers loyal to their masters in life and in death. As such, while they may operate on a dog eat dog manner within the grouping, they demonstrate unswerving loyalty to their master--at least as long as their master can demonstrate enough strength to keep them under control. Although they sacrificed to Nerull, that was a matter of their society as much as their personal loyalty.
This is something that you can work with. In this case, an individual (perhaps the paladin or perhaps your ally in the town) who can demonstrate his strength well enough to rule over them can command their fear, respect and loyalty (such as it is). They should continue to be trained as an elite fighting force but they will offer a different kind of sacrifices to a different kind of god (Heironeous). Their training should be changed as well. New power structures should be emplaced which do not serve backstabbing or disloyalty. Training should demonstrate the values of teamwork and cooperation. (Perhaps by staging a skirmish between a group trained to fight as a unit and a group whose training is individualistic). Over time, they can be made to see the light of goodness but until then, they will be made to conform to order and used as what they are: well trained, loyal soldiers. (On the whole, assuming they started as NE, the goal would be to shift them to LN (although they might well stop at LE on their way there) and finally LG). Even if the moral training never took hold, whoever stayed would still have a disciplined troop of skilled LE fighters. Even a paladin could make use of that--maybe even to take control of and clean up the rat's nest of a pirate town.
I would expect that the situation is actually a mixture of the two. Some boys have clerical training and assisted in the sacrifices and others don't/didn't. In that case, the execution of the first group of boys (whose loyalty to Nerull would preclude the plan for the rehabilitation of the second group) would serve as both a warning and a demonstration of strength to cow the second group into submission. Since the boys are presumably NE at the moment, it's unlikely that they have significant loyalties to each other that would make such action counterproductive.