Dorchester Minerals, L.P. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dorchester owns mineral, royalty, overriding royalty, net profits and leasehold interests across 27 states. Figures below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net operating revenue | $20.6 | $21.1 | $39.6 | $37.0 |
| Net income | $13.6 | $16.4 | $27.6 | $27.3 |
| Net income per common unit | $0.38 | $0.49 | $0.80 | $0.82 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $35.3 | $32.7 |
| Cash and cash equivalents | $20.8 at June 30, 2019 | $18.3 at December 31, 2018 |
- Q2 net margin, calculated as net income divided by revenue, was approximately 66%, versus 77% in Q2 2018; six-month margin was approximately 70%, versus 74%.
- At June 30, total assets were $128.4 million and total liabilities were $4.9 million, including operating lease liabilities. The filing reports no material borrowings; the partnership agreement generally prohibits indebtedness above $50,000 other than trade payables, and prohibits acquisition indebtedness.
- Six-month investing cash flow was a $1.8 million source, including acquisition-related cash contributions and proceeds from property sales. Distributions paid were $34.5 million, compared with $26.9 million in the first half of 2018.
Material changes versus the prior comparable period
- Q2 revenue declined about 2%, while six-month revenue increased about 7%. Higher royalty and net profits interest (NPI) revenue supported the six-month increase; lower lease bonus revenue drove the Q2 decline.
- Q2 net income fell about 17%; six-month net income was approximately flat. Q2 income allocated to unitholders declined to $13.1 million from $15.8 million. Per-unit income also declined, with weighted average units increasing to 34.68 million in Q2 from 32.28 million.
- Royalty-property oil and gas sales volumes rose year over year in both periods, while royalty oil and gas prices were lower. NPI sales volumes also increased; NPI oil prices declined, while NPI gas prices were mixed.
- Lease bonus revenue fell about 90% in both periods, to approximately $0.4 million, primarily because Q1 2018 included a leasehold assignment transaction.
- Operating costs, including production taxes, rose 38% in Q2 and 31% for the first half, mainly due to higher volumes, production taxes and marketing costs. Depletion and amortization increased 70% in Q2 and 38% for the first half, including the effect of acquisitions and reserve estimates.
- Operating cash flow increased about 8% in the first half, principally reflecting higher sales volumes, partly offset by lower prices.
Acquisition, distributions and other notable items
- On March 29, 2019, Dorchester acquired mineral, royalty and net profits interests associated with approximately 76,000 net acres in 14 states, including Bakken and Permian Basin positions. Consideration included 2.4 million common units valued at $43.8 million. The balance sheet included $42.9 million of net property additions.
- The Q2 distribution was $0.515016 per unit and was scheduled for payment on August 8, 2019. The first-half distribution was $0.998887 per unit.
- Dorchester adopted lease accounting guidance on January 1, 2019, recognizing an office operating-lease right-of-use asset of $1.9 million and lease liability of $2.7 million at adoption. At June 30, the right-of-use asset was $1.8 million and lease liabilities totaled $2.6 million. Adoption did not affect partnership capital, income or cash flows.
- The Minerals NPI was in a cash surplus position at June 30 and had outstanding capital commitments equal to cash on hand of $7.8 million.
Outlook, risks and contingencies
- The filing provides no quantified revenue, earnings or distribution guidance. Management expects funds to be sufficient for expenses, but distributions depend on cash generated after expenses.
- Results are exposed to oil and natural gas prices and production volumes; Dorchester does not anticipate hedging these exposures. Management cites changing commodity prices, property operations and development, industry and economic conditions, and regulatory and environmental changes as risks.
- The Operating Partnership may pursue production-enhancement work, and potential infill drilling in the Guymon-Hugoton field could require significant capital; costs and outcomes are uncertain and may affect NPI payments.
- Ordinary-course legal and administrative proceedings are disclosed; management does not believe they will significantly affect financial position, cash flows or results.
- Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether increased production volumes persist and offset lower realized commodity prices.
- How much the 2018 lease-assignment comparison affects revenue trends, and the degree to which acquisition-related production contributes to future results.
- The effect of higher depletion, operating costs and production taxes on earnings and cash available for distributions.
- The status and economics of the Minerals NPI commitments and any Operating Partnership development or infill-drilling plans.
- Distribution sustainability, given cash distributions exceeded first-half net income and are variable.