Dorchester Minerals, L.P. — Q2 2017 Form 10-Q
Business context and reporting period. The partnership owns mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. This unaudited report covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance
Amounts below are in millions of dollars except per-unit data. The filing reports no debt; the partnership agreement generally prohibits indebtedness other than trade payables, subject to specified limits.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $12.553 | $10.009 | $25.280 | $16.135 |
| Net income | $8.449 | $5.951 | $16.971 | $7.449 |
| Net income per common unit | $0.26 | $0.19 | $0.53 | $0.24 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $21.280 | $13.420 |
- Q2 revenue rose 25% and net income attributable to common unitholders rose 41%; six-month revenue rose 57% and unitholder net income rose 127%. Net income was approximately 67% of revenue in both 2017 reporting periods, compared with approximately 59% for Q2 2016 and 46% for the first half of 2016.
- Higher oil and gas prices were the primary revenue driver. Royalty revenue was $10.489 million for Q2 and $21.112 million for the first half. Q2 oil and gas royalty-property volumes also increased; NPI oil volumes declined.
- For the first half, operating costs including production taxes increased 59% to $2.038 million, primarily reflecting higher commodity prices. Depreciation, depletion and amortization declined 19% to $3.648 million; G&A declined 10% to $2.623 million.
- Cash and cash equivalents were $12.594 million at June 30, up from $8.212 million at year-end. Current assets were $19.818 million and current liabilities $1.657 million. Total liabilities were $1.717 million, principally accounts payable and deferred rent.
- First-half distributions paid totaled $17.466 million, versus $11.034 million a year earlier. Operating cash flow exceeded distributions by $3.814 million. No material borrowing or credit facility is reported.
Material changes and significant transactions
- On June 30, the partnership completed an acquisition of producing and nonproducing mineral and royalty interests in the Midland Basin: 1,850 net royalty acres across 22,400 gross surface acres. Consideration was valued at approximately $23.183 million, half cash and half common units priced at $14.98 per unit. The partnership issued 1,604,343 units to DSD Royalty and participating parties; certain officers- and director-affiliated parties participated in related transactions.
- The acquired properties’ contributors also delivered funds for specified prior-period production. MD&A reports approximately $614,000, while the cash flow statement reports $608,000 of cash contributed in the acquisition.
- Second-quarter distribution was $0.322965 per unit, payable August 10, 2017. The first-quarter distribution was $0.306700 per unit. Common units outstanding were 32,279,774 as of August 3, 2017.
- The office lease was amended for a new 129-month term beginning June 1, 2018, expiring in 2029, with monthly rent of $25,000–$30,000 and a $650,000 tenant improvement allowance.
Outlook, risks and contingencies
- No quantitative earnings or production guidance is provided. Management says liquidity should be sufficient for expenses and identifies cash flow from royalty properties and NPIs as its primary capital source.
- Results are exposed to oil and natural gas price volatility; the partnership does not anticipate hedging. Royalty-property volumes benefited from Permian Basin production, while NPI oil volumes were pressured by reservoir declines. NPI receipts can also vary with costs, capital spending and suspense releases.
- Management reports the Minerals NPI was in surplus at June 30, 2017, with outstanding capital commitments equal to $7.8 million of cash on hand. Accrued second-quarter net profits income from this NPI was zero because accrued cumulative capital costs exceeded accrued cumulative operating income.
- Reserve estimates and commodity prices affect depletion and the full-cost ceiling test; downward reserve revisions could result in a noncash impairment. Management says it cannot yet estimate the lease liability capitalization impact under the new lease accounting standard; it believes approximately $3 million of lease commitments may be subject to capitalization.
- Routine legal and administrative proceedings are disclosed; management does not believe they will significantly affect financial position, cash flows or results. Disclosure controls were considered effective, with no material internal-control changes reported.
Important facts for investors to verify
- Reconcile the acquisition cash amount reported as approximately $614,000 in MD&A versus $608,000 in the cash flow statement, and review the final transaction consideration and acquired interests.
- Review the acquisition’s unit issuance, participation by affiliated parties, dilution and related transaction agreements.
- Track realized oil and gas prices, production volumes and NPI capital costs, including the Minerals NPI commitment and surplus position.
- Assess distribution sustainability against operating cash flow, commodity-price exposure, reserve estimates and the full-cost ceiling test.
- Monitor future lease-accounting adoption and the partnership’s disclosed lease commitments.