Dorchester Minerals, L.P. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The partnership owns mineral and royalty interests and net profits interests (NPIs) in oil and natural gas properties; its units trade on Nasdaq. It generally distributes available cash quarterly and does not operate most of its properties.
Financial and operating results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $37.6 million | $31.9 million | +18% |
| Net income | $21.0 million | $13.3 million | +58% |
| Net income per unit | $0.66 | $0.42 | +$0.24 |
| Cash from operations | $28.3 million | $27.7 million | +2% |
| Depreciation, depletion and amortization | $8.5 million | $10.1 million | −16% |
| Cash and cash equivalents at year-end | $8.2 million | $7.1 million | +$1.1 million |
| Total liabilities | $0.3 million | $0.6 million | −$0.3 million |
- Operating margin was approximately 55.8%, compared with 41.6% in 2015, calculated as operating income divided by operating revenue.
- Revenue comprised $29.8 million in royalties, $4.8 million in NPI income, $2.7 million in lease bonuses and $0.3 million in other revenue.
- Year-end assets were $67.2 million and partnership capital was $66.9 million. The partnership reported no credit facility and expects no debt other than ordinary-course trade debt; its agreement generally limits indebtedness to $50,000.
- Cash distributions paid to partners during calendar 2016 totaled $27.2 million, including $26.3 million to limited partners. The four quarterly per-unit distributions attributable to 2016 were $0.147417, $0.257977, $0.252224 and $0.241475; the fourth-quarter payment was made in February 2017.
Material changes and operating trends
- Revenue recovered from 2015 but remained well below 2014’s $65.2 million; net income likewise remained below 2014’s $45.2 million. Management attributed the 2015 downturn primarily to sharp oil and gas price declines.
- In 2016, higher lease-bonus income and increased royalty-property oil sales more than offset continued commodity-price weakness. Lease-bonus revenue rose to $2.7 million from $53,000 in 2015; cash-basis lease bonuses were $2.765 million, compared with $51,000.
- Prices and volumes were mixed: royalty-property oil sales volume rose 18% to 620,000 barrels, while gas volume fell 12% to 3.271 billion cubic feet. Average realized royalty oil and gas prices declined 12% to $37.18 per barrel and 11% to $2.05 per mcf, respectively. NPI oil and gas prices fell 30% and 16%.
- Proved developed reserves at year-end were 7.092 million barrels of oil and 41.154 billion cubic feet of gas, versus 5.678 million barrels and 49.370 billion cubic feet in 2015. Oil reserves increased largely from Permian development and well performance; gas reserves declined mainly because lower prices shortened estimated economic production limits.
- Standardized measure of discounted future net cash flows declined to $121.5 million from $136.3 million. This SEC reserve measure is not presented as fair value and is sensitive to estimates, prices and costs.
Outlook, risks and other notable items
- No specific earnings, production or distribution guidance is provided. Management says distributions depend on available cash and are highly sensitive to oil and, particularly, natural gas prices. The partnership does not plan to hedge commodity-price exposure.
- Management expects to consider Oklahoma production activities such as fracture treatments, deepening, recompletions and drilling depending on gas prices. Costs and resulting NPI distributions are uncertain; the partnership does not directly control most property operations or development.
- The NPI entitles the partnership to 96.97% of qualifying net proceeds from the operating partnership’s properties. Costs and capital spending can reduce or defer NPI payments; deficits may carry forward under the NPI calculation.
- Key risks include volatile commodity prices, depletion and reserve-estimate uncertainty, limited control over operators, concentrated Hugoton-field exposure, aging Oklahoma gathering infrastructure, environmental and regulatory changes, and uninsured losses. The partnership has no business-interruption insurance.
- Management reported increased leasing activity late in 2016. Effective January 1, 2016, the operating partnership began gas deliveries under a DCP Midstream processing and purchase agreement with less favorable transportation costs than the prior agreement.
- Ordinary-course legal and administrative proceedings were disclosed; management did not believe they would significantly affect financial position or operating results. Dallas office lease commitments totaled $459,000, primarily due in 2017 and 2018.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How current commodity prices, production trends and leasing activity affect cash receipts and future quarterly distributions.
- Whether reserve estimates and the $121.5 million standardized measure remain reasonable as prices, costs and production data change.
- The operating partnership’s capital spending, cost carryforwards and condition of the Oklahoma gathering system, and their effect on NPI proceeds.
- Potential exposure to environmental, regulatory, tax and other contingencies, including risks associated with partnership tax treatment.
- The distinction between distributions paid during 2016 and the fourth-quarter 2016 distribution paid in February 2017.