Dorchester Minerals, L.P. — 2015 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2015. Dorchester owns oil and natural gas royalty properties and net profits interests (NPIs); it generally does not operate its royalty properties. It holds interests across 25 states and distributes available cash quarterly.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $31.9 million | $65.2 million |
| Operating income | $13.2 million | $44.5 million |
| Net income | $13.3 million | $45.2 million |
| Net income per unit | $0.42 | $1.42 |
| Net cash from operating activities | $27.7 million | $57.7 million |
| Cash distributions paid to partners | $36.6 million | $60.5 million |
| Cash and cash equivalents at year-end | $7.1 million | $15.9 million |
| Total assets | $73.7 million | $97.5 million |
| Total liabilities | $0.6 million | $1.0 million |
Operating margin was approximately 41.6%, versus 68.3% in 2014. The partnership reported no credit facility and does not anticipate debt other than ordinary-course trade payables; its partnership agreement generally limits indebtedness to $50,000. The filing reports no significant off-balance-sheet arrangements. The cash-flow statement shows no material capital expenditure by the Partnership itself; development spending on NPI properties is borne through the operating partnership and affects NPI proceeds.
Changes versus the prior comparable period
- Revenue fell 51%, chiefly because oil and natural gas prices declined sharply. Average royalty-property oil and gas prices fell 46% and 45%, respectively; NPI oil and gas prices fell 39% and 50%.
- Net income declined 71%; operating cash flow fell 52%. NPI revenue decreased to $1.0 million from $8.9 million, and lease-bonus revenue fell to $53,000 from $1.6 million.
- Oil sales volumes increased, including from Bakken activity, but did not offset lower prices. NPI gas sales volumes also declined.
- Cash distributions per unit for the four reported 2015 quarters totaled about $0.87, compared with about $1.92 for 2014. The filing’s selected-data measure reports $1.15 per unit for 2015; its distribution presentation uses different payment-period timing, so the measures should not be treated as identical.
- Proved reserves at year-end were 5.678 million barrels of oil and 49.370 billion cubic feet of gas, versus 5.746 million barrels and 55.701 billion cubic feet in 2014. The standardized measure of discounted future net cash flows fell to $136.3 million from $301.4 million, primarily reflecting lower prices.
Outlook, risks and unusual items
- Outlook: No numerical earnings, production or distribution guidance is provided. Management says the operating partnership may pursue Oklahoma production-enhancement work, depending on gas prices; related costs can reduce NPI payments.
- Distribution exposure: Distributions depend on commodity prices, production, costs, lease activity and cash receipts. The Partnership does not hedge oil or gas prices and has limited control over third-party operators and production decisions.
- Operating and concentration risks: A significant portion of NPI properties is concentrated in Oklahoma’s Hugoton field. Aging wells and a gathering pipeline installed around 1948 may require repairs or upgrades; the resulting costs could reduce NPI proceeds. The Partnership also lacks business-interruption insurance.
- Customer and contract change: The operating partnership began a new DCP Midstream gas processing and purchase agreement on January 1, 2016, with less favorable transportation costs than the prior agreement. Management says alternative purchasers are available.
- NPI balance: The Minerals NPI had a temporary $500,000 cash-basis deficit at December 31, 2015, with $8.3 million of outstanding capital commitments against $7.8 million cash on hand. Accrued Minerals NPI income was zero in 2014 and 2015 because accrued capital costs exceeded accrued operating income.
- Accounting and contingencies: No full-cost ceiling-test impairment was recorded in 2015, 2014 or 2013. Ordinary-course legal and administrative proceedings were not expected to have a significant financial effect. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
- Unusual comparison item: 2014 included $712,000 of other income from settlement of a North Dakota lease dispute; 2015 other income was $7,000.
Important facts for investors to verify
- Whether commodity prices, production and cash receipts support distributions after the steep 2015 decline; distinguish accounting-period distributions from calendar-year cash payments.
- How the 2016 DCP Midstream agreement’s transportation terms affect realized gas prices and net proceeds.
- The timing and amount of Oklahoma NPI capital spending, including whether the Minerals NPI deficit and outstanding commitments change subsequent payments.
- Reserve estimates and the standardized measure’s sensitivity to prices, production costs and future revisions; the filing cautions these estimates are not fair value.
- Potential effects of environmental, hydraulic-fracturing, climate and tax-law changes, as well as related-party cost reimbursements and partnership governance conflicts.