Dorchester Minerals, L.P. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing also provides fourth-quarter 2014 operating and distribution information. Dorchester is a publicly traded limited partnership that owns oil and natural gas royalty properties and net profits interests (NPIs); its interests span 25 states. The partnership distributes available cash quarterly and does not expect to incur debt other than ordinary-course trade payables.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $65.170 million | $65.869 million | Down 1.1% |
| Operating income | $44.527 million | $43.400 million | Up 2.6% |
| Net income | $45.239 million | $43.576 million | Up 3.8% |
| Net income per unit | $1.42 | $1.37 | Up $0.05 |
| Cash provided by operations | $57.660 million | $56.398 million | Up 2.2% |
| Cash distributions paid | $60.539 million | $55.015 million | Up 10.0% |
Operating and net margins were approximately 68.3% and 69.4%, respectively. Cash and cash equivalents were $15.912 million at year-end, versus $15.175 million a year earlier. Total assets were $97.509 million and total liabilities were $0.985 million; the filing reports no borrowing or credit facility. The current ratio was approximately 26.9x. The $0.485780-per-unit fourth-quarter distribution was paid in February 2015. The filing reports $1.903398 per unit of distributions paid during calendar 2014.
Material changes and operating developments
- Revenue was nearly flat year over year, as higher natural gas prices and oil production were offset by lower lease-bonus revenue, lower oil prices, and declining natural gas volumes.
- Royalty-property oil sales rose to 502 thousand barrels from 379 thousand; gas sales fell to 3,574 mmcf from 5,049 mmcf. NPI oil sales rose to 219 thousand barrels from 140 thousand; NPI gas sales declined to 3,383 mmcf from 4,111 mmcf.
- Higher average gas prices supported results: royalty-property gas averaged $4.21/mcf versus $3.44, and NPI gas averaged $5.02/mcf versus $4.15. Average oil prices declined to $78.64/bbl from $94.15 for royalty properties and to $80.83/bbl from $91.85 for NPIs.
- Depletion, depreciation and amortization declined to $10.050 million from $13.143 million, primarily reflecting a lower depletion rate and reserve estimate revisions. General and administrative expense increased 22.4% to $5.137 million, mainly due to increased property activity and compensation costs.
- The partnership received $2.264 million of lease-bonus cash in 2014, compared with $2.109 million in 2013; recognized lease-bonus revenue was $1.590 million, down from $2.319 million.
- Proved reserves at year-end were 5.746 million barrels of oil and 55,701 mmcf of gas, compared with 5.087 million barrels and 60,473 mmcf in 2013. Reserve revisions increased oil and gas estimates, while production and a sale of Kansas NPI gas reserves reduced them.
Outlook, risks and unusual items
- No formal earnings or distribution guidance is provided. Distributions depend on cash receipts, commodity prices, production, costs and reserves set aside by the general partner. Management described 2014 results as strong, citing activity in the Bakken and Permian regions.
- The partnership reported a temporary $9.0 million cumulative deficit for the Minerals NPI at December 31, 2014, after capital spending and commitments. Cash available in that NPI was $5.8 million against $14.8 million of capital commitments. No 2014 net profits income was recorded from this NPI while capital expenditures exceeded net operating income.
- Development costs on NPI properties were $19.034 million in 2014, versus $5.974 million in 2013. Capital expenditures and other production costs can reduce NPI payments and may defer future receipts.
- A September 2014 sale of Kansas working interests in the Hugoton NPI generated $3.616 million of cash proceeds; the transaction’s initial purchase price was $3.8 million. The partnership credited approximately $3.5 million, net of sale costs, to the full-cost pool.
- Other income included $0.712 million from a first-quarter 2014 settlement of a North Dakota lease dispute. Ordinary-course legal and administrative proceedings were not believed to have a significant financial effect.
- Key risks include volatile oil and gas prices, natural declines in production, limited control over third-party operators, uncertain reserve estimates, concentrated Hugoton-area exposure, regulatory and environmental changes, and potential uninsured losses. The partnership does not anticipate hedging commodity-price exposure.
- The Oklahoma Hugoton gas purchase and processing agreements were due to expire at the end of 2015. The filing states that alternative purchasers were reviewed and management did not expect loss of a single customer to have a material adverse effect.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- How the Minerals NPI deficit and $14.8 million of capital commitments may affect the timing and amount of future NPI distributions.
- Whether the expiring Hugoton gas purchase and processing arrangements were renewed or replaced, and on what terms.
- How lower oil prices after 2014 affected realized prices, revenues, reserve estimates and cash distributions.
- The reconciliation of reported annual distributions, including the timing difference between calendar-year payments and the fourth-quarter distribution paid in February 2015.
- Whether reserve revisions and the reported reserve mix remain supported by updated independent engineering estimates.