Dorchester Minerals, L.P. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 20, 2014. This is an annual report, not a standalone fourth-quarter report. Dorchester owns mineral and royalty properties and net profits interests (NPIs); it generally distributes available cash quarterly.
Financial and operating performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenues | $65.9 million | $63.2 million | +4.2% |
| Operating income | $43.4 million | $38.0 million | +14.2% |
| Net income | $43.6 million | $38.0 million | +14.6% |
| Net income per unit | $1.37 | $1.20 | +14.2% |
| Net cash from operating activities | $56.4 million | $56.4 million | Approximately flat |
| Cash and cash equivalents at year-end | $15.2 million | $13.8 million | +$1.4 million |
| Total assets | $112.8 million | $123.8 million | −8.9% |
| Total liabilities | $1.0 million | $0.5 million | +$0.4 million |
- Operating margin was approximately 65.9%, compared with 60.1% in 2012. Net margin was approximately 66.2%, versus 60.2%.
- Revenue comprised $53.1 million in royalties, $10.3 million in NPI income, $2.3 million in lease bonuses and $0.1 million in other revenue. Royalty and NPI income rose; lease bonus revenue fell from $4.5 million.
- Oil sales volumes increased on both royalty properties and NPIs. Natural gas volumes declined, while average realized oil and gas prices generally improved from 2012.
- Cash distributions paid to partners during calendar 2013 totaled $55.0 million, or $1.732311 per unit, including the prior-year fourth-quarter distribution. The fourth-quarter 2013 distribution of $0.468560 per unit was paid in January 2014. The four distributions associated with 2013 quarters totaled $1.767639 per unit.
- The partnership reported no credit facility and virtually no debt; its partnership agreement generally limits non-trade indebtedness to $50,000. Current assets were $28.2 million and current liabilities $1.0 million at year-end.
- Proved reserves at year-end were 5.087 million barrels of oil and 60.473 billion cubic feet of natural gas. Oil reserves rose from 2012; gas reserves declined. The standardized measure of discounted future net cash flows increased to $271.3 million from $211.7 million.
Material changes and unusual items
- Revenue rose 4.2% in 2013 after declining 9.0% in 2012. Management attributed the 2013 increase to higher oil and natural gas prices and oil production, partly offset by lower lease bonuses and gas production.
- Net income improved as revenues increased and depletion, depreciation and amortization fell to $13.1 million from $16.6 million. The lower noncash charge was primarily attributed to reserve revisions and reduced gas production.
- Operating cash flow remained essentially unchanged. Cash distributions paid in 2013 were below 2012’s $56.9 million.
- During the fourth quarter, the Minerals NPI and historically smaller Maecenas NPI were merged for operational efficiency; the merger was treated as effective January 1, 2013 for federal tax purposes. The combined NPI was in temporary deficit of $7.626 million at year-end, primarily due to budgeted capital expenditures. The filing says the merger was not expected to materially affect financial statements or distributions.
- No impairment was recorded in 2013, 2012 or 2011. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Outlook, risks and contingencies
- The filing provides no quantified earnings, production or distribution guidance. Management said the operating partnership may pursue Oklahoma production work, including fracture treatments, deepening, recompletions and drilling, depending in part on gas prices; costs and resulting NPI effects are uncertain.
- Distributions depend on volatile oil and gas prices, production levels, lease activity and costs. The partnership does not hedge commodity prices and has limited control over third-party operators and production decisions.
- Hugoton-area NPI properties are geographically concentrated. Aging equipment and the Oklahoma gathering system may require repairs or upgrades; associated costs can reduce NPI proceeds. Uninsured operational, environmental or interruption losses may also affect cash flow.
- Environmental regulation, including possible changes affecting hydraulic fracturing and greenhouse-gas emissions, could raise costs or delay development. Reserve estimates are uncertain and depend on engineering judgments and commodity prices.
- The partnership’s general partner and affiliates have potential conflicts of interest; unitholders have limited voting rights. Cash acquisition and unit issuance are subject to partnership agreement limits.
- Ordinary-course legal and administrative proceedings were disclosed, with no significant effect on financial position or operating results expected. A separate royalty underpayment class action was settled for $500,000 in 2012 and dismissed.
Important facts for investors to verify
- Confirm distribution timing and basis: calendar-year cash paid differs from distributions attributed to the four 2013 quarters.
- Review the combined Minerals/Maecenas NPI deficit, its accumulated cost treatment and implications for future NPI payments.
- Assess the reserve disclosures and the $271.3 million standardized measure, which the filing cautions is not necessarily fair value.
- Track commodity prices, gas-volume declines, lease bonus activity and operating/development costs that affect distributions.
- Review the full risk disclosures on operator control, geographic concentration, aging infrastructure, environmental exposure and general-partner conflicts.