Dorchester Minerals, L.P. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance sheet compared with December 31, 2012. Dorchester owns mineral and royalty interests and net profits interests (NPIs) in oil and natural gas properties. Financial statement amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Q1 2012 / December 31, 2012 | Change |
|---|---|---|---|
| Operating revenue | $13.218 | $13.433 | Down 1.6% |
| Operating income | $7.648 | $7.286 | Up 5.0% |
| Net income | $7.648 | $7.298 | Up 4.8% |
| Net income allocable to common units | $7.374 | $7.014 | Up 5.1% |
| Net income per common unit | $0.24 | $0.23 | Up $0.01 |
| Operating cash flow | $14.635 | $17.547 | Down 16.6% |
| Cash and cash equivalents | $14.639 | $13.792 | Up $0.847 |
| Total assets | $117.994 | $123.800 | Down $5.806 |
| Total liabilities | $0.871 | $0.537 | Up $0.334 |
Operating margin was approximately 57.9%, compared with 54.2% in Q1 2012. Cash flow from financing activities consisted of $13.788 million in distributions paid; cash increased by $0.847 million during the quarter. The partnership reported no debt and said it does not anticipate a credit facility or borrowing other than trade debt. Current assets were $23.650 million and current liabilities were $0.831 million.
Material changes and operating drivers
- Royalty-property gas sales volume declined 20.0% to 1,277 mmcf, primarily reflecting lower activity in the Fayetteville and Barnett Shales. Royalty-property oil volume was unchanged at 87 mbbls.
- NPI gas sales volume fell 4.6% to 1,067 mmcf, attributed to natural reservoir declines and reduced Fayetteville activity. NPI oil volume increased 40% to 21 mbbls, associated with Permian Basin and Bakken activity.
- Higher average gas prices partly offset lower volumes and oil prices: royalty-property gas prices rose to $3.10/mcf from $2.51, while oil prices fell to $87.72/bbl from $99.49. NPI gas prices rose to $3.35/mcf from $2.35; NPI oil prices declined to $88.89/bbl from $97.57.
- Revenue was lower mainly because of reduced lease bonus income, lower gas volumes, and lower oil prices, partly offset by higher gas prices. Costs and expenses declined 9.4%, largely due to lower depletion and amortization ($3.386 million versus $4.312 million). G&A increased 12.0% to $0.899 million, primarily from non-recurring Bakken Trend costs.
Outlook, risks, and unusual items
- Management identified oil and gas prices, production volumes, development activity, regulation, and reserve estimates as key uncertainties. The partnership does not expect to hedge commodity-price exposure.
- A $2.9 million natural gas liquids payment for 2012 production, under an Oklahoma gas delivery agreement in effect through 2015, increased the Q1 indicated NPI gas price by $3.12/mcf. Management cautioned that indicated prices may not reflect contract prices or production-period prices.
- The partnership was exploring options for its Bakken interests, including a possible request for proposals for leasing, combining, or other transaction structures; it gave no timing or assurance of a transaction. Development of Appalachian interests remains constrained by unresolved regulatory issues concerning high-volume hydraulic fracturing.
- The operating partnership may pursue Oklahoma production-enhancement work depending on gas prices; costs are unpredictable. Potential Guymon-Hugoton infill drilling could require considerable capital and affect NPI receipts.
- The Rapp royalty class action was settled for $0.5 million in October 2012, paid in December 2012, and dismissed. Other ordinary-course legal and administrative proceedings were not believed to have a significant financial effect.
- The first-quarter 2013 distribution was $0.448209 per unit and was paid May 2, 2013. The partnership agreement required the next distribution to be paid by August 15, 2013.
Investor facts to verify
- Whether commodity prices and production trends, particularly gas volumes, support future revenue and distributions.
- The recurrence and timing of NPI receipts, including the nonrecurring $2.9 million liquids payment and any related agreement payments.
- Reserve revisions and the quarterly full-cost ceiling test, which can cause noncash impairment charges; reserve estimates are based on independent consultants but remain uncertain.
- Progress and potential terms of any Bakken leasing or other transaction process, and the effect of operating-partnership activity and costs on NPI payments.
- Distribution coverage and cash generation, given lower operating cash flow year over year and the partnership’s dependence on property receipts.
Management stated that disclosure controls were effective and that no material change in internal controls occurred during the quarter.