Dorchester Minerals, L.P. — Q1 2018 Form 10-Q
Business and period: The Partnership owns mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. It reports the three months ended March 31, 2018; financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $15.9 million | $12.7 million | +25% |
| Net income | $11.0 million | $8.5 million | +29% |
| Net income allocable to common units | $10.6 million | $8.2 million | +29% |
| Net income per common unit | $0.33 | $0.27 | +22% |
| Cash from operating activities | $14.5 million | $10.1 million | +44% |
| Cash distributions paid | $12.9 million | $7.7 million | +68% |
- Net margin was approximately 69%, versus 67% in Q1 2017.
- Revenue comprised $13.2 million of royalties, $2.6 million of net profits interests (NPIs), $38,000 of lease bonus and $36,000 of other revenue.
- At March 31, cash and cash equivalents were $15.4 million, up from $13.8 million at year-end. Total assets were $90.8 million; total liabilities were $2.1 million. The filing reports no debt and limits indebtedness, other than trade payables, to $50,000.
- Investing activities provided $18,000 net, including $52,000 contributed in an acquisition of royalty interests and $34,000 of capital expenditures.
Changes and management commentary
- Royalty-property oil and gas sales volumes rose 9% and 7%, respectively. Average realized prices rose for oil (to $56.55/bbl from $44.44) but fell for natural gas (to $2.75/mcf from $3.31).
- NPI oil and gas volumes increased 36% and 11%; NPI average oil price rose to $55.36/bbl from $40.55, while gas price eased to $2.61/mcf from $2.71. Management attributed higher NPI volumes mainly to increased Permian Basin suspense releases.
- Management linked higher revenue and operating cash flow primarily to stronger oil prices and higher sales volumes. Operating costs, including production taxes, increased 27% to $1.3 million, largely reflecting higher oil prices; depletion and amortization rose 24% to $2.2 million, partly due to acquired interests. G&A was broadly unchanged at $1.5 million.
- The first-quarter distribution was $0.418449 per common unit, payable May 10, 2018. At March 31, the Minerals NPI was in surplus, with outstanding capital commitments equal to its $6.5 million cash on hand.
Outlook, risks and unusual items
- No quantified earnings or production guidance is provided. Management expects funds to be sufficient for expenses; distributions depend on available cash after expenses.
- Results are exposed to oil and natural gas price volatility; the Partnership does not anticipate hedging. Property development and production changes, including potential Oklahoma operations and infill drilling, may affect NPI receipts and involve uncertain costs.
- On April 18, 2018, the Partnership and general-partner affiliates closed a sale of nonproducing Upton County, Texas interests. The Partnership’s share of proceeds was $4.0 million, expected to be included in the second-quarter 2018 cash distribution.
- The office lease amendment extends the lease through 2029, with monthly rent of $25,000–$30,000 and a $0.7 million tenant-improvement allowance. The Partnership estimates $3.0 million in lease commitments may be subject to balance-sheet capitalization under the new lease standard; it was still evaluating the impact.
- Adoption of ASC 606 on January 1, 2018, using the full retrospective method, had no reported effect on revenue amounts or timing. Ordinary-course legal proceedings were not believed to have a significant financial effect. Management reported effective disclosure controls and no material internal-control changes during the quarter.
Key facts for investors to verify
- Whether revenue and cash-flow gains persist, particularly as oil and gas prices and volumes fluctuate.
- The timing and amount of distributions, including the treatment of the $4.0 million Upton County sale proceeds.
- The status and cash requirements of the $6.5 million in Minerals NPI capital commitments.
- Future reserve estimates, ceiling-test headroom and depletion; the filing notes that significant reserve revisions could result in a noncash impairment, though none had been recorded since 2003.
- The eventual balance-sheet and expense effects of the new lease-accounting standard.