Dorchester Minerals, L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
Dorchester owns producing and nonproducing mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. Net profits interests (NPIs) receive 96.97% of net profits realized by the related operating partnership from designated properties.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $17.339 | $13.218 | +31.2% |
| Operating income | $12.247 | $7.648 | +60.1% |
| Net income | $12.897 | $7.648 | +68.6% |
| Net income allocable to common units | $12.442 | $7.374 | +68.7% |
| Net income per common unit | $0.41 | $0.24 | +70.8% |
| Operating cash flow | $16.290 | $14.635 | +11.3% |
| Distributions paid | $14.934 | $13.788 | +8.3% |
- Operating margin was approximately 70.6%, compared with 57.9% in the prior-year quarter. Net margin was approximately 74.4%, versus 57.9%; Q1 2014 net income included $0.650 million of other income.
- Revenue comprised royalties of $14.663 million, NPI income of $2.445 million, lease bonus of $0.216 million and other revenue of $0.015 million.
- At March 31, cash and cash equivalents were $16.531 million, versus $15.175 million at year-end. Total assets were $110.902 million and total liabilities were $1.115 million. The filing reports no debt; the partnership agreement generally bars indebtedness above $50,000, other than trade payables.
- Q1 2014 cash distributions were $0.496172 per common unit, paid May 1, 2014. The next distribution is required by August 15, 2014.
Changes and drivers versus Q1 2013
- Higher natural-gas prices, increased oil sales volumes and lease bonus income drove revenue growth. Royalty-property gas price rose to $5.15/Mcf from $3.10; NPI gas price rose to $5.70/Mcf from $3.35. Oil prices were lower for royalty properties ($83.85/bbl versus $87.72) and broadly stable for NPIs ($87.89 versus $88.89).
- Reported gas volumes declined: royalty-property sales were 823 MMcf versus 1,277 MMcf, and NPI sales were 843 MMcf versus 1,067 MMcf. Oil volumes increased to 124 Mbbl from 87 Mbbl for royalty properties and to 48 Mbbl from 21 Mbbl for NPIs. Management attributed these movements to both field activity and a reporting-method change, as well as natural reservoir declines in some areas.
- Total costs and expenses decreased 8.6% to $5.092 million. Lower depletion and amortization ($2.517 million versus $3.386 million) offset higher G&A ($1.136 million versus $0.899 million) and operating costs. Management linked higher G&A primarily to Bakken Trend and Fayetteville Shale costs.
- The $0.650 million other-income item arose from settlement of a dispute concerning North Dakota leases. Operating cash flow increased, while distributions paid also rose.
Outlook, risks and other matters
- The filing provides no specific earnings, production or distribution guidance. Management expects sufficient funds to cover expenses; distributions are made after expenses are paid.
- The Minerals NPI had a temporary cumulative deficit of $7.9 million at March 31, 2014, primarily due to budgeted capital expenditures. NPI payments may be affected by operating-partnership drilling and other costs.
- Management said the operating partnership plans, depending on gas prices, to pursue Oklahoma production activities that may include fracture treatments, deepening, recompletions and drilling. Such costs are variable and not predictable. Infill drilling in the Guymon-Hugoton field could require considerable capital, with uncertain outcome and cost.
- Key exposures include volatile oil and gas prices, production and reserve changes, and estimation uncertainty. The partnership does not anticipate hedging commodity exposure, taking on debt or incurring material interest-rate or foreign-currency risk. Reserve revisions could affect depletion and the full-cost ceiling test and could result in a non-cash impairment.
- Management reported ordinary-course legal or administrative proceedings that it did not believe would significantly affect financial position, cash flows or results. Disclosure controls were deemed effective, with no material changes in internal controls reported.
Important facts for investors to verify
- Assess how much reported volume growth or decline reflects the accounting-method change rather than underlying production. From January 1, 2014, plant products were reclassified from gas-equivalent to liquid-equivalent volumes; prior-year volumes were not restated.
- Review the sustainability of higher gas prices and the effect of natural declines and production costs on royalty and NPI receipts.
- Track the $7.9 million temporary Minerals NPI deficit and related operating-partnership capital spending.
- Distinguish accrued sales from cash receipts: Q1 NPI cash receipts included a $2.0 million payment for 2013 production under a gas-delivery agreement in effect through 2015, which increased the quarter’s indicated NPI gas price.
- Monitor reserve estimates and the full-cost ceiling test, as well as the timing and amount of future distributions.