Dorchester Minerals, L.P. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Dorchester owns mineral, royalty, overriding royalty, leasehold and net profits interests across 25 states. The interim statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $14.308 million | $18.326 million | $42.983 million | $49.049 million |
| Operating income | $8.130 million | $11.469 million | $24.096 million | $28.979 million |
| Net earnings | $8.129 million | $11.506 million | $24.107 million | $29.016 million |
| Net earnings per common unit | $0.26 | $0.36 | $0.76 | $0.91 |
| Operating cash flow | $11.543 million | $14.892 million | $44.036 million | $42.506 million |
- Q3 revenue fell 21.9% and nine-month revenue fell 12.4%. Q3 unitholder earnings declined 29.6%; nine-month unitholder earnings declined 17.3%.
- Operating margin, calculated from reported revenue and operating income, was approximately 56.8% in Q3 2012 versus 62.6% in Q3 2011, and 56.1% for the first nine months versus 59.1%.
- At September 30, cash was $12.346 million, current assets $20.435 million, current liabilities $1.605 million, and total liabilities $1.665 million. The partnership reported no debt other than trade payables and is restricted from incurring more than $50,000 of indebtedness, apart from trade payables.
- Nine-month distributions paid were $45.928 million, compared with $38.014 million in 2011. Cash declined by $1.892 million during the first nine months to $12.346 million.
Changes and operating drivers
- Lower natural gas prices and lower Q3 royalty-property gas volumes weighed on revenue. Royalty-property gas volumes declined 19.7% in Q3, while gas prices fell 23.4%; nine-month gas prices were down 36.7%.
- Oil trends were more favorable: royalty-property oil volumes rose 2.3% in Q3 and 9.0% year to date; reported oil prices increased modestly. NPI oil and gas volumes also increased, with year-to-date NPI growth principally reflecting inclusion of the Minerals NPI.
- Lease bonus revenue rose to $1.128 million in Q3 from $56,000 and to $4.531 million for nine months from $386,000. Lower general and administrative and depletion expenses partly offset revenue pressure.
- Nine-month operating cash flow increased 3.6%, despite lower earnings, primarily due to increased oil and gas volumes and lease bonus income; Q3 operating cash flow declined 22.5%.
Outlook, risks and contingencies
- No earnings or production guidance was provided. Management cited oil and gas price volatility as a principal risk and said it did not anticipate hedging.
- Management was exploring options for unleased Bakken interests and anticipated circulating a request for proposals; it could not predict whether, when or with whom a transaction might occur.
- A Hugoton royalty-underpayment dispute was settled for $500,000 plus immaterial future fuel-gas royalty amounts. The $500,000 reserve was recorded in Q1 2012; court approval followed on October 18, 2012. Other ordinary-course proceedings were not expected to have a significant financial effect.
- Management described possible increases in operating and repair costs as field facilities age and reservoir pressure declines. Infill drilling in the Guymon-Hugoton field could require significant capital, but its outcome and cost were uncertain.
- Full-cost accounting and reserve estimates involve significant judgment; downward reserve revisions or lower prices could result in a noncash impairment. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Investor facts to verify
- Whether subsequent quarters sustain the improved oil volumes and lease-bonus income, and how natural gas prices and volumes affect royalty and NPI receipts.
- The effects of the Hugoton settlement and any remaining or future related royalty obligations.
- Whether the proposed Bakken marketing process results in a lease or other transaction, and its terms and timing.
- How distributions compare with operating cash flow: nine-month distributions exceeded reported operating cash flow in 2012.
- The basis for reserve estimates, depletion rates and full-cost ceiling calculations, given commodity-price and reserve-estimation sensitivity.