Dorchester Minerals, L.P. — 2021 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2021, compared with 2020. Dorchester Minerals owns oil and natural gas mineral, royalty and overriding royalty interests, plus a net profits interest (NPI). Its properties span 582 counties and parishes in 26 states. The Partnership generally does not operate its royalty properties and distributes available cash quarterly after expenses and reserves.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Operating revenue | $93.4 million | $46.9 million |
| Net income | $70.2 million | $21.9 million |
| Net income per common unit | $1.94 | $0.61 |
| Net cash from operating activities | $70.3 million | $39.4 million |
| Cash and cash equivalents at year-end | $28.3 million | $11.2 million |
Net income margin was approximately 75% in 2021, compared with 47% in 2020. Total liabilities were $4.4 million, consisting primarily of operating lease liabilities; the Partnership reported no credit facility and does not anticipate material debt. Current assets were $46.7 million against current liabilities of $2.8 million.
Revenue comprised $74.0 million in royalties, $17.6 million in NPI revenue, $0.8 million in lease bonuses and $1.0 million in other revenue. The Partnership reported $55.8 million of distributions paid to limited partners and the General Partner during 2021, including $53.9 million to limited partners. The fourth-quarter 2021 distribution, paid in February 2022, was $0.639287 per unit.
Changes versus 2020
- Revenue nearly doubled, primarily reflecting substantially higher realized commodity prices and increased royalty-property volumes. Average royalty-property oil and natural gas prices rose 76% and 130%, respectively; NPI prices rose 88% and 211%.
- Royalty-property oil and natural gas sales volumes increased 9% and 5%. NPI oil and natural gas volumes decreased 29% and 41%, respectively, reflecting production declines and the absence of Hugoton NPI production following its 2020 divestiture.
- Production taxes and operating expenses increased 33%, chiefly due to higher production taxes. DD&A declined 12%, and G&A declined 31%, including the effect of forgiveness of two Operating Partnership PPP loans totaling $1.7 million and lower 2020 transaction and severance costs.
- Operating cash flow rose 78%. Cash increased by $17.1 million during the year, after distributions and other cash flows.
- The Partnership issued 725,000 units valued at $12.2 million for Bakken overriding royalty interests and 1,580,000 units valued at $31.3 million for mineral and royalty interests across four states. The acquisitions added approximately 11,000 net royalty acres combined.
Outlook, risks and unusual items
Management stated that it expects sufficient liquidity to fund operations and distributions, but provided no specific earnings, production or distribution guidance. Distributions depend on cash receipts, expenses and reserves, and can vary with commodity prices and production. Management noted that oil and gas markets remained volatile and that COVID-19 and its variants could affect demand and prices.
- The Partnership does not control most property operations, drilling or production and does not currently plan to hedge commodity exposure.
- Production declines, operator decisions, lease expirations, title disputes or payment suspense, and costs charged against NPI proceeds could reduce cash receipts and distributions.
- Material disclosed uncertainties include environmental and climate regulation, hydraulic-fracturing and wastewater rules, regional concentration in the Bakken and Permian, and potential impacts from litigation concerning the Dakota Access Pipeline.
- Acquisitions were funded with units, diluting existing unitholders. The Partnership is subject to limitations on cash-funded acquisitions and generally avoids debt; its partnership agreement restricts indebtedness other than trade payables to $50,000.
- Proved developed producing reserves totaled 9.175 million barrels of oil and 37.899 billion cubic feet of natural gas at year-end. The standardized measure of discounted future net cash flows rose to $269.5 million from $136.8 million, reflecting higher prices, reserve revisions and acquisitions; this measure is not a fair-value estimate.
- The 2021 results included $1.7 million in nonrecurring PPP loan forgiveness credits to compensation costs. The 2020 Hugoton NPI divestiture generated $5.7 million of gross proceeds and $0.5 million of transaction costs.
The independent auditor issued an unqualified opinion on the financial statements and reported no critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021. Ordinary-course legal proceedings were not expected to have a significant financial effect.
Important facts for investors to verify
- How much of 2021’s revenue and cash-flow improvement came from higher prices versus sustained production and how those drivers are evolving.
- The effect of the two unit-funded acquisitions on per-unit cash distributions, reserves and future production.
- NPI cost commitments, accumulated deficits and the timing of related-party NPI receivables and payments.
- Reserve assumptions, including commodity prices, production declines and the sensitivity of reserve estimates and the standardized measure to revisions.
- Distribution timing and the distinction between calendar-year cash paid and the fourth-quarter distribution paid in February 2022.
- Potential effects of operator payment suspensions, regulatory changes and Dakota Access Pipeline developments on Bakken-related revenue.