Dorchester Minerals, L.P. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Dorchester owns mineral, royalty, overriding royalty, leasehold and net profits interests. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net operating revenue | $19.6 | $13.9 | $59.2 | $50.9 |
| Net income | $12.9 | $9.3 | $40.4 | $36.6 |
| Net income allocable to unitholders | $12.4 | $8.9 | $39.1 | $35.3 |
| Net income per common unit | $0.35 | $0.27 | $1.15 | $1.09 |
| Operating cash flow | Not separately presented | Not separately presented | $54.8 | $46.7 |
Q3 revenue rose 41% and unitholder income rose 39%; for the nine months, revenue rose 16% and unitholder income rose 11%. The filing attributes these gains mainly to higher royalty and net profits interest (NPI) revenue, with Q3 also benefiting from lease bonuses. Lower commodity prices and higher depletion, depreciation and amortization, general and administrative costs, and—in the nine-month period—operating costs partly offset the gains. Calculated net income margins were approximately 65.8% for Q3 2019 versus 66.6% in Q3 2018, and 68.3% versus 71.9% for the nine-month periods.
Q3 revenue included royalties of $14.1 million, NPI revenue of $2.3 million and lease bonuses of $3.1 million. Nine-month revenue included royalties of $44.6 million, NPI revenue of $10.5 million and lease bonuses of $3.6 million.
Operations and material changes
- Royalty-property oil volumes increased 26% in Q3 and 31% year to date; natural gas volumes increased 19% and 18%, respectively. The filing cites increased production, including in the Permian and Bakken.
- Royalty oil prices fell 10% in Q3 and 12% year to date; natural gas prices fell 43% and 25%. NPI oil and gas prices also declined. Management identifies changing market conditions as the cause.
- Q3 lease bonus revenue increased to $3.1 million from $0.3 million, mainly due to multiple Texas leases. Nine-month lease bonus revenue declined to $3.6 million from $4.5 million, partly because of a prior-year leasehold assignment.
- On March 29, 2019, the Partnership completed the Huffman Acquisition, receiving mineral, royalty and NPI interests, including approximately 76,000 net acres across 14 states. It issued 2.4 million common units valued at $43.8 million and received $1.4 million in cash receipts. The balance sheet included $42.9 million of net property additions related to the acquisition.
Cash, liquidity and capital
- Cash and cash equivalents were $21.9 million at September 30, 2019, compared with $18.3 million at December 31, 2018. Nine-month operating cash flow of $54.8 million exceeded distributions paid of $53.0 million.
- Investing activities provided $1.8 million, principally reflecting cash contributed with the acquisition; there were no material capital expenditures reported. Cash increased $3.6 million during the nine months.
- Total assets were $124.0 million and total liabilities were $6.0 million. Liabilities included $2.6 million of operating lease obligations; the filing reports no debt other than trade payables and states the partnership agreement generally restricts indebtedness above $50,000.
- Nine-month distributions were $1.513903 per unit. The filing lists the Q3 2019 distribution as $0.499055 per unit, payable November 7, 2019. Distribution timing and amounts should be distinguished from distributions recorded or paid during a particular reporting period.
Outlook, risks and other matters
No numerical earnings or production guidance is provided. Management says cash from royalty properties and NPIs is the primary capital source and expects funds to be available for expenses. The Partnership does not directly bear exploration, development or production costs. NPI receipts may be affected by the Operating Partnership’s costs, capital spending and production; management noted the Minerals NPI had $6.3 million of outstanding capital commitments, equal to its cash on hand, at September 30.
Results are exposed to oil and natural gas prices, production volumes, development activity, market and regulatory conditions, and environmental requirements. The Partnership does not anticipate hedging commodity-price exposure and does not expect material interest-rate or foreign-currency risk. Legal and administrative proceedings arise in the ordinary course; management does not believe they will significantly affect financial position, cash flows or results. The filing reports effective disclosure controls and no material changes in internal controls during the quarter.
Important facts for investors to verify
- How much of revenue and cash flow growth is sustainable after the Huffman Acquisition, and how acquisition assets affect future depletion.
- Exposure to falling oil and gas prices, including realized prices and production trends for royalty properties and NPIs.
- Whether lease bonuses and NPI payments remain at recent levels; lease bonuses can vary substantially between periods.
- Distribution coverage and the timing distinction between declared, paid and reported per-unit distributions.
- Lease-obligation commitments, NPI-related capital requirements and any changes in the Operating Partnership’s development plans.