Dorchester Minerals, L.P. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The partnership owns mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net operating revenues | $21.1 million | $12.6 million | $37.0 million | $25.3 million |
| Net income | $16.4 million | $8.4 million | $27.3 million | $17.0 million |
| Net income per common unit | $0.49 | $0.26 | $0.82 | $0.53 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $32.7 million | $21.3 million |
Revenue rose 67% in Q2 and 46% for the first half; net income increased 94% and 61%, respectively. Net income was approximately 77.5% of revenue in Q2 2018 versus 67.3% in Q2 2017, and 73.8% for the first half versus 67.1%. Higher oil prices and sales volumes, increased net profits interest (NPI) income, and lease bonus revenue drove results. Natural gas prices were lower.
Cash and cash equivalents were $19.6 million at June 30, 2018, up from $13.8 million at December 31, 2017. Total assets were $93.5 million and total liabilities $2.3 million; the filing reports no material borrowings and states the partnership generally cannot incur indebtedness beyond trade payables, subject to specified restrictions. Six-month distributions paid were $26.9 million, compared with $17.5 million a year earlier. The Q2 2018 distribution was $0.537264 per unit, versus $0.322965 in Q2 2017; the Q2 2018 payment was scheduled for August 10, 2018.
Operating developments and period comparisons
- Q2 royalty-property oil volumes increased 13% and gas volumes 5% year over year. NPI oil volumes rose 37% and gas volumes 5%, with increases attributed mainly to new wells and production developments.
- Royalty-property average realized oil prices increased to $56.30 per barrel in Q2 from $42.70; gas prices declined to $2.20 per mcf from $2.91. NPI oil prices increased to $57.23 per barrel from $39.06, while gas prices declined to $1.98 per mcf from $2.81.
- Lease bonus revenue was $4.1 million in Q2 versus $1.7 million, and $4.2 million for the first half versus $1.8 million. The principal driver was an April assignment of a non-producing Upton County, Texas leasehold interest; the partnership’s approximately $4.0 million share of proceeds was recorded as lease bonus revenue, with an overriding royalty interest retained.
- Operating costs, including production taxes, increased 18% in Q2 and 30% for the first half, primarily because higher oil prices increased production taxes. Depletion and amortization rose 21% and 25%, respectively; general and administrative expenses were broadly unchanged.
Liquidity, outlook and risks
Management identifies cash flows from royalty properties and NPIs as primary capital sources and expects sufficient funds to pay expenses. The partnership is not directly liable for exploration, development or production costs and reports no anticipated significant spending to replace the operating partnership’s Oklahoma facilities. No earnings or production guidance is provided.
- Commodity prices are the principal market risk; the partnership does not anticipate hedging oil or natural gas price exposure. Results are also exposed to production changes and purchaser timing, suspended funds and prior-period adjustments.
- As of June 30, the Minerals NPI was in a cash deficit position, with $7.4 million of outstanding capital commitments exceeding $6.7 million of cash on hand. NPI payments may be affected by operating costs, capital spending and accumulated deficits.
- The partnership has a $3.0 million office lease commitment that management believes will be subject to balance-sheet capitalization under the new lease standard; the impact was still being evaluated. Its renewed office lease runs through 2029, with monthly rent of $25,000–$30,000.
- Ordinary-course legal and administrative proceedings were not believed to have a significant financial effect. The filing reports effective disclosure controls and no material change in internal controls during the quarter.
- Adoption of the new revenue recognition standard in 2018 had no reported impact on revenue amounts or timing.
Important facts for investors to verify
- Whether oil and gas prices and production volumes sustain the reported revenue and earnings growth, particularly given lower natural gas prices and the absence of hedging.
- The sustainability of lease bonus revenue: Q2 included approximately $4.0 million from a specific leasehold assignment.
- The Minerals NPI’s deficit and capital commitments, and how the Operating Partnership’s future activity and spending may affect NPI receipts.
- The amount and timing of future distributions; Q2 2018 distribution was declared for payment after period-end, and the filing does not provide forward distribution guidance.
- The eventual balance-sheet and expense effects of adopting the lease accounting standard.