Dorchester Minerals, L.P. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Amounts are in millions of dollars unless otherwise noted. Dorchester owns mineral, royalty, overriding royalty, net profits, and leasehold interests across 25 states.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $12.480 | $10.679 | $37.760 | $26.814 |
| Net income | $7.224 | $6.647 | $24.195 | $14.096 |
| Net income per common unit | $0.22 | $0.21 | $0.75 | $0.44 |
| Net margin | 57.9% | 62.2% | 64.1% | 52.6% |
- Revenue rose 17% in Q3 and 41% for the nine-month period. Management attributed the increases principally to higher royalty revenue from stronger oil and gas prices and higher royalty-property volumes.
- Q3 operating costs and production taxes increased 46% to $1.320 million, mainly due to higher commodity prices; nine-month costs increased 54% to $3.358 million. Q3 depletion and amortization increased 34% to $2.795 million, primarily reflecting acquired interests.
- Royalty-property oil and gas volumes increased in both comparison periods, mainly due to Permian Basin production. NPI oil volumes declined 29% in Q3 and 35% year to date, principally from natural reservoir declines.
- Nine-month operating cash flow was $31.274 million, up 45% from $21.563 million. Distributions paid were $28.260 million, compared with $19.203 million. Cash increased to $11.557 million from $8.212 million at year-end 2016.
Financial position, capital, and distributions
- At September 30, total assets were $88.305 million and total liabilities were $2.251 million; partnership capital was $86.054 million. Current assets were $19.088 million versus current liabilities of $1.789 million.
- The filing reports no borrowings and states that the Partnership generally cannot incur indebtedness above $50,000, other than trade payables. It expects cash from its royalty properties and NPIs to cover expenses; distributions are made after expenses.
- The Q3 distribution was $0.284650 per unit and was scheduled for payment November 9, 2017. Units outstanding were 32,279,774 as of November 3, 2017, up from 30,675,431 before the 2017 issuance.
Significant transactions, outlook, and risks
- On June 30, 2017, the Partnership completed an acquisition of Midland Basin mineral and royalty interests for consideration valued at approximately $23.183 million. It issued 1,604,343 common units; the transaction’s consideration was structured as approximately half cash and half units. The acquired interests included 1,850 net royalty acres across six Texas counties.
- Management provided no quantified earnings or production guidance. It said it anticipates sufficient funds to pay expenses and does not expect significant costs to replace the operating partnership’s Oklahoma facilities at this time. Development and capital activity by the operating partnership may affect NPI payments.
- Commodity-price volatility is a principal risk; the Partnership does not anticipate hedging. Results are also exposed to production changes, including natural declines, and reserve-estimation uncertainty that could result in a non-cash impairment under the full-cost ceiling test.
- The Minerals NPI was in surplus at quarter-end, with outstanding capital commitments of $7.4 million, equal to cash on hand. Ordinary-course legal and administrative proceedings were reported, with no significant financial impact expected by management.
- The office lease was amended for a 129-month term beginning June 1, 2018, through 2029, with monthly rent of $25,000–$30,000 and an approximately $700,000 tenant-improvement allowance. The Partnership estimated approximately $3 million of lease commitments may be subject to capitalization under the forthcoming lease standard, but could not estimate the amount to be recognized at adoption.
- Management stated that revenue-recognition changes were expected to have a materially consistent timing and presentation. Disclosure controls were assessed as effective, with no material change in internal controls reported during the quarter.
Key facts for investors to verify
- Whether the acquired interests deliver expected production and revenue, and how the unit issuance affects per-unit distributions and earnings.
- Whether oil and gas prices and volumes sustain the improvement in royalty revenue, given commodity exposure and declining NPI oil volumes.
- The level and timing of NPI cash receipts, capital commitments, and distributions; NPI payments can vary with underlying property economics.
- Future reserve revisions and full-cost ceiling-test results, as well as the lease liabilities recognized when the new lease standard is adopted.