Dorchester Minerals, L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Dorchester owns mineral, royalty, overriding royalty, net profits and leasehold interests across 25 states.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $12.727 million | $6.126 million |
| Net income | $8.522 million | $1.498 million |
| Net income allocated to common unitholders | $8.222 million | $1.438 million |
| Net income per common unit | $0.27 | $0.05 |
| Net cash provided by operating activities | $10.086 million | $4.470 million |
| Distributions paid | $7.690 million | $6.339 million |
Revenue increased 108%, and net income margin was approximately 67%, versus 24% in Q1 2016. Royalties were $10.623 million (up from $5.784 million); net profits interests (NPIs) were $1.660 million (up from $23,000). Q1 2017 revenue included $1.1 million from legal settlements relating to royalty properties.
Total costs and expenses were $4.205 million, down from $4.628 million. Operating costs rose to $987,000 from $507,000, primarily due to higher production taxes; general and administrative expense fell 22% to $1.463 million, and depletion and amortization fell 22% to $1.755 million.
Balance sheet and liquidity
At March 31, 2017, cash was $10.608 million, total current assets $17.798 million, current liabilities $754,000, and total assets $68.522 million. Partnership capital was $67.768 million. The filing reports no debt; the partnership agreement generally prohibits indebtedness above $50,000 other than trade payables and also restricts acquisition indebtedness. Cash increased by $2.396 million during the quarter.
The first-quarter distribution was $0.306700 per common unit, scheduled for payment May 11, 2017. The partnership agreement required the next cash distribution to be paid by August 14, 2017.
Material changes and management commentary
- Royalty-property oil volumes rose 23% to 175,000 barrels; gas volumes were unchanged at 854 million cubic feet. Royalty-property average realized prices increased to $44.44 per barrel for oil and $3.31 per Mcf for gas, from $29.90 and $1.80, respectively.
- NPI oil and gas volumes declined 25% and 31%, respectively, reflecting natural reservoir declines and, for gas, higher suspense releases in the prior-year quarter. NPI average prices nevertheless increased year over year.
- Management attributes improved results principally to higher oil and gas prices, increased royalty-property oil volumes and other income. It expects sufficient funds to cover expenses and does not anticipate significant replacement spending for the operating partnership’s Oklahoma facilities.
Outlook, risks and unusual items
- No quantitative earnings, production or price guidance is provided. Results depend substantially on volatile oil and natural gas prices; the partnership does not anticipate hedging.
- The Minerals NPI had a $800,000 cumulative cash-basis deficit at March 2017. A monthly deficit can defer NPI payments; deficits are carried forward in payment calculations.
- Reserve estimates and commodity prices affect depletion and the full-cost ceiling test. Downward reserve revisions or lower prices could cause a non-cash impairment.
- Ordinary-course legal and administrative proceedings have unpredictable outcomes, but management does not believe they will significantly affect financial position, cash flows or results.
- An office-lease amendment signed April 17, 2017, extends the lease through 2029, with monthly rent of $25,000–$30,000 and a $650,000 tenant improvement allowance. The filing estimates approximately $3 million of lease commitments may be subject to balance-sheet capitalization under a forthcoming accounting standard; the adoption amount was not yet estimable.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the higher commodity prices and the $1.1 million legal settlement are recurring or continue to support results.
- Subsequent oil and gas prices, production volumes, and the effect of ongoing natural declines on royalty and NPI cash receipts.
- The status and potential payment impact of the Minerals NPI’s $800,000 cash-basis deficit.
- Future distribution levels and the timing of cash receipts, including suspended funds and purchaser adjustments.
- Reserve assumptions, any full-cost ceiling-test impairment exposure, and the eventual balance-sheet effect of the amended lease and new lease accounting rules.