Dorchester Minerals, L.P. — Q2 2015 Form 10-Q
Business context and reporting period. The partnership owns mineral, royalty, overriding royalty, net profits, and leasehold interests across 574 counties and parishes in 25 states. This filing covers the three and six months ended June 30, 2015; interim results are unaudited.
Key financial results
Amounts below are in millions of dollars, except per-unit data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $8.280 | $17.973 | $17.084 | $35.312 |
| Operating income | $3.814 | $12.611 | $7.844 | $24.858 |
| Net income | $3.816 | $12.669 | $7.847 | $25.566 |
| Net income allocable to unitholders | $3.667 | $12.208 | $7.545 | $24.650 |
| Net income per common unit | $0.12 | $0.39 | $0.25 | $0.80 |
| Operating margin | 46.1% | 70.2% | 45.9% | 70.4% |
- For the first six months, operating cash flow was $16.073 million, down from $32.282 million. Distributions paid were $25.075 million, versus $30.675 million a year earlier; cash declined by $8.884 million to $7.028 million.
- At June 30, cash was $7.028 million, current assets were $14.912 million, and current liabilities were $1.779 million. Total liabilities were $1.829 million, including deferred rent incentives; the partnership reports no debt and is contractually restricted from incurring material indebtedness.
- Second-quarter distribution was $0.167430 per unit, paid August 6, 2015. The partnership agreement requires the next distribution by November 15, 2015.
Material changes and operating drivers
- Revenue fell 53.9% in Q2 and 51.6% for the first half year over year. Unitholder-allocated net income declined 70.0% and 69.4%, respectively.
- Lower oil and gas prices were the primary pressure: royalty-property oil prices fell 41.9% in Q2 and 45.3% for the half; gas prices fell 49.6% and 48.3%. NPI oil and gas prices also declined substantially.
- Production trends were mixed. First-half royalty oil volumes rose 3.2%, while royalty gas volumes fell 6.7%. NPI oil volumes increased 86.0%; NPI gas volumes declined 9.1%. Management attributed increases to activity in the Permian and Bakken and declines mainly to natural reservoir decline and, for NPI gas, a sale of Kansas working interests.
- Lease bonus revenue dropped to $3,000 in Q2 and $50,000 for the half, from $523,000 and $739,000, respectively. Costs and expenses declined less than revenue; G&A rose 8.4% in Q2 and 10.4% for the half, primarily due to compensation for new hires.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or production guidance. Management expects operating cash to be sufficient for expenses, but distributions depend on cash receipts and are affected by prices and production.
- Commodity-price exposure is material; the partnership does not anticipate using financial hedges. It also cites reservoir decline, operating and development activity, regulatory and environmental changes, and estimation uncertainty as risks.
- The Minerals NPI had a disclosed cumulative deficit of $4.1 million at June 30, 2015, reflecting capital commitments exceeding available cash after activity since July 2013. Net profits income from this NPI was zero in Q2 and the first half of 2015 because cumulative capital costs exceeded operating income.
- Oil and gas properties use the full-cost method and are subject to a quarterly ceiling test. Lower prices or downward reserve revisions could lead to a noncash impairment. Management stated ordinary-course legal or administrative proceedings were not expected to materially affect financial position, cash flows, or results.
- Management was evaluating the impact and adoption method for the new revenue-recognition standard, then effective for annual periods beginning after December 15, 2017. Disclosure controls were considered effective, with no material internal-control changes reported during the quarter.
Important facts for investors to verify
- Whether commodity prices and production volumes continue to pressure revenues, margins, and cash available for distributions.
- How the Minerals NPI deficit and capital commitments develop, and when that NPI may again generate distributable net profits.
- Distribution levels relative to operating cash flow, particularly given first-half distributions exceeded reported operating cash flow.
- Any reserve revisions or full-cost ceiling-test impairment, and any material changes in legal matters or operating-partnership activity.