Dorchester Minerals, L.P. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The partnership owns mineral, royalty, leasehold and net profits interests across 574 counties and parishes in 25 states. Amounts below are in millions except per-unit data and where noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $15.242 | $16.434 | $28.675 | $30.723 |
| Operating income / net earnings | $8.680 | $9.770 | $15.966 / $15.978 | $17.510 / $17.510 |
| Net earnings allocated to unitholders | $8.339 | $9.420 | $15.353 | $16.891 |
| Basic and diluted earnings per unit | $0.27 | $0.31 | $0.50 | $0.55 |
| Operating margin | 57.0% | 59.5% | 55.7% | 57.0% |
| Operating cash flow | $14.946 | $13.684 | $32.493 | $27.614 |
Revenue comprised royalties ($11.665 million in Q2), net profits interests ($0.318 million), lease bonus ($3.127 million) and other ($0.132 million). Q2 costs and expenses were $6.562 million; depletion and amortization was $4.482 million.
Liquidity, distributions and capital
- At June 30, cash was $15.350 million, total assets $127.772 million, current assets $22.253 million and total liabilities $1.064 million. Current liabilities were $0.994 million; working capital was approximately $21.259 million.
- The filing reports no borrowings and states that partnership-agreement restrictions generally prohibit indebtedness above $50,000, apart from trade payables. Distributions are the principal use of cash.
- Operating cash flow for the first half was $32.493 million; distributions paid were $31.381 million. Cash increased $1.112 million from year-end 2011.
- The Q2 2012 distribution was $0.456351 per common unit, paid August 2, 2012. The partnership agreement required the next distribution to be paid by November 15, 2012; no amount for that next distribution is provided.
Changes versus prior comparable periods
- Q2 revenue fell 7.3% and first-half revenue fell 6.7%; unitholder earnings declined 11.5% and 9.1%, respectively. Lower natural gas prices and a litigation reserve were partly offset by higher sales volumes and lease bonus income.
- Q2 royalty-property oil volume rose 13.6% and gas volume rose 10.3% year over year, while weighted-average prices fell 10.9% for oil and 46.8% for gas. First-half royalty-property volumes rose 12.6% for oil and 14.3% for gas.
- NPI volumes also increased, principally because Minerals NPI activity began being reflected in consolidated results in Q3 2011. The Minerals NPI had achieved cumulative net profit status in September 2011.
- First-half operating cash flow rose 17.7%, which management attributed to increased lease bonus income and higher oil and gas volumes.
Outlook, risks and unusual items
- No quantified earnings, production or distribution guidance is provided. Management expects sufficient funds to pay expenses and describes distributions as determined after expenses actually paid.
- Commodity-price volatility is a principal risk; the partnership does not anticipate hedging. Production, reserve estimates, operating costs and development activity can also affect receipts and earnings.
- Q2 included approximately $2.8 million of lease bonus from two notable transactions: 506 net acres in Pennsylvania leased at $3,000–$4,000 per acre, and 160 net acres in Texas at $7,000 per acre. Reported Q2 lease-bonus and other receipts totaled approximately $3.2 million.
- A $0.5 million reserve was recorded in Q1 2012 for a mediated settlement of royalty-underpayment claims involving the Hugoton properties. The settlement also provides for immaterial future fuel-gas royalty amounts and remained subject to finalization and court approval.
- Management cited potential future increases in operating and repair costs at Kansas and Oklahoma facilities, and possible capital needs from infill drilling; timing and costs were described as uncertain. New York Marcellus development remained subject to unresolved regulatory issues.
- Disclosure controls were assessed as effective, with no material internal-control changes reported during the quarter. Other ordinary-course legal proceedings were not believed to have a significant financial effect.
Important facts for investors to verify
- Whether the $0.5 million Hugoton settlement was finalized and approved, and whether related future royalty payments remain immaterial.
- How sustained low natural gas prices or changes in oil prices affect royalty receipts, NPI proceeds and distributions.
- Whether production growth and lease bonuses continue to offset lower commodity prices; lease bonus revenue can be variable.
- Reserve estimates and the full-cost ceiling-test position, including sensitivity to commodity prices and reserve revisions.
- The timing and cost of operating-partnership development, facility repairs and any potential infill drilling.