Dorchester Minerals, L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012, compared with December 31, 2011. Dorchester owns mineral, royalty, overriding royalty, leasehold and net profits interests across 574 counties and parishes in 25 states. Its revenue depends primarily on oil and natural gas production and prices. Financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Operating revenue | $13.433 | $14.289 |
| Operating income | $7.286 | $7.740 |
| Operating margin | 54.2% | 54.2% |
| Net earnings | $7.298 | $7.740 |
| Net earnings per common unit | $0.23 | $0.24 |
| Operating cash flow | $17.547 | $13.930 |
| Cash and cash equivalents | $17.551 | $14.238 at Dec. 31, 2011 |
| Total liabilities | $0.739 | $0.658 at Dec. 31, 2011 |
Revenue fell 6.0% and net earnings fell 5.7% year over year; earnings allocated to common units decreased 6.1%. Operating cash flow increased 26.0%. The Partnership reported no borrowings and stated it generally cannot incur indebtedness beyond trade payables except within specified restrictions. Current assets were $25.913 million and current liabilities $0.659 million.
Drivers and material changes
- Royalty-property oil sales volume rose 11.5% and natural gas volume rose 19.0%. Average oil prices increased to $99.49/bbl from $87.52/bbl, while gas prices declined to $2.51/mcf from $3.95/mcf.
- NPI oil and gas volumes also increased; the gas-volume comparison was principally affected by inclusion of the Minerals NPI, which reached cumulative net-profit status in 2011. NPI average oil prices rose to $97.57/bbl from $85.46/bbl; gas prices fell to $2.35/mcf from $4.16/mcf.
- Lower gas prices, continued Minerals NPI capital expenditures and a $0.5 million reserve for a Hugoton royalty-underpayment settlement reduced revenue and earnings. Higher oil prices, increased volumes and lease bonus income partly offset these effects.
- Operating costs and expenses declined 6.1% to $6.147 million. Lower G&A mainly reflected timing and non-recurring 2011 costs; depletion and amortization increased to $4.312 million from $4.242 million.
- Cash distributions paid to the general partner and unitholders totaled $14.234 million, versus $11.249 million in Q1 2011. The Q1 2012 distribution was $0.541883 per common unit and was paid May 3, 2012.
Outlook, risks and unusual items
- The filing gives no specific earnings, production or distribution guidance. Management expects sufficient funds for expenses and describes the Partnership’s cash requirements as distributions and certain operating and administrative expenses.
- The Partnership does not hedge oil or natural gas price exposure. Commodity-price volatility is a central risk; future production, prices, development activity and regulatory conditions may affect results.
- Management expects gradual increases in repairs and field operating costs as operating facilities age and reservoir pressure declines. Development and infill-drilling costs and effects on NPI payments are uncertain.
- On April 27, 2012, the parties mediated settlement terms for $500,000 plus immaterial future fuel-gas royalties in a long-running royalty-underpayment case. The settlement remained subject to finalization and court approval; a $500,000 reserve was recorded in Q1 2012.
- Reserve estimates and the full-cost ceiling test involve judgment; significant downward reserve revisions or lower commodity prices could lead to a non-cash impairment. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
- A $3.3 million payment for 2011 natural gas liquids production increased Q1 indicated NPI gas cash-receipt pricing by $2.97/mcf. The payment arises under an agreement in effect through 2015 and is not a recurring quarterly price indicator.
Important facts for investors to verify
- Whether the Hugoton settlement was finalized and approved, and the resulting total future royalty obligations.
- How much NPI revenue and cash flow depends on the Minerals NPI and whether its cumulative net-profit status continues.
- Current oil and gas prices, production volumes and the timing of cash receipts, which may differ from accrual-basis sales.
- Reserve estimates, full-cost ceiling-test headroom and potential impairment exposure.
- Subsequent distributions and operating-partnership development, maintenance and capital-spending plans.