Dorchester Minerals, L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Dorchester is a publicly traded limited partnership whose revenues are primarily royalties and net profits interests (NPIs) from oil and natural gas properties across 25 states. It generally distributes available cash quarterly.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $69.5 million | $61.1 million | +13.7% |
| Operating income | $42.2 million | $34.8 million | +21.2% |
| Net income | $42.2 million | $34.9 million | +21.0% |
| Net income per unit | $1.33 | $1.11 | +19.8% |
| Cash from operating activities | $55.5 million | $52.8 million | +5.2% |
| Cash distributions paid during year | $52.5 million | $52.2 million | +0.6% |
Operating margin was approximately 60.7%, compared with 57.0% in 2010. Fourth-quarter 2011 revenue was $20.4 million and net income was $13.2 million, versus $14.8 million and $8.5 million, respectively, in fourth-quarter 2010.
Year-end cash was $14.2 million, up from $11.3 million. Current assets were $28.5 million and current liabilities $0.6 million. Total liabilities were $0.7 million; the Partnership reported no credit facility and does not anticipate borrowing other than ordinary-course trade debt. Net profits interests receivable from the related operating partnership was $7.6 million.
The fourth-quarter 2011 distribution was $0.448553 per common unit, paid February 2, 2012. Distributions are based on available cash, not reported net income.
Material changes and operating drivers
- Royalty Properties gas sales volumes rose 24.6% and oil sales volumes rose 1.6% year over year. Average oil prices increased, while average gas prices declined: Royalty Properties gas price was $3.77 per mcf versus $4.21 in 2010.
- The Minerals NPI reached cumulative payout in 2011. Its inclusion in consolidated reporting beginning in the third quarter increased reported NPI activity; management attributed growth in revenue partly to this event, higher production and oil prices, and natural gas liquids payments.
- Lease bonus revenue fell to $0.5 million from $3.8 million. Cash lease bonuses received were $0.6 million in 2011 versus $3.9 million in 2010.
- Proved reserves at year-end were 3.566 million barrels of oil and 66.963 bcf of natural gas, compared with 3.333 million barrels and 61.679 bcf a year earlier. The standardized measure of discounted future net cash flows was $261.6 million, up from $219.6 million; this is not a fair-value estimate.
Outlook, risks and contingencies
The filing provides no specific earnings, production, price or distribution guidance. Management described 2011 results as strong despite lower natural gas prices and reduced drilling activity in some areas. It expects continued Oklahoma production efforts and gradual increases in repair and field operating costs as equipment ages and reservoir pressure declines, but did not forecast amounts.
- Cash distributions are highly exposed to volatile oil and natural gas prices, production volumes, third-party development decisions, and costs deducted in NPI calculations. The Partnership does not hedge commodity prices and has limited operational control over most properties.
- A significant portion of NPI properties is concentrated in the Hugoton field in Oklahoma and Kansas. The operating partnership’s aging Oklahoma gas gathering system may require repairs or upgrades; related costs can reduce NPI proceeds. The Partnership carries no business interruption insurance and may not be fully insured for operational or environmental losses.
- Environmental and hydraulic-fracturing rules, potential climate regulation, and state production restrictions could increase costs or constrain development. Reserve estimates and accrued royalty revenues and costs rely on estimates and may be revised.
- A royalty-underpayment claim against the operating partnership remained pending after a 2011 partial summary judgment in its favor. An adverse outcome could reduce NPI receipts; the filing does not quantify potential exposure.
- Acquisition capacity is restricted by the partnership agreement, and issuing units for acquisitions could dilute holders. The general partner and affiliates may pursue some opportunities independently, and related-party cost reimbursements and governance conflicts are disclosed risks.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2011.
Important facts for investors to verify
- Whether the Minerals NPI’s payout and the resulting contribution to reported NPI revenue and reserves are sustainable, and how much related-party receivables are collected.
- The production, price and cost assumptions underlying reserve estimates and the standardized measure, particularly given the Partnership’s limited access to operator data.
- The status and possible financial effect of the pending royalty-underpayment litigation.
- Future distributions in light of commodity-price changes, lease bonus activity, NPI costs and the Partnership’s cash-distribution policy.
- Potential costs or development impacts from aging infrastructure, environmental regulation and the Partnership’s concentrated Hugoton exposure.