Dorchester Minerals, L.P. — Q3 2016 Form 10-Q
Business and period: The partnership owns producing and nonproducing mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. This unaudited report covers the quarter and nine months ended September 30, 2016; amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $10.679 | $7.389 | $26.814 | $24.476 |
| Net income | $6.647 | $2.683 | $14.096 | $10.530 |
| Net income per common unit | $0.21 | $0.08 | $0.44 | $0.33 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $21.563 | $22.476 |
- Q3 net income margin was approximately 62%, versus 36% a year earlier; nine-month margin was approximately 53%, versus 43%.
- At September 30, cash was $9.496 and current assets were $14.904, against total liabilities of $1.232. The partnership reported no debt; its partnership agreement generally bars indebtedness above $50,000, except trade payables, and prohibits acquisition indebtedness.
- Nine-month distributions paid to the general partner and unitholders totaled $19.203, compared with $30.413 in 2015. The Q3 2016 distribution was $0.252224 per unit and was scheduled for payment November 10, 2016.
Changes and management commentary
- Revenue rose 45% in Q3 and 10% year to date. Q3 gains reflected higher royalty, net profits interest (NPI) and lease bonus income; the nine-month increase was led by NPI and lease bonus income, partly offset by weaker oil and gas prices.
- Q3 unitholder income increased 149%; nine-month unitholder income increased 34%. Lower depletion expense contributed to the results: $2.080 in Q3 versus $3.048, and $6.571 for nine months versus $7.854.
- Nine-month operating cash flow declined 4%, which management attributed mainly to a smaller decrease in accounts receivable than in the prior-year period.
- Production trends were mixed: royalty-property oil volumes rose, while gas volumes fell. NPI oil and gas volumes declined, reflecting lower suspense releases, natural declines and, for gas, a 2016 processing and purchase agreement for Hugoton properties. Lower oil and gas prices also affected results.
- Management cited higher year-to-date G&A, principally from outsourced and enhanced IT services and legal costs associated with royalty litigation. No full-year financial guidance was provided.
Outlook, risks and other items
- Results and distributions are exposed to volatile oil and natural gas prices; the partnership does not anticipate hedging. Production changes, development activity and operator costs may also affect NPI receipts.
- Management reported no full-cost ceiling-test impairment in the quarter or nine-month period. Reserve estimates and commodity prices used in the ceiling test are important assumptions; significant downward reserve revisions could cause a noncash impairment.
- Management said ordinary-course legal and administrative proceedings had no predictable outcomes and were not believed to have a significant financial effect. Disclosure controls were considered effective, with no material quarterly change in internal controls.
- An affiliate purchased 16,168 units in September at an average $15.39 under a Rule 10b5-1 plan to satisfy equity awards. The filing described this as an equity-incentive-program transaction.
- The partnership was evaluating the effects of the new revenue-recognition and lease-accounting standards; it had not determined the adoption method for revenue recognition.
Important facts for investors to verify
- Whether improved revenue and earnings persist, given continued commodity-price exposure and mixed production volumes.
- How NPI receipts, suspense releases and the Hugoton agreement affect future distributions.
- Reserve estimates, depletion assumptions and the sensitivity of the full-cost ceiling test to prices or reserve revisions.
- The amount and timing of future distributions; distributions are not guaranteed by the reported earnings or cash balance.
- The scale and outcome of royalty litigation and any resulting legal costs or liabilities.