Dorchester Minerals, L.P. — Q1 2020 Form 10-Q
Business and period: The partnership owns mineral, royalty, overriding royalty, net profits and leasehold interests across 27 states, plus six net profits interests (NPIs) in properties operated by an affiliate. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenues | $15.476 million | $19.031 million; down 18% |
| Net income | $8.761 million | $13.979 million; down 37% |
| Net income per common unit | $0.25 | $0.42 |
| Operating cash flow | $17.840 million | $17.689 million |
| Cash and cash equivalents | $20.226 million at March 31 | $15.339 million at December 31, 2019 |
| Total assets / liabilities | $113.364 million / $5.220 million | $116.883 million / $4.547 million at December 31, 2019 |
Revenue consisted primarily of royalties ($9.950 million) and NPI income ($5.168 million), with $0.263 million in lease bonus revenue. Total costs and expenses rose to $6.715 million from $5.052 million. Depletion, depreciation and amortization increased 48% to $3.357 million; general and administrative expense increased 73% to $1.918 million, mainly due to IT project and public-company compliance costs. Operating costs, including production taxes, fell 13% to $1.440 million. Net income as a share of revenue was approximately 57%, versus 73% in Q1 2019.
The partnership reported no material borrowing debt; liabilities were mainly operating lease obligations and current payables. Its partnership agreement generally restricts indebtedness, other than trade payables, to $50,000. The $12.953 million of distributions recorded for the quarter was lower than the $17.238 million recorded in Q1 2019. A separate distribution of $0.477891 per unit was declared for Q1 2020 and was scheduled for payment May 14, 2020.
Changes and management commentary
- Royalty revenue declined amid lower oil and gas prices and lower Royalty Property volumes. Royalty oil and gas sales volumes fell 16% and 7%, respectively; corresponding average prices fell 18% and 31%.
- NPI oil and gas volumes increased 26% and 20%, respectively, partly offsetting the royalty decline. NPI gas prices fell 53%, while NPI oil prices rose 5%.
- Operating cash flow remained broadly stable year over year despite lower revenue and net income. Cash increased by $4.887 million during the quarter.
- Q1 2019 comparability is affected by the March 29, 2019 Huffman acquisition, which added interests in exchange for 2.4 million common units. The acquisition contributed to the increase in weighted average units from 32.360 million to 34.680 million.
Outlook, risks and contingencies
Management said COVID-19, reduced hydrocarbon demand and the oil-price disruption following the failed OPEC-and-Russia production-cut talks had not materially affected Q1 results or financial condition, but their future effects were uncertain. The partnership expected to have sufficient liquidity for operations and distributions, while evaluating reductions in discretionary spending. Future distributions depend on cash receipts, commodity prices, production, and operating expenses; no numerical earnings or distribution guidance was provided.
Risks include sustained low or volatile oil and gas prices, COVID-19-related demand disruption, operator drilling suspensions or shut-ins, and the possibility that shut-in wells may be costly to restart. NPI payments can also be affected by operating costs and capital spending. Ordinary-course legal and administrative proceedings were disclosed; management did not believe they would significantly affect financial position, cash flows or results. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether subsequent commodity prices, demand and producer activity materially changed revenue, cash flow or distribution capacity.
- Payment of the declared $0.477891-per-unit Q1 distribution and the level of subsequent distributions.
- How much of the revenue and cash-flow performance reflects timing of receipts, prior-period adjustments or suspended-fund releases.
- Whether lower Royalty Property production and higher depletion and G&A costs persist, and whether NPI capital commitments affect future receipts.