Dorchester Minerals, L.P. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Dorchester owns mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states.
Financial performance
Amounts below are in millions except per-unit data. Revenue and income figures are for the stated period.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $7.387 | $15.716 | $24.471 | $51.028 |
| Operating income | $2.681 | $10.965 | $10.525 | $35.823 |
| Operating margin | 36.3% | 69.8% | 43.0% | 70.2% |
| Net income | $2.683 | $10.969 | $10.530 | $36.535 |
| Net income allocated to unitholders | $2.580 | $10.569 | $10.125 | $35.219 |
| Net income per common unit | $0.08 | $0.35 | $0.33 | $1.15 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $22.476 | $47.009 |
- Oil and gas royalties were the principal revenue source. Lower commodity prices and lease-bonus income drove the steep revenue decline; lower operating and production taxes partly offset the impact.
- For the first nine months, royalty-property oil and gas volumes were broadly flat year over year. NPI oil volumes increased substantially, while NPI gas volumes declined. Management attributed volume movements to activity, reservoir declines, prior-period adjustments and a prior sale of Kansas working interests.
- Nine-month operating expenses declined 8% to $13.946 million. G&A increased 17% to $3.488 million for the nine-month period, primarily due to added compensation and outsourced IT services. Q3 depletion and amortization rose 17%, which management attributed mainly to significant prior-period adjustments.
Cash, capital and distributions
- Cash and cash equivalents were $8.113 million at September 30, 2015, versus $15.912 million at December 31, 2014. Current assets were $15.314 million and current liabilities $1.783 million.
- Nine-month operating cash flow of $22.476 million was below distributions paid of $30.413 million. Cash declined by $7.799 million during the period; investing activity included $0.138 million of proceeds from reserve sales.
- The balance sheet showed no borrowings. The partnership agreement generally limits indebtedness, other than trade payables, to $50,000 and prohibits acquisition indebtedness. Management said it does not anticipate a credit facility or debt.
- 2015 distributions per unit were $0.306553, $0.167430 and $0.194234 for the first three quarters, totaling $0.668217. The third-quarter distribution was paid November 5, 2015. The partnership agreement required the next distribution to be paid by February 14, 2016.
- The Minerals NPI, which had not generated a payment since 2013, returned to a $0.2 million cash-basis surplus at September 30, 2015. Management said the related payment would be reflected in the fourth-quarter distribution. Accrued net profits income from this NPI remained zero because accrued cumulative capital costs exceeded accrued cumulative operating income.
Outlook, risks and other matters
- No specific earnings or production guidance was provided. Management described potential Oklahoma production-enhancement work by the operating partnership, dependent in part on gas prices; costs and results are uncertain. Potential infill drilling in the Guymon-Hugoton field could require substantial capital, with unpredictable cost and outcome.
- Results are highly exposed to oil and natural gas prices. The partnership does not anticipate hedging. Management cited market-price volatility, operator activity, production declines, regulatory and environmental changes, and reserve-estimate uncertainty as risks.
- Under full-cost accounting, a quarterly ceiling test uses proved-reserve estimates and prescribed oil and gas prices. A significant reserve revision or price deterioration could result in a noncash impairment; the filing does not report a ceiling-test impairment for this quarter.
- 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 concluded effective, with no material quarterly change in internal controls.
- The partnership was evaluating the impact and adoption method for the new revenue-recognition standard, then scheduled to take effect for it in 2018.
Most important facts for investors to verify
- Whether commodity prices and any subsequent changes in production volumes sustain or further reduce royalty revenue and cash flow.
- The timing and amount of the distribution associated with the Minerals NPI cash-basis surplus, and how it differs from accrual-basis NPI income.
- Whether reserve estimates or the full-cost ceiling test could lead to an impairment.
- Whether distributions remain supported by operating cash flow given that nine-month distributions exceeded operating cash flow.
- Any material developments in operator capital activity, regulatory matters or ordinary-course proceedings.