Dorchester Minerals, L.P. — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2018, filed February 28, 2019. Dorchester is a publicly traded limited partnership that owns oil and natural gas royalty properties and net profits interests (NPIs); it generally does not operate its royalty properties. Its properties span 574 counties and parishes in 25 states. The partnership distributes available cash quarterly, after expenses and reserves.
Financial and operating highlights
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $73.3 million | $57.3 million | Up 28% |
| Net income | $53.9 million | $38.4 million | Up 40% |
| Net income per unit | $1.61 | $1.18 | Up 36% |
| Net cash from operating activities | $62.5 million | $44.0 million | Up 42% |
| Distributions paid to partners | $58.0 million | $37.8 million | Up 53% |
| Distributions per unit paid during year | $1.737441 | $1.155790 | Up 50% |
| Cash and cash equivalents at year-end | $18.3 million | $13.8 million | Up $4.5 million |
| Total assets / total liabilities | $87.9 million / $1.3 million | $92.0 million / $1.3 million | Assets down; liabilities broadly unchanged |
Net income was approximately 73.6% of revenue, compared with 67.1% in 2017. No credit facility or material interest-bearing debt was reported; the partnership agreement generally limits indebtedness other than trade payables to $50,000. Year-end liabilities were mainly deferred rent and current operating liabilities. Cash flow from operations exceeded 2018 distributions paid by about $4.5 million.
- Revenue mix: royalties $54.9 million; NPIs $7.4 million; lease bonus $9.3 million; other revenue $1.6 million. Lease bonus income rose from $2.4 million to $9.3 million.
- Royalty-property oil sales volume increased 8% to 847 thousand barrels, while gas volume declined 5% to 3,561 million cubic feet. NPI oil volume increased 27% to 443 thousand barrels; NPI gas volume declined 6% to 2,581 million cubic feet.
- Average realized oil prices increased: royalty properties to $54.15/barrel and NPIs to $54.84/barrel. Average gas prices decreased to $2.54/mcf and $2.46/mcf, respectively.
- 2018 cash distributions to limited partners were $56.1 million. The fourth-quarter 2018 distribution, $0.516572 per unit, was paid in February 2019 and is not included in the 2018 distributions-paid total.
- Fourth-quarter reported revenue was $22.3 million and net income was $17.3 million, compared with $19.5 million and $14.2 million in fourth-quarter 2017.
- Proved developed reserves at year-end were 9.041 million barrels of oil and 44.230 billion cubic feet of gas. Year over year, oil reserves increased from 8.311 million barrels and gas reserves declined from 46.921 billion cubic feet. The standardized measure of discounted future net cash flows was $248.3 million, versus $182.1 million in 2017; it is not presented as fair value.
Material changes, outlook, and risks
Management attributed 2018 revenue growth primarily to stronger oil prices, higher royalty-property oil production, and increased lease bonus revenue. It reported $7.6 million of proceeds from assignments of leasehold interests in two Texas transactions and cited continued drilling activity in the Permian Basin and Bakken. The partnership received lease bonuses of $1.657 million on 36 leases and pooling elections; the average bonus was $692 per net acre, down from $3,330 in 2017.
The filing provides no formal earnings, production, or distribution guidance. Management said the operating partnership did not anticipate significant facility replacement expense at that time, but Oklahoma field work and possible infill drilling could entail unpredictable capital costs that reduce NPI payments. At December 31, 2018, the Minerals NPI was in a cash-surplus position but had $11.3 million of outstanding capital commitments, equal to its cash on hand.
- Distributions are exposed to volatile oil and gas prices; the partnership does not anticipate hedging. Gas-price weakness and natural production declines can reduce receipts.
- The partnership has limited operational control over most properties. Operators’ drilling, development, production, and marketing decisions affect volumes and proceeds; NPI payments also bear a substantial share of underlying costs, and accumulated costs may defer payments.
- Reserves are depleting, and replacement through development or acquisitions is constrained by acquisition, financing, tax, and partnership-agreement limitations. Reserve estimates and the full-cost ceiling calculation are sensitive to engineering assumptions and prices.
- Other disclosed exposures include environmental and regulatory changes, weather and operating incidents, uninsured losses, cybersecurity, regional concentration in the Hugoton field, and counterparty or pipeline constraints. No business-interruption insurance is carried.
- Ordinary-course legal and administrative matters were disclosed; management did not believe they would significantly affect financial position or operating results. The Dallas office lease creates $3.52 million of minimum payments, with $254,000 due in 2019.
Grant Thornton LLP issued unqualified opinions on the 2018 financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Whether oil prices, gas prices, and production trends support recurring cash receipts and distributions; distinguish distributions paid in 2018 from the fourth-quarter distribution paid in 2019.
- The sustainability and composition of 2018 revenue growth, especially lease bonuses, leasehold assignments, and other income that included legal settlements.
- The timing and potential impact of the $11.3 million of NPI capital commitments and any accumulated cost deficits on future NPI payments.
- Independent reserve reports, reserve revisions, and the assumptions underlying the $248.3 million standardized measure; this measure is not fair value.
- Potential dilution or acquisition financing: 6,395,657 common units remained available under acquisition-related registration statements; review the partnership’s approval limits and related-party arrangements.
- Tax treatment and unitholder-specific outcomes, including partnership status, potential UBTI, and availability of the pass-through deduction; the filing notes these matters may depend on IRS guidance and individual circumstances.