Dorchester Minerals, L.P. — Q1 2016 Form 10-Q
Business context and period: The partnership owns mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. This unaudited report covers the three months ended March 31, 2016; financial amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $6.126 | $8.805 | Down 30% |
| Operating costs and expenses | $4.628 | $4.774 | Down 3% |
| Net income | $1.498 | $4.031 | Down 63% |
| Net income allocated to common unitholders | $1.438 | $3.878 | Down 63% |
| Net income per common unit | $0.05 | $0.13 | |
| Net margin | 24.5% | 45.8% | Down 21.3 percentage points |
| Cash provided by operating activities | $4.470 | $10.050 | Down 56% |
Revenue consisted primarily of royalties ($5.784 million); net profits interest revenue was $0.023 million, lease bonus income $0.189 million and other revenue $0.130 million. The filing does not present a separate operating-profit margin.
Liquidity and distributions
- Cash and cash equivalents were $5.267 million at March 31, 2016, versus $7.136 million at December 31, 2015. Current assets were $10.203 million and current liabilities $0.607 million.
- Total liabilities were $0.616 million; the partnership reported no borrowings. Its partnership agreement generally limits indebtedness, other than trade payables, to $50,000.
- Cash declined by $1.869 million during the quarter. Distributions paid to the general partner and unitholders totaled $6.339 million, compared with $15.356 million in Q1 2015.
- The Q1 2016 distribution was $0.147417 per unit and was scheduled to be paid May 12, 2016. The partnership agreement requires the next distribution to be paid by August 14, 2016.
Material changes and management commentary
- Management attributed lower revenue and earnings mainly to weaker oil and gas prices. Royalty-property realized sales prices fell to $29.90 per barrel of oil and $1.80 per Mcf of gas, from $43.26 and $2.66, respectively. NPI prices also declined.
- Royalty-property oil volumes rose 6% to 142 thousand barrels, while gas volumes fell 8% to 854 million cubic feet. NPI oil volumes fell 14% to 89 thousand barrels; NPI gas volumes rose 11% to 828 million cubic feet.
- Operating costs, including production taxes, declined 51% to $0.507 million, principally due to lower production and ad valorem taxes. Depreciation, depletion and amortization decreased 9% to $2.236 million.
- General and administrative expense rose 48% to $1.885 million, mainly reflecting expanded outsourced information technology services and higher legal costs associated with royalty litigation.
- The Minerals NPI had a $0.5 million cash-basis surplus for March 2016; the related payment was expected to be reflected in the Q2 distribution. Accrued net profits income for this NPI remained zero because cumulative capital costs exceeded cumulative operating income.
Outlook, risks and contingencies
- No numerical earnings, production or distribution guidance was provided. Management said it expects sufficient funds to pay expenses; distributions are determined after expenses are paid.
- Results are exposed to volatile oil and natural gas prices. The partnership said it did not anticipate using financial hedges. Management also noted that operating-partnership development activity and potential infill drilling in Oklahoma could affect NPI receipts and involve unpredictable costs.
- Full-cost accounting makes results sensitive to reserve estimates and the quarterly ceiling test; significant downward reserve revisions could cause a non-cash impairment. Estimates of accrued revenues and expenses can also be uncertain.
- The partnership and operating partnership face ordinary-course legal and administrative proceedings. Outcomes are not predictable, but management did not believe the matters would significantly affect financial position, cash flows or results.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether weak commodity prices persist and how they affect revenue, cash generation and distributions.
- Whether the reported March Minerals NPI cash surplus translates into the expected Q2 distribution, given the NPI’s zero accrued income.
- Whether royalty litigation costs or other legal developments materially change G&A or the partnership’s exposure.
- Whether reserve revisions or the full-cost ceiling test result in impairment or materially change depletion.
- How adoption of the new revenue-recognition and lease accounting standards affects reported results and disclosures; the partnership was still evaluating their impact.