Dorchester Minerals, L.P. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter 2019 cash receipts; it is an annual report, not a standalone quarterly filing.
Business context
Dorchester is a publicly traded limited partnership that owns non-operated mineral, royalty, leasehold and net profits interests in oil and natural gas properties across 27 states. It generally distributes available cash quarterly after expenses and reserves. The partnership has no credit facility and partnership-agreement restrictions generally limit indebtedness to trade payables of no more than $50,000.
On March 29, 2019, Dorchester completed the Huffman acquisition, adding interests representing approximately 76,000 net acres across 14 states. Consideration was 2.4 million common units valued at $43.8 million; the acquired properties contributed to 2019 results from the acquisition date.
Financial and operating highlights
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $78.8 million | $73.3 million | +7.5% |
| Net income | $52.8 million | $53.9 million | -2.1% |
| Net income per common unit | $1.50 | $1.61 | -6.8% |
| Net cash from operating activities | $66.1 million | $62.5 million | +5.7% |
| Cash and cash equivalents at year-end | $15.3 million | $18.3 million | Down $2.9 million |
| Total liabilities at year-end | $4.5 million | $1.3 million | Up, primarily reflecting lease liabilities |
Net margin was approximately 67.0%, compared with 73.5% in 2018. Cash distributions paid during 2019 totaled $70.9 million, including $68.6 million to limited partners and $2.3 million to the General Partner. The fourth-quarter 2019 distribution, paid in February 2020, was $0.361242 per unit. Operating cash flow was below total cash distributions paid during the year.
Revenue growth reflected higher royalty and NPI revenue, partly offset by weaker lease bonus and other revenue. Royalty revenue was $58.8 million versus $54.9 million; NPI revenue was $15.8 million versus $7.4 million. Lease bonus revenue fell to $3.8 million from $9.3 million, and other revenue declined to $0.5 million from $1.6 million. Production taxes and operating expenses rose to $6.6 million from $5.5 million; depreciation, depletion and amortization increased to $13.3 million from $8.9 million; and general and administrative expense increased to $6.1 million from $4.9 million.
Sales volumes increased across the reported royalty and NPI categories, while average realized prices declined. Royalty-property oil and gas volumes rose 25% and 11%, respectively; NPI oil and gas volumes rose 22% and 10%. Average prices fell 9% for royalty oil, 30% for royalty gas, 15% for NPI oil and 25% for NPI gas. Management attributed volume gains principally to drilling and production in the Permian Basin and Bakken, with some areas offset by lower production.
At year-end, proved developed producing reserves totaled 9.638 million barrels of oil and 45.860 Bcf of natural gas, compared with 9.041 million barrels and 44.230 Bcf in 2018. The standardized measure of discounted future net cash flows was $208.8 million, down from $248.3 million, reflecting lower prices and production-cost changes, partly offset by reserve revisions and the acquisition.
Outlook, risks and unusual items
The filing provides no formal earnings, production or distribution guidance. Management says results are principally affected by oil and natural gas prices, production volumes and costs deducted in calculating NPI payments. The partnership’s distribution depends on cash receipts and reserves; it does not promise a fixed distribution.
- Oil and gas prices are volatile, and Dorchester has limited control over operators, production decisions, volumes or sale terms.
- NPI payments are reduced by eligible operating and capital costs; accumulated cost deficits can defer payments. The largest NPI, Minerals NPI, was in surplus at year-end and had $5.1 million of outstanding Bakken capital commitments, equal to cash on hand.
- A significant portion of NPI properties is concentrated in Oklahoma’s Hugoton field. The filing cites aging wells and a 132-mile gathering pipeline, which may require repairs or upgrades and reduce NPI cash flow.
- Other material risks include reserve-estimate uncertainty, depletion and limited ability to replace assets, environmental and regulatory changes, cyber incidents, uninsured losses, acquisition restrictions, related-party conflicts and possible dilution from future unit issuance.
- The partnership reported no impairment in 2019 or 2018. Ordinary-course legal and administrative proceedings were not believed to have a significant effect on financial position or results. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether subsequent oil and gas prices, production volumes and operator activity support cash receipts and distributions after year-end.
- The realized contribution, reserve quality and depletion impact of the Huffman acquisition, including the 2.4 million units issued and acquired properties recorded in the full-cost pool.
- The sustainability of distributions relative to operating cash flow, including the timing difference between receipts, production and quarterly distributions.
- The status and cost implications of Bakken capital commitments, Hugoton infrastructure needs and any accumulated NPI cost deficits.
- Reserve assumptions and the sensitivity of the $208.8 million standardized measure to commodity prices, production costs and future revisions; the measure is not presented as fair value.