Dorchester Minerals, L.P. — Q3 2018 Form 10-Q
Business and period: The partnership owns mineral, royalty, overriding royalty, net profits and leasehold interests across 25 states. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net operating revenue | $13.9 million | $12.5 million | $50.9 million | $37.8 million |
| Net income | $9.3 million | $7.2 million | $36.6 million | $24.2 million |
| Net income per common unit | $0.27 | $0.22 | $1.09 | $0.75 |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $46.7 million | $31.3 million |
- Revenue rose 11% in Q3 and 35% for the nine-month period. Higher oil prices drove much of the increase; nine-month results also benefited from higher lease bonus revenue.
- Net income margin was approximately 66.6% in Q3 versus 57.9% a year earlier, and 71.9% for nine months versus 64.1%.
- Cash and cash equivalents were $15.7 million at September 30, 2018, up from $13.8 million at year-end 2017. Current assets were $25.6 million and current liabilities $2.1 million, for working capital of approximately $23.4 million.
- Total liabilities were $2.9 million; the filing reports no debt other than trade payables and says the partnership generally cannot incur indebtedness above $50,000, subject to stated exceptions.
- Nine-month distributions paid were $44.7 million, compared with $28.3 million in 2017. The Q3 2018 distribution was $0.394813 per unit, scheduled for payment November 8, 2018.
Changes and operating drivers
- Q3 royalty revenue increased to $12.9 million from $11.5 million; net profits interest (NPI) revenue declined to $0.4 million from $0.7 million. Nine-month royalties were $40.1 million versus $32.6 million, and NPI revenue was $6.0 million versus $2.7 million.
- Nine-month lease bonus revenue increased to $4.5 million from $1.8 million, primarily from the April 2018 assignment of a non-producing Upton County, Texas leasehold interest; the partnership’s proceeds of $4.0 million were recorded as lease bonus revenue.
- Royalty-property oil volumes increased 7% for nine months and oil prices rose to $55.68/bbl from $43.46/bbl. Royalty-property gas volumes declined 4%, while gas prices fell to $2.41/mcf from $2.94/mcf.
- NPI oil volumes increased 70% for nine months, mainly due to new Bakken and Permian Basin well activity. Operating costs rose 18% for nine months, primarily from higher production taxes; G&A declined 7%, mainly because the 2017 office remodel was complete.
- Depletion, depreciation and amortization was $6.9 million for nine months, up 7% from $6.4 million.
- Nine-month operating cash flow increased 49%. Investing cash flow was a $0.1 million use, versus $0.3 million provided in 2017; capital expenditures were $0.04 million.
Outlook, risks and contingencies
- No quantified financial guidance is provided. Results depend substantially on oil and gas prices, production volumes, development activity and purchaser adjustments. The partnership does not anticipate hedging commodity exposure.
- The Minerals NPI was in a cash deficit position at September 30, with $14.8 million of outstanding capital commitments compared with $10.8 million of cash on hand. The filing attributes this to recent Bakken capital commitments; NPI deficits are borne by the Operating Partnership and may affect NPI payments.
- The partnership states it is not directly liable for exploration, development or production costs. Development and potential infill-drilling activity by the Operating Partnership could nevertheless affect NPI receipts.
- Ordinary-course legal and administrative proceedings were disclosed; management did not believe they would have a significant effect on financial position, cash flows or operating results.
- The partnership adopted ASC 606 in 2018 with no effect on the amount or timing of recognized revenue. It was still evaluating lease accounting adoption; it estimates a $3.0 million office lease commitment may be subject to capitalization.
- Disclosure controls were assessed as effective, and no material change in internal controls was reported.
Important facts for investors to verify
- Whether higher commodity prices and recent Bakken and Permian production growth persist, and how lower gas prices and Fayetteville Shale declines affect volumes.
- The status, funding and cash-flow implications of the Minerals NPI’s deficit and $14.8 million of outstanding capital commitments.
- The sustainability of distributions relative to commodity-driven cash receipts and the partnership’s distribution obligations.
- The eventual balance-sheet impact of adopting the new lease standard and the status of any legal or administrative proceedings.