Dorchester Minerals, L.P. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report; fourth-quarter details are included where disclosed. The partnership owns oil and natural gas royalty and mineral interests and net profits interests (NPIs), with operations and administration conducted through affiliated partnerships. Its units trade on Nasdaq.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $57.291 million | $37.557 million | +53% |
| Net income | $38.424 million | $20.967 million | +83% |
| Net income per unit | $1.18 | $0.66 | +$0.52 |
| Cash from operating activities | $44.028 million | $28.278 million | +56% |
| Cash distributions paid | $37.797 million | $27.202 million | +39% |
| Cash and cash equivalents, year-end | $13.827 million | $8.212 million | +$5.615 million |
| Total assets / liabilities, year-end | $92.047 million / $1.301 million | $67.211 million / $0.275 million |
- Net income margin was approximately 67% in 2017, compared with 56% in 2016. Revenue growth and higher net income principally reflected improved oil and gas prices, increased royalty production and higher NPI revenue.
- Revenue comprised $46.125 million in royalties, $8.014 million in NPI income, $2.399 million in lease bonuses and $0.753 million in other revenue. Total costs and expenses were $18.867 million, including $9.302 million of depletion, depreciation and amortization and $4.930 million of general and administrative expense.
- Operating cash flow exceeded net income, but year-end receivables rose: trade and other receivables were $6.198 million and related-party NPI receivables were $5.330 million.
- The partnership reports no credit facility and does not anticipate debt beyond ordinary-course trade payables. Its partnership agreement generally prohibits indebtedness above $50,000. Year-end liabilities were primarily lease-related, not reported as borrowing.
- Cash paid in calendar 2017 was $1.155790 per unit, or $37.797 million in total distributions to limited partners and the general partner. The fourth-quarter 2017 distribution was $0.386915 per unit, paid February 8, 2018; it is distinct from distributions paid during calendar 2017.
Material changes and operating developments
- Royalty-property oil sales increased 26% to 784 thousand barrels; gas sales increased 15% to 3,753 million cubic feet. NPI oil sales fell 8% to 349 thousand barrels and NPI gas sales fell 2% to 2,750 million cubic feet.
- Average realized prices improved year over year: royalty oil to $45.27/bbl and gas to $2.83/mcf; NPI oil to $44.71/bbl and gas to $2.60/mcf. Management attributed price changes to market conditions.
- The partnership acquired 1,850 net royalty acres across 22,400 gross surface acres in six Texas counties, in a transaction completed June 30. It issued 1,604,343 units valued at approximately $23.183 million; the transaction also involved approximately $614,000 of cash receipts delivered by contributors.
- It reported 409 new wells completed on Royalty Properties and 52 on NPI properties, and received $2.399 million in lease bonus revenue from 17 leases or pooling elections.
- Proved developed reserves at year-end were 8.311 million barrels of oil and 46.921 billion cubic feet of gas, compared with 7.092 million barrels and 41.154 billion cubic feet in 2016. The filing attributes reserve revisions largely to Permian Basin development and, for gas, higher prices extending economic limits.
- There were no oil and gas property impairments in 2015–2017. The standardized measure of discounted future net cash flows increased to $182.146 million from $121.525 million in 2016; the filing cautions this measure is not necessarily fair value.
Outlook, risks and unusual items
- No specific financial or production guidance is provided. Management described continued Oklahoma production-enhancement efforts by the operating partnership, dependent on gas prices; the partnership expects no significant facility-replacement expense at this time.
- Distributions are variable and depend on commodity prices, production, costs, lease activity and reserves. The partnership does not control most operators’ development decisions and does not expect to hedge oil or gas price exposure.
- Key risks include commodity-price volatility, depletion and limited reserve replacement, concentration of NPI gas properties in the Hugoton field, accumulated NPI costs that can defer payments, and aged Oklahoma wells and gathering infrastructure. The partnership does not carry business-interruption insurance and is not fully insured against all operating or environmental risks.
- Regulatory and environmental changes—including rules affecting emissions, hydraulic fracturing, water disposal and production—could increase costs or restrict activity. The 2017 Tax Act’s effects were described as uncertain; partnership tax status and unitholder tax outcomes also depend on applicable law and IRS interpretations.
- The partnership disclosed ordinary-course legal and administrative proceedings, none believed to have a significant effect on financial position or operating results. It also disclosed related-party participation in the 2017 acquisition; the Advisory Committee reviewed and approved the related transaction arrangements.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported disclosure controls and internal controls were effective at year-end.
- Revenue recognition guidance adopted January 1, 2018 was expected to have no impact on amounts or timing of revenue. The partnership was still evaluating the effect of the lease-accounting standard, with approximately $3 million of lease commitments potentially subject to capitalization.
Investor verification priorities
- Confirm distribution figures by distinguishing amounts paid during 2017 from the fourth-quarter 2017 distribution paid in February 2018.
- Review the acquisition’s unit issuance, cash component, related-party participation and resulting dilution; units outstanding increased to 32,279,774.
- Assess the durability of 2017 revenue and reserve growth against commodity prices, Permian activity, natural declines and Hugoton concentration.
- Monitor NPI receivables and accumulated property costs, which may affect the timing and amount of future NPI payments.
- Review the partnership’s tax disclosures, including the Tax Act, partnership classification and potential effects of tax audits on distributable cash.
- Check subsequent filings for lease-accounting implementation, regulatory developments, and any material changes in reserves, costs or distributions.