Dorchester Minerals, L.P. — Q2 2016 Form 10-Q
Business context and period: The partnership owns producing and nonproducing mineral, royalty, overriding royalty, net profits and leasehold interests across 574 counties and parishes in 25 states. It also receives net profits interest (NPI) payments from properties owned by an affiliated operating partnership. This unaudited filing covers the three and six months ended June 30, 2016; amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $10.009 | $8.282 | $16.135 | $17.087 |
| Net income | $5.951 | $3.816 | $7.449 | $7.847 |
| Net income allocable to unitholders | $5.750 | $3.667 | $7.188 | $7.545 |
| Net income per common unit | $0.19 | $0.12 | $0.24 | $0.25 |
| Operating costs, including production taxes | $0.771 | $0.977 | $1.278 | $2.011 |
| Depreciation, depletion and amortization | $2.255 | $2.341 | $4.491 | $4.806 |
| General and administrative expense | $1.032 | $1.148 | $2.917 | $2.423 |
Q2 revenue rose 21%, and unitholder income rose 57%, chiefly because of higher NPI and lease bonus income. For the first six months, revenue declined 6% and unitholder income declined 5%, mainly reflecting lower oil and gas prices. Q2 revenue included $6.766 million of royalties, $1.708 million of NPI income and $1.455 million of lease bonus income.
Six-month net cash from operating activities was $13.420 million, down from $16.073 million. Distributions paid were $11.034 million, compared with $25.075 million in the prior-year period. Cash increased by $2.386 million to $9.522 million. The filing does not present a separate operating margin measure.
Liquidity, debt and distributions
At June 30, cash was $9.522 million and current assets were $14.252 million, versus current liabilities of $1.152 million. Total liabilities were $1.152 million. The partnership reports no debt other than trade payables, and its partnership agreement generally limits indebtedness (other than trade payables) to $50,000. Management says cash flows from royalty properties and NPIs are the primary capital source and expects sufficient funds for expenses.
The Q2 2016 distribution was $0.257977 per common unit, payable August 11, 2016. The Q1 distribution was $0.147417, compared with $0.306553 for Q1 2015. The partnership reported a $400,000 June surplus for the Minerals NPI on a cash basis; management said the related payment would be reflected in the third-quarter distribution.
Changes, outlook and risks
- Royalty-property oil sales volumes increased 18% in Q2 and 12% for the first six months year over year; gas volumes increased 5% in Q2 but declined 2% for the six-month period. Higher Permian Basin production supported volumes.
- NPI oil volumes increased 91% in Q2 and 29% for six months; NPI gas volumes declined 33% and 13%, respectively. The filing attributes changes to production, suspense releases, natural declines and a 2016 processing and purchase agreement on Hugoton properties.
- Oil and gas prices were lower year over year. For royalty properties, six-month average sales prices were $33.57 per barrel of oil and $1.72 per mcf of gas, versus $46.54 and $2.50. For NPIs, corresponding prices were $32.74 and $1.96, versus $46.56 and $2.59.
- Six-month G&A increased about 20%, attributed to outsourced and enhanced IT services and higher legal costs associated with royalty litigation. Q2 G&A decreased 10%, primarily because of lower recruiting fees.
- No formal earnings or production guidance is provided. The operating partnership may pursue production-enhancement work in Oklahoma, but costs and activity are uncertain; potential infill drilling in the Guymon-Hugoton field could require significant capital and affect NPI payments.
- Commodity-price fluctuations are the principal market risk; the partnership does not anticipate hedging. Reserve estimates and the full-cost ceiling test involve judgment; no impairment was recorded for the quarter or six months. Ordinary-course legal and administrative proceedings are not expected by management to materially affect results, although royalty litigation contributed to higher costs.
- The partnership is evaluating revenue-recognition and lease accounting standards; the filing does not quantify their expected effects. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Investor facts to verify
- Whether lower oil and gas prices or production changes materially affect royalty and NPI receipts and future distributions.
- The Minerals NPI’s movement from temporary deficit status to its reported June cash-basis surplus, and the timing and amount of related payments.
- Progress, costs and potential effects of Oklahoma production work and any Guymon-Hugoton infill drilling.
- Developments in royalty litigation and the impact of higher legal and IT expenses.
- Changes in reserve estimates and the full-cost ceiling-test cushion, which the filing does not quantify.