Dorchester Minerals, L.P. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial amounts below are in millions of dollars unless stated otherwise. Dorchester owns mineral, royalty, overriding royalty, net profits, and leasehold interests across 25 states; its principal revenues depend on oil and natural gas production and prices.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $15.716 | $16.440 | $51.028 | $46.953 |
| Operating income | $10.965 | $10.718 | $35.823 | $30.250 |
| Net income | $10.969 | $10.749 | $36.535 | $30.422 |
| Net income per common unit | $0.35 | $0.34 | $1.15 | $0.96 |
| Operating margin | 69.8% | 65.2% | 70.2% | 64.4% |
Revenue comprises royalties, net profits interests (NPIs), lease bonuses, and other income. Nine-month revenue increased 8.7%, while Q3 revenue declined 4.4%. Nine-month net income increased 20.1%; Q3 net income increased 2.0%. Margins are calculated from reported revenue and operating income.
Cash flow and distributions: Operating cash flow for the first nine months was $47.009 million, up from $42.508 million. Cash distributions paid were $46.285 million, versus $40.535 million; cash increased $0.724 million to $15.899 million. The Q3 2014 distribution was $0.447805 per unit, paid October 30, 2014.
Balance sheet and liquidity: At September 30, cash was $15.899 million, total current assets $30.443 million, current liabilities $1.447 million, total assets $103.521 million, and total liabilities $1.447 million. The filing reports no borrowings and states the partnership generally cannot incur indebtedness above $50,000, except trade payables, or acquisition indebtedness.
Changes and management commentary
- Royalty-property oil volumes rose while gas volumes fell; NPI oil volumes also rose and gas volumes fell. Management attributes the reported volume shifts partly to a January 2014 change in how plant products are classified, as well as production trends. The change moved some reported volume from gas to oil equivalents.
- Oil prices were lower year over year in both Q3 and the nine-month period; natural gas prices were higher. Increased oil volumes, gas pricing, and lease bonus income supported nine-month revenue, partly offset by lower oil prices and gas volumes.
- Total costs and expenses fell 17.0% in Q3 and 9.0% for the first nine months, primarily due to lower depletion and amortization. Nine-month G&A increased 10.5%, partly reflecting Bakken Trend and Fayetteville Shale costs.
- First-quarter 2014 other income included $0.712 million from settlement of a North Dakota lease dispute.
- On September 24, the partnership and its operating partnership sold Kansas working interests in the Hugoton NPI. The initial purchase price was $3.8 million, subject to adjustments; the sale was effective June 1. The partnership received $4.041 million on October 20, partly reflecting sale proceeds. Proceeds were credited to the full-cost pool.
Outlook, risks, and contingencies
The filing provides no formal earnings or distribution guidance. Management describes possible ongoing operating-partnership activity in Oklahoma, including fracture treatments, deepening, recompletions, and drilling; costs and resulting NPI payments may vary. The Minerals NPI had a temporary $11.5 million deficit at September 30, principally due to capital commitments; the filing says this deficit is borne by the operating partnership when cumulative NPI costs exceed revenues. Its stated cash on hand was $10.3 million against $21.8 million of capital commitments.
Key risks include volatile oil and gas prices, production declines, development activity and costs, reserve-estimation uncertainty, and possible impairment under the full-cost ceiling test. The partnership does not anticipate hedging commodity prices, borrowing other than trade debt, or material interest-rate or foreign-currency exposure. Management says ordinary-course legal and administrative proceedings are not expected to significantly affect financial position, cash flows, or operating results. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
The partnership is evaluating ASU 2014-09, the new revenue-recognition standard, effective for it in 2017; it had not determined the adoption method or impact.
Investor verification points
- Check the subsequent accounting and final proceeds for the Hugoton NPI property sale, including purchase-price adjustments.
- Assess the Minerals NPI deficit and capital commitments, and their potential effect on future NPI distributions.
- Separate underlying production trends from the plant-products volume-classification change when comparing periods.
- Review sensitivity to oil and gas prices, reserve estimates, depletion, and the full-cost ceiling test.
- Confirm future distributions and operating-partnership drilling or development spending; this filing gives no formal forward guidance.