Dorchester Minerals, L.P. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The partnership owns mineral, royalty and related interests across 25 states; its income is principally tied to oil and natural gas production and prices.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $16.434 million | $14.256 million | $30.723 million | $29.795 million |
| Operating income | $9.770 million | $7.926 million | $17.510 million | $16.850 million |
| Net earnings | $9.770 million | $7.932 million | $17.510 million | $16.858 million |
| Earnings per common unit | $0.31 | $0.25 | $0.55 | $0.54 |
| Operating margin | 59.5% | 55.6% | 57.0% | 56.6% |
Revenue rose 15.3% for the quarter and 3.1% year to date. Management attributed the increases primarily to higher oil prices and increased royalty-property gas volumes; reduced lease bonus income partly offset the earnings gains. Costs and expenses increased 5.3% for the quarter and 2.1% year to date, mainly from higher production taxes.
For the six months, operating cash flow was $27.614 million, essentially unchanged from $27.585 million a year earlier. Investing cash flow was a $4,000 use; distributions paid to the general partner and unitholders totaled $24.753 million. Cash increased to $14.110 million from $11.253 million at year-end 2010. At June 30, total assets were $146.293 million, total liabilities $1.135 million, and partnership capital $145.158 million. The filing reports no material borrowings; the partnership agreement generally bars indebtedness above $50,000, other than trade payables. Current assets were $22.457 million versus current liabilities of $1.026 million.
Changes and operating activity
- Royalty-property gas sales volumes increased 42.9% in Q2 and 24.1% for the first six months; oil volumes were down 6.9% in Q2 and slightly lower year to date. The company attributed gas growth largely to the Maecenas acquisition, Fayetteville Shale activity and continued development.
- Royalty-property oil prices increased to $98.44 per barrel in Q2 from $73.54; gas prices were nearly flat in Q2 but lower year to date. NPI gas volumes declined 7.2% in Q2 and 6.4% year to date, attributed to reservoir decline.
- Depletion and amortization was broadly stable. Management said reserve revisions more than offset the effect of the Maecenas acquisition on depletion.
- The Q2 distribution was $0.417027 per common unit and was paid August 4, 2011. The partnership agreement required the next distribution to be paid by November 15, 2011.
Outlook, risks and contingencies
The filing provides no earnings or production guidance. Management expects available cash flow to cover expenses and says the partnership is not directly responsible for exploration, development or production costs. The operating partnership plans further Oklahoma production work, whose costs and impact on NPI receipts are uncertain. Repairs and field operating costs may gradually increase as facilities age and reservoir pressure declines.
- Commodity exposure: Oil and gas prices are volatile and materially affect revenue; the partnership does not expect to hedge this exposure. Interest-rate and foreign-currency risks are not expected to be material.
- Minerals NPI deficit: The Minerals NPI remained in deficit by $1.498 million at June 30, 2011, after improving by $1.546 million during the first half. No NPI payment is due until the deficit is recovered; timing is uncertain. The associated Fayetteville Shale properties are excluded from reported NPI results.
- Legal contingency: A royalty-underpayment claim involving the operating partnership remains pending after a June 30, 2011 partial summary judgment in its favor. An adverse final outcome could reduce NPI receipts; the filing does not quantify potential exposure.
- Other risks: Appalachian development depends in part on resolution of regulatory issues for high-volume hydraulic fracturing. Reserve estimates and the full-cost ceiling test involve judgment; significant downward reserve revisions could cause a non-cash impairment.
Investor verification priorities
- Confirm the durability of royalty-property production growth and its dependence on acquisition-related volumes, development and commodity prices.
- Track recovery of the Minerals NPI deficit and whether it begins generating payments.
- Review subsequent developments in the royalty-underpayment litigation and any potential effect on NPI receipts.
- Check later filings for distribution levels, cash generation, production trends and reserve-related impairment indicators.