Dorchester Minerals Expects Growing Proceeds from Shale Formations

We initiate a buy recommendation on the limited partner units of Dorchester Minerals (DMLP) for royalty income from oil and gas production including growing proceeds from shale formations unlocked by new technology. The stock offers unlevered appreciation potential of 54% to a McDep Ratio of 1.0 and identical levered appreciation potential of 54% to Net Present Value (NPV) of $32 a share.

Estimated annual distribution yield is 8% despite unusually low natural gas price relative to the already low Henry Hub industry benchmark. The Bakken Shale of North Dakota is beginning to contribute to oil that accounts for 31% of NPV. In our analysis we add production and reserves from the backlog of shale wells to be transferred to the partnership when cash flow is no longer reinvested in new drilling. General Partner Casey McManemin explains the “Minerals NPI” that holds the backlog in his annual presentation to unit-holders.

Developing natural gas volumes from the Fayetteville Shale in Arkansas contributes to a stable volume outlook that boosts NPV. The partnership will also be positioned in the Barnett Shale of Texas when an acquisition announced May 15 closes in a few weeks. Finally, the timing of our buy recommendation appears supported by stock price and long-term oil price moving above the 200-day and 40-week averages potentially signaling an extended uptrend.

Originally published on June 5, 2009.

Comments

[Mad Hedge F...:]

they are im the right sector. The Potential Gas Committee of the American Gas Association published a report that US reserves have jumped by 35% to 1,836 trillion cubic feet, thanks to the huge discoveries of new shale fields since 2006. Also contributing are the new fracturing technologies, which I had a hand in pioneering myself ten years ago. That means our natural gas reserves can now meet 100 years of current consumption, and are roughly equivalent to Saudi Arabia’s crude reserves on a BTU basis. Natural gas futures dove 26 cents to $4.23, and the ETF (UNG) gave back 4%. A buddy of mine close to the committee warned me that something like this was headed down the pike, which is why I sent readers a warning two weeks ago to cash out at $4.30 (see www.madhedgefundtrader...). When you only see chart driven traders buying a commodity and the industry insiders selling the Hell out of it, you want to stay away. Bewildered technicians were last seen feverishly searching for Hainesville on Google. It was their models that sucked $3 billion into UNG over the last three months. This is great news for the big consumers of NG, like the utility industry and the petrochemical industry. It will also give a shot in the arm to Boone Pickens’ plan to shift our transportation system to NG (see www.madhedgefundtrader...). Even the ratio, pairs, and mean reversion traders have been burned by NG this year. As cheap as NG is, a Saudi Arabia’s worth of supply hitting the market could easily knock the price down by half from here. As extreme as the move in the oil/gas ratio is at 18:1, we could be breaking new ground.

Jun 29 12:29 PM