Buy-recommended Dorchester Minerals (NASDAQ:DMLP) offers unlevered appreciation potential of 22% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $27 a share. Along with the release of fourth quarter financial results on February 25, management disclosed that new reserves replaced production during the past year despite the partnership paying out all of its cash flow without reinvesting any.
Like other Top Line Cash Payers in our coverage, DMLP receives royalty payments without the obligation to make new investments. Those payments fund income distributions currently projected at $1.82 a unit for 2010. Because none of Ebitda is applied to sustain production, NPV corresponds to higher than normal multiples of cash flow (PV/Ebitda) in an industry context. At the same time, reserve life index (Adjusted R/P) is understated because it includes no proven undeveloped reserves and B.P. Huddleston, DMLP’s engineer, is especially conservative, in our experience.
There are no undeveloped reserves because royalty owners often lack the detailed information of an operator required for an official estimate. Yet, we know from DMLP disclosures and industry trends that DMLP's lands are well-located to contribute future reserves. Thus, latest disclosures reaffirm our opinion that DMLP has high quality characteristics that make the distribution more sustainable than may be reflected in stock price.
Originally published on February 26, 2010.