Buy-recommended Dorchester Minerals (DMLP) would pay a distribution yield of 7% in the next twelve months by our latest estimates. Second quarter results released on August 5 displayed record volume including a rising contribution from newly economic shale formations in the Fayetteville Trend in Arkansas and the Bakken Trend in North Dakota. Recently acquired minerals interests also contributed incremental volume. An indicator of future distributions, general partner advances to the Minerals NPI (Net Profits Interest) increased to $1.7 million, or 10% of Ebitda in the latest quarter. Funds spent by other operators, also to the ultimate benefit of DMLP, may be more than twice that amount and are not reported by DMLP. As a result, the multiple of our estimate of present value to Ebitda looks higher than it would be if we knew the full amount of Ebitda.
Normally, the minerals owner leases the right to drill in return for a percentage of revenue before any deduction for drilling or operating costs. In many cases DMLP also has the option to pay a share of costs in return for a further share of revenue. In the latter case, DMLP’s general partner advances the partnership’s share of drilling costs to the Minerals NPI. After the advances are recovered by the GP, the partnership gains a new source of continuing cash flow for distribution to unitholders.
DMLP appears competitively valued among Top Line Cash Payers offering 6-10% distribution yields derived from a preferred cost position and participation in future oil and gas price trends.
Originally posted on August 6, 2010.