Dorchester Minerals is a pure royalty play in Oil & Gas without the constraints and overheads of an E&P company.
There is a potential 10.2% partnership distribution with a schedule K-1 during tax season.
The company has been maintaining steady mineral reserves since 2003 along with a healthy balance sheet (no debt).
We can see Insider buying in recent quarters. Institutional interest in the partnership has been increasing steadily over the past few years.
Dorchester Minerals LP (DMLP) is a limited partnership whose principal operating assets are net profit interests in working interest properties. The company owns and holds producing and non-producing mineral, royalty, overriding royalty, net profits, and leasehold interests.
With a business model built around acquiring new royalty interests to replace the depleting assets and aim to grow the dividend distribution, DMLP presents a great income play for investors.
Background Of The Mineral Royalty Model
The US Mineral Exchange defines mineral interest as “the ownership of all rights to gas, oil, and other minerals at or below the surface of a tract of land.” Mineral interests are divided into three categories – royalty interests, working interests, and overriding royalty interests. Each is defined as follows:
Royalty Interest – an ownership in production that bears no cost in production. Royalty interest owners receive their share of production revenue before the working interest owners.
Working Interest – an ownership in a well that bears 100% of the cost of production. Working interest owners receive their share of the profit after
royalty owners have received their share and
all operating expenses have been paid
Overriding Royalty Interest (ORRI) – a percentage share of production, or the value derived from production, which is free of all costs of drilling and producing, and is created by the lessee or working interest owner and paid by the lessee or working interest owner.
DMLP’s partnership agreement requires them to distribute quarterly an amount equal to all funds received from the Royalty Properties and NPIs after subtracting certain expenses and reasonable reserves. This makes the distribution variable. The current distribution is approximately a 10.24% yield.
Source: Company Form 10-K
Since 2003, the company’s reserves have grown organically, more than its production. During the end of FY2019, the company reported year‐end reserves exceeded initial 2003 reserves by 5%.
Source: FY2019 10-K
Recent Land Acquisition
Dorchester Minerals regularly performs acquisitions to maintain its mineral-producing reserves. During March 2019, the company closed the acquisition of producing and non-producing mineral, royalty and net profits interests from multiple parties. The mineral and royalty properties consist of varying undivided interests totaling approximately 76,000 net acres located in 172 counties in 14 states, including positions in the Bakken Trend of North Dakota and interests in multiple enhanced oil recovery units in the Permian Basin.
Insider And Institutional Buying
Insider interest in DMLP stock has been consistently good in 2019.
Source: Insider Monitor
Institutional ownership has also seen a steady increase in the past decade.
Healthy Partnership Structure Without IDRs
From FY2019 10-K - DMLP limited partners received 96%, and the general partner received 4% of the net cash generated in the year 2018. Due to these fixed percentages, the general partner does not have any incentive distribution rights (IDR) or other right or arrangement that will increase its percentage share of net cash generated by DMLP’s activities or those of the operating partnership.
Healthy Balance Sheet - No Debt
As of September 30, 2019, the company had total liabilities of $6 million. It is fair to say the company has virtually no debt since it amounts to ~4.5% of the company’s total assets. Further, the company has a cash balance of $21.9 million.
Cash distributions are highly dependent on oil and natural gas prices, which have historically been very volatile.
One of the cons with investing in Dorchester Minerals is that the company issues a form K-1 to all unitholders during the end of the tax year. Due to increased overhead in the process of tax filing, along with other considerations based on individual tax situation, this is likely to make several individual investors uncomfortable.
Based on data from OPEC World Oil Outlook, oil and gas will continue to play a central role in achieving sustainable economic development. Analysis projects a 25 percent increase in total primary energy demand worldwide between 2018 and 2040, and oil and gas is expected to meet most of this demand. The growth is likely to be driven by rising demand in developing countries where there is still lack of access to electricity and sources of energy for cooking needs.
The company’s royalty-based income model enables investors to participate in the Oil & Gas industry by staying away from regulatory and environmental penalties, operational hazards as well as restrictive regulations amongst several other challenges faced by most E&P companies.
With healthy mineral-producing reserves, no debt on the balance sheet, growing insider and institutional interest in DLMP, the partnership presents a great opportunity to investors seeking income.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.