Dorchester Minerals: Strong Production Growth Enhances Its Value

Jul. 24, 2022 8:00 AM ETDorchester Minerals, L.P. (DMLP)8 Comments

Summary

  • Dorchester's Q1 2022 oil sales volumes were 22% higher than Q4 2021.
  • Q1 2022 natural gas sales volumes ended up 14% higher than Q4 2021.
  • This growth was mostly organic, although Dorchester made an acquisition at the end of Q4 2021 that boosted its unit count by 4.5%.
  • Production growth boosts Dorchester's estimated value to $29 to $30 per unit in a long-term $75 WTI oil environment.
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Dorchester Minerals (NASDAQ:DMLP) reported a $0.969 per unit distribution for Q2 2022, which is generally in-line with my belief that it could start to deliver quarterly distributions of $1+ per unit with $100+ WTI oil and $7+ NYMEX gas.

Dorchester's production growth was stronger than I expected, with a double-digit increase in production when comparing Q1 2022 volumes to Q4 2021 volumes and adjusting for the increase in outstanding units. This production growth bumps up Dorchester's estimated value to $29 to $30 in a long-term $75 WTI oil environment.

Realized Commodity Prices

Dorchester's realized prices for a reported quarter tend to reflect results that are offset by around one to two months. So for Q2 2022, Dorchester's realized prices would mostly reflect February/March to April/May commodity prices.

This suggests that Dorchester's Q2 2022 results likely reflected near $100 WTI oil along with $5 to $6 NYMEX gas.

Dorchester's 2021 reserve value calculations showed a differential of negative $2.30 for oil and negative $0.80 for natural gas. However, one thing to note is that Dorchester includes NGLs in its oil volumes. It appears that close to 20% of Dorchester's oil volumes are attributable to NGLs. This makes Dorchester's realized price for oil approximately 85% to 90% of WTI.

Thus in a flat $100 WTI and $7 NYMEX gas price environment, Dorchester would realize approximately $88 for its oil (with the large differential due to NGLs) and around $6.20 for its natural gas.

Growing Production

Dorchester's production growth appeared to get stronger in Q1 2022. It reported a 14% increase in natural gas sales and a 22% increase in oil sales (by volume) in Q1 2022 compared to Q4 2021.

Dorchester acquired 4,600 net royalty acres at the end of Q4 2021 for 1.58 million common units, which increased its outstanding units by approximately 4.5%. Adjusting for that still results in a 9% increase in natural gas sales and a 17% increase in oil sales per outstanding unit.

Production Q2 2021 Q3 2021 Q4 2021 Q1 2022
Royalty natural gas sales (mmcf) 1,014 971 940 1,147
Royalty oil sales (mbbls) 225 271 265 369
NPI natural gas sales (mmcf) 415 304 347 320
NPI oil sales (mbbls) 97 80 113 94

Dorchester's Q2 2022 distribution suggests that its Q2 2022 production levels were likely close to Q1 2022 levels.

Notes On Valuation

Dorchester's production levels can bounce up and down a bit from quarter to quarter. However, it does appear likely that I underestimated its production growth. Thus, I am now estimating that Dorchester could be worth approximately $29 to $30 per unit in a long-term $75 WTI oil scenario.

This assumes that Dorchester's production levels continue to grow at least modestly from 1H 2022 levels. With the strength in commodity prices, there should be at least some production growth, although too much production growth would end up depressing prices.

Conclusion

Dorchester Minerals had strong production growth in Q1 2022, with natural gas volumes up 14% compared to Q4 2021 and oil volumes up 22% over the same time frame. Some of this growth was due to Dorchester's late 2021 acquisition, which boosted its unit count by 4.5%. Adjusting for that still results in double-digit production growth per common unit.

As a result of the strong production growth, I now estimate that Dorchester is worth around $29 to $30 in a long-term $75 WTI oil scenario. Dorchester's near-term yields should be good, with Q3 2022's distribution likely to be higher than Q2 2022.

Beyond that, distributions may start to decrease a bit as September 2022 to December 2022 oil strip is around $92 now. Natural gas prices are very strong still, but Dorchester's production is around 65% oil (including NGLs) compared to 35% natural gas.

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