10-K: Dorchester Minerals, L.P. Details Securities and Operations in Annual 10-K Filing

Dorchester Minerals, L.P.'s annual 10-K filing details the company's securities, operations, and financial performance as of February 22, 2024.

Summary

• Dorchester Minerals, L.P. has one class of securities registered under the Securities Exchange Act of 1934, which are common units representing limited partnership interests.
• As of February 22, 2024, there were 39,583,243 common units outstanding.
• The general partner has a 1% partnership interest in overriding royalty interests and a 4% interest in all other assets, properties, and revenue.
• The partnership distributes available cash to its general and limited partners within 45 days of each fiscal quarter end.
• Available cash is defined as all cash and cash equivalents on hand, less any cash reserves deemed necessary by the general partner.
• The partnership may redeem a limited partner's common units if they fail to provide certification of qualification to own real property interests.
• Transfers of common units require a transfer application and consent of the general partner to be recognized.
• Unitholders have limited voting rights, with the general partner voting units held by assignees who are not yet admitted as limited partners.
• A majority of outstanding common units is required for most major actions, including the sale of assets, dissolution, and removal of the general partner.
• The partnership agreement limits the issuance of new partnership securities representing over 40% of outstanding limited partner interests without unitholder approval.
• The partnership's primary business objective is to provide an attractive yield to unitholders by strategically managing assets and maintaining a conservative capital structure.
• The partnership focuses on acquiring mineral and royalty interests, preferring to issue equity as consideration.
• The partnership does not have a credit facility and does not anticipate incurring debt.
• The partnership's royalty revenues from properties operated by Pioneer Natural Resources Company represented approximately 11% of total operating revenues for the year ended December 31, 2023.
• The partnership acquired mineral and royalty interests totaling approximately 716 net royalty acres in Texas in exchange for 494,000 common units on September 29, 2023.
• The partnership acquired mineral and royalty interests totaling approximately 568 net royalty acres in Texas in exchange for 374,000 common units on August 31, 2023.
• The partnership acquired mineral and royalty interests totaling approximately 900 net royalty acres in Louisiana, New Mexico, and Texas in exchange for 343,750 common units on July 12, 2023.
• The partnership received $12.7 million in lease bonus revenue during 2023.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company has a solid business model and a conservative financial approach, it faces significant risks related to commodity prices, operational control, and regulatory changes. The decrease in net income and operating revenue in 2023 is a concern.

Positives

• The partnership maintains a conservative capital structure with no debt.
• The partnership has a diversified customer base, mitigating the risk of losing a single customer.
• The partnership has a clear objective of providing an attractive yield to unitholders.
• The partnership has a history of acquiring accretive mineral and royalty interests.
• The partnership prefers to issue equity as consideration in acquisitions, which can be beneficial for existing unitholders.
• The partnership has a business opportunities agreement that defines the scope of its activities and limits competition from its general partner and affiliates.
• The partnership has a comprehensive process for identifying, assessing, and managing material risks from cybersecurity threats.

Negatives

• The partnership's cash distributions are highly dependent on volatile oil and natural gas prices.
• The partnership does not control the operations and development of the Royalty Properties or the properties underlying the NPIs.
• The partnership's lease bonus revenue depends on third parties' actions, which are outside of its control.
• The partnership's cash distributions are affected by production and other costs, most of which are outside of its control.
• The partnership's oil and natural gas reserves are depleting assets, and there are limitations on its ability to replace them.
• The partnership may experience delays in receiving royalty payments and may be unable to replace operators that do not make required royalty payments.
• The partnership does not currently plan to enter into hedging arrangements, exposing it to the impact of decreases in the price of oil and natural gas.
• The partnership's ability to identify and capitalize on acquisitions is limited by contractual provisions and substantial competition.
• The partnership is subject to operating hazards and unforeseen interruptions for which it may not be fully insured.
• The partnership is subject to governmental policies, laws, and regulations that could have an adverse impact on its business and cash distributions.
• The partnership may be adversely affected by price volatility in the oil and natural gas markets.
• The partnership may be adversely affected by the international economic instability caused by ongoing global conflicts.
• The partnership will continue to incur increased costs as a result of operating as a public company.

Risks

• The partnership's cash distributions are highly dependent on volatile oil and natural gas prices.
• The partnership does not control the operations and development of the Royalty Properties or the properties underlying the NPIs.
• The partnership's lease bonus revenue depends on third parties' actions, which are outside of its control.
• The partnership's oil and natural gas reserves are depleting assets, and there are limitations on its ability to replace them.
• The partnership may experience delays in receiving royalty payments and may be unable to replace operators that do not make required royalty payments.
• The partnership does not currently plan to enter into hedging arrangements, exposing it to the impact of decreases in the price of oil and natural gas.
• The partnership's ability to identify and capitalize on acquisitions is limited by contractual provisions and substantial competition.
• The partnership is subject to operating hazards and unforeseen interruptions for which it may not be fully insured.
• The partnership is subject to governmental policies, laws, and regulations that could have an adverse impact on its business and cash distributions.
• The partnership may be adversely affected by price volatility in the oil and natural gas markets.
• The partnership may be adversely affected by the international economic instability caused by ongoing global conflicts.
• The partnership will continue to incur increased costs as a result of operating as a public company.
• Cyber incidents or attacks targeting the partnership's systems and infrastructure may adversely impact operations.
• Continuing or worsening inflationary issues and associated changes in federal monetary policy may result in increases to the costs of the goods, services and labor used by the partnership's operators.
• Environmental costs and liabilities and changing environmental regulation could affect the partnership's cash flow.
• The outcome of pending litigation related to the Dakota Access Pipeline and any related executive orders could have a material adverse effect on the partnership's revenue and cash distributions.
• The partnership's unitholders have limited voting rights and do not control the general partner.
• The control of the general partner may be transferred to a third party without unitholder consent.
• The general partner and its affiliates have conflicts of interests, which may permit them to favor their own interests to the detriment of unitholders.
• The partnership may issue additional securities, diluting unitholders' interests.
• The partnership's unitholders may not have limited liability in certain circumstances and may be liable for the return of certain distributions.
• The partnership is dependent upon key personnel, and the loss of services of any of its key personnel could adversely affect its operations.
• The partnership is dependent on service providers who assist with providing Schedule K-1 tax statements to unitholders.
• The tax consequences to a unitholder of the ownership and sale of common units will depend in part on the unitholders tax circumstances.
• The partnership may be subject to federal income tax and possibly certain state corporate income or franchise taxes if it is classified as a corporation and not as a partnership for federal income tax purposes.
• The tax treatment of publicly traded partnerships or an investment in the partnership's common units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.
• The recently enacted 20% deduction for certain pass-through income may not be available for the partnership's unitholders allocable share of the partnership's net income.
• The IRS could reallocate items of income, gain, deduction and loss between transferors and transferees of common units if the IRS does not accept the partnership's monthly convention for allocating such items.
• The partnership's unitholders may not be able to deduct losses attributable to their common units.
• The partnership's unitholders partnership tax information may be audited.
• The partnership's unitholders may have more taxable income or less taxable loss with respect to their common units if the IRS does not respect the partnership's method for determining the adjusted tax basis of their common units.
• Tax-exempt investors may recognize unrelated business taxable income.
• Tax consequences of certain NPIs are uncertain.
• The partnership's unitholders may not be entitled to deductions for percentage depletion with respect to the partnership's oil and natural gas interests.
• The partnership's unitholders may have more taxable income or less taxable loss on an ongoing basis if the IRS does not accept the partnership's method of allocating depletion deductions.
• The partnership's unitholders may have more taxable income or less taxable loss on an ongoing basis if the IRS does not accept the partnership's method of determining a unitholder's share of the basis of partnership property.
• The ratio of the amount of taxable income that will be allocated to a unitholder to the amount of cash that will be distributed to a unitholder is uncertain, and cash distributed to a unitholder may not be sufficient to pay tax on the income the partnership allocates to a unitholder.
• A unitholder may lose his status as a partner of the partnership for federal income tax purposes if the unitholder lends the partnership's common units to a short seller to cover a short sale of such common units.
• Foreign, state and local taxes could be withheld on amounts otherwise distributable to a unitholder.
• If the IRS makes audit adjustments to the partnership's income tax returns for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from the partnership.
• The partnership's unitholders may be subject to withholding tax upon transfers of their common units.
• Public health threats could have an adverse effect on the partnership, its cash flow and its industry.

Future Outlook

The partnership intends to continue to capitalize on the development of its properties, seek accretive acquisitions, and maintain a conservative capital structure.

Management Comments

• The partnership's primary business objective is to provide an attractive yield to unitholders by focusing on strategically managing assets and protecting the balance sheet, while maintaining a best-in-class cost structure.
• The partnership intends to accomplish this objective by capitalizing on the development of the properties underlying its mineral interests, seeking to acquire accretive mineral or other interests, and maintaining a conservative capital structure.

Industry Context

The oil and natural gas industry is intensely competitive, and the partnership competes with other companies that have greater resources. The partnership's ability to acquire additional mineral, royalty, overriding royalty, net profits and similar interests in the future will be dependent upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment mainly by issuing equity.

Comparison to Industry Standards

• The document does not provide specific details on comparable companies or projects, but it does mention that the partnership competes with other companies in the oil and natural gas industry, some of which have greater resources.
• The partnership's strategy of focusing on royalty and net profits interests is common among similar publicly traded partnerships, such as Black Stone Minerals, L.P., Viper Energy Partners, L.P., Sitio Royalties Corp., and Kimbell Royalty Partners, L.P., which are listed as the peer group in the document.
• The partnership's conservative capital structure, with no debt, is a differentiating factor compared to some other companies in the industry that may utilize leverage to finance acquisitions and operations.
• The partnership's reliance on cash distributions and its limited control over operations are typical characteristics of royalty and net profits interest owners.
• The partnership's use of the full cost method of accounting for oil and natural gas properties is a common practice in the industry.

Legal Proceedings

• The Partnership and the Operating Partnership are involved in legal and/or administrative proceedings arising in the ordinary course of their businesses, none of which have predictable outcomes.

Related Party Transactions

• The partnership reimburses its general partner for certain allocable general and administrative costs, including rent, salaries, and employee equity and benefit plans.
• The general partner owns all of the partnership interests in the operating partnership, which provides day-to-day operational and administrative services to the partnership and the general partner.

Stakeholder Impact

• Unitholders are impacted by the partnership's cash distributions, which are dependent on oil and natural gas prices and production.
• Employees are impacted by the partnership's compensation and benefit programs.
• Customers are impacted by the partnership's ability to deliver oil and natural gas production.
• Suppliers are impacted by the partnership's ability to pay for goods and services.
• Creditors are impacted by the partnership's financial stability and ability to repay debts.

Next Steps

• The partnership intends to continue to capitalize on the development of its properties.
• The partnership intends to seek accretive acquisitions.
• The partnership intends to maintain a conservative capital structure.

Key Dates

Keywords

mineral interests, royalty interests, net profits interests, oil and gas, limited partnership, common units, distributions, unitholders, energy, production, reserves, acquisitions