Annual Statements Open main menu

DORCHESTER MINERALS, L.P. - Quarter Report: 2020 June (Form 10-Q)

dmlp20200630_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________ 

 

Commission File Number 000-50175

 

DORCHESTER MINERALS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

81-0551518

(I.R.S. Employer Identification No.)

 

3838 Oak Lawn Avenue, Suite 300, Dallas, Texas 75219

(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code: (214) 559-0300

 

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which

registered

Common Units Representing Limited Partnership Interest

 

DMLP

 

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer,” “smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

 

 

Smaller reporting company ☒

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

 

Number of common units representing limited partnership interests outstanding as of August 6, 2020: 34,679,774  

 

 

 

 

TABLE OF CONTENTS

 

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

1

 

 

PART I – FINANCIAL INFORMATION

1

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

 

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2020 AND DECEMBER 31, 2019 (UNAUDITED)

2

 

 

 

 

 

 

CONDENSED CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

3

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

4

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)

5

 

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6

 

 

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

9

       
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

12

 

 

 

 

PART II – OTHER INFORMATION

13

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

13

 

 

 

 

 

ITEM 1A.

RISK FACTORS

13

 

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

13

 

 

 

 

 

ITEM 6.

EXHIBITS

14

 

 

 

SIGNATURES

15

 

 

 

DORCHESTER MINERALS, L.P.

(A Delaware Limited Partnership)

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

 

Statements included in this report that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), are forward-looking statements. These statements can be identified by the use of forward-looking terminology including "may," "believe," "will," "expect," "anticipate," "estimate," "continue" or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other forward-looking information.  In this report, the terms “us”, “our”, “we”, and “its” are sometimes used as abbreviated references to the Partnership.

 

These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and, therefore, involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements for a number of important reasons, including those discussed under Item 1A.  "Risk Factors" in the Partnership’s annual report on Form 10-K and in this report, in its other filings with the Securities and Exchange Commission and elsewhere in this report.  Examples of such reasons include, but are not limited to, changes in the price or demand for oil and natural gas, including the recent significant decline in energy prices, public health crises including the worldwide COVID-19 or coronavirus outbreak beginning in early 2020, changes in the operations on or development of our properties, changes in economic and industry conditions and changes in regulatory requirements (including changes in environmental requirements) and our financial position, business strategy and other plans and objectives for future operations.

 

You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other forward-looking information. Before you invest, you should be aware that the occurrence of any of the events herein described in Item 1A.  "Risk Factors" in the Partnership’s annual report on Form 10-K and its other filings with the Securities and Exchange Commission and elsewhere in this report could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common units could decline, and you could lose all or part of your investment.

 

 

PART I – FINANCIAL INFORMATION

 

 

ITEM 1.     FINANCIAL STATEMENTS

 

See attached financial statements on the following pages.

 

 

 

DORCHESTER MINERALS, L.P.

(A Delaware Limited Partnership)

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

(Unaudited)

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 
         

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $11,753  $15,339 

Trade and other receivables

  3,141   7,061 

Net profits interests receivable - related party

  317   5,882 

Total current assets

  15,211   28,282 
         

Property and leasehold improvements - at cost:

        

Oil and natural gas properties (full cost method)

  405,670   405,670 

Accumulated full cost depletion

  (325,795

)

  (319,544

)

Total

  79,875   86,126 
         

Leasehold improvements

  989   989 

Accumulated amortization

  (192

)

  (146

)

Total

  797   843 
         

Operating lease right-of-use asset

  1,510   1,632 
         

Total assets

 $97,393  $116,883 
         

LIABILITIES AND PARTNERSHIP CAPITAL

        
         

Current liabilities:

        

Accounts payable and other current liabilities

 $2,764  $2,052 

Operating lease liability

  305   310 

Total current liabilities

  3,069   2,362 
         

Operating lease liability

  2,033   2,185 

Total liabilities

  5,102   4,547 
         

Commitments and contingencies (Note 3)

          
         

Partnership capital:

        

General Partner

  629   1,228 

Unitholders

  91,662   111,108 

Total partnership capital

  92,291   112,336 

Total liabilities and partnership capital

 $97,393  $116,883 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

DORCHESTER MINERALS, L.P.

(A Delaware Limited Partnership)

 

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In Thousands, except per unit amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net operating revenues:

                               

Royalties

  $ 6,505     $ 15,975     $ 16,455     $ 30,554  

Net profits interests

    278       3,885       5,446       8,264  

Lease bonus

    6       419       269       422  

Other

    6       321       101       391  
                                 

Total net operating revenues

    6,795       20,600       22,271       39,631  
                                 

Costs and expenses:

                               

Operating, including production taxes

    1,350       1,789       2,790       3,401  

Depreciation, depletion and amortization

    2,940       3,930       6,297       6,237  

General and administrative expenses

    1,313       1,285       3,231       2,418  
                                 

Total costs and expenses

    5,603       7,004       12,318       12,056  
                                 

Net income

  $ 1,192     $ 13,596     $ 9,953     $ 27,575  
                                 

Allocation of net income:

                               

General partner

  $ 60     $ 455     $ 298     $ 901  

Unitholders

  $ 1,132     $ 13,141     $ 9,655     $ 26,674  

Net income per common unit (basic and diluted)

  $ 0.03     $ 0.38     $ 0.28     $ 0.80  

Weighted average basic and diluted common units outstanding

    34,680       34,680       34,680       33,480  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

DORCHESTER MINERALS, L.P.

(A Delaware Limited Partnership)

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL

(In Thousands)

(Unaudited)

  

  

General

Partner

  

Unitholders

  

Total

  

Unitholder

Units

 

Three Months Ended June 30, 2019

                

Balance at April 1, 2019

 $1,709  $125,503  $127,212   34,680 

Net income

  455   13,141   13,596     

Distributions ($0.482315 per Unit)

  (553

)

  (16,726

)

  (17,279

)

    

Balance at June 30, 2019

 $1,611  $121,918  $123,529   34,680 
                 

Three Months Ended June 30, 2020

                

Balance at April 1, 2020

 $1,041  $107,103  $108,144   34,680 

Net income

  60   1,132   1,192     

Distributions ($0.477891 per Unit)

  (472

)

  (16,573

)

  (17,045

)

    

Balance at June 30, 2020

 $629  $91,662  $92,291   34,680 

 

 

  

General

Partner

  

Unitholders

  

Total

  

Unitholder

Units

 

Six Months Ended June 30, 2019

                

Balance at January 1, 2019

 $1,826  $84,821  $86,647   32,280 

Net income

  901   26,674   27,575     

Acquisition of assets for units

  -   43,824   43,824   2,400 

Distributions ($0.998887 per Unit)

  (1,116

)

  (33,401

)

  (34,517

)

    

Balance at June 30, 2019

 $1,611  $121,918  $123,529   34,680 
                 

Six Months Ended June 30, 2020

                

Balance at January 1, 2020

 $1,228  $111,108  $112,336   34,680 

Net income

  298   9,655   9,953     

Distributions ($0.839133 per Unit)

  (897

)

  (29,101

)

  (29,998

)

    

Balance at June 30, 2020

 $629  $91,662  $92,291   34,680 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

 

DORCHESTER MINERALS, L.P.

(A Delaware Limited Partnership)

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 30,

 
   

2020

   

2019

 
                 

Net cash provided by operating activities

  $ 26,412     $ 35,300  
                 

Cash flows provided by investing activities:

               

Net cash contributed in acquisition

    -       1,406  

Proceeds from the sale of oil and natural gas properties

    -       350  

Total cash flows provided by investing activities

    -       1,756  
                 

Cash flows used in financing activities:

               

Distributions paid to General Partner and unitholders

    (29,998

)

    (34,517

)

                 

(Decrease) increase in cash and cash equivalents

    (3,586 )     2,539  

Cash and cash equivalents at beginning of period

    15,339       18,285  
                 

Cash and cash equivalents at end of period

  $ 11,753     $ 20,824  
                 
                 

Non-cash investing and financing activities:

               

Fair value of common units issued for acquisition

  $ -     $ 43,824  

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

DORCHESTER MINERALS, L.P.

(A Delaware Limited Partnership)

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

1.

Basis of Presentation

 

Dorchester Minerals, L.P. (the “Partnership”) is a publicly traded Delaware limited partnership that was formed in December 2001, and commenced operations on January 31, 2003. The unaudited condensed consolidated financial statements include the accounts of the Partnership and its wholly-owned subsidiaries Dorchester Minerals Oklahoma LP, Dorchester Minerals Oklahoma GP, Inc., Maecenas Minerals LLP, Dorchester-Maecenas GP LLC, The Buffalo Co., A Limited Partnership, and DMLPTBC GP LLC.

 

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring adjustments unless indicated otherwise) that are, in the opinion of management, necessary for the fair presentation of our financial position and operating results for the interim period. Interim period results are not necessarily indicative of the results for the calendar year. For more information regarding limitations on the forward-looking statements contained herein, see page 1 of this Quarterly Report on Form 10-Q. Per unit information is calculated by dividing the income or loss applicable to holders of the Partnership’s common units by the weighted average number of units outstanding. The Partnership has no potentially dilutive securities and, consequently, basic and diluted income per unit do not differ. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s 2019 Annual Report on Form 10-K.

 

The accompanying unaudited condensed consolidated financial statements include the consolidated results of the Partnership. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, estimates of uncollected revenues and unpaid expenses from Royalty Properties (which are interests in oil and natural gas leases that give the Partnership the right to receive a portion of the production from the leased acreage, without bearing the costs of such production) and net profits overriding royalty interests (referred to as the Net Profits Interests, or “NPIs”) operated by non-affiliated entities are particularly subjective due to our inability to gain accurate and timely information. Therefore, actual results could differ from those estimates.

 

Recent Events – In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and the significant risks to the international community and economies as the virus spreads globally beyond its point of origin.  In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally, and throughout the second quarter of 2020 and thereafter, COVID-19 continued to spread throughout the U.S. In addition, after the Organization of the Petroleum Exporting Countries (“OPEC”) and a group of oil producing nations led by Russia failed in March 2020 to agree on oil production cuts, Saudi Arabia announced that it would cut oil prices and increase production, leading to a sharp further decline in oil and natural gas prices. While OPEC, Russia and other oil producing countries reached an agreement in April 2020 to reduce production levels, and U.S. production has declined, a significant crude oil price recovery is not expected until global supply matches current lower levels of demand caused by a number of factors, including the uncertainty around the extent and timing of an economic recovery due to the COVID-19 pandemic. The effects of COVID-19 and concerns regarding its domestic and global spread, as well as the recent actions by Russia and Saudi Arabia, could continue to negatively impact the domestic and international supply and demand for oil and natural gas, to sustain continued price volatility and impact the price paid for oil and natural gas and to materially and adversely affect the demand for and marketability of oil and natural gas production.

 

 

 

We are closely monitoring the current and potential impact of the COVID-19 pandemic and future OPEC actions on all aspects of our business, including how these events may impact our future operations, financial results, liquidity, employees and producers. The impact of the COVID-19 pandemic and the related economic downturn and the historically low oil and natural gas prices on the account of the oil price war between OPEC and other oil producing countries is rapidly evolving. We cannot predict the long-term impact of these events on our liquidity, financial position, results of operations or cash flows due to uncertainties including the severity of COVID-19, the duration of the outbreak domestically and worldwide, additional governmental or other actions taken to combat COVID-19 and the effect COVID-19 and the current depressed oil prices will have on the demand for oil and natural gas. These situations remain fluid and unpredictable, and we are actively managing our response.

 

Revenue Recognition – Revenues from Royalty Properties and NPIs are recorded under the cash receipts approach as directly received from the remitters’ statement accompanying the revenue check. Since the revenue checks are generally received two to four months after the production month, the Partnership accrues for revenue earned but not received by estimating production volumes and product prices. Identified differences between our accrued revenue estimates and actual revenue received historically have not been significant.

 

The Partnership does not record revenue for unsatisfied or partially unsatisfied performance obligations. The Partnership’s right to revenues from Royalty Properties and NPIs occurs at the time of production, at which point, payment is unconditional, and no remaining performance obligation exists for the Partnership. Accordingly, the Partnership’s revenue contracts for Royalty Properties and NPIs do not generate contract assets or contract liabilities.

 

Revenues from lease bonus payments are recorded upon receipt. The lease bonus is separate from the lease itself and is recognized as revenue to the Partnership upon receipt of payment. The Partnership generates lease bonus revenue by leasing its mineral interests to exploration and production companies, and includes proceeds from assignments of leasehold interests where the Partnership retains an interest. A lease agreement represents the Partnership’s contract with a lessee and generally transfers the rights to develop oil or natural gas, grants the Partnership a right to a specified royalty interest, and requires that drilling and completion operations commence within a specified time period. Upon signing a lease agreement, no further performance obligation exists for the Partnership, and therefore, no contract assets or contract liabilities are generated.

 

 

 

2.

Acquisition for Units

 

On March 29, 2019, pursuant to a Contribution and Exchange Agreement with H. Huffman & Co., A Limited Partnership, an Oklahoma limited partnership (“HHC”), The Buffalo Co., A Limited Partnership, an Oklahoma limited partnership (“TBC” and together with HHC, the “Acquired Entities”), Huffman Oil Co., L.L.C., an Oklahoma limited liability company, and the equity holders of the Acquired Entities, the Partnership acquired (i) a 96.97% net profits interest in certain working interests in various oil and natural gas properties owned by HHC, (ii) all of the minerals and royalty interests held by HHC, and (iii) all of the minerals and royalty interests held by TBC in exchange for 2,400,000 common units representing limited partnership interests in the Partnership (“Common Units”) valued at $43.8 million and issued pursuant to the Partnership's acquisition shelf registration statements on Form S-4. We believe that the acquisition is considered complimentary to our business. The Acquired Entities were accounted for as an acquisition of assets under U.S. GAAP. Accordingly, the cost of the acquisition was allocated on a relative fair value basis and transaction costs were capitalized as a component of the cost of the assets acquired. The consolidated balance sheet as of December 31, 2019 includes $42.9 million in net property additions. Net property additions for the six months ended June 30, 2019 includes $4.3 million of unproved properties acquired that were recorded to the oil and natural gas properties full cost pool, thereby accelerating the costs subject to depletion.

 

The Partnership subsequently filed an acquisition shelf registration statement on Form S-4 that became effective June 6, 2019 and a shelf registration statement on Form S-3 that became effective August 21, 2019. 20,000,000 units remain available for issuance under the Partnership's registration statements. 

 

 

3.

Commitments and Contingencies

 

The Partnership and Dorchester Minerals Operating L.P., a Delaware limited partnership owned directly and indirectly by our General Partner, are involved in legal and/or administrative proceedings arising in the ordinary course of their businesses, none of which have predictable outcomes and none of which are believed to have any significant effect on our consolidated financial position, cash flows, or operating results.

 

 

4.

Distributions to Holders of Common Units

 

Distributions for both the second quarter of 2020 and the second quarter of 2019 were paid on 34,679,774 common units. The second quarter 2020 distribution of $0.226318 per common unit will be paid on August 13, 2020. Our partnership agreement requires the third quarter cash distribution to be paid by November 12, 2020.

 

 

 

item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion contains forward-looking statements. For a description of limitations inherent in forward-looking statements, see page 1 of this Quarterly Report on Form 10-Q.

 

Overview

 

We own producing and nonproducing mineral, royalty, overriding royalty, net profits and leasehold interests. We refer to these interests as the Royalty Properties. We currently own Royalty Properties in 592 counties and parishes in 27 states.

 

We own six net profits overriding royalty interests (referred to as the Net Profits Interests, or “NPIs”) in various properties owned by Dorchester Minerals Operating LP (the “Operating Partnership”), a Delaware limited partnership owned directly and indirectly by our General Partner. We receive monthly payments equaling 96.97% of the net profits actually realized by the Operating Partnership from these properties in the preceding month. In the event that costs, including budgeted capital expenditures, exceed revenues on a cash basis in a given month for properties subject to a Net Profits Interest, no payment is made and any deficit is accumulated and reflected in the following month's calculation of net profit.

 

Each of the six NPIs (including the Minerals NPI, which is our largest NPI) have previously had cumulative revenue that exceeded cumulative costs, such excess constituting net proceeds on which NPI payments were determined. In the event an NPI has a deficit of cumulative revenue versus cumulative costs, the deficit will be borne solely by the Operating Partnership.

 

From a cash perspective, as of June 30, 2020, the Minerals NPI was in a deficit position and had outstanding capital commitments of $2.6 million, exceeding cash on hand of $2.5 million.

 

Commodity Price Risks

 

Our profitability is affected by oil and natural gas market prices. Oil and natural gas market prices have fluctuated significantly in recent years in response to changes in the supply and demand for oil and natural gas in the market, along with domestic and international political and economic conditions.

 

In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin.  In March 2020, the WHO classified the COVID-19 as a pandemic, based on the rapid increase in exposure globally, and subsequently, throughout the second quarter of 2020 and thereafter, COVID-19 continued to spread throughout the U.S. In addition, after OPEC, and a group of oil producing nations led by Russia failed in March 2020 to agree on oil production cuts, Saudi Arabia announced that it would cut oil prices and increase production, leading to a sharp further decline in oil and natural gas prices. While OPEC, Russia and other oil producing countries reached an agreement in April 2020 to reduce production levels, and U.S. production has declined, oil prices remain low.

 

The COVID-19 pandemic and oil and natural gas market volatility have resulted in a significant decrease in oil prices and significant disruption and uncertainty in the oil and natural gas market. These recent events have impacted operators throughout the energy industry, and as described below, our revenues have decreased on account of lower commodity prices and related operator curtailment.  Please see "--- Results of Operations."  While these market disruptions may be temporary, we cannot reliably estimate the duration of the COVID-19 pandemic or current market conditions, or the ultimate impact these events will have on our future financial position, results of operations, cash flows or liquidity. 

    

 

Results of Operations

 

Huffman Acquisition

 

On March 29, 2019, the Partnership acquired (the “Huffman Acquisition”) producing and nonproducing mineral, royalty and net profits interests pursuant to a Contribution and Exchange Agreement with H. Huffman & Co., A Limited Partnership, an Oklahoma limited partnership (“HHC”), The Buffalo Co., A Limited Partnership, an Oklahoma limited partnership (“TBC” and, together with HHC, the “Acquired Entities”), Huffman Oil Co., L.L.C., an Oklahoma limited liability company, and the equity holders of the Acquired Entities (the “Contribution and Exchange Agreement”). The mineral and royalty properties acquired pursuant to the Contribution and Exchange Agreement consisted of varying undivided interests totaling approximately 76,000 net acres located in 169 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. In addition to conveying mineral, royalty and net profits interests to the Partnership, the Acquired Entities delivered funds to the Partnership in an amount equal to their cash receipts during the period from January 1, 2019 through March 29, 2019 of $1.4 million (including adjustments made post-closing). The contributing entities conveyed their interests to the Partnership and affiliates of its General Partner in exchange for 2,400,000 common limited partnership units.

  

Three and Six Months Ended June 30, 2020 as compared to Three and Six Months Ended June 30, 2019

 

Our period-to-period changes in net income and cash flows from operating activities are principally determined by changes in oil and natural gas sales volumes and prices. Our portion of oil and natural gas sales and weighted average prices were:

 

   

Three Months Ended

           

Six Months Ended

         
   

June 30,

           

June 30,

         

Accrual basis sales volumes:

 

2020

   

2019

   

% Change

   

2020

   

2019

   

% Change

 

Royalty properties natural gas sales (mmcf)

    839       1,215       (31

%)

    1,708       2,146       (20

%)

Royalty properties oil sales (mbbls)

    227       274       (17

%)

    446       536       (17

%)

NPI natural gas sales (mmcf)

    611       721       (15

%)

    1,356       1,344       1

%

NPI oil sales (mbbls)

    117       121       (3

%)

    301       267       13

%

                                                 

Accrual basis weighted average sales price:

                                               

Royalty properties natural gas sales ($/mcf)

  $ 1.16     $ 1.79       (35

%)

  $ 1.40     $ 2.03       (31

%)

Royalty properties oil sales ($/bbl)

  $ 24.36     $ 50.22       (51

%)

  $ 31.54     $ 48.83       (35

%)

NPI natural gas sales ($/mcf)

  $ 1.59     $ 2.02       (21

%)

  $ 1.35     $ 2.22       (39

%)

NPI oil sales ($/bbl)

  $ 24.46     $ 48.44       (50

%)

  $ 36.67     $ 45.10       (19

%)

 

Both oil and natural gas sales price changes reflected in the table above resulted from changing market conditions.

 

The decrease in oil sales volumes attributable to our Royalty properties during the second quarter and first six months of 2020 compared to the same periods of 2019 is primarily a result of decreased Permian Basin production due to operator curtailments based on the low commodity price environment and natural declines. The decrease in natural gas sales volumes attributable to our Royalty properties during the second quarter and first six months of 2020 compared to the same periods of 2019 is a result of decreased production across multiple regions due to operator curtailments based on the low commodity price environment and natural declines.

 

The increase in oil and natural gas sales volumes attributable to our NPI properties during the first six months of 2020 compared to the same period of 2019 is primarily a result of higher suspense releases for new wells in the Bakken and Permian Basin and increased production in the Mid-Continent, primarily during the first quarter of 2020 versus the first quarter of 2019 partially offset by second quarter 2020 Bakken curtailments due to the low commodity price environment. The decrease in oil and natural gas sales volumes attributable to our NPI properties in the second quarter of 2020 compared to the same period of 2019 is due to decreases in production across multiple regions due to operator curtailments based on the low commodity price environment and natural declines.

 

Operating revenues decreased 67% from $20.6 million during the second quarter of 2019 to $6.8 million during the same period of 2020. Operating revenues also decreased 44% from $39.6 million to $22.3 million during the first six months of 2019 compared to the same period of 2020. The decrease in both periods are primarily a result of lower realized oil and natural gas sales prices and oil and natural gas sales volumes attributable to our Royalty Properties and our NPI properties due to operator curtailments based on the low commodity price environment.

 

Second quarter operating costs, including production taxes, decreased 22% from $1.8 million in 2019 to $1.4 million in 2020. Operating costs during the first six months of 2020 decreased 18% from $3.4 million during 2019 to $2.8 million during the same period of 2020. The decrease in both periods is primarily a result of lower production taxes and marketing costs due to lower oil and natural gas sales volumes and lower oil and natural gas prices.

 

Depletion and amortization costs of $3.9 million during the second quarter of 2019 decreased 26% to $2.9 million during the same period of 2020. Depletion and amortization costs of $6.3 million during the first six months of 2020 remained consistent at $6.2 million during the same period of 2019. We adjust our depletion rate each quarter for significant changes in our estimates of oil and natural gas reserves, including acquisitions.

 

General and administrative expenses remained consistent at $1.3 million during the second quarter of 2020 to the same period of 2019. General and administrative expenses increased 33% to $3.2 million in the first six months of 2020 compared to $2.4 million in the same period of 2019. The increase is primarily a result of higher information technology project costs and higher public company compliance costs in the first quarter of 2020 versus the first quarter of 2019.

  

Net cash provided by operating activities decreased 25% to $26.4 million for the first six months of 2020 compared to $35.3 million in the same period of 2019 primarily as a result of lower net operating revenues driven by lower sales volumes and prices for both oil and natural gas, for the first six months of 2020 compared to the same period of 2019.

 

 

In an effort to provide the reader with information concerning prices of oil and natural gas sales that correspond to our quarterly distributions, management calculates the weighted average price by dividing gross revenues received by the net volumes of the corresponding product without regard to the timing of the production to which such sales may be attributable. This “indicated price” does not necessarily reflect the contract terms for such sales and may be affected by transportation costs, location differentials, and quality and gravity adjustments. While the relationship between our cash receipts and the timing of the production of oil and natural gas may be described generally, actual cash receipts may be materially impacted by purchasers’ release of suspended funds and by purchasers’ prior period adjustments.

 

Cash receipts attributable to our Royalty Properties during the second quarter of 2020 totaled $6.3 million. Approximately 62% of these receipts reflect oil sales during March 2020 through May 2020 and natural gas sales during February 2020 through April 2020, and approximately 38% from prior sales periods. The weighted average indicated prices for oil and natural gas sales received during the second quarter of 2020 attributable to the Royalty Properties were $25.36/bbl and $1.29/mcf, respectively.

 

Cash receipts attributable to our NPIs during the second quarter of 2020 totaled $4.0 million. Approximately 59% of these receipts reflect oil sales and natural gas sales during February 2020 through April 2020, and approximately 41% from prior sales periods. The weighted average indicated prices for oil and natural gas sales received during the second quarter of 2020 attributable to our NPIs were $37.49/bbl and $1.74/mcf, respectively.

 

Liquidity and Capital Resources

 

Capital Resources

 

Our primary sources of capital are our cash flows from the NPIs and the Royalty Properties. Our partnership agreement requires that we distribute quarterly an amount equal to all funds that we receive from the NPIs and the Royalty Properties (other than cash proceeds received by the Partnership from a public or private offering of securities of the Partnership) less certain expenses and reasonable reserves. Additional cash requirements include the payment of oil and natural gas production and property taxes not otherwise deducted from gross production revenues and general and administrative expenses incurred on our behalf and allocated to the Partnership in accordance with the partnership agreement. Because the distributions to our unitholders are, by definition, determined after the payment of all expenses actually paid by us, the only cash requirements that may create liquidity concerns for us are the payment of expenses. Because many of these expenses vary directly with oil and natural gas sales prices and volumes, we anticipate that sufficient funds will be available at all times for payment of these expenses. See Note 4 to the unaudited Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding cash distributions to unitholders.

 

We are not directly liable for the payment of any exploration, development or production costs. We do not have any transactions, arrangements or other relationships that could materially affect our liquidity or the availability of capital resources. We have not guaranteed the debt of any other party, nor do we have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt.

 

Pursuant to the terms of the partnership agreement, we cannot incur indebtedness, other than trade payables, (i) in excess of $50,000 in the aggregate at any given time or (ii) which would constitute “acquisition indebtedness” (as defined in Section 514 of the Internal Revenue Code of 1986, as amended).

 

We currently expect to have sufficient liquidity to fund our distributions to unitholders and operations despite potential material uncertainties that may impact us as a result of the COVID-19 pandemic and oil and natural gas market volatility. Our ability to fund future distributions to unitholders may be affected by the prevailing economic conditions in the oil and natural gas market and other financial and business factors, including the ongoing COVID-19 pandemic, which are beyond our control. If market conditions were to change due to further declines in oil prices or uncertainty created by the ongoing COVID-19 pandemic, and our revenues were reduced significantly or our operating costs were to increase significantly, our cash flows and liquidity could be reduced.  We continue to evaluate potential reductions in all discretionary spending. The current economic environment is rapidly evolving and therefore, we cannot predict the ultimate impact on our liquidity or cash flows.

 

Expenses and Capital Expenditures 

 

The Operating Partnership continues to assess the opportunity to increase production based on prevailing market conditions in Oklahoma with techniques that may include fracture treating, deepening, recompleting, and drilling. Costs vary widely and are not predictable as each effort requires specific engineering. Such activities by the Operating Partnership could influence the amount we receive from the NPIs.

 

The Operating Partnership owns and operates the wells, pipelines and natural gas compression and dehydration facilities located in Oklahoma. The Operating Partnership does not anticipate incurring significant expense to replace these facilities at this time. These capital and operating costs are reflected in the NPI payments we receive from the Operating Partnership.

 

 

In 1998, Oklahoma regulations removed production quantity restrictions in the Guymon-Hugoton field and did not address efforts by third parties to persuade Oklahoma to permit infill drilling in the Guymon-Hugoton field. Infill drilling could require considerable capital expenditures. The outcome and the cost of such activities are unpredictable and could influence the amount we receive from the NPIs. The Operating Partnership believes it now has sufficient field compression and permits for vacuum operation for the foreseeable future.

 

Liquidity and Working Capital

 

Cash and cash equivalents totaled $11.8 million at June 30, 2020 and $15.3 million at December 31, 2019.

 

Critical Accounting Policies

 

As of June 30, 2020, there have been no significant changes to our critical accounting policies and related estimates previously disclosed in our 2019 Annual Report on Form 10-K.

 

item 3.

quantitative and qualitative disclosures about market risk

 

Not applicable.

 

item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, our principal executive officer and principal financial officer carried out an evaluation of the effectiveness of our disclosure controls and procedures. Based on their evaluation, they have concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1.

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, and none of which are believed to have any significant effect on consolidated financial position, cash flows, or operating results.

 

Item 1a.

rISK fACTORS

 

This section supplements and updates certain risk factors disclosed in Item 1A of Part I of the Partnership’s annual report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”) and the Partnership’s quarterly report on Form 10-Q for the quarter ended March 31, 2020 (the “First Quarter Report” and together with the Annual Report, the “Former Reports”). The following risk factors supersede the corresponding risks described in the Former Reports and should be read together with the other risk factors disclosed in the Former Reports. In addition to the other information in this report, all of these risk factors should be carefully considered in evaluating us and our common units. Any of these risks, many of which are beyond our control, could materially and adversely affect our financial condition, results of operations or cash flows, or cause our actual results to differ materially from those projected in any forward-looking statements. We may also face other risks and uncertainties that are not presently known, are not currently believed to be material, or are not identified below because they are common to all businesses. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. For more information, see “Disclosure Regarding Forward-Looking Statements” on page 1 of this report

 

The Company may be adversely affected by the recent oversupply of oil and natural gas as a result of the actions of Saudi Arabia and Russia.

 

Recent actions by Saudi Arabia and Russia have caused a worldwide oversupply in oil and natural gas. After OPEC and a group of oil producing nations led by Russia failed in March 2020 to agree on oil production cuts, Saudi Arabia announced that it would cut oil prices and increase production, leading to a sharp further decline in oil and natural gas prices. While OPEC, Russia and other oil producing countries reached an agreement in April 2020 to reduce production levels, and U.S. production has declined, oil prices remain low on account of an oversupply of oil and natural gas, with a simultaneous decrease in demand as a result of the impact of COVID-19 on the global economy, and such significant decrease in the prices of hydrocarbons may have a material adverse effect on our cash distributions. Oil and natural gas operators on our properties may suspend drilling programs and may lose significant customers as purchasers, which would impact our revenues and operating income. In the event that any wells on our properties are shut-in, restarting wells may require significant costs from our operators, and we cannot guarantee that they would be able to restart at the same level. Moreover, due to the extremely volatile market conditions, we are unable to predict the degree or duration of any adverse impact on our operations and financial condition and other risks in our industry may be enhanced by such conditions

 

The outcome of pending litigation related to the Dakota Access Pipeline could have a material adverse effect on our revenue and cash distributions.

 

In connection with ongoing litigation initiated in February 2017 by the Standing Rock Sioux Tribe and the Cheyenne River Sioux Tribe contesting the validity of the process used by the United States Army Corps of Engineers (the “Army Corps”) to permit the Dakota Access Pipeline, on July 6, 2020, the United States Court for the District of Columbia (the “Court”) issued an order vacating the Army Corps’ easement for the Dakota Access Pipeline and requiring that the pipeline be shut down by August 5, 2020. Dakota Access, LLC and the Army Corps appealed the decision and filed a motion for a stay pending appeal with the United States Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”). On July 14, 2020, the Court of Appeals granted a temporary administrative stay to allow the Court time to consider briefing on whether to continue the stay until the appeal is decided on the merits. While this litigation does not directly impact our operations, we derive a significant amount of revenue from the Royalty Properties and NPIs we hold in the Bakken region, the region for which the Dakota Access Pipeline is intended to be a key pipeline.  The outcome of this litigation may have a material adverse affect on our Royalty and NPI revenues derived from the Bakken region based on the timing of future development of wells on, or production of oil and natural gas from, or the method and cost of transportation related to the production on the properties.  We have no control over the operation of such properties.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Issuer Purchases of Equity Securities

 

Period

 

(a)

 

 

 

 

 

 

 

Total Number of

Units Purchased

   

(b)

 

 

 

 

 

 

Average Price

Paid

per Unit

   

(c)

 

 

 

Total Number of

Units Purchased

as

Part of Publicly

Announced Plans

or Programs

   

(d)

 

 

Maximum

Number

of Units that May

Yet Be Purchased

Under the Plans

or

Programs

 

April 1, 2020

April 30, 2020     15,000 (2)   $ 10.22       15,000       84,984 (1)

May 1, 2020

May 31, 2020     -       N/A       -       84,984 (1)

June 1, 2020

June 30, 2020     -       N/A       -       84,984 (1)

Total

    15,000 (2)   $ 10.22       15,000       84,984 (1)

 

 

(1)

The number of common units that the Operating Partnership may grant under the Dorchester Minerals Operating LP Equity Incentive Program, which was approved by our common unitholders on May 20, 2015 (the “Equity Incentive Program”), each fiscal year may not exceed 0.333% of the number of common units outstanding at the beginning of the fiscal year. In 2020, the maximum number of common units that could be purchased under the Equity Incentive Program is 115,484 common units.

 

(2)

Open-market purchases by the Operating Partnership, an affiliate of the Partnership, pursuant to a Rule 10b5-1 plan adopted on May 14, 2019 for the purpose of satisfying equity awards to be granted pursuant to the Equity Incentive Program.

 

 

Item 6.

Exhibits

 

Number

 

Description

3.1

  

Certificate of Limited Partnership of Dorchester Minerals, L.P. (incorporated by reference to Exhibit 3.1 to Dorchester Minerals’ Registration Statement on Form S-4, Registration Number 333-88282)

 

 

 

3.2

  

Amended and Restated Agreement of Limited Partnership of Dorchester Minerals, L.P. (incorporated by reference to Exhibit 3.2 to Dorchester Minerals’ Annual Report on Form 10-K filed for the year ended December 31, 2002)

 

 

 

3.3

 

Amendment No. 1 to Amended and Restated Partnership Agreement of Dorchester Minerals, L.P. (incorporated by reference to Exhibit 3.1 to Dorchester Minerals’ Current Report on Form 8-K filed with the SEC on December 22, 2017)

 

 

 

3.4

 

Amendment No. 2 to Amended and Restated Partnership Agreement of Dorchester Minerals, L.P. (incorporated by reference to Exhibit 3.4 to Dorchester Minerals’ Quarterly Report on Form 10-Q filed with the SEC on August 6, 2018)

 

 

 

3.5

  

Certificate of Limited Partnership of Dorchester Minerals Management LP (incorporated by reference to Exhibit 3.4 to Dorchester Minerals’ Registration Statement on Form S-4, Registration Number 333-88282)

 

 

 

3.6

  

Amended and Restated Limited Partnership Agreement of Dorchester Minerals Management LP (incorporated by reference to Exhibit 3.4 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.7

  

Certificate of Formation of Dorchester Minerals Management GP LLC (incorporated by reference to Exhibit 3.7 to Dorchester Minerals’ Registration Statement on Form S-4, Registration Number 333-88282)

 

 

 

3.8

  

Amended and Restated Limited Liability Company Agreement of Dorchester Minerals Management GP LLC (incorporated by reference to Exhibit 3.6 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.9

  

Certificate of Formation of Dorchester Minerals Operating GP LLC (incorporated by reference to Exhibit 3.10 to Dorchester Minerals’ Registration Statement on Form S-4, Registration Number 333-88282)

 

 

 

3.10

  

Limited Liability Company Agreement of Dorchester Minerals Operating GP LLC (incorporated by reference to Exhibit 3.11 to Dorchester Minerals’ Registration Statement on Form S-4, Registration Number 333-88282)

 

 

 

3.11

  

Certificate of Limited Partnership of Dorchester Minerals Operating LP (incorporated by reference to Exhibit 3.12 to Dorchester Minerals’ Registration Statement on Form S-4, Registration Number 333-88282)

 

 

 

3.12

  

Amended and Restated Agreement of Limited Partnership of Dorchester Minerals Operating LP (incorporated by reference to Exhibit 3.10 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.13

  

Certificate of Limited Partnership of Dorchester Minerals Oklahoma LP (incorporated by reference to Exhibit 3.11 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.14

  

Agreement of Limited Partnership of Dorchester Minerals Oklahoma LP (incorporated by reference to Exhibit 3.12 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.15

 

Certificate of Incorporation of Dorchester Minerals Oklahoma GP, Inc. (incorporated by reference to Exhibit 3.13 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.16

 

Bylaws of Dorchester Minerals Oklahoma GP, Inc. (incorporated by reference to Exhibit 3.14 to Dorchester Minerals’ Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

31.1*

 

Certification of Chief Executive Officer of the Partnership pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934

 

 

 

31.2*

 

Certification of Chief Financial Officer of the Partnership pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934

 

 

 

32.1**

 

Certification of Chief Executive Officer and Chief Financial Officer of the Partnership pursuant to 18 U.S.C. Sec. 1350

 

 

 

101.INS**

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH**

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL**

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF**

 

Inline XBRL Taxonomy Extension Definition Document

 

 

 

101.LAB**

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE**

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

 

* Filed herewith

    **Furnished herewith

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

DORCHESTER MINERALS, L.P.

 

 

 

 

 

 

By:

Dorchester Minerals Management LP

 

 

 

its General Partner

 

 

 

 

 

 

By:

Dorchester Minerals Management GP LLC

 

 

 

its General Partner

 

 

 

 

By:

/s/ William Casey McManemin

 

 

 

William Casey McManemin

 

 Date: August 6, 2020

 

Chief Executive Officer

 

 

 

 

By:

/s/ Leslie Moriyama

 

 

 

Leslie Moriyama

 

 Date: August 6, 2020

 

Chief Financial Officer

 

 

15