DORCHESTER MINERALS, L.P. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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 May 6, 2021: 34,679,774
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| ITEM 1. |
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| CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2021 AND DECEMBER 31, 2020 (UNAUDITED) |
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| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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(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 coronavirus (COVID-19) 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.
(A Delaware Limited Partnership)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 13,322 | $ | 11,232 | ||||
| Trade and other receivables | 7,183 | 5,075 | ||||||
| Net profits interest receivable - related party | 3,065 | 1,914 | ||||||
| Total current assets | 23,570 | 18,221 | ||||||
| Property and leasehold improvements - at cost: | ||||||||
| Oil and natural gas properties (full cost method) | 399,282 | 399,324 | ||||||
| Accumulated full cost depletion | (333,636 | ) | (331,361 | ) | ||||
| Total | 65,646 | 67,963 | ||||||
| Leasehold improvements | 989 | 989 | ||||||
| Accumulated amortization | (261 | ) | (238 | ) | ||||
| Total | 728 | 751 | ||||||
| Operating lease right-of-use asset | 1,334 | 1,392 | ||||||
| Total assets | $ | 91,278 | $ | 88,327 | ||||
| LIABILITIES AND PARTNERSHIP CAPITAL | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and other current liabilities | $ | 1,485 | $ | 1,578 | ||||
| Operating lease liability | 298 | 300 | ||||||
| Total current liabilities | 1,783 | 1,878 | ||||||
| Operating lease liability | 1,811 | 1,885 | ||||||
| Total liabilities | 3,594 | 3,763 | ||||||
| Commitments and contingencies (Note 3) | ||||||||
| Partnership capital: | ||||||||
| General Partner | 654 | 536 | ||||||
| Unitholders | 87,030 | 84,028 | ||||||
| Total partnership capital | 87,684 | 84,564 | ||||||
| Total liabilities and partnership capital | $ | 91,278 | $ | 88,327 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
(A Delaware Limited Partnership)
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In Thousands, except per unit amounts)
(Unaudited)
| Three Months Ended March 31, |
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| 2021 |
2020 |
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| Operating revenues: |
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| Royalties |
$ | 14,371 | $ | 9,950 | ||||
| Net profits interest |
2,975 | 5,168 | ||||||
| Lease bonus and other |
443 | 358 | ||||||
| Total operating revenues |
17,789 | 15,476 | ||||||
| Costs and expenses: |
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| Operating, including production taxes |
1,521 | 1,440 | ||||||
| Depreciation, depletion and amortization |
2,298 | 3,357 | ||||||
| General and administrative expenses |
2,169 | 1,918 | ||||||
| Total costs and expenses |
5,988 | 6,715 | ||||||
| Net income |
$ | 11,801 | $ | 8,761 | ||||
| Allocation of net income: |
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| General Partner |
$ | 397 | $ | 238 | ||||
| Unitholders |
$ | 11,404 | $ | 8,523 | ||||
| Net income per common unit (basic and diluted) |
$ | 0.33 | $ | 0.25 | ||||
| Weighted average basic and diluted common units outstanding |
34,680 | 34,680 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
(A Delaware Limited Partnership)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL
(In Thousands)
(Unaudited)
| General Partner | Unitholders | Total | Unitholder Units | |||||||||||||
| Three Months Ended March 31, 2020 | ||||||||||||||||
| Balance at January 1, 2020 | $ | 1,228 | $ | 111,108 | $ | 112,336 | 34,680 | |||||||||
| Net income | 238 | 8,523 | 8,761 | |||||||||||||
| Distributions ($ per Unit) | (425 | ) | (12,528 | ) | (12,953 | ) | ||||||||||
| Balance at March 31, 2020 | $ | 1,041 | $ | 107,103 | $ | 108,144 | 34,680 | |||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||
| Balance at January 1, 2021 | $ | 536 | $ | 84,028 | $ | 84,564 | 34,680 | |||||||||
| Net income | 397 | 11,404 | 11,801 | |||||||||||||
| Distributions ($ per Unit) | (279 | ) | (8,402 | ) | (8,681 | ) | ||||||||||
| Balance at March 31, 2021 | $ | 654 | $ | 87,030 | $ | 87,684 | 34,680 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
(A Delaware Limited Partnership)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Three Months Ended |
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| March 31, |
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| 2021 |
2020 |
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| Net cash provided by operating activities |
$ | 10,509 | $ | 17,840 | ||||
| Cash flows provided by investing activities: |
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| Proceeds from the sale of oil and natural gas properties |
262 | - | ||||||
| Cash flows used in financing activities: |
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| Distributions paid to General Partner and unitholders |
(8,681 | ) |
(12,953 | ) |
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| Increase in cash and cash equivalents |
2,090 | 4,887 | ||||||
| Cash and cash equivalents at beginning of period |
11,232 | 15,339 | ||||||
| Cash and cash equivalents at end of period |
$ | 13,322 | $ | 20,226 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
(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 2020 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 Interest, or “NPI”) 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 thereafter, COVID-19 continued to spread throughout the U.S. and worldwide. 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 continues to decline into 2021, a significant 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 continued COVID-19 pandemic. The effects of COVID-19 and concerns regarding its domestic and global spread could continue to negatively impact the domestic and international supply and demand for oil and natural gas and sustain continued price volatility.
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 operators. 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 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 the NPI 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 the NPI 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 NPI 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. |
Net Profits Interest Divestiture |
On September 30, 2020, the Partnership and affiliates of its General Partner closed the divestiture of our Hugoton net profits interest located in Texas County, Oklahoma and Stevens County, Kansas to a third party. In accordance with the full cost method of accounting, as the divestiture did not represent a significant portion of the Partnership’s reserves, gross divestiture proceeds of $5.7 million were credited to the oil and natural gas properties full cost pool as of December 31, 2020. Final net proceeds from the sale were subject to customary holdbacks and post-closing adjustments. Customary holdbacks of $0.2 million were paid to the Partnership during the first quarter of 2021 and are included in proceeds from the sale of oil and natural gas properties on the condensed consolidated statement of cash flows for the three months ended March 31, 2021.
| 3. |
Commitments and Contingencies |
The Partnership and Dorchester Minerals Operating LP, 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 the first quarter of 2021 and 2020 were paid on 34,679,774 common units. The first quarter 2021 distribution of $0.303441 per common unit will be paid on May 13, 2021. Our partnership agreement requires the second quarter cash distribution to be paid by August 14, 2021.
| 5. | Subsequent Acquisition of Royalty Properties |
On April 30, 2021, the Partnership entered into a contribution and exchange agreement with JSFM, LLC, a Wyoming limited liability company ("JSFM"), to acquire overriding royalty interests in the Bakken Trend totaling approximately 6,400 net royalty acres located in Dunn, McKenzie, McLean and Mountrail Counties, North Dakota in exchange for 725,000 common units representing limited partnership interests in the Partnership. The acquisition is expected to close on June 30, 2021.
| 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 581 counties and parishes in 26 states.
As of March 31, 2021, we own a net profits overriding royalty interest (referred to as the Net Profits Interest, or “NPI”) 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 from the NPI 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.
The NPI has previously had cumulative revenue that exceeded cumulative costs, such excess constituting net proceeds on which NPI payments were determined. In the event the 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 March 31, 2021, the NPI was in a surplus position and had outstanding capital commitments in the Bakken region equaling cash on hand of $1.4 million.
Commodity Price Risks
The pricing of oil and natural gas sales is primarily determined by supply and demand in the marketplace and can fluctuate considerably. As a royalty owner and non-operator, we have extremely limited access to timely information and involvement and no operational control over the volumes of oil and natural gas produced and sold and the terms and conditions on which such volumes are marketed and sold.
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 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 thereafter, COVID-19 continued to spread throughout the U.S. and worldwide. 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 continues to decline into 2021, a significant 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 continued COVID-19 pandemic. The effects of COVID-19 and concerns regarding its domestic and global spread could continue to negatively impact the domestic and international supply and demand for oil and natural gas and sustain continued price volatility.
The COVID-19 pandemic and oil and natural gas market volatility have resulted in significant volatility in oil prices over the past year and significant disruption and uncertainty in the oil and natural gas market.
Results of Operations
Net Profits Interest Divestiture
On September 30, 2020, the Partnership and affiliates of its General Partner closed the divestiture of our Hugoton net profits interest located in Texas County, Oklahoma and Stevens County, Kansas to a third party. In accordance with the full cost method of accounting, as the divestiture did not represent a significant portion of the Partnership’s reserves, gross divestiture proceeds of $5.7 million were credited to the oil and natural gas properties full cost pool as of December 31, 2020. Final net proceeds from the sale were subject to customary holdbacks and post-closing adjustments. Customary holdbacks of $0.2 million were paid to the Partnership and are included in proceeds from the sale of oil and natural gas properties on the condensed consolidated statement of cash flows for the three months ended March 31, 2021.
Three Months Ended March 31, 2021 as compared to Three Months Ended March 31, 2020
Our period-to-period changes in net income and cash flows from operating activities are principally determined by changes in oil and natural gas sales volumes and prices, and to a lesser extent, by capital expenditures deducted under the NPI calculation. Our portion of oil and natural gas sales volumes and average sales prices are shown in the following table.
| Three Months Ended |
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| March 31, |
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| Accrual basis sales volumes: |
2021 |
2020 |
% Change |
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| Royalty Properties natural gas sales (mmcf) |
740 | 869 | (15 | %) |
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| Royalty Properties oil sales (mbbls) |
246 | 219 | 12 | % |
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| NPI natural gas sales (mmcf) |
278 | 745 | (63 | %) |
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| NPI oil sales (mbbls) |
90 | 184 | (51 | %) |
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| Accrual basis average sales price: |
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| Royalty Properties natural gas sales ($/mcf) |
$ | 2.28 | $ | 1.62 | 41 | % |
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| Royalty Properties oil sales ($/bbl) |
$ | 51.47 | $ | 38.97 | 32 | % |
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| NPI natural gas sales ($/mcf) |
$ | 2.92 | $ | 1.15 | 154 | % |
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| NPI oil sales ($/bbl) |
$ | 49.50 | $ | 44.50 | 11 | % |
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Both oil and natural gas sales price changes reflected in the table above resulted from changing market conditions.
The increase in oil sales volumes attributable to our Royalty Properties from the first three months of 2020 to the same period of 2021 is primarily a result of increased Permian Basin production due to higher suspense releases on new wells and prior period adjustments, partially offset by lower suspense releases on new wells in the Bakken region and natural declines in the Permian Basin and Mid-Continent. The decrease in natural gas sales volumes attributable to our Royalty Properties from the first three months of 2020 to the same period of 2021 is primarily a result of decreased Mid-Continent and South Texas production, partially offset by increased production in the Bakken region and Barnett Shale and higher prior period adjustments in the Permian Basin in the first quarter of 2021.
The decrease in oil sales volumes attributable to our NPI properties from the first three months of 2020 to the same period of 2021 is primarily a result of lower suspense releases for new wells in the Bakken region and Permian Basin and decreased production across all regions after 2020 curtailments were restored. The decrease in natural gas sales volumes attributable to our NPI properties from the first three months of 2020 to the same period of 2021 is primarily the result of the absence of production from the Hugoton Field in the first quarter of 2021 due to the Hugoton NPI divestiture in the third quarter of 2020, lower suspense releases on new wells in the Bakken region and Permian Basin, and decreased production in the Mid-Continent.
Operating revenues increased 15% from $15.5 million during the first three months of 2020 to $17.8 million during the same period of 2021. The increase is primarily a result of higher realized prices on Royalty Properties oil and natural gas sales and higher Royalty Properties oil sales volumes, partially offset by lower NPI revenues and lower Royalty Properties natural gas sales volumes.
Operating costs, including production taxes, increased 7% from $1.4 million during the first three months of 2020 to $1.5 million during the same period of 2021. The increase is primarily a result of higher production taxes due to higher oil sales volumes and higher oil and natural gas sales prices, partially offset by lower natural gas sales volumes.
Depreciation, depletion and amortization decreased 32% from $3.4 million during the first three months of 2020 to $2.3 million during the same period of 2021. We adjust our depletion rate each quarter for significant changes in our estimates of oil and natural gas reserves, including acquisitions and divestitures.
General and administrative expenses increased 16% from $1.9 million during the first three months of 2020 to $2.2 million during the same period of 2021. The increase is primarily a result of higher compensation expenses, partially offset by lower information technology and consulting project costs.
Net cash provided by operating activities decreased 41% from $17.8 million during the first three months of 2020 to $10.5 million during the same period of 2021. The decrease is primarily a result of lower NPI payment receipts for the first three months of 2021 compared to the same period of 2020.
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 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 first three months of 2021 totaled $10.8 million. Approximately 81% of these receipts reflect oil sales during December 2020 through February 2021 and natural gas sales during November 2020 through January 2021, and approximately 19% from prior sales periods. The average indicated prices for oil and natural gas sales cash receipts attributable to the Royalty Properties during the first quarter of 2021 were $43.62/bbl and $2.34/mcf, respectively.
Cash receipts attributable to our Net Profits Interests during the first three months of 2021 totaled $1.8 million. Approximately 72% of these receipts reflect oil sales and gas sales during November 2020 through January 2021, and approximately 28% from prior sales periods. The average indicated prices for oil and natural gas sales cash receipts attributable to the NPI properties during the first quarter of 2021 were $38.94/bbl and $2.17/mcf, respectively.
Liquidity and Capital Resources
Capital Resources
Our primary sources of capital are our cash flows from the NPI and the Royalty Properties. Our partnership agreement requires that we distribute quarterly an amount equal to all funds that we receive from 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 – Financial Statements” 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 continued 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. The current economic environment is volatile, and therefore, we cannot predict the ultimate impact on our liquidity or cash flows.
Liquidity and Working Capital
Cash and cash equivalents totaled $13.3 million at March 31, 2021 and $11.2 million at December 31, 2020.
Critical Accounting Policies
As of March 31, 2021, there have been no significant changes to our critical accounting policies and related estimates previously disclosed in our 2020 Annual Report on Form 10-K.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| 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 March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 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.
| RISK FACTORS |
There have been no material changes to the Partnership's risk factors as disclosed in “Item 1A – Risk Factors” of Part I of the Partnership's annual report on Form 10-K for the year ended December 31, 2020.
| EXHIBITS |
| Number |
Description |
| 3.1 |
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| 3.2 |
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| 3.3 |
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| 3.4 |
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| 3.5 |
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| 3.6 |
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| 3.7 |
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| 3.8 |
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| 3.9 |
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| 3.10 |
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| 3.11 |
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| 3.12 |
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| 3.13 |
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| 3.14 |
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| 3.15 |
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| 3.16 |
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| 31.1* |
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| 31.2* |
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| 32.1** |
| 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 |
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. |
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| By: |
Dorchester Minerals Management LP |
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| its General Partner |
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| By: |
Dorchester Minerals Management GP LLC |
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| its General Partner |
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| By: |
/s/ William Casey McManemin |
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| William Casey McManemin |
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| Date: May 6, 2021 |
Chief Executive Officer |
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| By: |
/s/ Leslie Moriyama |
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| Leslie Moriyama |
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| Date: May 6, 2021 |
Chief Financial Officer |
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