2023-03-10 14:30:45 ET
Summary
- Dorchester Minerals, L.P.'s margins remain strong due to its production being around 65% oil and nearly 75% royalty based.
- Dorchester's NPI production spiked up in Q4 2022, which should benefit its Q1 2023 distribution due to the timing of cash receipts.
- I estimate its Q1 2023 distribution at $0.80 to $0.85 per unit.
- At current strip, its distribution should average around $0.70 to $0.75 per unit for the other quarters in 2023.
Dorchester Minerals, L.P. (DMLP) had a strong year in 2022 in which it reported $3.35 per unit in net income and announced $3.74 per unit in distributions related to 2022 results.
Dorchester's production is approximately 65% oil, while close to 75% of its production comes from royalty properties. As such, it is significantly insulated from the industry's challenges dealing with higher service costs (up around 40% compared to 2021) and weak near-term natural gas prices.
Dorchester's Q4 2022 distribution was slightly higher than I had expected , and I believe that its Q1 2023 distribution will end up in the $0.80 to $0.85 per unit range despite weaker commodity prices. The timing of cash receipts means that much of Dorchester's Q1 2023 distribution is related to Q4 2022 production. That quarter's production saw a spike in NPI production and also should have higher realized prices than the current commodity prices.
Overall, I believe that Dorchester is worth approximately $30 per unit, and believe that its quarterly distribution will be around $0.70 to $0.75 per unit during the last three quarters of 2023.
Notes On Production Levels
Dorchester's royalty production continued to be roughly flat in terms of growth. Dorchester's royalty production has been stable over the last several quarters (Q2 2022 to Q4 2022). The royalty production was actually slightly lower than I expected since Dorchester's Excess Energy acquisition closed at the end of Q3 2022. I thought there would be a corresponding slight boost in royalty production in Q4 2022, even though the Excess Energy acquisition is expected to benefit 2023 production more.
Dorchester's NPI production saw a large boost in Q4 2022 though, with NPI natural gas sales going up +71% compared to Q3 2022 and NPI oil sales going up +131% compared to Q3 2022.
Dorchester's NPI production does bounce up and down quite a lot, so this is likely more of a blip due to the timing of new wells coming online.
Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | |
Royalty natural gas sales (mmcf) | 1,147 | 1,105 | 1,086 | 1,078 |
Royalty oil sales (mbbls) | 369 | 318 | 322 | 319 |
NPI natural gas sales (mmcf) | 320 | 353 | 290 | 495 |
NPI oil sales (mbbls) | 94 | 139 | 80 | 185 |
Approximately 73% of Dorchester's oil production and 75% of its natural gas production during 2022 was from its royalty properties. This production will do well in a higher cost and higher commodity price environment. Dorchester's NPI production would see more constrained margins in such an environment, similar to typical E&P companies, although without the risk of negative cash flow.
Distribution Estimates
I estimated that Dorchester's Q4 2022 distribution would be around $0.85 per unit. It announced a distribution of $0.884339 per unit for Q4 2022, which was slightly above my estimates.
Dorchester's Q1 2023 distribution could actually be reasonably close to its Q4 2022 distribution despite weaker commodity prices in Q1 2023. Natural gas prices in particular are weaker, with benchmark natural gas prices close to 50% lower in Q1 2023 compared to Q4 2022.
Going by Q1 2023 commodity prices alone, one would expect a Q1 2023 distribution of around $0.70 to $0.75 per unit for Dorchester. However, the timing of cash receipts means that a large proportion of Dorchester's Q1 2023 cash receipts will actually be related to Q4 2022 production (and Q4 2022 pricing).
This doesn't make much of a difference when there is stable pricing and production. Commodity prices were stronger in Q4 2022 compared to Q1 2023 though, and Dorchester also saw a significant jump in NPI production in Q4 2022 compared to previous quarters.
Due to those timing related items, I estimate that Dorchester's Q1 2023 distribution will be in the $0.80 to $0.85 per unit range.
Notes On Valuation
I am maintaining an estimated value of $30 per unit for Dorchester's common shares, which is based on long-term $70s WTI oil. Dorchester's estimated value could improve if there is sustained production growth (as opposed to just quarter to quarter fluctuations) from its properties. Dorchester's production growth would have to take place in a situation where overall domestic production growth is fairly modest though, as higher domestic production growth would lower my long-term commodity price projections.
After Q1 2023, I'd expect Dorchester to end up with a quarterly distribution more in the $0.70 to $0.75 per unit range for the rest of the year based on current strip prices.
Conclusion
Dorchester Minerals, L.P.'s production is mainly oil and from royalty properties, so its margins remain quite good despite weak natural gas prices and rising service costs. Dorchester's Q1 2023 distribution should end up in the $0.80 to $0.85 per unit range as it is based significantly on Q4 2022 production, which saw a spike in NPI production.
I'd expect Dorchester's quarterly distribution to average more in the $0.70 to $0.75 range for the rest of 2023 based on strip prices. This results in an estimate of $3 per unit in total distributions for 2023. I estimate Dorchester's value at $30 per unit and it should be able to generate a roughly 10% yield at that unit price during 2023. Given that Dorchester Minerals, L.P. is currently trading at around $29 per unit, I consider it a hold. Dorchester's estimated value will increase if its assets start generating sustained organic production growth.
For further details see:
Dorchester Minerals: Q1 2023 Distribution Benefits From Cash Receipts Timing