2023-11-15 21:55:05 ET
Summary
- Dorchester paid a Q3 2023 distribution of nearly $0.85 per unit.
- This was higher than my expectations due to a significant increase in royalty sales volumes.
- The cash receipts from those sales volumes should carry over to DMLP's Q4 2023 distribution as well.
- The Company also announced $0.30 per unit in lease bonus payments that will affect its Q4 2023 distribution.
Dorchester Minerals ( DMLP ) reported a couple of pieces of good news recently. It announced a Q3 2023 distribution of $0.845120 per unit , helped by increased royalty sales (for both oil and natural gas). It also announced that large lease bonus payments would add around $0.30 per unit to its Q4 2023 distribution.
I had previously expected Dorchester's quarterly distribution to average around $0.80 per unit for the second half of 2023, but the combination of increased production and added lease bonus revenues should result in its quarterly distribution averaging close to $1.00 per unit for the second half of 2023 instead.
I've increased Dorchester's estimated value to $33 per unit to reflect its large Q4 2023 lease bonus payments and the potential for occasional additional large lease bonus payments.
Lease Transactions
Dorchester recently announced a couple of significant Midland Basin lease transactions. It leased 243 net acres in Reagan County for $30,000 per net acre and a 25% royalty. It also amended an existing lease on a separate 243 net acres in Reagan County for $18,750 per net acre.
This results in $11.8 million in lease bonus proceeds (approximately $0.30 per unit) that will boost Dorchester's Q4 2023 distribution. I typically assume only around $0.02 per unit in quarterly lease bonus proceeds, so these large transactions add some near-term value to Dorchester.
Q3 2023 Distribution
Dorchester's Q3 2023 distribution of $0.845120 per unit exceeded my expectations of a $0.75 to $0.80 per unit distribution for the quarter. This strong performance was driven by a significant increase in royalty sales during the quarter. Royalty natural gas sales volumes were up 17% compared to Q2 2023 and 24% compared to Q3 2022. Royalty oil sales were up 42% compared to Q2 2023 and 48% compared to Q3 2022. For comparison, Dorchester's unit count has gone up 3% from November 2022 to November 2023 as a result of acquisitions.
Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | |
Royalty natural gas sales (mmcf) | 1,086 | 1,078 | 1,330 | 1,153 | 1,344 |
Royalty oil sales (mbbls) | 322 | 319 | 302 | 335 | 477 |
NPI natural gas sales (mmcf) | 290 | 495 | 864 | 475 | 412 |
NPI oil sales (mbbls) | 80 | 185 | 269 | 158 | 135 |
It is uncertain whether Dorchester's Q4 2023 royalty sales volumes will be as high as its Q3 2023 volumes, but its strong Q3 2023 sales volumes should still have a significant impact on its Q4 2023 distribution due to the timing of cash receipts.
With the large lease bonuses coming in too, Dorchester's Q4 2023 distribution could be around $1.15 per unit.
Other Notes
Dorchester also made another acquisition in September 2023 , involving 7,984 gross acres and 716 net royalty acres in Texas. Dorchester contributed 494,000 common units in exchange for this acreage, with a total value of approximately $14.35 million based on Dorchester's closing unit price on the day of its acquisition announcement.
Dorchester has now issued 1.21 million units worth close to $36 million for various acquisitions during 2023.
Dorchester's proposed partnership agreement amendments passed during its October 2023 annual meeting . I previously discussed amendment number 3 in detail, with the takeaway being that Dorchester now has more flexibility to pay for an acquisition with a combination of cash and units. The overall size of the acquisitions Dorchester can make is relatively unchanged.
Notes On Valuation
The large lease bonus payments help with Dorchester's Q4 2023 distribution, but the timing of additional large lease bonus payments is quite uncertain. Dorchester had a large lease bonus payment that added approximately $0.19 per unit to its Q3 2022 distribution. However, before that you'd have to go back to 2012 for lease bonuses to average more than a couple of cents per unit per quarter during a year.
I typically value Dorchester at around a 10x multiple to distributable cash flow at long-term $75 WTI oil and $3.75 NYMEX gas. This includes a couple of cents per unit per quarter in lease bonus payments.
Due to the relative infrequency of large lease bonus payments, I wouldn't apply the same multiple to those payments, but I have boosted Dorchester's estimated value to $33 per unit. This is a $1 per unit increase from before and assumes that Dorchester can get large lease bonus payments adding up to roughly $0.20 to $0.30 per unit every two or three years.
Conclusion
Dorchester's Q3 2023 distribution ended up near $0.85 per unit, driven by a significant increase in royalty sales for both oil and natural gas. The surge in Q3 2023 sales volumes should also benefit its Q4 2023 distribution due to the timing of cash receipts.
As well, Dorchester announced large lease bonus payments adding up to approximately $0.30 per unit that will contribute to its Q4 2023 distribution. As a result, Dorchester's Q4 2023 distribution may end up around $1.15 per unit.
I now estimate Dorchester's value at $33 per unit at long-term prices of $75 WTI oil and $3.75 NYMEX gas, which factors in the potential for occasional large lease bonus payments.
For further details see:
Dorchester Minerals: Q4 2023 Distribution May Reach $1.15 Per Unit