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Dorchester Minerals (NASDAQ:DMLP) looks set to report a strong Q3 2022 distribution (probably around $1.10 to $1.15 per unit), as it benefited from a $7.3 million lease bonus payment during the quarter. It also made an acquisition of 2,100 net royalty acres (primarily Eagle Ford acreage) that appears to improve its near-term cash flow per common unit.
Dorchester’s Q2 2022 production ended up meeting my expectations and I’d now value it at approximately $30 per unit in a long-term $75 WTI oil environment after its latest transaction.
Lease Transaction
Dorchester announced that it leased 243 net acres in the Midland Basin for $30,000 per net acre and a 25% royalty. This resulted in a $7.3 million lease bonus payment that will boost Dorchester’s Q3 2022 distribution.
This lease bonus payment will add approximately $0.19 per unit to Dorchester’s Q3 2022 distribution, and results in a significant boost compared to previous quarters. Dorchester only reported $1.25 million in lease bonuses in 1H 2022 and $0.83 million in lease bonuses in 2021.
The lease bonus payment should help boost Dorchester’s Q3 2022 distribution to around the $1.10 to $1.15 per unit range despite weaker oil prices later in the quarter.
Recent Acquisition
Dorchester acquired 2,100 net royalty acres in New Mexico and Texas in September from Excess Energy LLC in exchange for 816,719 common units. These units had a value of $20.4 million based on Dorchester’s share price at the end of September when the deal closed.
The acquired royalty acreage appears to largely match (although the net royalty acres are around 7% smaller than) the package that Excess Energy put up for sale in July. Most of the acquired net royalty acreage appears to be in the Eagle Ford (Webb County), and the projected next 12-month net cash flow was estimated at $7.5 million at the time. With lower strip prices now and a slightly lower amount of net royalty acreage, the next 12-month net cash flow may be closer to $6 million now.
The near-term cash flow to purchase price ratio is quite high, although the longer-term cash flow from those assets is subject to a fair amount of variability due to development patterns. Excess Energy indicated that only around 28% of the next 12-month net cash flow projection was from PDP wells, and near-term cash flow was getting a large boost from wells coming online.
Stable Base Production
Dorchester’s production in Q2 2022 was pretty flat (down -1% in total volume for both oil and gas) compared to Q1 2022. This was consistent with my expectation that Dorchester’s Q2 2022 production levels ended up close to its Q1 2022 production levels.
| Production | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 |
| Royalty natural gas sales (mmcf) | 971 | 940 | 1,147 | 1,105 |
| Royalty oil sales (mbbls) | 271 | 265 | 369 | 318 |
| NPI natural gas sales (mmcf) | 304 | 347 | 320 | 353 |
| NPI oil sales (mbbls) | 80 | 113 | 94 | 139 |
There was a bit of a shift in mix between royalty production and NPI production, with NPI production growing and royalty production declining. This tends to fluctuate though, and doesn’t appear to be part of any particular trend.
Notes On Distribution And Valuation
Dorchester’s distribution for Q3 2022 should be quite strong (potentially around $1.10 to $1.15 per unit as mentioned above), although the outlook for commodity prices has weakened in subsequent quarters. At current strip of high $70s WTI oil and approximately $5.30 NYMEX gas for 2023, Dorchester may be able to offer a quarterly distribution of around $0.75 to $0.80 per unit. This includes the boost from its recent acquisition, which appears to have a modest overall positive effect (around a couple cents per quarter) on its projected distribution.
After its latest acquisition, I estimate Dorchester’s value at approximately $30 per unit in a long-term $75 WTI oil scenario. Accordingly, I am now neutral on it from a valuation perspective, although it should still be able to offer around a 10% yield (at its current unit price) at long-term $75 WTI oil, while its Q3 2022 distribution should be quite good.
Conclusion
Dorchester’s production in Q2 2022 met my expectations, and it also announced a significant lease bonus payment that should help boost its Q3 2022 distribution into the $1.10 to $1.15 per unit range.
Dorchester’s most recent acquisition should also help improve its near-term cash flow by a couple cents per unit. However, due to lowered strip prices, Dorchester is now expected to deliver a distribution of around $0.75 to $0.80 per unit (for 2023) based on 2023 strip.
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