zhengzaishuru
Dorchester Minerals (NASDAQ:DMLP) declared a distribution for Q2 2023 that was approximately 32% lower than its Q1 2023 distribution. This was not all that surprising since it has a variable distribution tied to its cash receipts and Q1 2023 benefited from both the timing of cash receipts and a spike in sales volumes that didn’t look sustainable. Dorchester’s distribution averaged $0.833 per quarter during the first half of 2023.
Dorchester’s Q2 2023 sales volumes are closer to what I would normally expect Dorchester to average, although natural gas prices (with NYMEX averaging barely over $2 during the quarter) in particular were quite poor. Dorchester does not hedge its sales volumes.
I expect Dorchester’s quarterly distribution to average close to $0.80 per unit during the second half of 2023, with its Q4 distribution likely a bit higher than its Q3 distribution. I am keeping my estimate of Dorchester’s value at $32 per unit with a long-term $75 WTI oil and $3.75 NYMEX gas environment, and believe that it can generate a roughly 10% yield at that unit price (and those commodity prices).
Notes On Sales Volumes
I’ve previously noted that Dorchester’s sales volumes (particularly its NPI sales volumes) can vary a lot from quarter to quarter. Thus I had used Dorchester’s Q4 2022 sales volumes as a general baseline to represent an average quarter.
| Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | |
| Royalty natural gas sales (mmcf) | 1,086 | 1,078 | 1,330 | 1,153 |
| Royalty oil sales (mbbls) | 322 | 319 | 302 | 335 |
| NPI natural gas sales (mmcf) | 290 | 495 | 864 | 475 |
| NPI oil sales (mbbls) | 80 | 185 | 269 | 158 |
This still appears to be a reasonable assumption. Dorchester’s natural gas sales volumes went down 26% from Q1 2023 to Q2 2023. Its oil sales volumes also went down 14% over the same period.
However, Dorchester’s natural gas sales volumes were up 3% in Q2 2023 compared to Q4 2022,while its oil sales volumes were down 2% in Q2 2023 compared to Q4 2022 (which has one more day than Q2). Thus Dorchester’s production levels were very similar in Q2 2023 compared to Q4 2022.
Variable Distribution
Dorchester Minerals has a variable distribution tied to its cash receipts. Dorchester’s Q2 2023 distribution ended up being significantly lower (at $0.676818 per unit) than its Q1 2023 distribution, which was $0.989656 per unit. This was a decrease of approximately 32%.
This quarter-over-quarter distribution decrease appears to be due to a combination of lower sales volumes, lower commodity prices and the timing of Dorchester’s cash receipts.
Dorchester’s Q2 2023 cash receipts from its Royalty Properties were down 6%, including a 12% decrease in receipts related to current period sales. The current period for Q2 2023 was March to May 2023, while the current period for Q1 2023 was December 2022 to February 2023.
A 12% decrease is close to what I’d expect in a scenario with roughly flat production growth, given the changes in commodity prices between the two sets of current periods.
| $ Millions | Prior Periods | Current Period | Total |
| Q1 2023 Royalty Receipts | $5.9 | $18.7 | $24.6 |
| Q2 2023 Royalty Receipts | $6.7 | $16.5 | $23.2 |
On the other hand, Dorchester’s cash receipts attributable to its Net Profits Interest declined by 71% quarter-over-quarter. Dorchester’s NPI sales volumes went down by 43% quarter-over-quarter while commodity prices were also lower. The 39% quarter-over-quarter decrease in current period receipts is actually less than I’d expect, but the change in receipts from prior periods was very high and seems to be due to timing.
| $ Millions | Prior Periods | Current Period | Total |
| Q1 2023 NPI Receipts | $12.1 | $5.4 | $17.5 |
| Q2 2023 NPI Receipts | $1.8 | $3.3 | $5.1 |
Acquisition Notes
Dorchester also announced that it acquired mineral and royalty interests totaling around 900 net royalty acres (and involving approximately 17,000 gross acres) in Louisiana, New Mexico and Texas.
The consideration for these interests was 343,750 common units worth approximately $11 million at that time.
This appears to be a relatively minor set of transactions (involving multiple unrelated third parties) that adds less than 1% to Dorchester’s outstanding common unit count.
Notes On Valuation
I am keeping Dorchester’s estimated value at $32 per unit based on my long-term commodity price expectations of $75 WTI oil and $3.75 NYMEX gas. I believe that Dorchester can deliver a quarterly distribution averaging approximately $0.80 per unit in that scenario.
As noted above, Dorchester’s distribution can be fairly variable from quarter-to-quarter, but one should focus on long-term averages rather than short-term spikes and dips in its distribution.
For the second half of 2023, I’d expect Dorchester’s distribution to average around $0.80 per quarter, with Q4 2023 likely to be higher than Q3 2023 based on strip.
Conclusion
Dorchester is a solid (and debt free) company that looks capable of generating a 10.5% yield based on my long-term commodity price estimates and Dorchester’s current unit price. Dorchester’s potential for capital appreciation looks relatively limited currently, but its average quarterly distribution should be around $0.80 per unit. There may be significant variance from quarter to quarter (such as with Q1 2023 and Q2 2023), but overall I believe the quarterly distribution can average out to around $0.80 per unit.
