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Dorchester Minerals (NASDAQ:DMLP) announced a Q3 2022 distribution of $1.135 per unit, which was in-line with my expectations. Dorchester’s Q3 2022 distribution was boosted by a large lease bonus payment though, and without that lease bonus payment it would have ended up with a distribution of around $0.945 per unit. In a more typical quarter, Dorchester’s lease bonus payments are fairly small (such as $0.01 or $0.02 per unit per quarter).
Dorchester’s Q3 2022 production was actually down a noticeable amount compared to Q2 2022, due to a large decline in its NPI oil production. That production tends to fluctuate from quarter-to-quarter, though, so I’d generally expect a rebound in Q4 2022 plus a boost from Dorchester’s September acquisition of net royalty acreage.
The average WTI oil price for Q4 2022 appears likely to end up over $10 per barrel lower than Q3 2022, while natural gas prices are also going to be down significantly. The rebound in production helps offset lower commodity prices a bit, but I’d expect Dorchester’s Q4 2022 distribution to end up near $0.85 per unit if there are no large lease bonus payments that boost its distribution.
Longer-term (at $75 WTI oil), I believe that Dorchester can support a $0.75 to $0.80 per unit distribution, which would translate into a value of approximately $30 per unit with a 10% yield (at $0.75 per unit per quarter).
Notes On Production Levels
Dorchester’s royalty production was close to flat for Q3 2022 compared to Q2 2022, but its NPI production (for oil) was down significantly at -42% quarter-over-quarter. Dorchester’s NPI oil production was flat compared to Q3 2021.
Dorchester’s NPI production can be pretty volatile depending on the timing of new wells coming online, so it will probably rebound a bit in Q4 2022. As well, Dorchester’s September acquisition of net royalty acres from Excess Energy help may boost its royalty production by several percent compared to Q3 2022, independent of organic growth.
| Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | |
| Royalty natural gas sales (mmcf) | 940 | 1,147 | 1,105 | 1,086 |
| Royalty oil sales (mbbls) | 265 | 369 | 318 | 322 |
| NPI natural gas sales (mmcf) | 347 | 320 | 353 | 290 |
| NPI oil sales (mbbls) | 113 | 94 | 139 | 80 |
Distribution Notes
I previously estimated that Dorchester’s Q3 2022 distribution would end up in the range of $1.10 to $1.15 per unit, helped by the $7.3 million Midland Basin lease bonus payment that added around $0.19 per unit to its distribution. Dorchester’s Q3 2022 distribution ended up at $1.135 per unit, in-line with my expectations. Without that large lease bonus payment, Dorchester’s Q3 2022 distribution would have ended up at approximately $0.945 per unit.
The large lease bonus payment was essentially a one-time transaction, though, and Dorchester typically sees a much smaller amount of lease bonus payments (under $1 million) during a particular quarter. Oil and gas prices were also weaker in Q4 2022 compared to Q3 2022, so Dorchester seems more likely to end up with a distribution closer to $0.85 per unit in Q4 2022. I’ve assumed that Dorchester’s production increases in the high-single digits range in Q4 2022 compared to Q3 2022. Dorchester’s total oil production was down around -13% in Q3 2022 compared to Q1 2022, so a high-single digits increase would still leave its Q4 2022 production slightly lower than its Q1 2022 production. Thus, that level of production growth doesn’t seem unreasonable to expect, although it is hard to predict quarter-to-quarter fluctuations.
Estimated Valuation
I am sticking to a long-term WTI oil price in the $70s for my valuation calculations. At that price, I’d expect Dorchester to be able to sustain a distribution in the mid-to-high 70 cents per unit. At sustained $75 WTI oil, I’d estimate Dorchester’s value at around $30 per unit.
Dorchester appears fairly priced currently based on that long-term oil price, while it also should offer a solid yield (approximately 10% to 11%) going forward for income-focused investors.
Conclusion
Dorchester’s Q3 2022 distribution ended up in-line with my expectations at $1.135 per unit. This is probably a high-water mark for Dorchester’s distribution, though, as it received an approximately $0.19 per unit boost from a large lease bonus payment, while commodity prices have decreased. I’d expect Dorchester’s production to rebound in Q4 2022, but with the lower commodity prices (and probably much lower lease bonus payments), its distribution will probably be around $0.85 per unit in Q4 2022.
Longer-term (in a $75 WTI oil environment), I’d expect Dorchester’s distribution to end up closer to $0.75 to $0.80 per unit, which would support a value of approximately $30 per unit.
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