Dorchester Minerals (DMLP): Quarterly Distribution May Exceed $1

Dorchester Minerals (NASDAQ:DMLP) now looks capable of generating quarterly distributions of $1+ per unit based on near-term oil prices of $100+ and near-term natural gas prices of $7+.

I am assuming that Dorchester can also maintain modest organic production growth (averaging around 1% per quarter) in addition to some production growth that is driven by its acquisitions. Overall, Dorchester appears close to fairly priced for a long-term $75 WTI oil scenario, while it also offers relatively high yields in the near-term.

Acquisitions

Dorchester made another acquisition recently. It acquired around 3,600 net royalty acres located across Colorado, Louisiana, Ohio, Oklahoma, Pennsylvania, West Virginia and Wyoming. This acquisition closed at the end of Q1 2022 and involved consideration of 0.57 million common units (worth approximately $14.8 million). At the end of 2021, Dorchester had also acquired 4,600 net royalty acres across New Mexico, Oklahoma, Texas and Wyoming in exchange for 1.58 million common units worth approximately $31.3 million. That acquisition appears to have involved more valuable acreage than its more recent acquisition given that the cost per net royalty acre was around 66% higher.

Dorchester now appears to have approximately 37.6 million common units outstanding.

Notes On Production

Dorchester’s production trends appear to show generally modest production growth.

Dorchester acquired overriding royalty interests in the Bakken at the end of Q2 2021, and that transaction added 725,000 common units (or approximately 2.1%) to Dorchester’s outstanding common units.

Dorchester’s average daily royalty oil sales (per unit) were thus up slightly (around 3%) in Q4 2021 compared to Q1 2021. Its average daily royalty natural gas sales (per unit) went up around 22% in Q4 2021 compared to Q1 2021, although that comparison is partly affected by the natural gas freeze offs in Q1 2021. Dorchester’s royalty production was also down a bit in Q4 2021 compared to Q3 2021.

Production	Q1 2021	Q2 2021	Q3 2021	Q4 2021
Royalty natural gas sales (mmcf)	740	1,014	971	940
Royalty oil sales (mbbls)	246	225	271	265
NPI natural gas sales (mmcf)	278	415	304	347
NPI oil sales (mbbls)	90	97	80	113

Generally I’d expect Dorchester’s (per unit) average daily production levels to show slight growth (such as 1% per quarter) in the current environment, although there will be fluctuations from quarter to quarter.

Near-Term Distributions And Valuation

With near-term oil prices at over $100 and near-term natural gas prices over $7, it appears that Dorchester Minerals should be able to start generating a quarterly distribution of $1+ per unit.

I now estimate that Dorchester is worth approximately $26 to $27 per unit in a long-term $75 WTI oil scenario. This assumes that oil and natural gas prices remain above those long-term prices for 2022 and 2023 (thus resulting in larger distributions) before returning to long-term prices after that point.

I remain relatively conservative about longer-term oil prices due to the potential for general production growth with near-term oil prices at $100+.

Conclusion

Dorchester Minerals looks capable of generating a quarterly distribution of $1+ per unit based on near-term oil and gas prices of $100+ and $7+ respectively. I have also assumed that Dorchester’s organic production volumes (per unit) will increase slightly, averaging around a 1% increase per quarter.

Dorchester has also been active in making acquisitions, with its most recent acquisitions closing at the end of 2021 and the end of Q1 2022. These acquisitions will likely boost Dorchester’s overall production by mid-single digits (compared to Q4 2021 production levels).

Dorchester’s units appear to be trading close to its estimated fair value (around $26 to $27) for a long-term $75 WTI oil scenario, while they should also offer particularly strong near-term yields.