Dorchester Minerals: Acquisitions provide temporary distribution boost (DMLP)

Dorchester Minerals (NASDAQ:DMLP) declared a distribution of $0.781837 per unit for the first quarter of 2024, which was consistent with my expectation that Dorchester would declare a quarterly distribution of $0.75-0.80 on average for 2024.

However, Dorchester’s Q1 2024 is subject to distribution cash flow was plus acquisitions which appear to provide a noticeable increase in cash flow in the near future, but the impact of these recent acquisitions will likely fade over time.

Dorchester’s organic sales volume was lower than I expected in Q1 2024, and royalty oil sales volume (per day) was down -14% compared to Q4 2023. Not sure if this is just a blip, but I have lowered my estimate of the value Dorchester by $1 to $32 per unit to reflect volume risk.

Acquisitions and insider purchases

At the end of March 2024, Dorchester took over (from multiple third parties) approximately 1,485 net royalty acres in Colorado in exchange for 505,369 Dorchester common units valued at $17 million. Total cash receipts for these assets in the first quarter of 2024 (end of March) were $4.0 million, and Dorchester received this money as part of the transaction. These cash inflows helped boost Dorchester’s distribution in the first quarter of 2024.

I assume that sales volume associated with the acquired license area will decline significantly in future quarters as Dorchester would only pay approximately 1.0 times annual cash flow if cash receipts remain unchanged from Q1 2024 levels.

It would not make sense to sell at such a low multiple, so I believe it is likely that cash flow from the acquired assets could decline to approximately $2 million in Q2 2024 and decline further thereafter. It still seems quite likely that Dorchester will receive (within the first year) cash receipts of more than 50% of the price paid for these assets.

Recently, information about an insider purchase also appeared. Dorchester CFO Leslie Moriyama purchased 2,430 common units on May 17 at an average price of $31.74 each for a total of $0.77 million. This increases her ownership to 68,812 common units.

Results for the first quarter of 2024

Dorchester’s first quarter 2024 sales volumes decreased slightly compared to the fourth quarter of 2023. Dorchester’s royalty natural gas sales volumes and NPI crude oil sales volumes remained essentially unchanged quarter over quarter. However, crude oil sales volume (daily) decreased by -14% and NPI natural gas sales volume (daily) decreased by -10%.

	Q1 2023	Q2 2023	Q3 2023	Q4 2023	Q1 2024
Natural gas royalty sales (mmcf)	1330	1153	1344	1283	1268
Crude oil sales (mbbls)	302	335	477	404	343
Natural Gas Sales NPI (mmcf)	864	475	412	550	489
NPI crude oil sales (mbbls)	269	158	135	178	176

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Compared to Q1 2023, Dorchester’s Q1 2024 daily sales volumes increased +12% for royalty crude oil sales, but decreased -6% for royalty natural gas sales, decreased -44% in the case of NPI natural gas sales and decreased -36% in the case of NPI oil sales. However, NPI data for Q1 2023 was somewhat of an anomaly, with a one-off increase to levels significantly higher than other quarters.

Dorchester’s common unit volume also increased +4% year-over-year due to Dorchester issuing units for acquisitions, which should be taken into account when comparing sales volumes. Dorchester’s recent acquisitions (adding just over 1% of unit count) had minimal impact on volumes in Q1 2024 due to acquisitions closing at the end of the quarter.

Ultimately, Dorchester declared a distribution of $0.781837 per unit in the first quarter of 2024, although without the late March acquisitions (and the $4 million in cash flow provided by those acquisitions), Dorchester’s distribution would have been approximately $0.70 per unit. Dorchester’s Q1 2024 distribution also benefited from the timing of cash receipts as sales volumes declined slightly in the quarter.

Notes on future quarters

Dorchester’s Q1 2024 royalty sales volume was lower than I expected, while Dorchester’s Q2 2024 sales volume is expected to increase as a result of acquisitions that closed in late Q1 2024.

However, if Dorchester’s organic sales volume growth (Q1 2024 to Q2 2024) is more or less consistent, I see Q2 2024 distribution being closer to $0.70 per unit.

My earlier forecast of $0.75 to $0.80 per unit in quarterly distribution is largely dependent on royalty crude oil sales volumes of over 400,000 barrels per quarter. This is more in line with Dorchester’s Q4 2023 sales volume.

Valuation notes

Due to the decline in Dorchester’s royalty crude oil sales volume in the first quarter of 2024, I have lowered Dorchester’s value estimate by $1 per unit to $32 with a long-term (post-2024) price of WTI crude oil of $75 and NYMEX gas of value of $3.75. Perhaps in my previous model I was too optimistic about organic growth in Dorchester’s sales volume.

This valuation estimate, however, assumes royalty crude oil sales volumes will rebound to nearly 400,000 barrels per quarter in the future, as royalty crude oil sales volumes of 350,000 barrels per quarter would instead only mean a value of $29-$30.

The insider purchase, however, appears to be a vote of confidence that Dorchester’s sales volume in the first quarter of 2024 was a sharp decline rather than a new normal.

Application

Dorchester’s distribution in Q1 2024 was in line with my expectations, although the path to this level of distribution was different than I expected. Dorchester’s royalty oil sales volume (daily) decreased by approximately -14% compared to Q4 2023 and was noticeably lower than my expectations. However, Dorchester made up for this with several acquisitions, which saw it raise $4 million in cash proceeds in Q1 2024 in exchange for just over 0.5 million common units.

I do not expect the acquired assets to provide the same level of cash inflows in future quarters, so Dorchester’s organic sales volumes will need to rebound. I currently estimate Dorchester’s value at $32 per unit based on my long-term commodity prices, while also assuming that Dorchester can return to around 400,000 barrels per quarter in crude oil sales volume.