Dorchester Minerals(DMLP) - 2018 Q4 - Annual Report

PART I Business Overview Dorchester Minerals, L.P. acquires, owns, and administers Royalty Properties and Net Profits Interests in oil and natural gas, distributing quarterly funds less expenses, with limitations on growth and subject to extensive regulations and competition - Dorchester Minerals, L.P. commenced operations on January 31, 2003, with common units listed on the NASDAQ Global Select Market under 'DMLP'[9] - The business involves acquiring, owning, and administering Royalty Properties (mineral, royalty, overriding royalty, net profits, and leasehold interests in 574 counties/parishes across 25 states) and Net Profits Interests (NPIs) in properties owned by the operating partnership[12] - The partnership agreement mandates quarterly distributions of all funds from Royalty Properties and NPIs, less certain expenses and reasonable reserves[13] - Growth through acquisitions of oil and natural gas properties is permitted but subject to limitations, including unitholder approval for acquisitions exceeding 40% of outstanding common units (if exchanged for units) or 10% of aggregate cash distributions (if for cash)[14][15][16] - The Partnership does not have a credit facility and does not anticipate incurring debt beyond $50,000 in aggregate or 'acquisition indebtedness' to avoid unrelated business taxable income[18] - The oil and natural gas industry is subject to extensive federal, state, and local regulations covering permits, bonding, well operations, environmental requirements, and taxes[19][20][21] - Oil and natural gas pricing is market-driven and volatile; as a royalty owner, the Partnership has limited control over production volumes, marketing, and sales terms[22] - The Partnership operates in an intensely competitive energy industry, with many competitors possessing greater financial resources[25] - A business opportunities agreement limits the Partnership's engagement to oil and natural gas within a designated area, and affiliates of the general partner are not obligated to offer renounced opportunities to the Partnership[26][27][28][29][30] - The Partnership is indirectly affected by operational risks of property operators, such as drilling accidents, title issues, and weather, which can impact cash receipts, and maintains some insurance but is not fully covered for all risks[32][33][34][35] - As of February 28, 2019, the operating partnership had 25 full-time employees in Dallas, Texas, and six in field locations[36] Risk Factors Cash distributions are vulnerable to volatile prices and external costs, with depleting assets, limited reserve replacement, and acquisition restrictions posing challenges, alongside operational, geographic, cybersecurity, environmental, and regulatory risks, plus complex tax implications and unitholder control limitations - Cash distributions are highly dependent on volatile oil and natural gas prices, which are influenced by global supply/demand, geopolitical factors, and economic conditions[37][38][39] - The Partnership, as a fractional interest owner, lacks control over the development and operations of Royalty and NPI properties, limiting its ability to influence production volumes and development decisions[41][42][43] - Lease bonus revenue is significantly dependent on third-party actions, which are outside the Partnership's control[44][45] - Oil and natural gas reserves are depleting assets, and the Partnership's ability to replace them is limited by restrictions on using operating cash and partnership interests for acquisitions, as well as the general partner's obligation to avoid unrelated business taxable income[50][51][52][53] - Future drilling activities on properties may not be productive, and unsuccessful drilling on NPI properties can reduce amounts payable to the Partnership by 96.97% of costs[55][56][57] - Acquisition opportunities are limited by contractual provisions, substantial competition, and the general partner's duty to avoid unrelated business taxable income, which may require converting working interests into non-operating interests[58][59][60][61][62] - Acquisitions involve risks such as integration difficulties, unfamiliarity with new assets, and diversion of management's attention, and unitholders bear 100% of dilution from new common units while receiving 96% of the benefit[63][64][65] - Geographic concentration of NPI properties in the Hugoton field in Oklahoma makes them vulnerable to regional events and increases credit risk due to limited natural gas purchasers[69][70][71] - Under NPI terms, the Partnership bears 96.97% of property costs, and excess costs can accumulate, delaying future payments; aging equipment in the operating partnership's facilities could also lead to substantial capital expenditures, reducing cash flow[72][73][74][76][77] - The business is subject to cybersecurity risks, with potential for unauthorized data release or business disruption, and current protective measures or insurance may be insufficient[84][85] - Environmental costs and liabilities, including compliance with CERCLA, RCRA, Clean Air Act, Clean Water Act, and Safe Drinking Water Act, could increase production costs and reduce cash flow, with potential for the Partnership to be held liable as an 'owner'[86][87][88][89][90][91][93][94][95][96][97][98][99][101] - Potential federal and state legislation or executive orders regarding hydraulic fracturing and climate change could delay or restrict development, increase operating costs, and reduce demand for oil and natural gas production[102][103][104][105][106][107][109][110][111][112] - Estimates of oil and natural gas reserves and future net revenues are uncertain and subject to substantial judgment, which could lead to inaccurate projections and lower revenues[113][114] - Unitholders have limited voting rights and do not control the general partner, whose removal is difficult; the general partner's control can be transferred without unitholder consent, and conflicts of interest may arise, favoring the general partner's interests[121][122][123][124][125][126][127][128] - Issuance of additional securities could dilute unitholders' interests, reduce market price, and decrease per-unit cash distributions[129][130] - Unitholders may not have limited liability under certain circumstances and could be liable for the return of distributions or Partnership obligations under Delaware or other state laws[131][132][133][135] - The Partnership is dependent on key personnel, and the loss of their services could adversely affect operations[136] - The future costs and timeliness of providing Schedule K-1 tax statements to unitholders are uncertain due to a limited number of service providers[137][138] - The Partnership generally does not obtain IRS rulings, and recently enacted U.S. tax legislation (Tax Cuts and Jobs Act) may adversely affect business, results, and cash flow, particularly regarding the 20% pass-through income deduction[140][141][142][143][154][155] - If classified as a corporation for federal income tax purposes, the Partnership would incur corporate tax, substantially reducing cash available for distribution and the value of common units[144][145][146][147] - The tax treatment of publicly traded partnerships is subject to potential legislative, judicial, or administrative changes, which could negatively impact the value of common units[150][151][152][153] - The IRS could reallocate income, gain, deduction, and loss items between transferors and transferees if the monthly allocation convention is not accepted, potentially increasing unitholders' taxable income[156][157] - Unitholders may not be able to deduct losses attributable to their common units, as such losses may be limited to portfolio income[158] - An IRS audit of the Partnership's tax return could trigger audits of unitholders' individual returns and increased tax liabilities[159] - The IRS may challenge the Partnership's method for determining the adjusted tax basis of common units, potentially leading to more taxable income or less taxable loss for unitholders[161][162] - Tax-exempt investors may recognize unrelated business taxable income (UBTI) despite the general partner's efforts to prevent it, as the Partnership may realize UBTI to maximize unitholder value[163][164] - Unitholders may be subject to withholding tax upon transfers of common units, though this requirement is currently suspended for publicly traded partnerships[165] - The tax consequences of certain NPIs are uncertain, as the IRS could characterize the assignment of working interests differently[166] - Unitholders may not be entitled to percentage depletion deductions if they do not qualify under the independent producer exemption[167][168] - The IRS may challenge the Partnership's method of allocating depletion deductions and determining a unitholder's share of partnership property basis, potentially increasing taxable income or reducing taxable loss[169][170][171][173][174] - The ratio of taxable income to cash distributions is uncertain, and cash distributions may not be sufficient to cover tax liabilities on allocated income[175][176] - Lending common units to a short seller may cause a unitholder to lose partner status for tax purposes, leading to recognition of gain/loss and full taxation of distributions as ordinary income[177][178] - Failure to notify of unit transfers may result in distributions and tax information being provided to the original transferor instead of the transferee, potentially leading to IRS challenges[179][180] - Unitholders may be subject to foreign, state, and local taxes in jurisdictions where they reside or where the Partnership operates, and state income tax may be withheld from distributions[181][182] - IRS audit adjustments for tax years after 2017 could result in taxes, penalties, and interest collected directly from the Partnership, substantially reducing cash available for distribution to current unitholders[183][184][185] Disclosure Regarding Forward-Looking Statements This section clarifies that statements not based on historical facts are forward-looking, involving risks and uncertainties, and actual results may differ materially from projections - Statements in the report that are not historical facts are considered forward-looking and involve risks and uncertainties[187][188] - Actual results could differ materially from those expressed or implied in forward-looking statements due to factors discussed under 'Risk Factors'[188][189] Unresolved Staff Comments The Partnership has no unresolved staff comments from the SEC Properties The Partnership owns Royalty Properties across 25 states and Net Profits Interests (NPIs) primarily in Oklahoma, with significant acreage and productive wells, and reported increases in proved oil and natural gas reserves in 2018 due to development and well performance - The Partnership's office in Dallas consists of 11,847 square feet of leased space, and the operating partnership owns a field office in Hooker, Oklahoma[193] - The Partnership owns two categories of properties: Royalty Properties and Net Profits Interests (NPIs)[198] - Royalty Properties consist of producing and nonproducing mineral, royalty, overriding royalty, net profits, and leasehold interests in 574 counties and parishes across 25 states[191] Royalty Properties Acreage Summary (as of December 31, 2018) | Category | Number of States | Number of Counties/Parishes | Gross Acres | Net Acres (where applicable) | |:---|:---|:---|:---|:---| | Mineral | 25 | 465 | 2,312,000 | 379,000 | | Royalty | 18 | 190 | 624,000 | | | Overriding Royalty | 18 | 137 | 209,000 | | | Leasehold | 8 | 34 | 32,000 | | - The majority of the Partnership's net mineral acres are unleased[192] Leasing Activity Summary (2016-2018) | Metric | 2018 | 2017 | 2016 | |:---|:---|:---|:---| | Number of Leases/Elections | 36 | 17 | 37 | | Number of States | 6 | 4 | 7 | | Number of Counties | 21 | 11 | 22 | | Average Royalty | 24.65% | 23.94% | 24.92% | | Average Bonus, $/acre | $692 | $3,330 | $2,499 | | Total Lease Bonus | $1,657,000 | $2,399,000 | $2,721,000 | - The Partnership owns NPIs in properties owned by Dorchester Minerals Operating LP, receiving 96.97% of net profits; deficits in cumulative revenue versus costs for NPIs are borne solely by the operating partnership[204] NPI Properties Acreage Summary (as of December 31, 2018) | Category | Number of States | Number of Counties/Parishes | Gross Acres | Net Acres | |:---|:---|:---|:---|:---| | Mineral | 12 | 61 | 50,000 | 6,000 | | Royalty | 6 | 23 | | | | Leasehold | 6 | 12 | 91,000 | 75,000 | | Total | | | 141,000 | 81,000 | Productive Well Summary for NPI Properties (as of December 31, 2018) | Location | Productive Gross Wells | Net Wells/Units | |:---|:---|:---| | Oklahoma | 135 | 116 | | All others | 899 | 35 | | Total | 1,034 | 151 | - During 2018, 301 new wells were completed on Royalty Properties and 54 on NPI Properties, primarily in the Permian Basin and Bakken region[213] Proved Oil and Natural Gas Reserves (as of December 31) | Year | All Royalty Oil (mbbls) | All Royalty Natural Gas (mmcf) | Net Profits Interests Oil (mbbls) | Net Profits Interests Natural Gas (mmcf) | Total Oil (mbbls) | Total Natural Gas (mmcf) | |:---|:---|:---|:---|:---|:---|:---| | 2018 | 6,981 | 24,327 | 2,060 | 19,903 | 9,041 | 44,230 | | 2017 | 6,688 | 24,327 | 1,623 | 22,594 | 8,311 | 46,921 | | 2016 | 5,643 | 22,967 | 1,449 | 18,187 | 7,092 | 41,154 | - Proved oil reserves increased by 1,984 thousand barrels in 2018, 2,352 thousand barrels in 2017, and 2,335 thousand barrels in 2016, mainly due to ongoing development in the Permian Basin and Bakken and better-than-projected well performance[412] - Proved natural gas reserves increased by 3,423 million cubic feet in 2018 due to Permian Basin activity and by 12,269 million cubic feet in 2017 due to Permian activity and higher gas prices; a downward revision of 1,718 million cubic feet occurred in 2016 due to shorter economic limits from lower gas prices[412] - The Hugoton Field is the only significant field, representing more than 15% of total proved developed reserves[220] Hugoton Field Net Sales Volumes (2016-2018) | Year | Oil Boe | Gas mcf | |:---|:---|:---| | 2018 | 57,000 | 1,542,000 | | 2017 | 47,000 | 1,388,000 | | 2016 | 64,000 | 1,951,000 | - The Partnership believes it has satisfactory title to all assets, with appropriate filings in relevant jurisdictions, and existing encumbrances are not expected to materially detract from property value or business operations[221] Legal Proceedings The Partnership is involved in routine legal and administrative proceedings not expected to significantly impact its financial position or operating results - The Partnership and operating partnership are involved in ordinary course legal/administrative proceedings, none of which are believed to have a significant effect on financial position or operating results[223] Mine Safety Disclosures This item is not applicable to the Partnership - Mine Safety Disclosures are not applicable to the registrant[224] PART II Market for Registrant's Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities Dorchester Minerals, L.P.'s common units trade on NASDAQ under 'DMLP', with 11,760 unitholders as of December 31, 2018, showing fluctuating performance and repurchases under its Equity Incentive Program - Common units began trading on the NASDAQ National Market (now NASDAQ Global Select Market) on February 3, 2003, under the ticker symbol 'DMLP'[226] - As of December 31, 2018, there were 11,760 common unitholders[227] Comparative Stock Performance (December 31, 2013 - December 31, 2018) | Date | Dorchester Minerals, L.P. | Industry Group | NASDAQ Composite Index | |:---|:---|:---|:---| | 12/31/13 | $100.00 | $100.00 | $100.00 | | 12/31/14 | $105.15 | $95.90 | $113.40 | | 12/31/15 | $43.53 | $42.64 | $119.89 | | 12/31/16 | $81.88 | $64.34 | $128.89 | | 12/31/17 | $76.42 | $81.68 | $165.29 | | 12/31/18 | $81.06 | $59.49 | $158.87 | - The peer group index consists of publicly traded royalty trust units: Cross Timbers Royalty Trust, Mesa Royalty Trust, Sabine Royalty Trust, Permian Basin Royalty Trust, Hugoton Royalty Trust, and San Juan Basin Royalty Trust[229] Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Number of Units Purchased | Average Price Paid per Unit | Total Number of Units Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Units that May Yet Be Purchased Under the Plans or Programs | |:---|:---|:---|:---|:---| | Month 1 (Oct 1 – Oct 31, 2018) | - | N/A | - | 80,988 | | Month 2 (Nov 1 – Nov 30, 2018) | - | - | - | 80,988 | | Month 3 (Dec 1 – Dec 31, 2018) | 9,064 | $16.92 | 9,064 | 80,988 | | Total | 9,064 | $16.92 | 9,064 | 80,988 | - The maximum number of common units that could be purchased under the Equity Incentive Program in 2018 was 107,492 units[232] Selected Financial Data Selected financial data for Dorchester Minerals, L.P. indicates positive trends in total operating revenues and net income from 2016 to 2018, with increasing distributions and substantial partnership capital Selected Financial Data (Fiscal Years Ended December 31, in thousands, except per unit data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | |:---|:---|:---|:---|:---|:---| | Total operating revenues | $73,278 | $57,291 | $37,557 | $31,870 | $65,170 | | Depreciation, depletion and amortization | 8,947 | 9,302 | 8,507 | 10,068 | 10,050 | | Net income | 53,907 | 38,424 | 20,967 | 13,255 | 45,239 | | Net income per common unit (basic and diluted) | 1.61 | 1.18 | 0.66 | 0.42 | 1.42 | | Distributions paid to general partner and unitholders | 58,006 | 37,797 | 27,202 | 36,608 | 60,539 | | Distributions per unit | 1.74 | 1.16 | 0.86 | 1.15 | 1.90 | | Total assets | 87,923 | 92,047 | 67,211 | 73,729 | 97,509 | | Total liabilities | 1,276 | 1,301 | 275 | 558 | 985 | | Partnership capital | 86,647 | 90,746 | 66,936 | 73,171 | 96,524 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, Dorchester Minerals, L.P. experienced significant increases in net income and distributions, driven by higher oil prices and drilling activity, maintaining strong liquidity with minimal debt and adhering to specific distribution methods - 2018 results were primarily influenced by industry-wide increases in realized oil prices and continued drilling activity in the Permian Basin and Bakken[238] - Key 2018 results included net income of $53.9 million, distributions of $56.1 million to limited partners, $7.6 million from leasehold interest assignments, and 301 new wells on Royalty Properties and 54 on NPI Properties[242] - The Partnership uses the full cost method of accounting for oil and natural gas properties, capitalizing costs and amortizing them over estimated lives using the units-of-production method, with capitalized costs subject to a ceiling test based on discounted future net revenues[238][239] Contractual Obligations (as of December 31, 2018, in thousands) | Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |:---|:---|:---|:---|:---|:---| | Operating Lease Obligations | $3,520 | $254 | $670 | $694 | $1,902 | - The only contractual obligation is the office lease in Dallas, Texas[241] Accrual Basis Sales Volumes (Years Ended December 31) | Metric | 2018 | 2017 | 2016 | |:---|:---|:---|:---| | Royalty Properties Gas Sales (mmcf) | 3,561 | 3,753 | 3,271 | | Royalty Properties Oil Sales (mbbls) | 847 | 784 | 620 | | Net Profits Interests Gas Sales (mmcf) | 2,581 | 2,750 | 2,807 | | Net Profits Interests Oil Sales (mbbls) | 443 | 349 | 381 | Accrual Basis Weighted Average Sales Price (Years Ended December 31) | Metric | 2018 | 2017 | 2016 | |:---|:---|:---|:---| | Royalty Properties Gas Sales ($/mcf) | $2.54 | $2.83 | $2.05 | | Royalty Properties Oil Sales ($/bbl) | $54.15 | $45.27 | $37.18 | | Net Profits Interests Gas Sales ($/mcf) | $2.46 | $2.60 | $2.08 | | Net Profits Interests Oil Sales ($/bbl) | $54.84 | $44.71 | $34.64 | - Royalty Properties' oil sales volumes increased 8% in 2018 (to 847 thousand barrels) and 26% in 2017 (to 784 thousand barrels), driven by activity in the Permian Basin and Bakken region[245] - Royalty Properties' gas sales volumes decreased 5% in 2018 (to 3,561 million cubic feet) but increased 15% in 2017 (to 3,753 million cubic feet), with 2018 declines in Fayetteville and Bakken shales partially offset by Permian Basin increases[245] - NPI properties' oil sales volumes increased 27% in 2018 (to 443 thousand barrels) due to Permian Basin production and suspense releases, after an 8% decrease in 2017[246] - NPI properties' gas sales volumes decreased 6% in 2018 (to 2,581 million cubic feet) and 2% in 2017, primarily due to natural declines across most regions[246] - Weighted average oil sales prices for Royalty Properties increased 20% in 2018 (to $54.15/bbl) and 22% in 2017; NPI properties' oil prices increased 23% in 2018 (to $54.84/bbl) and 29% in 2017[247][248] - Weighted average gas sales prices for Royalty Properties decreased 10% in 2018 (to $2.54/mcf) but increased 38% in 2017; NPI properties' gas prices decreased 5% in 2018 (to $2.46/mcf) but increased 25% in 2017[247][248] - Total operating revenues increased 28% to $73.3 million in 2018 and 52% to $57.3 million in 2017, driven by commodity prices, Royalty Property production, and lease bonus revenues[249] - Lease bonus income increased to $9.3 million in 2018 from $2.4 million in 2017 and $2.7 million in 2016, primarily from new leasing activity and leasehold interest assignments in the Permian Basin[250] - Other income increased to $1.6 million in 2018, mainly from legal settlements on Royalty Properties[251] - Depletion, depreciation, and amortization decreased 4% to $8.9 million in 2018, after a 9% increase in 2017[252] - General and administrative (G&A) costs remained constant at $4.9 million in 2018 compared to 2017[254] - Net cash provided by operating activities increased 42% to $62.5 million in 2018 and 55% to $44.0 million in 2017, mainly due to increases in Royalty and Net Profits Interest income[255] - In June 2017, the Partnership acquired mineral and royalty interests in Texas for approximately $23.2 million, issuing 1,604,343 common units in a non-taxable contribution and exchange[256][257] - The Partnership believes it qualifies as a 'passive entity' and is exempt from the Texas margin tax, meaning unitholders include their portion of Partnership revenues in their own tax computations[258][259][260] - Primary capital sources are cash flows from NPIs and Royalty properties; cash requirements are distributions, production/property taxes, and G&A expenses; the Partnership anticipates sufficient funds for expenses as they vary with sales prices and volumes[261] - The Partnership is not directly liable for exploration, development, or production costs and has no significant off-balance sheet arrangements or debt guarantees[262][263][264] - The operating partnership assesses opportunities to increase production in Oklahoma, with associated capital and operating costs reflected in NPI payments; infill drilling in the Guymon-Hugoton field could require considerable capital expenditures[266][267][268] - Year-end cash and cash equivalents totaled $18.3 million for 2018, up from $13.8 million in 2017[269] Distributions Paid to General Partner and Unitholders (October 2017 - December 2018, in thousands) | Year | Quarter | Record Date | Payment Date | Per Unit Amount | Limited Partners | General Partner | |:---|:---|:---|:---|:---|:---|:---| | 2017 | 4th | Jan 29, 2018 | Feb 8, 2018 | $0.386915 | $12,490 | $449 | | 2018 | 1st | Apr 30, 2018 | May 10, 2018 | $0.418449 | $13,507 | $444 | | 2018 | 2nd | Jul 30, 2018 | Aug 10, 2018 | $0.537264 | $17,343 | $510 | | 2018 | 3rd | Oct 29, 2018 | Nov 8, 2018 | $0.394813 | $12,744 | $519 | | | Total | distributions paid in 2018 | | | $56,084 | $1,922 | | 2018 | 4th | Jan 28, 2019 | Feb 7, 2019 | $0.516572 | $16,675 | $563 | - Limited partners receive 96% of Royalty Properties' net receipts and 99% of NPI net receipts, while the general partner receives 4% and 1% respectively, plus the operating partnership's 3.03% share of NPI net proceeds[272][273][275][276] - Cash receipts for Q4 2018 from Royalty Properties totaled $12.6 million (oil sales: $55.17/bbl, gas sales: $2.38/mcf) and from NPIs totaled $4.2 million (oil sales: $59.55/bbl, gas sales: $2.28/mcf)[279][280] - General and administrative costs reimbursed to the general partner are limited to 5% of distributions plus certain prior costs, and these reimbursements have remained below the limit[281] Quantitative and Qualitative Disclosures About Market Risk The Partnership faces market risk from volatile oil and natural gas prices but does not plan hedging, expecting minimal exposure to interest rate and currency risks due to its financial structure - The Partnership is subject to market risk from fluctuations in oil and natural gas prices, as its income is derived from Royalty Properties and NPIs[284] - The Partnership does not anticipate entering into financial hedging activities to reduce exposure to price fluctuations[284] - Interest rate risk is not expected to be material due to the absence of a credit facility or significant debt; foreign currency related market risk is also not anticipated[285] Financial Statements and Supplementary Data The consolidated financial statements and supplementary data are presented starting on page F-1 of this report - The consolidated financial statements are set forth starting on page F-1[286] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[286] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes during the fourth quarter - As of December 31, 2018, management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective[287] - Management determined that the Partnership's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[288] - Grant Thornton LLP issued an unqualified attestation report on the Partnership's internal control over financial reporting[288] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2018[289] Other Information There is no other information to report under this item - There is no other information to report under this item[290] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference to the 2019 Proxy Statement, to be filed not later than 120 days subsequent to December 31, 2018[292] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference to the 2019 Proxy Statement, to be filed not later than 120 days subsequent to December 31, 2018[294] Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters Information regarding security ownership of certain beneficial owners and management, and related unitholder matters, is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference to the 2019 Proxy Statement, to be filed not later than 120 days subsequent to December 31, 2018[295] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference to the 2019 Proxy Statement, to be filed not later than 120 days subsequent to December 31, 2018[296] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2019 Proxy Statement - Information for this item is incorporated by reference to the 2019 Proxy Statement, to be filed not later than 120 days subsequent to December 31, 2018[297] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and schedules, along with a comprehensive list of exhibits filed with the 10-K report, including various agreements, organizational documents, consents, and certifications - The section includes a list of exhibits required by Item 601 of Regulation S-K, such as Contribution, Exchange and Purchase Agreements, Participation Agreements, organizational documents, consents, and certifications[300][301][302] - Financial statements are referenced to the Index to Consolidated Financial Statements, and no schedules are required[300] Form 10-K Summary There is no Form 10-K Summary provided in this report - No Form 10-K Summary is provided[302] Glossary of Certain Oil and Natural Gas Terms This section provides definitions for key terms used in the oil and natural gas industry and within the report, such as 'bbl', 'mcf', 'boe', 'depletion', 'royalty', 'net profits interest', and 'proved reserves', to ensure clarity and understanding - The glossary defines terms specific to the oil and natural gas industry, including units of measurement (bbl, bcf, boe, mcf, mmcf, mbbls), operational concepts (depletion, enhanced recovery, formation, payout, unitization), and property interests (division order, lease bonus, leasehold, mineral interest, net profits interest, overriding royalty interest, royalty, working interest)[304][305][306][307][308][309][310][311][312][313][314][315][316][317][318][319][321][322][323][324][325][326][327][328][329][330][331][332] Signatures The report is signed on behalf of Dorchester Minerals, L.P. by its Chief Executive Officer, William Casey McManemin, and other managers, certifying compliance with the Securities Exchange Act of 1934 as of February 28, 2019 - The report is signed by William Casey McManemin, Chief Executive Officer, and other managers, on February 28, 2019, in compliance with the Securities Exchange Act of 1934[335][336][337] Index to Consolidated Financial Statements This index lists all consolidated financial statements and supplementary data included in the report, along with their respective page numbers, providing a roadmap to the Partnership's financial disclosures - The index lists the Reports of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Income Statements, Consolidated Statement of Cash Flows, Consolidated Statement of Changes in Partnership Capital, Notes to Consolidated Financial Statements, Supplemental Oil and Natural Gas Data (Unaudited), and Supplemental Quarterly Data (Unaudited)[340] Reports of Independent Registered Public Accounting Firm Grant Thornton LLP, the independent registered public accounting firm, issued an unqualified opinion on Dorchester Minerals, L.P.'s internal control over financial reporting and consolidated financial statements for the year ended December 31, 2018 - Grant Thornton LLP issued an unqualified opinion on the Partnership's internal control over financial reporting as of December 31, 2018, based on COSO criteria[342][351] - The firm also issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2018[343][350] Consolidated Balance Sheets As of December 31, 2018, Dorchester Minerals, L.P. reported total assets of $87.9 million, a decrease from $92.0 million in 2017, with current assets increasing, property decreasing, and total liabilities remaining low at $1.3 million Consolidated Balance Sheets (as of December 31, in thousands) | ASSETS | 2018 | 2017 | |:---|:---|:---| | Current assets: | | | | Cash and cash equivalents | $18,285 | $13,827 | | Trade and other receivables | 6,635 | 6,198 | | Net profits interests receivable—related party | 5,198 | 5,330 | | Total current assets | 30,118 | 25,355 | | Property and leasehold improvements—at cost: | | | | Oil and natural gas properties (full cost method) | 363,205 | 363,186 | | Accumulated full cost depletion | (306,335) | (297,442) | | Total (Oil and natural gas properties) | 56,870 | 65,744 | | Leasehold improvements | 1,614 | 1,573 | | Accumulated amortization | (679) | (625) | | Total (Leasehold improvements) | 935 | 948 | | Total assets | $87,923 | $92,047 | | LIABILITIES AND PARTNERSHIP CAPITAL | | | | Current liabilities: | | | | Accounts payable and other current liabilities | $421 | $599 | | Current portion of deferred rent incentive | 65 | 38 | | Total current liabilities | 486 | 637 | | Deferred rent incentive less current portion | 790 | 664 | | Total liabilities | 1,276 | 1,301 | | Partnership capital: | | | | General partner | 1,826 | 1,782 | | Unitholders | 84,821 | 88,964 | | Total partnership capital | 86,647 | 90,746 | | Total liabilities and partnership capital | $87,923 | $92,047 | Consolidated Income Statements Dorchester Minerals, L.P.'s consolidated income statements show a significant increase in net income from $21.0 million in 2016 to $53.9 million in 2018, driven by consistent growth in total operating revenues Consolidated Income Statements (Years Ended December 31, in thousands, except per unit amounts) | Metric | 2018 | 2017 | 2016 | |:---|:---|:---|:---| | Operating revenues: | | | | | Royalties | $54,898 | $46,125 | $29,750 | | Net profits interests | 7,447 | 8,014 | 4,824 | | Lease bonus | 9,298 | 2,399 | 2,721 | | Other | 1,635 | 753 | 262 | | Total operating revenues | 73,278 | 57,291 | 37,557 | | Costs and expenses: | | | | | Production taxes | 2,749 | 2,175 | 1,360 | | Operating expenses | 2,762 | 2,460 | 1,733 | | Depreciation, depletion and amortization | 8,947 | 9,302 | 8,507 | | General and administrative expenses | 4,913 | 4,930 | 4,990 | | Total costs and expenses | 19,371 | 18,867 | 16,590 | | Net income | $53,907 | $38,424 | $20,967 | | Allocation of net income: | | | | | General partner | $1,966 | $1,341 | $736 | | Unitholders | $51,941 | $37,083 | $20,231 | | Net income per common unit (basic and diluted) | $1.61 | $1.18 | $0.66 | | Weighted average basic and diluted common units outstanding (000's) | 32,280 | 31,488 | 30,675 | Consolidated Statement of Cash Flows Dorchester Minerals, L.P.'s cash flows from operating activities significantly increased from $28.3 million in 2016 to $62.5 million in 2018, primarily due to higher net income, supporting increased distributions to partners Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Metric | 2018 | 2017 | 2016 | |:---|:---|:---|:---| | Cash flows from operating activities: | | | | | Net income | $53,907 | $38,424 | $20,967 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Depreciation, depletion and amortization | 8,947 | 9,302 | 8,507 | | Amortization of deferred rent incentive | (38) | (23) | (54) | | Changes in operating assets and liabilities: | | | | | Trade and other receivables | (437) | (1,727) | (1,693) | | Net profits interests receivable—related party | 132 | (3,105) | 780 | | Accounts payable and other current liabilities | (178) | 455 | (252) | | Deferred rent liabilities | 191 | 702 | 23 | | Net cash provided by operating activities | 62,524 | 44,028 | 28,278 | | Cash flows used in investing activities: | | | | | Cash (used) contributed in acquisition of royalty interests | (19) | 440 | - | | Capital expenditures | (41) | (1,056) | - | | Total cash flows used in investing activities | (60) | (616) | - | | Cash flows used in financing activities: | | | | | Distributions paid to general partner and unitholders | (58,006) | (37,797) | (27,202) | | Increase in cash and cash equivalents | 4,458 | 5,615 | 1,076 | | Cash and cash equivalents at beginning of year | 13,827 | 8,212 | 7,136 | | Cash and cash equivalents at end of year | $18,285 | $13,827 | $8,212 | | Non-cash investing and financing activities: | | | | | Fair value of common units issued for acquisition of royalty interests | $ - | $23,183 | $ - | Consolidated Statement of Changes in Partnership Capital Total partnership capital increased from $73.2 million in early 2016 to $86.6 million by end of 2018, driven by net income, with a $23.2 million non-cash asset acquisition in 2017 Consolidated Statement of Changes in Partnership Capital (Years Ended December 31, in thousands) | Year | General Partner | Unitholders | Total | Unitholder Units | |:---|:---|:---|:---|:---| | 2016 | | | | | | Balance at January 1, 2016 | $1,996 | $71,175 | $73,171 | 30,675,431 | | Net income | 736 | 20,231 | 20,967 | | | Distributions ($0.856694 per Unit) | (923) | (26,279) | (27,202) | | | Balance at December 31, 2016 | $1,809 | $65,127 | $66,936 | 30,675,431 | | 2017 | | | | | | Net income | 1,341 | 37,083 | 38,424 | | | Acquisition of assets for units | - | 23,183 | 23,183 | 1,604,343 | | Distributions ($1.155790 per Unit) | (1,368) | (36,429) | (37,797) | | | Balance at December 31, 2017 | $1,782 | $88,964 | $90,746 | 32,279,774 | | 2018 | | | | | | Net income | 1,966 | 51,941 | 53,907 | | | Distributions ($1.737441 per Unit) | (1,922) | (56,084) | (58,006) | | | Balance at December 31, 2018 | $1,826 | $84,821 | $86,647 | 32,279,774 | Notes to Consolidated Financial Statements The notes detail Dorchester Minerals, L.P.'s operations, accounting policies (full cost method, cash receipts revenue recognition), income tax treatment, related party transactions, commitments, and the impact of new accounting pronouncements - The Partnership is a Dallas, Texas-based owner of producing and nonproducing natural gas and crude oil royalty, net profits, and leasehold interests in 574 counties and 25 states, formed in December 2001 and commencing operations on January 31, 2003[367] - Financial statements are prepared in accordance with U.S. GAAP, and basic and diluted earnings per unit are calculated by dividing net income by weighted average units outstanding, with no potentially dilutive securities[368][369] - The consolidated financial statements include Dorchester Minerals, L.P. and its subsidiaries, with all intercompany balances and transactions eliminated[370] - Management makes estimates and assumptions, particularly for uncollected revenues and unpaid expenses from Royalty Properties and NPIs, and for proved oil and natural gas reserves, which are subject to revision[371][372] - The general partner, Dorchester Minerals Management LP, owns the operating partnership and is allocated 4% of Royalty Properties' net revenues and 1% of NPI net proceeds[373] - Cash and cash equivalents are carried at cost, approximating fair value, and the Partnership has no significant credit risk concentration due to its lack of control over sales volumes[374][375][376] - Receivables primarily consist of Royalty Properties and NPI payments, with no allowance for doubtful accounts deemed necessary[379] - The Partnership uses the full cost method for oil and natural gas properties, capitalizing costs and amortizing them using the unit-of-production method, subject to a ceiling test based on discounted future net revenues; no impairments occurred in 2016-2018[380][381][382] - Leasehold improvements are amortized over the shorter of their useful lives or lease term, and the Partnership has no material asset retirement obligations[383][384] - Revenue from Royalty Properties and NPIs is recorded using the cash receipts approach, with accruals for earned but unreceived revenue; lease bonus revenues are recognized upon receipt, including proceeds from leasehold interest assignments where the Partnership retains an interest[385][386][387] - The Partnership is treated as a partnership for income tax purposes, with income/loss includable in individual unitholders' tax returns; it believes it is exempt from Texas margin tax as a 'passive entity'[388][389][390][392] - In June 2017, the Partnership acquired mineral and royalty interests for approximately $23.2 million, issuing 1,604,343 common units in a non-taxable transaction[393] - Related party transactions include reimbursement to the general partner for allocable G&A costs, limited to 5% of distributions plus certain prior costs, which have been below the limit; NPI payments receivable from the operating partnership were $5.2 million in 2018[394] - The Partnership is involved in routine legal proceedings not expected to significantly affect financial position; its primary commitment is an office lease expiring in 2029, with minimum rental commitments totaling $3.52 million[395][396][399] - Distributions were paid on 32,279,774 units starting Q2 2017, with fourth-quarter distributions paid in February of the following year[400] - The Partnership adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, using the full retrospective method, with no material impact on financial statements; it plans to adopt ASU 2016-02 (Leases) in 2019, recognizing a right-to-use asset and lease liability of $2.3 million to $2.5 million for its office lease, with no material impact on income or cash flow statements[401][402][403][404][405][406] Supplemental Oil and Natural Gas Data (Unaudited) This unaudited section provides detailed information on Dorchester Minerals, L.P.'s proved developed oil and natural gas reserves and the standardized measure of discounted future net cash flows, showing significant increases from 2016 to 2018 - The Partnership's proved developed oil and natural gas reserves are all located in the United States and are subject to imprecise estimates from independent petroleum engineers[409][410] Changes in Oil and Natural Gas Reserves (Years Ended December 31) | Metric | 2018 Oil (mbbls) | 2017 Oil (mbbls) | 2016 Oil (mbbls) | 2018 Natural Gas (mmcf) | 2017 Natural Gas (mmcf) | 2016 Natural Gas (mmcf) | |:---|:---|:---|:---|:---|:---|:---| | Estimated quantity, beginning of year | 8,311 | 7,092 | 5,678 | 46,921 | 41,154 | 49,370 | | Revisions in previous estimates | 1,984 | 2,352 | 2,335 | 3,423 | 12,269 | (1,718) | | Production | (1,254) | (1,133) | (921) | (6,114) | (6,502) | (6,498) | | Estimated quantity, end of year | 9,041 | 8,311 | 7,092 | 44,230 | 46,921 | 41,154 | - Upward revisions in oil reserves were primarily due to ongoing development in the Permian Basin and Bakken properties and well performance exceeding projections[412] - Upward revisions in natural gas reserves were a result of increased Permian Basin activity and higher gas prices extending economic limits[412] Standardized Measure of Discounted Future Net Cash Flows (Years Ended December 31, in thousands) | Metric | 2018 | 2017 | 2016 | |:---|:---|:---|:---| | Future estimated gross revenues | $534,758 | $405,137 | $270,209 | | Future estimated production costs | (29,668) | (23,241) | (15,820) | | Future estimated net revenues | 505,090 | 381,896 | 254,389 | | 10% annual discount for estimated timing of cash flows | (256,826) | (199,750) | (132,864) | | Standardized measure of discounted future estimated net cash flows | $248,264 | $182,146 | $121,525 | | Sales of oil and natural gas produced, net of production costs | $(56,834) | $(49,504) | $(31,481) | | Net changes in prices and production costs | 50,337 | 37,552 | (7,604) | | Revisions of previous quantity estimates | 54,314 | 63,621 | 24,043 | | Accretion of discount | 18,214 | 12,152 | 13,628 | | Change in production rate and other | 87 | (3,200) | (13,345) | | Net change in standardized measure of discounted future estimated net cash flows | $66,118 | $60,621 | $(14,759) | | Depletion of oil and natural gas properties (dollars per mcfe) | $0.65 | $0.70 | $0.70 | | Property acquisition costs | $ - | $22,623 | $ - | | Average oil price per barrel | $56.38 | $43.74 | $34.60 | | Average natural gas price per mcf | $2.44 | $2.56 | $2.00 | Supplemental Quarterly Data (Unaudited) Unaudited quarterly data for 2017 and 2018 shows fluctuations in total operating revenues and net income, with Q4 2018 recording the highest figures for the year Supplemental Quarterly Data (in thousands except per unit data) | Metric | 2018 March 31 | 2018 June 30 | 2018 Sept. 30 | 2018 Dec. 31 | 2017 March 31 | 2017 June 30 | 2017 Sept. 30 | 2017 Dec. 31 | |:---|:---|:---|:---|:---|:---|:---|:---|:---| | Total operating revenues | $15,883 | $21,123 | $13,938 | $22,334 | $12,727 | $12,553 | $12,480 | $19,531 | | Net income | $10,963 | $16,364 | $9,279 | $17,301 | $8,522 | $8,449 | $7,224 | $14,229 | | Net income per Unit (basic and diluted) | $0.33 | $0.49 | $0.27 | $0.52 | $0.27 | $0.26 | $0.22 | $0.43 |