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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
For the Quarterly Period Ended September 30, 2005
Commission file number 000-50175
DORCHESTER MINERALS, L.P.
(Exact name of Registrant as specified in its charter)
Delaware 81-0551518
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
3838 Oak Lawn Avenue, Suite 300, Dallas, Texas 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 559-0300
None
Former name, former address and former fiscal
year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
As of November 3, 2005, 28,240,431 common units of partnership interest
were outstanding.
Page 1
TABLE OF CONTENTS
PART I.........................................................................3
ITEM 1. FINANCIAL INFORMATION...............................................3
CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 (UNAUDITED) AND
DECEMBER 31, 2004......................................................4
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)................................5
CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30,2005 AND 2004 (UNAUDITED).................................6
NOTES TO THE CONDENSED FINANCIAL STATEMENTS...............................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........13
ITEM 4. CONTROLS AND PROCEDURES............................................13
PART II.......................................................................14
ITEM 1. LEGAL PROCEEDINGS..................................................14
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS........14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................14
ITEM 5. OTHER INFORMATION..................................................14
ITEM 6. EXHIBITS...........................................................14
SIGNATURES....................................................................14
INDEX TO EXHIBITS.............................................................15
CERTIFICATIONS................................................................17
Page 2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements included in this report which are not historical facts
(including any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions or forecasts related
thereto), are forward-looking statements. These statements can be identified by
the use of forward-looking terminology including "may," "believe," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state other "forward-looking"
information. In this report, the term "Partnership," as well as the terms "us,"
"our," "we," and "its" are sometimes used as abbreviated references to
Dorchester Minerals, L.P. itself or Dorchester Minerals, L.P. and its related
entities.
These forward-looking statements are based upon management's current plans,
expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements for a number of important reasons. Examples of such
reasons include, but are not limited to, changes in the price or demand for oil
and natural gas, changes in the operations on or development of the
Partnership's properties, changes in economic and industry conditions and
changes in regulatory requirements (including changes in environmental
requirements) and the Partnership's financial position, business strategy and
other plans and objectives for future operations. These and other factors are
set forth in the Partnership's filings with the Securities and Exchange
Commission.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest, you should be aware that the
occurrence of any of the events herein described in this report could
substantially harm our business, results of operations and financial condition
and that upon the occurrence of any of these events, the trading price of our
common units could decline, and you could lose all or part of your investment.
PART I
ITEM 1. FINANCIAL INFORMATION
Dorchester Minerals, L.P. is a publicly traded Delaware limited
partnership that commenced operations on January 31, 2003, upon the combination
of Dorchester Hugoton, Ltd., which was a publicly traded Texas limited
partnership, and Republic Royalty Company and Spinnaker Royalty Company, L.P.,
both of which were privately held Texas partnerships. The combination was
accounted for using the purchase method of accounting.
Page 3
DORCHESTER MINERALS, L.P.
(A Delaware Limited Partnership)
CONDENSED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2005 2004
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 17,526 $ 12,365
Trade receivables............................... 8,194 5,389
Net profits interest receivable - related party. 6,613 4,750
Note receivable - related party................. 117 155
Prepaid expenses ............................... 37 25
-------- --------
Total current assets........................ 32,487 22,684
Properties and leasehold improvements - at cost:
Oil and natural gas properties (full cost method) 291,875 291,855
Less full cost depletion ....................... 124,958 108,834
-------- -------
Total......................................... 166,917 183,021
Leasehold improvements.......................... 512 480
Less amortization............................... 48 12
-------- -------
Total ...................................... 464 468
-------- --------
Net properties and leasehold improvements....... 167,381 183,489
-------- --------
Total assets................................ $199,868 $206,173
======== ========
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities
Accounts payable and other current liabilities.. $ 1,180 $ 669
-------- --------
Total current liabilities.................. 1,180 669
-------- --------
Deferred rent incentive.............................. 336 366
-------- -------
Total liabilities.......................... 1,516 1,035
-------- -------
Commitments and contingencies
Partnership capital:
General partner................................. 7,651 7,807
Unitholders..................................... 190,701 197,331
-------- --------
Total partnership capital.................. 198,352 205,138
-------- --------
Total liabilities and partnership capital............ $199,868 $206,173
======== ========
The accompanying condensed notes are an integral part of
these financial statements.
Page 4
DORCHESTER MINERALS, L.P.
(A Delaware Limited Partnership)
CONDENSED STATEMENT OF OPERATIONS
(In Thousands except Earnings per Unit)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
2005 2004 2005 2004
------- --------- -------- ---------
Operating revenues:
Net profits interests................. $ 8,755 $, 5,775 $21,329 $ 18,061
Royalties............................. 14,442 7,822 33,077 21,677
Lease bonus........................... 456 836 606 1,516
------- --------- -------- ---------
Total operating revenues.............. 23,653 14,433 55,012 41,254
Cost and expenses:
Operating, including production taxes. 1,028 687 2,501 1,767
Depletion and amortization............ 5,659 5,103 16,161 15,426
General and administrative expenses... 612 800 2,072 2,390
------- --------- -------- --------
Total costs and expenses................... 7,299 6,590 20,734 19,583
------- --------- -------- ---------
Operating income .......................... 16,354 7,843 34,278 21,671
Other income (expense), net:
Investment income..................... 95 33 219 69
Other income (expense), net........... (46) 17 (27) 112
------- --------- -------- ---------
Total other income (expense), net..... 49 50 192 181
------- --------- -------- ---------
Net earnings .............................. $16,403 $ 7,893 $34,470 $ 21,852
======= ========= ======== =========
Allocation of net earnings:
General partner....................... $ 461 $ 211 $ 946 $ 557
======= ========= ======== =========
Unitholders........................... $15,942 $ 7,682 $33,524 $ 21,295
======= ========= ======== =========
Net earnings per common unit (basic
and diluted)............................. $ 0.57 $ 0.29 $ 1.19 $ 0.79
======= ========= ======== =========
Weighted avg. common units outstanding..... 28,240 27,053 28,240 27,044
======= ========= ======== =========
The accompanying condensed notes are an integral part of
these financial statements.
Page 5
DORCHESTER MINERALS, L.P.
(A Delaware Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2005 2004
--------- --------
Net cash provided by operating activities. ........... $ 46,526 $ 36,836
Cash flows used in investing activities:
Adjustment related to acquisition of
royalty interests.......................... -- 1,068
Capital expenditures.......................... (109) (128)
-------- --------
Net cash used in investing activities (109) 622
Cash flows used in financing activities:
Distributions paid to general partner
and unitholders............................. (41,256) (33,889)
-------- --------
Increase in cash and cash equivalents................. 5,161 3,569
Cash and cash equivalents at January 1,............... 12,365 10,881
-------- ---------
Cash and cash equivalents at September 30,............ $ 17,526 $ 14,450
========= =========
The accompanying condensed notes are an integral part of
these financial statements.
Page 6
DORCHESTER MINERALS, L.P.
(A Delaware Limited Partnership)
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION: Dorchester Minerals, L.P. is a publicly
traded Delaware limited partnership that commenced operations on January 31,
2003, upon the combination of Dorchester Hugoton, Ltd., which was a publicly
traded Texas limited partnership, and Republic Royalty Company and Spinnaker
Royalty Company, L.P., both of which were privately held Texas partnerships. The
combination was accounted for using the purchase method of accounting.
The condensed financial statements reflect all adjustments (consisting
only of normal and recurring adjustments unless indicated otherwise) that are,
in the opinion of management, necessary for the fair presentation of the
Partnership's financial position and operating results for the interim period.
Interim period results are not necessarily indicative of the results for the
calendar year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information. Per-unit information is
calculated by dividing the income applicable to holders of the Partnership's
common units by the weighted average number of units outstanding.
2. CONTINGENCIES: In January 2002, some individuals and an association
called Rural Residents for Natural Gas Rights, referred to as RRNGR, sued
Dorchester Hugoton, Ltd., along with several other operators in Texas County,
Oklahoma. Dorchester Minerals Operating LP, owned directly and indirectly by our
general partner, now owns and operates the properties formerly owned by
Dorchester Hugoton. These properties contribute a major portion of the Net
Profits Interests amounts paid to the Partnership. The suit is currently pending
in the District Court and discovery is partially completed by the plaintiffs and
defendants. The individuals and RRNGR consist primarily of Texas County,
Oklahoma residents who, in residences located on leases use natural gas from
gas wells located on the same leases, at their own risk, free of cost. The
plaintiffs seek declaration that their domestic gas use is not limited to stoves
and inside lights and is not limited to a principal dwelling as provided in the
oil and gas lease agreements with defendants in the 1930s to the 1950s.
Plaintiffs' claims against defendants include failure to prudently operate
wells, violation of rights to free domestic gas, and fraud. Plaintiffs also seek
certification of class action against defendants. On October 1, 2004, the
plaintiffs severed claims against Dorchester Minerals Operating LP regarding
royalty underpayments. Dorchester Minerals Operating LP believes plaintiffs'
claims, including severed claims, are completely without merit. Based upon past
measurements of such domestic gas usage, Dorchester Minerals Operating LP
believes the domestic gas damages sought by plaintiffs to be minimal. An adverse
decision could reduce amounts the Partnership receives from the Net Profits
Interests.
The Partnership and Dorchester Minerals Operating LP are involved in
other legal and/or administrative proceedings arising in the ordinary course of
their businesses, none of which have predictable outcomes and none of which are
believed to have any significant effect on financial position or operating
results.
3. DISTRIBUTIONS TO HOLDERS OF COMMON UNITS: Since the Partnership's
combination on January 31, 2003, unitholder cash distributions per common unit
have been or will be:
Year Quarter Record Date Payment Date Amount
---- ------------- ---------------- ---------------- ---------
2003 1st (partial) April 28, 2003 May 8, 2003 $0.206469
2003 2nd July 28, 2003 August 7, 2003 $0.458087
2003 3rd October 31, 2003 November 10, 2003 $0.422674
2003 4th January 26, 2004 February 5, 2004 $0.391066
2004 1st April 30, 2004 May 10, 2004 $0.415634
2004 2nd July 26, 2004 August 5, 2004 $0.415315
2004 3rd October 25, 2004 November 4, 2004 $0.476196
2004 4th February 1, 2005 February 11, 2005 $0.426076
2005 1st April 29, 2005 May 9, 2005 $0.481242
2005 2nd July 25, 2005 August 4, 2005 $0.514542
2005 3RD October 24, 2005 November 3, 2005 $0.577287
Distributions since the third quarter of 2004 have been paid on
28,240,431 units; previous distributions were paid on 27,040,431 units. The
next cash distribution will be paid by February 15, 2006.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We own producing and non-producing mineral, royalty, overriding royalty,
net profits and leasehold interests. We refer to these interests as the Royalty
Properties. We currently own Royalty Properties in 585 counties and parishes
in 25 states.
Dorchester Minerals Operating LP, a Delaware limited partnership owned
directly and indirectly by our general partner, holds the working interest
properties previously owned by Dorchester Hugoton and a minor portion of mineral
interest properties previously owned by Republic and Spinnaker. We refer to
Dorchester Minerals Operating LP as the "operating partnership." We directly and
indirectly own a 96.97% net profits overriding royalty interest in these
properties. We refer to our net profits overriding royalty interest in these
properties as the Net Profits Interests. After the close of each month, we
receive a payment equaling 96.97% of the net proceeds actually received during
that month from the properties subject to the Net Profits Interests.
In accordance with our partnership agreement we have the continuing
right to create additional net profits interests by transferring properties to
the operating partnership subject to the reservation of a Net Profits Interest
identical to the Net Profits Interests created upon our formation. Net profits
overriding royalty interests do not generate unrelated business taxable income.
One such interest, called the 2003/2004 NPI, resulted from transferring various
properties to the operating partnership subject to a Net Profits Interest. As of
September 30, 2005 cumulative costs and expenses attributable to the 2003/2004
NPI properties exceeded cumulative revenues by $683,000, an amount which we
refer to as the 2003/2004 NPI deficit. The 2005 NPI deficit was $66,000. Our
financial statements do not reflect activity attributable to properties subject
to Net Profits Interests that are in a deficit status. Consequently, revenues,
expenses, production sales volumes and prices set forth herein do not reflect
amounts attributable to the 2003/2004 NPI or the 2005 NPI properties;
information concerning acreage owned and drilling activity attributable to these
properties is included herein.
Commodity Price Risks
Our profitability is affected by volatility in prevailing oil and
natural gas prices. Oil and natural gas prices have been subject to significant
volatility in recent years in response to changes in the supply and demand for
oil and natural gas in the market and general market volatility.
Page 8
Results of Operations
Three and Nine Months Ended September 30, 2005 as compared to Three and Nine
Months Ended September 30, 2004
Normally, our period-to-period changes in net earnings and cash flows
from operating activities are principally determined by changes in crude oil
and natural gas sales volumes and prices. Our portion of oil and natural gas
sales and weighted average prices were:
Three Months Ended Nine Months Ended
----------------------- -----------------
September 30, June 30, September 30,
-------------- --------- ----------------
Accrual Basis Sales Volumes: 2005 2004 2005 2005 2004
- ---------------------------- ------- ------- ------- ------- ------
Net Profits Interests Gas Sales (mmcf) 1,228 1,343 1,215 3,666 4,042
Net Profits Interests Oil Sales (mbbls) 2 2 3 7 6
Royalty Properties Gas Sales (mmcf) 1,097 831 974 2,961 2,541
Royalty Properties Oil Sales (mbbls) 94 73 90 264 220
Weighted Average Sales Price:
Net Profits Interests Gas Sales ($/mcf) $ 8.49 $ 5.42 $ 6.64 $ 7.10 $ 5.56
Net Profits Interests Oil Sales ($/bbl) $57.20 $38.14 $47.31 $48.84 $34.16
Royalty Properties Gas Sales ($/mcf) $ 8.22 $ 5.89 $ 6.19 $ 6.71 $ 5.40
Royalty Properties Oil Sales ($/bbl) $57.78 $40.10 $48.70 $50.04 $36.17
Production Costs Deducted
Under the Net Profits
Interests ($/mcfe) (1) $ 1.48 $ 1.21 $ 1.45 $ 1.40 $ 1.18
________________________________________________________
(1) Provided to assist in determination of revenues; applies only to Net
Profit Interest sales volumes and prices.
Oil sales volumes attributable to our Royalty Properties during the
third quarter increased 29% from 73 mbbls in 2004 to 94 mbbls in 2005. Oil
sales volumes attributable to our Royalty Properties during the first nine
months of 2005 increased 20% from 220 mbbls in 2004 to 264 mbbls in 2005. The
increases in oil sales volumes are primarily attributable to the effects of the
acquisition consummated at the end of the third quarter of 2004 and to increased
production from the Little Cedar Creek Fieldwide Unit in Conecuh County, Alabama
and the T-Patch Field in Starr County, Texas (see discussion below).
Natural gas sales volumes attributable to our Royalty Properties during
the third quarter increased 32% from 831 mmcf in 2004 to 1,097 mmcf in 2005.
Natural gas sales volumes attributable to our Royalty Properties during the
first nine months of 2005 increased 17% from 2,541 in 2004 to 2,961 mmcf in
2005. The increases in gas sales volumes are primarily attributable to the
effects of the acquisition consummated at the end of the third quarter of 2004
and to increased production from the T-Patch Field in Starr County, Texas
(see discussion below).
We have not identified any specific impact of Hurricanes Katrina or
Rita on our Royalty Properties other than to production from the Port Hudson
Field located near Baton Rouge, Louisiana. We have been advised by the operator
of this property that production was shut-in or curtailed for the entire month
of September 2005. We have further been advised that production from this
property has not returned, and may not return to levels observed prior to the
September shut-in and curtailment. As a royalty owner, we are unable to estimate
any other impact that pipeline or processing facility curtailments may have on
sales volumes from our Royalty Properties, although we expect any such
curtailments to be immaterial and temporary. Consequently, we estimate total
net oil and gas sales volumes attributable to our Royalty Properties were
reduced by less than 1.0% and 1.0%, respectively, due to the effects of
Hurricanes Katrina and Rita during the third quarter.
Oil sales volumes attributable to our Net Profits Interests during the
third quarter and first nine months of 2005 were virtually unchanged when
compared to the same periods of 2004. Natural gas sales volumes attributable to
our Net Profits Interests during the third quarter and first nine months of 2005
decreased from the same periods of 2004. Third quarter sales of 1,228 mmcf
during 2005 were 9% less than 1,343 mmcf during 2004. First nine months sales
of 3,666 mmcf during 2005 were 9% less than 4,042 mmcf during 2004. Decreases
were a result of natural reservoir decline. Natural gas and crude oil sales
volumes and prices from the 2003/2004 NPI and the 2005 NPI properties are
excluded from the above table. See "Overview" above.
Our Net Profits Interests properties are generally located in the
Mid-Continent, Permian Basin and Rocky Mountain regions and as such were not
materially affected by Hurricanes Katrina and Rita. We are not aware of any
curtailments experienced by our Net Profits Interests due to temporary
transportation or processing disruptions.
9
Weighted average oil sales prices attributable to the Partnership's
interest in Royalty Properties increased 44% from $40.10 per bbl during the
third quarter of 2004 to $57.78 per bbl during the third quarter of 2005 and 38%
from $36.17 per bbl during the first nine months of 2004 to $50.04 per bbl
during the first nine months of 2005. Similarly, third quarter weighted average
Partnership natural gas sales prices from Royalty Properties increased 40% from
$5.89 per mcf during 2004 to $8.22 per mcf during 2005. Nine months ended
September 30 weighted average Partnership natural gas sales prices increased 24%
from $5.40 per mcf during 2004 to $6.71 per mcf during 2005. Both oil and
natural gas price increases resulted from changing market conditions.
Third quarter weighted average oil sales prices from the Net Profits
Interests' properties increased 50% from $38.14 per bbl in 2004 to $57.20 per
bbl in 2005. Similarly, the first nine months' Net Profits Interests' oil sales
prices increased 43% from $34.16 per bbl in 2004 to $48.84 per bbl in 2005.
Weighted average natural gas sales prices attributable to the Net Profits
Interests increased during the third quarter and first nine months of 2005
compared to the same periods of 2004. Third quarter natural gas sales prices of
$8.49/mcf in 2005 were 57% greater than $5.42/mcf in 2004. First nine month
2005 prices increased 28% to $7.10/mcf from $5.56/mcf in 2004. Changing market
conditions resulted in the increased oil and natural gas sales prices.
In an effort to provide the reader with information concerning prices
of oil and gas sales that correspond to our quarterly distributions, management
calculates the weighted average price by dividing gross revenues received by the
net volumes of the corresponding product without regard to the timing of the
production to which such sales may be attributable. This "indicated price"
does not necessarily reflect the contract terms for such sales and may be
affected by transportation costs, location differentials, and quality and
gravity adjustments. While the relationship between the Partnership's cash
receipts and the timing of the production of oil and gas may be described
generally, actual cash receipts may be materially impacted by purchasers'
release of suspended funds and by prior period adjustments.
Cash receipts attributable to the Partnership's Net Profits Interests
during the third quarter totaled $6,760,000. These receipts generally reflect
oil and gas sales from the properties underlying the Net Profits Interests
during May through July 2005. The weighted average indicated prices for oil and
gas sales during the third quarter attributable to the Net Profits Interests
were $47.76/bbl and $6.78/mcf, respectively.
Cash receipts attributable to the Partnership's Royalty Properties
during the third quarter totaled $10,429,000. These receipts generally reflect
oil sales during June through August 2005 and gas sales during May through
July 2005. The weighted average indicated prices for oil and gas sales during
the third quarter attributable to the Royalty Properties were $53.03/bbl and
$6.37/mcf, respectively.
Our third quarter net operating revenues increased 64% from $14,433,000
during 2004 to $23,653,000 during 2005. Net operating revenues for the first
nine months of 2005 increased 33% from $41,254,000 during 2004 to $55,012,000.
Both such quarterly and nine-month increases resulted primarily from increased
natural gas prices and crude oil prices.
Costs and expenses increased 11% from $6,590,000 during the third
quarter of 2004 to $7,299,000 during the third quarter of 2005, while nine
months ended September 30 costs and expenses increased 6% from $19,583,000
during 2004 to $20,734,000 during 2005. Such increases primarily resulted from
increased depletion and amortization, and increased production and ad valorem
taxes associated with increased revenues.
Other income (expense) was $49,000 during the three month period ended
September 30, 2005 compared to $50,000 during the same period of 2004. During
2005 increased investment income was offset by expenses of $57,000 attributable
to evaluation of property acquisitions which were not consummated. Other income
(expense) for the nine month period ended September 30, 2005 was $192,000
compared to $181,000 for the same period of 2004. The first nine months of 2004
include expenses of $87,000 attributable to evaluation of property acquisitions
which were not consummated. Investment income increased 188% from $33,000 in
the third quarter of 2004 to $95,000 in the same period of 2005, and increased
217% from $69,000 in the first nine months of 2004 to $219,000 in the same
period of 2005 as a result of increased cash flows and higher interest rates.
Depletion and amortization increased 11% during the three month period
ending September 30 and 5% during the nine month period ended September 30. The
increases from $5,103,000 and $15,426,000 during 2004, respectively, to
$5,659,000 and $16,161,000 during 2005, resulted from increased production
offset by increased reserves due to the addition of properties to the base at
the end of the third quarter of 2004 and recent drilling activity.
10
We received cash payments in the amount of $488,000 from various
sources during the third quarter of 2005 including lease bonuses attributable to
14 leases and pooling elections located in nine counties and parishes in two
states. These leases reflected royalty terms ranging up to 30% and lease bonuses
ranging up to $800/acre.
We received division orders for, or otherwise identified, 59 new wells
completed on our Royalty Properties and Net Profit Interests in 29 counties and
parishes in seven states during the third quarter of 2005. The operating
partnership elected to participate in eighteen wells to be drilled on our Net
Profits Interests located in four counties in three states. Selected new wells
and the royalty interests owned therein by the operating partnership are
summarized in the following table:
Test Rates
Ownership per day
------------ -------------
County/ Gas, Oil,
State Parish Operator Well Name WI(1) NRI(1) mcf bbls
- ----- ------- -------- ----------------- ---- ------ ------ -----
Royalty Properties
- --------------------
Oklahoma Beckham St. Mary William 3-1 -- 1.2% 2,179 87
Oklahoma Custer Apache Nellie McConnell -- 1.3% 1,615 10
Texas Starr EOG Southwest Texas Corp 4 -- 5.1% 1,376 57
Texas Starr EOG Southwest Texas Corp 5 -- 5.1% 4,344 132
Texas Crockett Bluegrass Simpson Canyon 3045 -- 1.5% 175 290
Texas Tyler Anadarko Wheat Mineral Trust 2 -- 1.5% 2,832 548
Net Profits Interests
- ---------------------
Oklahoma Roger Mills Chesapeake Fowler 3-6 1.5% 1.5% 2,679 40
Oklahoma Roger Mills Chesapeake Alexander 1-30 1.5% 1.5% 2,017 13
Oklahoma Roger Mills JMA Hutson Farms 2-18 1.6% 1.6% 6,113 12
____________________________________
(1) WI and NRI mean working interest and net revenue interest, respectively.
T-Patch (Reklaw OSO) Field, Starr County, Texas - The operator of this
property, EOG Resources, Inc. has filed completion and production reports
with the Texas Railroad Commission for some of the wells located in this field.
Seven wells have been drilled and completed on lands in which we own a 5.12%
net revenue interest. One additional well has been proposed to be drilled to
a total depth of 10,000 feet. We received $181,725 during the first quarter of
2005 attributable to production during December 2004 and January 2005 from
the first two wells. We received $765,527 during the second quarter of 2005
attributable to production during February, March and April 2005 from the
first five wells. We received $1,008,930 during the third quarter attributable
to production during May, June and July, 2005 from the first six wells.
Management has observed significant variance in flow rates and production
declines from these wells and cautions the reader from estimating future
performance based on the limited history available.
Third quarter net earnings allocable to common units increased 108%
from $7,682,000 during 2004 to $15,942,000 during 2005. First nine month common
unit net earnings increased 57% from $21,295,000 during 2004 to $33,524,000
during 2005. Increased crude oil and natural gas sales prices primarily
resulted in increased net earnings of common units.
Net cash provided by operating activities increased 28% from
$13,318,000 during the third quarter of 2004 to $17,018,000 during the third
quarter of 2005. Similarly, net cash from operating activities for the first
nine months increased 26% from $36,836,000 in 2004 to $46,526,000 in 2005. The
principal reason for such increases is increased crude oil and natural gas sales
prices.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
Our primary sources of capital are our cash flow from the Net
Profits Interests and the Royalty Properties. Our only cash requirements are the
distributions to our unitholders, the payment of oil and natural gas production
and property taxes not otherwise deducted from gross production revenues and
general and administrative expenses incurred on our behalf and properly
allocated in accordance with our partnership agreement. Since the distributions
to our unitholders are, by definition, determined after the payment of all
expenses actually paid by us, the only cash requirements that may create
liquidity concerns for us are the payments of expenses. Since most of these
expenses vary directly with oil and natural gas prices and sales volumes, we
anticipate that sufficient funds will be available at all times for payment of
these expenses. See Note 3 of the Notes to the Condensed Financial Statements
for the amounts and dates of cash distributions to unitholders.
11
We are not directly liable for the payment of any exploration,
development or production costs. We do not have any transactions, arrangements
or other relationships that could materially affect our liquidity or the
availability of capital resources. We have not guaranteed the debt of any other
party, nor do we have any other arrangements or relationships with other
entities that could potentially result in unconsolidated debt.
Pursuant to the terms of our Partnership Agreement, we cannot incur
indebtedness other than trade payables, (i) in excess of $50,000 in the
aggregate at any given time or (ii) which would constitute "acquisition
indebtedness" (as defined in Section 514 of the Internal Revenue Code of 1986,
as amended).
Liquidity and Working Capital
Cash and cash equivalents totaled $17,526,000 at September 30, 2005 and
$12,365,000 at December 31, 2004.
Expenses and Capital Expenditures
The operating partnership does not currently anticipate drilling
additional wells as a working interest owner in the Fort Riley zone or
the Council Grove formations or elsewhere in the Oklahoma properties previously
owned by Dorchester Hugoton. Successful activities by others in these formations
or other developments underway could prompt a reevaluation of this position. Any
such drilling is estimated to cost $250,000 to $300,000 per well. The operating
partnership anticipates continuing additional fracture treating in the Oklahoma
properties previously owned by Dorchester Hugoton but is unable to predict the
cost as a specific engineering study is required for each fracture treatment.
Such activities by the operating partnership could influence the amount we
receive from the Net Profits Interests.
The operating partnership owns and operates the wells, pipelines and
gas compression and dehydration facilities located in Kansas and Oklahoma
previously owned by Dorchester Hugoton. The operating partnership anticipates
gradual increases in expenses as repairs to these facilities become more
frequent, and anticipates gradual increases in field operating expenses as
reservoir pressure declines. The operating partnership does not anticipate
incurring significant expense to replace these facilities at this time. These
capital and operating costs are reflected in the Net Profit Interests payments
we receive from the operating partnership.
In 1998, Oklahoma regulations removed production quantity restrictions
in the Guymon-Hugoton field, and did not address efforts by third parties to
persuade Oklahoma to permit infill drilling in the Guymon-Hugoton field. Both
infill drilling and removal of production limits could require considerable
capital expenditures. The outcome and the cost of such activities are
unpredictable. Such activities by the operating partnership could influence the
amount we receive from the Net Profits Interests. No additional compression
affecting the wells formerly owned by Dorchester Hugoton has been installed
since 2000 by operators on adjoining acreage. The operating partnership believes
it now has sufficient field compression and permits for vacuum operation to
remain competitive with adjoining operators for the foreseeable future.
Critical Accounting Policies
We utilize the full cost method of accounting for costs related to
our oil and natural gas properties. Under this method, all such costs
(productive and nonproductive) are capitalized and amortized on an aggregate
basis over the estimated lives of the properties using the units-of-production
method. These capitalized costs are subject to a ceiling test, however, which
limits such pooled costs to the aggregate of the present value of future net
revenues attributable to proved oil and natural gas reserves discounted at 10%
plus the lower of cost or market value of unproved properties. In accordance
with applicable accounting rules, Dorchester Hugoton was deemed to be the
accounting acquiror of the Republic and Spinnaker assets. Our Partnership's
acquisition of these assets was recorded at a value based on the closing price
of Dorchester Hugoton's common units immediately prior to consummation of the
combination transaction, subject to certain adjustments. Consequently, the
acquisition of these assets was recorded at values that exceed the historical
book value of these assets prior to consummation of the combination transaction.
Our Partnership did not assign any book or market value to unproved properties,
including nonproducing royalty, mineral and leasehold interests. Oil and gas
properties are evaluated using the full cost ceiling test at the end of each
quarter.
The discounted present value of our proved oil and natural gas reserves
is a major component of the ceiling test calculation and requires many
subjective judgments. Estimates of reserves are forecasts based on engineering
and geological analyses. Different reserve engineers may reach different
conclusions as to estimated quantities of
12
natural gas reserves based on the same information. Our reserve estimates are
prepared by independent consultants. The passage of time provides more
qualitative information regarding reserve estimates, and revisions are made to
prior estimates based on updated information. However, there can be no assurance
that more significant revisions will not be necessary in the future. Significant
downward revisions could result in an impairment representing a non-cash charge
to earnings. In addition to the impact on calculation of the ceiling test,
estimates of proved reserves are also a major component of the calculation of
depletion.
While the quantities of proved reserves require substantial judgment,
the associated prices of oil and natural gas reserves that are included in the
discounted present value of our reserves are objectively determined. The ceiling
test calculation requires use of prices and costs in effect as of the last day
of the accounting period, which are generally held constant for the life of the
properties. As a result, the present value is not necessarily an indication of
the fair value of the reserves. Oil and natural gas prices have historically
been volatile and the prevailing prices at any given time may not reflect our
Partnership's or the industry's forecast of future prices.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. For example, estimates of uncollected
revenues and unpaid expenses from royalties and net profits interests in
properties operated by non-affiliated entities are particularly subjective due
to inability to gain accurate and timely information. Therefore, actual results
could differ from those estimates.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information provides quantitative and qualitative
information about our potential exposures to market risk. The term "market risk"
refers to the risk of loss arising from adverse changes in oil and natural
gas prices, interest rates and currency exchange rates. The disclosures
are not meant to be precise indicators of expected future losses, but rather
indicators of reasonably possible losses.
Market Risk Related to Oil and Natural Gas Prices
Essentially all of our assets and sources of income are from the Net
Profits Interests and the Royalty Properties, which generally entitle us to
receive a share of the proceeds based on oil and natural gas production from
those properties. Consequently, we are subject to market risk from fluctuations
in oil and natural gas prices. Pricing for oil and natural gas production has
been volatile and unpredictable for several years. We do not anticipate entering
into speculative or financial hedging activities intended to reduce our exposure
to oil and natural gas price fluctuations.
Absence of Interest Rate and Currency Exchange Rate Risk
We are prohibited from incurring any debt, other than trade debt as
discussed previously in this document. Therefore, we do not expect interest rate
risk to be material to us. We do not anticipate engaging in transactions in
foreign currencies which could expose us to foreign currency related
market risk.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our Partnership's
principal executive officer and principal financial officer carried out an
evaluation of the effectiveness of our disclosure controls and procedures. Based
on their evaluation, they have concluded that our Partnership's disclosure
controls and procedures effectively ensure that the information required to be
disclosed in the reports the Partnership files with the Securities and Exchange
Commission is recorded, processed, summarized and reported, within the time
periods specified by the Securities and Exchange Commission.
Changes in Internal Controls
There were no changes in our Partnership's internal controls or in
other factors that have materially affected, or are reasonably likely to
materially affect, our Partnership's internal controls subsequent to the date of
their evaluation of our disclosure controls and procedures.
Page 13
PART II
Item 1. LEGAL PROCEEDINGS
None.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
See the attached Index to Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DORCHESTER MINERALS, L.P.
By: Dorchester Minerals Management LP,
its General Partner,
By: Dorchester Minerals Management GP LLC,
its General Partner
/s/ William Casey McManemin
--------------------------------
William Casey McManemin
Date: November 3, 2005 Chief Executive Officer
/s/ H.C. Allen, Jr.
---------------------------------
H.C. Allen, Jr.
Date: November 3, 2005 Chief Financial Officer
Page 14
INDEX TO EXHIBITS
Number Description
3.1 Certificate of Limited Partnership of Dorchester Minerals, L.P.
(incorporated by reference to Exhibit 3.1 to Dorchester Minerals'
Registration Statement on Form S-4, Registration Number 333-88282)
3.2 Amended and Restated Agreement of Limited Partnership of Dorchester
Minerals, L.P. (incorporated by reference to Exhibit 3.2 to Dorchester
Minerals' Report on Form 10-K filed for the year ended
December 31, 2002)
3.3 Certificate of Limited Partnership of Dorchester Minerals Management LP
(incorporated by reference to Exhibit 3.4 to Dorchester Minerals
Registration Statement on Form S-4, Registration Number 333-88282)
3.4 Amended and Restated Agreement of Limited Partnership of Dorchester
Minerals Management LP (incorporated by reference to Exhibit 3.4 to
Dorchester Minerals' Report on Form 10-K for the year ended December 31,
2002)
3.5 Certificate of Formation of Dorchester Minerals Management GP LLC
(incorporated by reference to Exhibit 3.7 to Dorchester Minerals'
Registration Statement on Form S-4, Registration Number 333-88282)
3.6 Amended and Restated Limited Liability Company Agreement of Dorchester
Minerals Management GP LLC (incorporated by reference to Exhibit 3.6 to
Dorchester Minerals' Report on Form 10-K for the year ended December 31,
2002)
3.7 Certificate of Formation of Dorchester Minerals Operating GP LLC
(incorporated by reference to Exhibit 3.10 to Dorchester Minerals'
Registration Statement on Form S-4, Registration Number 333-88282)
3.8 Limited Liability Company Agreement of Dorchester Minerals
Operating GP LLC (incorporated by reference to Exhibit 3.11 to
Dorchester Minerals' Registration Statement on Form S-4, Registration
Number 333-88282)
3.9 Certificate of Limited Partnership of Dorchester Minerals Operating LP
(incorporated by reference to Exhibit 3.12 to Dorchester Minerals'
Registration Statement on Form S-4, Registration Number 333-88282)
3.10 Amended and Restated Agreement of Limited Partnership of Dorchester
Minerals Operating LP. (incorporated by reference to Exhibit 3.10 to
Dorchester Minerals' Report on Form 10-K for the year ended December 31,
2002)
3.11 Certificate of Limited Partnership of Dorchester Minerals Oklahoma LP
(incorporated by reference to Exhibit 3.11 to Dorchester Minerals'
Report on Form 10-K for the year ended December 31, 2002)
3.12 Agreement of Limited Partnership of Dorchester Minerals Oklahoma LP
(incorporated by reference to Exhibit 3.12 to Dorchester Minerals'
Report on Form 10-K for the year ended December 31, 2002)
3.13 Certificate of Incorporation of Dorchester Minerals Oklahoma GP, Inc.
(incorporated by reference to Exhibit 3.13 to Dorchester Minerals'
Report on Form 10-K for the year ended December 31, 2002)
3.14 Bylaws of Dorchester Minerals Oklahoma GP, Inc. (incorporated by
reference to Exhibit 3.14 to Dorchester Minerals' Report on Form 10-K
for the year ended December 31, 2002)
3.15 Certificate of Limited Partnership of Dorchester Minerals Acquisition LP
(incorporated by reference to Exhibit 3.15 to Dorchester Minerals'
Report on Form 10-K for the year ended December 31, 2004)
3.16 Agreement of Limited Partnership of Dorchester Minerals Acquisition LP
(incorporated by reference to Exhibit 3.16 to Dorchester Minerals'
Report on Form 10-Q for the quarter ended September 30, 2004)
3.17 Certificate of Incorporation of Dorchester Minerals Acquisition GP, Inc.
(incorporated by reference to Exhibit 3.17 to Dorchester Minerals'
Report on Form 10-Q for the quarter ended September 30, 2004)
3.18 Bylaws of Dorchester Minerals Acquisition GP, Inc. (incorporated by
reference to Exhibit 3.18 to Dorchester Minerals' Report on Form 10-Q
for the quarter ended September 30, 2004)
31.1 Certification of Chief Executive Officer of the Partnership pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer of the Partnership pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer of the Partnership pursuant
to 18 U.S.C. Sec. 1350
32.2 Certification of Chief Financial Officer of the Partnership pursuant
to 18 U.S.C. Sec. 1350 (contained within Exhibit 32.1 hereto)
Page 15
Exhibit 31.2
I, H.C. Allen, Jr., Chief Financial Officer of Dorchester Minerals
Management GP LLC, General Partner of Dorchester Minerals Management LP, General
Partner of Dorchester Minerals, L.P., (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dorchester Minerals,
L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.
c) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the Registrant's auditors and the audit committee of the Registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
/s/ H.C. Allen, Jr.
-----------------------------
H.C. Allen, Jr.
Chief Financial Officer
Date: November 3, 2005
Exhibit 31.1
Certifications
I, William Casey McManemin, Chief Executive Officer of Dorchester Minerals
Management GP LLC, General Partner of Dorchester Minerals Management LP, General
Partner of Dorchester Minerals, L.P., (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dorchester Minerals,
L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.
c) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the Registrant's auditors and the audit committee of the Registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
/s/ William Casey McManemin
-----------------------------
William Casey McManemin
Chief Executive Officer
Date: November 3, 2005
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Quarterly Report of Dorchester
Minerals, L.P., (the "Partnership") on Form 10-Q for the period ended
September 30, 2005 (the "Report"), each of the undersigned officers of
Dorchester Minerals Management GP LLC, General Partner of Dorchester Minerals
Management LP, General Partner of the Partnership, hereby certifies that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Partnership.
/s/ William Casey McManemin
----------------------------
William Casey McManemin
Chief Executive Officer
Date: November 3, 2005
/s/ H.C. Allen, Jr.
----------------------------
H.C. Allen, Jr.
Chief Financial Officer
Date: November 3, 2005