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With oil prices now reaching the mid-$80s for 2022 strip, Dorchester Minerals (DMLP) looks capable of providing an average distribution of $0.70+ per quarter during 2022. At current production levels, a change in oil prices of around $10 to $11 per barrel affects Dorchester’s quarterly distribution by around $0.10 per unit.
Although Dorchester’s near-term distributions should be quite good, I am moving to a neutral outlook on Dorchester at its current unit price since I have a more conservative outlook on longer-term oil prices. Dorchester appears reasonably priced for a longer-term $70 WTI oil scenario currently.
Q4 2021 Distribution
Dorchester Minerals announced a healthy Q4 2021 cash distribution of $0.639287 per common unit, which was in-line with my expectations. It mentioned that around 82% of its receipts related to its royalty properties (which accounts for around 82% of its overall revenues) reflected oil sales during September 2021 to November 2021 and gas sales during August 2021 to October 2021. As well, 77% of its receipts related to its Net Profits Interests (which accounts for around 16% of its overall revenues) reflected oil and gas sales for the August 2021 to October 2021 period.
Oil and natural gas prices weakened a bit to end 2021, with December 2021 NYMEX oil and gas prices averaging around $71.71 and $3.76 respectively. However, the subsequent rebound in oil and gas prices to start 2022 should result in Q1 2022’s distribution being at least a bit higher than Q4 2021. I’d estimate that Q1 2022’s distribution should be in the $0.65 to $0.70 range per common unit.
Potential Distribution At Mid-$80s Oil In 2022
Later in 2022, Dorchester’s distribution should increase further on Q1 2022’s estimated distribution of $0.65 to $0.70 per common unit. The current WTI oil strip for 2022 is in the mid-$80s, which is a level at which Dorchester should be able to average a quarterly distribution of $0.70+ per unit (for the rest of 2022).
This assumes minimal organic production growth from Q3 2021 levels, and that its November acquisition doesn’t materially affect its value-weighted production levels per common unit.
Dorchester does not have any hedges, so it is fully affected by any changes in commodity prices.
Sensitivity Of Distribution To Commodity Prices
At recent production levels, a roughly $10 to $11 change in WTI oil prices would change Dorchester’s quarterly distribution by around $0.10 per unit. It would take a roughly $3 change in natural gas prices to have the same $0.10 per unit impact on Dorchester’s quarterly distribution.
Dorchester’s production was roughly 62% oil (before its November acquisition). Since oil has a higher value per BOE, it contributes roughly a mid-80s percent share of Dorchester’s revenues. As a result, Dorchester’s results and distribution are mostly influenced by oil prices.
It also appears that a 13% change in total production at current prices would change Dorchester’s quarterly distribution by around $0.10 per unit as well.
Thus Dorchester’s distribution should be approximately the same in a situation with mid-$80s WTI oil and current production levels as it would be in a situation with mid-$70s WTI oil and around a 13% production increase from current levels.
Notes On Valuation
In a long-term $70 WTI oil and $3.50 natural gas scenario, I estimate that Dorchester would be worth approximately $22.50 to $23.00 per unit now. This assumes current mid-$80s oil strip for 2022 and then those longer-term oil and gas prices after that. This also assumes that Dorchester’s production remains near current levels.
At long-term $75 WTI oil, Dorchester’s estimated value would increase to around $25 per unit. A similar estimated value could be achieved with long-term $70 WTI oil and around a 6% to 7% increase in production from current levels.
Since I am reasonably conservative in my outlook on longer-term commodity prices (typically using a higher-end of $70 for WTI oil prices), I am moving to a neutral outlook on Dorchester at its current price of $23 per share.
Conclusion
Dorchester Minerals should offer a nice quarterly distribution of $0.70+ per unit later in 2022 based on current strip prices. A scenario with mid-$80s WTI oil generally supports a $0.70+ quarterly distribution, while a roughly $10 to $11 change in oil prices or 13% change in total production would also affect Dorchester’s quarterly distribution by around $0.10 per unit.
Longer-term, I am generally valuing companies based on $70 WTI oil or less, so Dorchester appears fairly priced at its current $23 per unit.
