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 March 31, 2004
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)
3738 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
As of May 5, 2004, 27,040,431 common units of partnership interest were
outstanding.
Page 1
TABLE OF CONTENTS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS................................3
PART I.........................................................................3
ITEM 1. FINANCIAL INFORMATION..........................................3
CONDENSED BALANCE SHEETS AS OF MARCH 31, 2004 (UNAUDITED) AND
DECEMBER 31, 2003......................................................4
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003 (UNAUDITED)....................................5
CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31,2004 AND 2003 (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.......................................................................13
ITEM 1. LEGAL PROCEEDINGS..................................................13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................13
ITEM 5. OTHER INFORMATION..................................................14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................14
SIGNATURES....................................................................14
INDEX TO EXHIBITS.............................................................15
CERTIFICATIONS................................................................16
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.
These forward-looking statements are made 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 amounts and results of
operations of Dorchester Minerals included in these financial statements as
historical amounts prior to February 1, 2003 reflect the results of operations
of Dorchester Hugoton. The effect of the combination is reflected in the balance
sheet and in the results of operations and cash flows since January 31, 2003.
The combination was accounted for using the purchase method of accounting. 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.
Page 3
DORCHESTER MINERALS, L.P.
(A Delaware Limited Partnership)
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2004 2003
---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 11,715 $ 10,881
Trade receivables............................... 8,064 7,658
Note receivable - related party................. 192 205
Prepaid expenses ............................... 113 69
-------- --------
Total current assets........................ 20,084 18,813
Oil and gas properties - at cost (full cost method).. 268,194 268,189
Less accumulated depletion ................... (93,352) (88,051)
-------- --------
Net oil and natural gas properties............ 174,842 180,138
-------- --------
Total assets................................ $194,926 $198,951
======== ========
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities.. $ 689 $ 512
-------- --------
Total current liabilities.................. 689 512
Commitments and contingencies - -
Partnership capital:
General partner................................. 8,134 8,246
Unitholders..................................... 186,103 190,193
-------- --------
Total partnership capital.................. 194,237 198,439
-------- --------
Total liabilities and partnership capital............ $194,926 $198,951
======== ========
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
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------
2004 2003
-------- --------
Net operating revenues:
Net profits interests........................... $ 5,994 $ 4,874
Natural gas sales............................... - 2,401
Royalties....................................... 7,039 6,555
Other........................................... 408 126
-------- --------
Total net operating revenues.................... 13,441 13,956
Cost and expenses:
Operating, including production taxes........... 583 782
Depreciation, depletion and amortization........ 5,301 4,971
General and administrative...................... 842 907
Management fees................................. - 524
Combination costs and related expenses.......... - 2,907
-------- --------
Total costs and expenses........................ 6,726 10,091
-------- --------
Operating income..................................... 6,715 3,865
Other income (expense)
Investment income............................... 17 21
Other income (expense), net..................... (81) 57
-------- --------
Total other income (expense).................... (64) 78
-------- --------
Net earnings......................................... $ 6,651 $ 3,943
======== ========
Allocation of net earnings
General partner................................. $ 166 $ 131
======== ========
Unitholders..................................... $ 6,485 $ 3,812
======== ========
Net earnings per common unit (in dollars)............ $ 0.24 $ 0.18
======== ========
Weighted average common units outstanding (000's).... 27,040 21,608
======== ========
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
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------
2004 2003
-------- --------
Net cash provided by operating activities. ........... $ 11,777 $ 3,374
-------- --------
Cash flows from investing activities:
Cash received in combination................... - 68
Capital expenditures........................... (91) (3)
-------- --------
Net cash provided by (used in) investing activities... (91) 65
-------- --------
Cash flows from financing activities:
Distributions paid to partners................ (10,852) (20,613)
-------- --------
Increase (decrease) in cash and cash equivalents...... 834 (17,174)
Cash and cash equivalents at January 1,............... 10,881 23,129
-------- --------
Cash and cash equivalents at March 31,................ $ 11,715 $ 5,955
======== ========
Non cash investing and financing activities:
Acquisition of assets for units
Oil and gas properties...................... $ - $ 233,466
Receivables................................. - 3,660
Cash........................................ - 68
-------- ---------
Value assigned to assets acquired........ $ - $ 237,194
======== =========
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. (the "Partnership") is
a publicly traded Delaware limited partnership that was formed in December 2001
in connection with the combination, which was completed on January 31, 2003, of
Dorchester Hugoton, Ltd., which was a publicly traded Texas limited partnership,
and Republic Royalty Company (Republic) and Spinnaker Royalty Company, L.P.,
(Spinnaker) both of which were privately held Texas partnerships.
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.
The accompanying financial statements reflect the combination completed on
January 31, 2003 and accounted for using the purchase method of accounting. In
accordance with the purchase method of accounting, Dorchester Hugoton was
designated as the accounting acquiror. Under the purchase method of accounting,
the Partnership used the market price of Dorchester Hugoton's partnership units
on the last day of trading, adjusted for the liquidating distribution to
Dorchester Hugoton Unitholders, to determine the value of the Republic and
Spinnaker oil and gas properties merged into the Partnership. Such method
increased the historic book values of the oil and gas properties of Republic and
Spinnaker by approximately $192,000,000, which increased the Partnership's
quarterly depletion. See the Partnership's Form 8-K filed on April 15, 2003 and
Note 4 for more details.
Prior to January 31, 2003, the Partnership had no combined operations. In
these circumstances, the Partnership is required to present, discuss and analyze
the financial condition and results of operations of Dorchester Hugoton, the
accounting acquiror, for the one month period ended January 31, 2003 combined
with the financial condition and results of operations for the Partnership for
the two month period ended March 31, 2003 and results of operations of the
Partnership for the three month period ended March 31, 2004.
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., Anadarko Petroleum Corporation, Conoco, Inc., XTO
Energy Inc., ExxonMobil Corporation, Phillips Petroleum Company, Incorporated
and Texaco Exploration and Production, Inc. 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 of Texas County, Oklahoma and
discovery is underway 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, violation of irrigation gas contracts, underpayment of royalties, a request
for accounting, and fraud. Plaintiffs also seek certification of class action
against defendants. Dorchester Minerals Operating LP believes plaintiffs' claims
are completely without merit. In July 2002, the defendants were granted a motion
for summary judgment removing RRNGR as a plaintiff. Based upon past measurements
of such gas usage, Dorchester Minerals Operating LP believes the 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.
Page 7
3. COMBINATION TRANSACTION: On January 31, 2003, Dorchester Hugoton transferred
certain assets to Dorchester Minerals Operating LP in exchange for a net profits
interest, contributed the net profits interest and other assets to the
Partnership and subsequently liquidated. Republic and Spinnaker transferred
certain assets to Dorchester Minerals Operating LP in exchange for net profits
interests and subsequently merged with the Partnership. For accounting purposes
Dorchester Hugoton is deemed the acquiror. The value assigned to the assets of
Republic and Spinnaker was based on the market capitalization of Dorchester
Hugoton and the share of the total common units of the Partnership received by
the former partners of Republic (10,953,078 common units) and Spinnaker
(5,342,973 common units). The assets of Republic and Spinnaker were valued at
$237,194,000 which was allocated as follows:
Cash.................................. $ 68,000
Oil and gas properties................ 233,466,000
Receivables........................... 3,660,000
-------------
Total................................. $ 237,194,000
=============
The following reflects 2003 unaudited pro forma data related to the
combination discussed herein which assumes the combination had taken place as of
January 1, 2003. The pro forma amounts are not necessarily indicative of the
results that may be reported in the future. Pro forma adjustments have been made
to depletion, depreciation, and amortization to reflect the new basis of
accounting for the assets of Spinnaker and Republic as of January 31, 2003, and
to January 2003 revenues to reflect the revenues of Dorchester Hugoton as Net
Profits Interests.
Three Months Ended
March 31, 2003
------------------
Revenues....................................................... $15,845,000
Depletion...................................................... 6,722,000
Net earnings .................................................. 3,794,000
Earnings per common unit....................................... 0.18
Nonrecurring items:
Severance and related costs.................................... $ 3,003,000
Combination-related costs...................................... 496,000
4. DISTRIBUTION TO HOLDERS OF COMMON UNITS: Since the Partnership's combination
on January 31, 2003, unitholder cash distributions per common unit have been:
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
The next cash distribution will be paid by August 15, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Dorchester Minerals, L.P. is a publicly traded Delaware limited partnership
that was formed in December 2001 in connection with the combination, which was
completed on January 31, 2003, of Dorchester Hugoton, which was a publicly
traded Texas limited partnership, and Republic and Spinnaker both of which were
privately held Texas partnerships.
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 by the term "operating partnership". Our
Partnership directly and indirectly holds a 96.97% net profits overriding
royalty interest in these properties. We refer to our net profits overriding
royalty interest in these
Page 8
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 addition to the Net Profits Interests, we also hold producing and
non-producing mineral, royalty, overriding royalty, net profits and leasehold
interests, which we acquired as part of the combination upon the mergers of
Republic and Spinnaker into our Partnership. We refer to these interests as the
Royalty Properties. We currently own Royalty Properties in 563 counties and
parishes in 25 states.
Basis of Presentation
In the combination completed on January 31, 2003 and accounted for as a
purchase, Dorchester Hugoton was designated as the accounting acquiror. Prior to
January 31, 2003, our Partnership had no combined operations. In these
circumstances, we are required to present, discuss and analyze the financial
condition and results of operations of Dorchester Hugoton, the accounting
acquiror, for the one month period ended January 31, 2003 combined with the
financial condition and results of operations for Dorchester Minerals for the
two month period ended March 31, 2003 and the results of operations of our
Partnership for the three month period ended March 31, 2004. For the purposes of
this presentation, the term combination means the transactions consummated in
connection with the combination of the business and properties of Dorchester
Hugoton, Republic and Spinnaker.
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.
Results of Operations
Three Months Ended March 31, 2004 as compared to Three Months Ended March 31,
2003
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 gas sales and
weighted average prices were:
Three Months Ended
March 31,
-------------------
Sales Volumes: 2004 2003
-------- --------
Dorchester Hugoton Gas Sales (mmcf) (1) ......... -- 448
Net Profits Interests Gas Sales (mmcf)........... 1,347 886
Net Profits Interests Oil Sales (mbbls) ......... 2 2
Royalty Properties Gas Sales (mmcf) ............. 888 658
Royalty Properties Oil Sales (mbbls) ............ 80 57
Weighted Average Sales Price:
Dorchester Hugoton Gas Sales ($/mcf) ............ -- $ 5.20
Net Profits Interests Gas Sales ($/mcf).......... $ 5.46 $ 6.63
Net Profits Interests Oil Sales ($/bbl).......... $30.15 $33.23
Royalty Properties Gas Sales ($/mcf) ............ $ 5.05 $ 7.00
Royalty Properties Oil Sales ($/bbl)............. $31.96 $33.91
Production Costs Deducted
Under the Net Profits Interests ($/mcfe)(2) $ 1.09 $ 1.18
- --------------------------------------------------------
(1) For purposes of comparisons the January 2003 Dorchester Hugoton volumes
have been reduced to reflect our 96.97% Net Profits Interest in production
from the underlying properties.
(2) Provided to assist in determination of revenues; applies only to Net Profit
Interest sales volumes and prices.
First quarter natural gas sales volumes attributable to the former
Dorchester Hugoton properties underlying our Net Profits Interests increased
1.6% from 1,278,000 mcf during 2003 to 1,299,000 mcf during 2004 due to addition
of field compression causing gas well production increases to offset natural
reservoir decline. See "Liquidity and Capital Resources - Expenses and Capital
Expenditures".
Page 9
Oil and natural gas sales volumes attributable to the Royalty Properties
and oil and natural gas sales volumes attributable to the Net Profits Interests
from Republic and Spinnaker are included in our results for the three month
period ended March 31, 2004 and are included for only the two months ended March
31, 2003. See "Basis of Presentation".
The weighted average sales price for natural gas production from the former
Dorchester Hugoton properties underlying our Net Profits Interests decreased
11.9% from $6.22 per mcf during first quarter 2003 to $5.48 per mcf during first
quarter 2004 due to changing market conditions.
Weighted average prices for oil and natural gas sales volumes attributable
to the Royalty Properties and also to the Net Profits Interests from Republic
and Spinnaker are included in our results for the three months ended March 31,
2004 and are included for only the two months ended March 31, 2003. See "Basis
of Presentation" and Note 1 of the Notes to the Condensed Financial Statements.
Our first quarter net operating revenues decreased 3.7% from $13,956,000
during 2003 to $13,441,000 during 2004 due primarily to decreased natural gas
prices combined with the effects of the combination. Management cautions the
reader in the comparison of results for these periods because operations
attributable to properties formerly owned by Republic and Spinnaker are not
included for one month in the three-month period ending March 31, 2003. See
"Basis of Presentation" and Notes 1 and 3 to the Condensed Financial Statements.
Several categories of costs during the first quarter of 2004 were lower
than the first quarter of 2003 due to non-recurring expenses associated with the
2003 liquidation of Dorchester Hugoton. Such 2003 costs include combination and
related expenses of $2,907,000, consisting primarily as a result of
approximately $2,500,000 in severance payments and related costs. Similarly
management fees in 2003 include a one-time $496,000 charge.
Our first quarter 2004 other income (expense) net includes $87,000
attributable to unsuccessful property acquisition attempts.
Depletion, depreciation and amortization increased from $4,971,000 in first
quarter 2003 to $5,301,000 in first quarter 2004 primarily due to the effects of
the combination. Management cautions the reader in the comparison of results for
these periods because operations of the properties formerly owned by Republic
and Spinnaker are not included for one month in the three-month period ending
March 31, 2003 and due to the application of purchase accounting methods. See
"Basis of Presentation", "Critical Accounting Policies", and Notes 1 and 3 to
the Condensed Financial Statements.
We received cash payments in the amount of $487,000 from various sources
during the first quarter of 2004 including lease bonus attributable to nine
leases and pooling elections located in nine counties and parishes in four
states. These leases reflected royalty terms ranging from 20% to 25% and lease
bonuses ranging up to $300/acre. One of these leases included a commitment to
drill a well, in which we would own an approximate 5.1% royalty interest, to a
depth of approximately 10,000 feet in a relatively unexplored area of South
Texas. Another of these leases covered an undivided 75% interest in multiple
tracts located in North Texas. We negotiated the right to review seismic
information covering our lands and adjacent tracts, along with our lessees
interpretation thereof. In the event a well is drilled on our lands or lands
pooled therewith, we retain the right for the operating partnership to
participate with our unleased interest subject to our reservation of a 96.97%
Net Profits Interest.
We received division orders for, or otherwise identified 44 new wells
completed on our Royalty Properties and Net Profit Interests in 24 counties and
parishes in seven states during the first quarter of 2004. Selected new wells
and the royalty interests owned therein by us and the working interests and net
revenue interests owned therein by the operating partnership are summarized in
the following table:
Test Rates
Ownership per day
County/ ------------ -----------------
State Parish Operator Well Name WI(1) NRI(1) Gas, mcf Oil,bbls
- ----- ------- -------- ------------------ ---- ------ -------- --------
ROYALTY PROPERTIES
- ---------------------
Texas Hildago Shell Woods Christian 44 -- 2.8% 6,687 54
Texas Brooks Westport Garcia Gas Unit 2-2 -- 3.0% 2,584 156
NET PROFITS INTERESTS
- ---------------------
Oklahoma Washita Cimarex Green 3-2 BPO(2) -- 3.5% 6,535 417
Green 3-2 APO(2) 3.5% 4.8%
Oklahoma Washita Cimarex Sullivan 2-2 BPO(2) 7.0% 8.8% 1,793 143
Sullivan 2-2 APO(2) 8.8% 9.4%
- ------------------------------------
(1) WI and NRI mean working interest and net revenue interest, respectively.
(2) BPO and APO mean before payout and after payout, respectively.
Page 10
First quarter net earnings allocable to common units increased 70.1% from
$3,812,000 during 2003 to $6,485,000 during 2004 due primarily to the effects of
the combination. Management cautions the reader in the comparison of results for
these periods because operations of the properties formerly owned by Republic
and Spinnaker are not included for one month in the three-month period ending
March 31, 2003 and due to the application of purchase accounting methods. See
"Basis of Presentation" and Notes 1 and 3 to the Condensed Financial Statements.
Net cash provided by operating activities increased 249.1% from $3,374,000
during 2003 to $11,777,000 during 2004 due primarily to the effects of the
combination. Management cautions the reader in the comparison of results for
these periods because operations of the properties formerly owned by Republic
and Spinnaker are not included for one month in the three-month period ending
March 31, 2003. See "Basis of Presentation" and Notes 1 and 3 of the Notes to
the Condensed Financial Statements.
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 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 4 of the Notes to the Condensed Financial Statements for the amounts
and dates of cash distributions to unitholders.
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).
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 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 until additional
engineering studies are performed. Previous fracture treatments in those
properties have cost between $36,000 and $45,000 per well, excluding any needed
casing repairs. 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. The operating partnership
incurred approximately $767,000 of capital costs in connection with the
installation of field compression facilities on portions of its Oklahoma
properties during the second and third quarters of 2003. Incremental operating
costs (primarily compressor rentals) attributable to these facilities are
estimated to be approximately $680,000 per year. These capital and operating
costs are reflected in the Net Profit Interests payments we receive from the
operating partnership. Management believes the benefits of such compression have
recovered such capital and will continue to more than exceed cost. Over 70% of
the operating partnership's Oklahoma wells have received regulatory approval to
operate at a vacuum made possible by the compression. The operating partnership
does not currently plan to install additional field compression capacity.
Page 11
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 to remain competitive with adjoining
operators for the foreseeable future.
Liquidity and Working Capital
Cash and cash equivalents totaled $11,715,000 at March 31, 2004 and
$10,881,000 at December 31, 2003.
CRITICAL ACCOUNTING POLICIES
We utilize the full cost method of accounting for costs related to our oil
and 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 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. The full cost ceiling is evaluated at
the end of each quarter. For 2003, our unamortized costs of oil and gas
properties exceeded the ceiling test. As a result, in 2003, our Partnership
recorded full cost write-downs of $43,804,000. No additional impairments have
been recorded since the quarter ended September 30, 2003.
The discounted present value of our proved oil and gas reserves is a major
component of the ceiling 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 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 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 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.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. SFAS No. 143 is effective for fiscal years
beginning after
Page 12
June 15, 2002. Dorchester Minerals adopted SFAS No. 143 on January 1, 2003,
which did not have a material effect on its financial statements.
The FASB's Emerging Issues Task Force (EITF) reached a consensus that
mineral rights are tangible assets in EITF Issue 04-2, "Whether Mineral Assets
Are Tangible or Intangible Assets". The FASB ratified the EITF consensus,
subject to amendment of SFAS No. 141 and No. 142 through a FASB Staff Position
(FSP).
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 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 do not anticipate having a credit facility or incurring any debt, other
than trade debt. 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) We held our Annual Unitholders meeting on Wednesday, May 5, 2004 in
Dallas, Texas.
b) Proxies were solicited by the Board of Managers pursuant to Regulation
14A under the Securities Exchange Act of 1934. There were no
solicitations in opposition to the nominees listed in the proxy
statement and all of such nominees were duly elected.
Page 13
c) The only matter voted on at the meeting was the election of the three
nominees to the Board of Managers. Out of the 27,040,431 units issued
and outstanding and entitled to vote at the meeting, 25,055,367 units
were present in person or by proxy. The results were as follows:
Votes Withheld
Nominee Votes for Election from Election Broker Non-Votes
- --------------- ------------------ -------------- ----------------
Buford P. Berry 24,757,336 298,031 1,985,064
Rawles Fulgham 24,931,147 124,220 1,985,064
C. W. Russell 24,978,477 76,890 1,985,064
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: See the attached Index to Exhibits.
b) Reports on Form 8-K filed during the quarter ended March 31, 2004:
(i) Filed January 16, 2004 on Item 9. Regulation FD Disclosure and
Item 12. Results of Operations and Financial Condition (Regarding
Fourth Quarter Cash Distribution)
(ii) Filed March 5, 2004 on Item 9. FD Disclosure and Item 12. Results
of Operations and Financial Condition (Regarding Fourth Quarter
Earnings)
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: May 5, 2004 Chief Executive Officer
/s/ H.C. Allen, Jr.
-----------------------------------------------
H.C. Allen, Jr.
Date: May 5, 2004 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)
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
Page 15