|Shares Out. (in M):||32||P/E||0||0|
|Market Cap (in $M):||600||P/FCF||0||0|
|Net Debt (in $M):||-20||EBIT||0||0|
Dorchester Minerals is a small cap illiquid MLP with zero analyst coverage or debt in an industry that is out of favor and hated by most. For the majority of readers, that is probably sufficient to stop reading the following summary.
Yellowhouse did a good job explaining the business in a 2014 writeup, including a breakdown of assets and acreage. The royalty business is essentially unchanged. However, the stock has been cut in half. DMLP now trades at roughly $18.50 with roughly $2.00 run-rate dividend. The company has a multiyear runway for growth while offering a double digit dividend yield. The distributions are sensitive to oil prices and may decline or increase. At the current forward oil and gas prices, the dividend is sustainable around the $2 range.
Overtime, we would expect and hope that DMLP yield will compress to 8.5% base case or less, as the company’s production continues to grow or if energy comes back in favor. There is 30-50% upside to the stock and probably 20-30% downside.
In simple terms, DMLP owns land royalty rights in 25 states and has zero capex, and all earnings are passed through into dividends. In addition, they choose to participate in some wells. While the total acreage has is more or less the same since 2014, the business has evolved somewhat. The company’s position in Midland improved with a 2017 acquisition. Oil production component increased from about 40% of DMLP’s total to roughly 55%. At the current prices, oil revenues account for about 85% of revenues.
Management owns 10% of their company and gets paid a low salary, so we think they are well-aligned with shareholders. The CEO has a salary of less than $120K and owns ~4% of shares. Essentially all C-suite members have all bought shares in the past year at mid teen prices, and the most recent open market purchase was by the COO in August at roughly $19. This management team is not promotional and is focused on running the business.
We think it is well understood among existing shareholders that the Q2 distribution included a larger than normal Lease Bonus payout so the Q3 will come down sequentially. The dividend would have still grown 5% sequentially without this one off. Our estimated quarterly distribution is $0.50 in 6-12 months, annualizing at $2 run-rate.
The dividend growth will come from two sources:
Continued royalty volume growth in the Permian. We are using the forward price curve for oil and gas.
Continued NPI participation growth. As oil prices rebounded, operators started recouping more of their capital but there’s an inherent lag in this. We think this can hit $15m two years out
As a high quality MLP, we think Dorchester should trade with a dividend yield in the high single digits vs. the current double digit yield. With an 8.5% yield with a $2 /shr distribution, the price would be $25.50 price when accounting for the dividend. DMLP has traded with a yield as low as 4.5% but the 10 year average is around 8.5%, which still leaves room for an inherent discount to competitors on a per acre basis.
The two larger comps are Venom Energy Partners (VNOM) and Black Stone Minerals (BSM)
VNOM has been trading at an increasing discount over the past year with a forward yield ~6.5%.
BSM trades closer to DMLP, but remains more expensive with an expected yield of ~7.5%
While most MLPs have taken a hit since 2014 with the price of oil falling, DMLP stock has been hit especially hard. At the time of the previous DMLP writeup, AMLP, the MLP index, had an LQA dividend yield of ~8.5% while DMLP was yielding 6%. Now, while Dorchester yields over 10%, AMLP yield is 7.5%.
Commodity risk that comes with oil price declines
Permian production slowdown
Use of equity for inorganic growth vs. debt - has only happened once and was highly accretive
Royalty business volume growth in Midland basin
Permian differential tightening
Further growth from NPI