Executive Summary / Key Takeaways

• Dorchester Minerals, L.P. (NASDAQ:DMLP) operates a unique, low-capex business model centered on passive ownership of diverse oil and gas royalty and net profits interests, providing direct exposure to commodity prices without the operational risks and costs of traditional E&P.
• Recent strategic acquisitions, particularly the significant unit-for-asset exchanges in 2024, have substantially expanded DMLP's asset base, contributing to increased Royalty Properties volumes and positioning the Partnership for future revenue streams.
• First Quarter 2025 results demonstrated robust revenue growth (+39.3% year-over-year), primarily driven by a significant increase in Royalty Properties volumes (+51% for oil, +17% for natural gas) and higher natural gas prices, despite a decrease in NPI volumes and a slight dip in oil prices.
• The Partnership maintains a strong financial position characterized by substantial cash reserves ($41.5 million as of March 31, 2025), minimal debt (limited to office lease obligations), and high profitability margins (TTM Net Margin 52.19%), underpinning its ability to fund its core distribution mandate.
• While highly susceptible to volatile commodity prices and global geopolitical factors, DMLP's passive structure, low operating costs, and acquisition strategy offer a differentiated investment profile focused on generating distributable cash flow, making it potentially attractive for income-oriented investors seeking direct energy exposure.

The Enduring Appeal of Passive Ownership in Energy

In the dynamic and often capital-intensive world of oil and natural gas, Dorchester Minerals, L.P. (NASDAQ:DMLP) presents a distinct proposition: a focus on the enduring value of passive mineral and royalty interests. Since commencing operations in 2003, DMLP's business has been rooted in the acquisition, ownership, and administration of a diverse portfolio of Royalty Properties, spanning producing and nonproducing mineral, royalty, overriding royalty, net profits, and leasehold interests. This model sidesteps the direct operational complexities, significant capital expenditures, and associated risks inherent in exploration and production (E&P) activities. Instead, DMLP's revenue is directly tied to the production from properties where it holds these interests, offering investors a more direct, albeit volatile, link to commodity price fluctuations.

Central to DMLP's structure is its ownership of a Net Profits Interest (NPI) in various properties managed by an affiliate, Dorchester Minerals Operating LP. This NPI entitles DMLP to 96.97% of the net profits realized from these specific properties monthly. A key feature of this arrangement is that any deficit in cumulative revenue versus costs for the NPI properties is borne solely by the Operating Partnership, insulating DMLP from direct losses in challenging periods for these assets. This unique operational structure, while not a technological innovation in the traditional sense, serves as a critical differentiator, shaping DMLP's financial profile by minimizing direct operating costs and capital requirements compared to integrated energy companies. The strategic intent behind this structure is clear: to maximize the flow-through of commodity-linked revenues to the Partnership, supporting its primary objective of generating distributable cash flow.

DMLP's overarching strategy has consistently centered on expanding its asset base through the acquisition of complementary mineral and royalty interests. This approach leverages the Partnership's structure to grow its footprint across prolific U.S. basins. Recent activity underscores this commitment. In 2024, DMLP executed several significant unit-for-asset exchanges, notably acquiring approximately 14,225 net mineral acres in New Mexico and Texas in September 2024 for 6.72 million common units valued at $202.6 million, alongside two separate acquisitions in Colorado totaling nearly 2,700 net royalty acres for approximately 1.035 million common units valued at $33 million. These transactions, explicitly deemed "complementary" to the business, demonstrate the execution of DMLP's growth strategy and have materially increased its scale and potential future revenue streams.

Performance Reflecting Asset Growth and Market Dynamics

The impact of DMLP's strategic acquisitions and the inherent leverage to commodity markets were evident in its First Quarter 2025 financial results. For the three months ended March 31, 2025, total operating revenues increased significantly by 39.3% to $43.16 million, compared to $30.98 million in the same period of 2024. This growth was primarily fueled by a robust 52.0% increase in Royalty Properties revenue, reaching $37.83 million, while Net Profits Interest revenue saw a decrease of 14.4% to $4.79 million.

The surge in Royalty Properties revenue was largely attributable to volume increases. Royalty oil sales volumes jumped 51% year-over-year, driven by suspense releases on new wells on legacy acreage, first-time payments and increased baseline production from properties acquired in the third quarter of 2024 (particularly in the Permian Basin and Rockies), partially offset by declines in the Bakken. Royalty natural gas sales volumes also rose 17%, influenced by similar factors in the Permian Basin and Rockies, though partially offset by lower suspense releases in the Mid-Continent and East Texas. Conversely, NPI oil and natural gas volumes decreased by 23% and 11% respectively, primarily due to decreased baseline production in the Bakken and Permian and lower suspense releases in the Bakken, with the NPI gas volumes also impacted by prior period adjustments in the Fayetteville Shale.

Commodity price movements also played a critical role. While Royalty oil prices saw a modest 5% decrease to $63.00 per barrel, Royalty natural gas prices experienced a dramatic 117% increase to $3.51 per mcf on an accrual basis. NPI prices followed a similar trend, with oil down 8% to $61.33/bbl and natural gas up 157% to $3.91/mcf. The significant increase in natural gas prices provided a substantial tailwind to overall revenues, particularly for the Royalty segment.

Operating costs, including production taxes, increased 70% to $4.45 million, primarily due to higher proportionate production taxes tied to increased revenue and higher post-production costs (compression, transportation, processing, marketing) linked to higher volumes. Ad valorem taxes on Royalty Properties also contributed to the increase. Depreciation, depletion, and amortization (DD&A) saw a substantial 142% increase to $16.76 million. This significant jump reflects the impact of higher reserve extraction volumes and quarterly adjustments to the depletion rate based on updated estimates of proved developed producing reserves, including the reserves added through the recent 2024 acquisitions and suspense releases on new wells. General and administrative (G&A) expenses rose 32% to $4.32 million, attributed to higher legal and professional service fees, increased regulatory filing fees related to the S-4 registration statement in Q1 2025, and higher compensation expenses, including an expanded equity program aimed at employee retention within the Operating Partnership.

Despite the increase in costs, net income for the quarter was $17.64 million, compared to $18.17 million in Q1 2024. Net cash provided by operating activities increased 19% to $33.39 million, driven by higher cash receipts from Royalty Properties (net of related expenses), partially offset by lower NPI payment receipts and higher G&A expenses. Cash receipts attributable to Royalty Properties in Q1 2025 totaled $34.2 million, with approximately 68% reflecting recent sales periods and 32% from prior periods. NPI cash receipts were $4.8 million, with 74% from recent periods and 26% from prior periods.

Comparing DMLP's financial profile to larger, more integrated competitors like Devon Energy (DVN), Occidental Petroleum (OXY), APA Corporation (APA), and ConocoPhillips (COP) highlights the advantages of its passive model. DMLP's TTM Net Profit Margin of 52.19% significantly outpaces the typical net margins of these E&P-focused companies (ranging from approximately 13% to 24% in recent periods). Its TTM EBITDA Margin of 73.45% also demonstrates superior operational efficiency at the gross profit level compared to competitors whose margins are impacted by production expenses. This financial efficiency is a key component of DMLP's competitive moat, allowing it to potentially maintain profitability even in lower commodity price environments where higher-cost producers might struggle.

Financial Strength and the Distribution Mandate

DMLP maintains a robust financial position, characterized by ample liquidity and minimal liabilities. As of March 31, 2025, the Partnership held $41.55 million in cash and cash equivalents.

Its balance sheet is notably clean, with total liabilities amounting to only $5.90 million, primarily consisting of accounts payable and operating lease liabilities. The Partnership has no material long-term debt beyond its office lease obligations, which total $974 thousand as of March 31, 2025, maturing through 2029. This lack of significant debt provides substantial financial flexibility and reduces financial risk compared to many energy companies that rely heavily on leverage for operations and expansion.

The Partnership's capital resources are primarily its cash flows generated from the Royalty Properties and the NPI. DMLP's partnership agreement mandates the distribution of virtually all funds received from these interests quarterly, less certain expenses and reasonable reserves. This structure aligns the Partnership's financial performance directly with unitholder distributions, making it an attractive vehicle for income-focused investors. The cash flow generation capacity, as evidenced by the $33.39 million in operating cash flow in Q1 2025, directly supports this distribution policy. The Partnership announced a cash distribution of $0.73 per common unit for Q1 2025, payable in May 2025, and the agreement requires the next distribution by August 14, 2025. Management has stated its expectation of sufficient liquidity to fund distributions and operations, even amidst potential market uncertainties.

While DMLP's passive model offers cost advantages and financial stability, it also presents competitive disadvantages in terms of scale and direct operational control. Larger integrated competitors like ConocoPhillips and Devon Energy possess vast operational scale and invest heavily in advanced E&P technologies, enabling them to develop assets more rapidly and potentially capture market share faster. DMLP, as a non-operator, is reliant on the development activities of third parties on its acreage. This means its volume growth is largely dependent on the drilling and completion decisions of others, a factor outside of its direct control. While DMLP's acquisition strategy helps mitigate this by adding new producing and prospective acreage, its overall growth trajectory may lag behind that of actively drilling E&P companies. However, the high barriers to entry in acquiring large, diversified portfolios of mineral and royalty interests, coupled with the significant capital required, help protect DMLP's established position against new entrants.

Outlook and Key Considerations for Investors

The outlook for DMLP remains intrinsically linked to the volatile landscape of global oil and natural gas markets. While the Partnership benefits from its low-cost, passive structure, its revenues and cash flows are directly exposed to price fluctuations driven by factors such as global supply and demand dynamics, geopolitical events (including conflicts in Ukraine and the Middle East), OPEC actions, interest rates, and trade policies. Management explicitly highlights these external factors as potential material uncertainties that could impact liquidity and the ability to fund distributions.

The increase in natural gas prices in Q1 2025 provided a significant boost, but future price movements are unpredictable. Changes in tariff and import/export regulations could affect costs and inflation in regions where DMLP holds properties. While larger, well-capitalized producers on DMLP's acreage may be better equipped to withstand price volatility, DMLP's passive position means it has limited recourse if operators curtail activity due to unfavorable market conditions.

Despite these risks, DMLP's core investment thesis remains centered on its ability to generate substantial cash flow from its diversified asset base and distribute it to unitholders. The recent acquisitions have expanded the footprint across key basins like the Permian and Rockies, potentially providing future growth avenues as these properties are developed. The Partnership's strong balance sheet, with significant cash reserves and minimal debt, provides a cushion against downturns and supports its distribution capability.

For investors, DMLP represents a unique way to gain exposure to energy commodity prices with a significantly different risk profile than traditional E&P companies. The trade-off for lower operational risk and higher margins is less control over production volumes and potentially slower growth compared to actively drilling operators. The investment case hinges on the long-term value of its mineral and royalty assets, the effectiveness of its acquisition strategy in adding new revenue streams, and the stability of its cash flow generation to support consistent distributions, all of which are ultimately tied to the unpredictable movements of oil and natural gas prices.

Conclusion

Dorchester Minerals, L.P. stands as a distinctive entity in the energy sector, offering investors a focused play on passive mineral and royalty interests. Its business model, characterized by low capital intensity and direct exposure to commodity prices through a diversified asset base and a unique Net Profits Interest structure, underpins its ability to generate high margins and robust cash flow. The strategic pursuit of complementary acquisitions, as evidenced by the significant transactions in 2024, continues to expand the Partnership's footprint and potential revenue streams, contributing to strong recent performance like the revenue growth seen in Q1 2025.

While DMLP's passive nature insulates it from direct drilling costs and operational risks, it also means reliance on third-party operators for production volumes and inherent vulnerability to the volatility of global energy markets and geopolitical events. Compared to larger, integrated competitors, DMLP excels in financial efficiency and margin profile but faces limitations in scale and direct control over growth drivers. Ultimately, the investment narrative for DMLP is one of a financially sound, low-risk vehicle designed to translate energy production revenues directly into unitholder distributions. Its success remains tied to the fundamental dynamics of oil and natural gas markets, making it a compelling, albeit price-sensitive, option for investors prioritizing income and a differentiated exposure to the energy complex.