You would think amaster limited partnership (
) that has outperformed its industry peers by 88% and theNasdaq
by 34% in the past five years -- while yielding an average of
8.8% -- would be well-known to investors.
But this MLP flies under the radar. NoWall Street analysts
follow this company, and institutions hold only 11% of itsshares
However, if you're looking for a profitable high yielder
poised for growth from rising energy prices, this is a name you
Thestock I'm talking about is
Dorchester Minerals (Nasdaq: DMLP)
, an energy MLP formed in 2003 through amerger of three smaller
Dorchester generatesrevenue from royalties it collects from
the oil and gas wells on its properties, which total 3 million
acres spread across 25 states. Dorchester has exposure to many of
North America's most prolific gas fields, including the
Fayetteville Shale, the Bakken formation, the Appalachian Basin,
the Barnett Shale, the Permian Basin and the GraniteWash .
Perhaps best of all, only about 30% of Dorchester's holdings
are developed. That adds to the potential for a risingincome
stream as new wells are drilled.
Unlike conventional oil and gas drillers, Dorchester has no
exposure to the costs and risks of exploration, development and
production. Instead, the company collects a royalty based on
thesales volume of each well after the driller recoups 150% of
well expenses. Because royalty payments are directly affected by
the selling price of natural gas.
Dorchester generates morecash flow when natural gas prices are
Dorchester also differs from many of its MLP peers in that
itsgeneral partner 's fee is fixed at 4%. There are no
distribution rights or incentives that increase the general
partner's percentage on higher profits. Dorchester unit holders
can count on consistently collecting 96% of the MLP's cash
The improving outlook for natural gas demand and prices means
this may be an especially good time to own Dorchester.Futures
prices for natural gas surged to a 20-month high in April in
response to an unusually cold spring that drained stockpiles.
This prompted Goldman Sachs to raise its outlook for 2013 natural
gas prices by 17%.
Natural gas accounts for roughly 75% of its reserves.
Historically, Dorchester has been able tooffset production
declines from a steady stream of new wells on its acreage.
During 2012, 490 new wells were completed on the MLP's
Despite low natural gas prices that led to reduced drilling
activity in many of the company's producing areas, Dorchester
produced respectable results in 2012. Revenue fell 9% from ayear
earlier to $63.2 million, but that was still the second-highest
in four years.Net income was $38 million or $1.20 a share, down
only 10% from a year earlier.
Despite its reducedearnings , Dorchester's cash flow actually
improved 2% in 2012 to $56.4 million from a year earlier, and the
MLP paid distributions of $1.79 a share to unit holders, an 8%
increase over 2011.
Dorchester ended 2012 withcash of $13.8 million and
nolong-term debt . In fact, the company's charter precludes
Dorchester from taking on long-term debt. But even without the
benefit ofleverage , Dorchester has been able to consistently
produce returns that exceed its industry peers.
In the past five years, Dorchester's operating margins have
averaged 62%, which is more than four times the average 15%margin
of its industry competitors. Dorchester's five-year average
return on assets is 28%, nearly three times its peer group
average of 10%.
Companyinsiders show their confidence in Dorchester's future
prospects by owning a healthy 9% of shares. Another sign of
management's confidence is a 3.5% increase in the distribution,
to 45 cents a share. Since 2009, Dorchester has increased its
annualized distribution 19%.
Consensusanalyst estimates forecast 5% earnings growth for
Dorchester's industry peers this year, accelerating to 6% next
year. I think it's likely that Dorchester can beat that estimate,
thanks to its unhedged exposure to further increases in natural
Risks to consider:
Dorchester typically pays out 87% of operating cash flow as
distributions. However, the amount may fluctuate due to the
volatility of natural gas prices. For example, Dorchester's
distributions dipped from $2.80 in 2008 to $1.50 in 2009 before
rising to $1.65 in 2010 and $1.79 in 2012. Some income investors
may find the variability of Dorchester's distribution too
Action to take -->
Dorchester is an appealing stock for investors who want generous
income and exposure to rising energy prices. I like this MLP
because of its industry-leading profitability, low-risk profile,
significant land holdings and untapped reserves.