DORCHESTER MINERALS, L.P. 10-K

ITEM 1. BUSINESS   General   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., Republic Royalty Company, L.P. and Spinnaker Royalty Company, L.P. Dorchester Hugoton was a publicly traded Texas limited partnership, and Republic and Spinnaker were private Texas limited partnerships. We have established a website at www.dmlp.net that contains the last annual meeting presentation and a link to the NASDAQ website. You may obtain all current filings free of charge at our website. We will provide electronic or paper copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) free of charge upon written request at our executive offices. 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.   Our general partner is Dorchester Minerals Management LP, which is managed by its general partner, Dorchester Minerals Management GP LLC. As a result, the Board of Managers of Dorchester Minerals Management GP LLC exercises effective control of the Partnership. In this report, the term "General Partner" is used as an abbreviated reference to Dorchester Minerals Management LP. Our General Partner also controls and owns, directly and indirectly, all of the Partnership interests in Dorchester Minerals Operating LP and its general partner. Dorchester Minerals Operating LP owns working interests and other properties underlying our Net Profits Interest (or “NPI”), provides day-to-day operational and administrative services to us and our General Partner, and is the employer of all the employees who perform such services. In this report, the term "Operating Partnership" is used as an abbreviated reference to Dorchester Minerals Operating LP. Our General Partner and the Operating Partnership are Delaware limited partnerships, and the general partners of their general partners are Delaware limited liability companies.   On March 29, 2019, pursuant to a Contribution and Exchange Agreement with H. Huffman & Co., A Limited Partnership, an Oklahoma limited partnership (“HHC”), The Buffalo Co., A Limited Partnership, an Oklahoma limited partnership (“TBC” and together with HHC, the “Acquired Entities”), Huffman Oil Co., L.L.C., an Oklahoma limited liability company, and the equity holders of the Acquired Entities, the Partnership acquired (the “Huffman Acquisition”) (i) a 96.97% net profits interest in certain working interests in various oil and gas properties owned by HHC, (ii) all of the minerals and royalty interests held by HHC, and (iii) all of the minerals and royalty interests held by TBC in exchange for 2,400,000 common units representing limited partnership interests in the Partnership (“Common Units”) valued at $43.8 million and issued pursuant to the Partnership's acquisition shelf registration statements on Form S-4. The mineral and royalty properties acquired consist of varying undivided interests totaling approximately 76,000 net acres located in 169 counties in 14 states.   On September 30, 2020, the Partnership and affiliates of its General Partner closed the divestiture of our Hugoton net profits interest located in Texas County, Oklahoma and Stevens County, Kansas. This divestiture to a third party included operated working interests and related properties, our field office and our gathering system and related assets. The Partnership’s share of proceeds from the transaction was $5.0 million, net of transaction costs and holdbacks.   On October 21, 2020, the Partnership and affiliates of its General Partner closed the divestiture of our immaterial HHC entity, including all associated working interest properties and net profits interest.   Our business may be described as the acquisition, ownership and administration of Royalty Properties and NPI. The NPI represents a net profits overriding royalty interest burdening various properties owned by the Operating Partnership. We receive monthly payments equaling 96.97% of the net profits realized by the Operating Partnership from these properties in the preceding month. The Royalty Properties consist of producing and nonproducing mineral, royalty, overriding royalty, net profits, and leasehold interests located in 587 counties and parishes in 27 states (“Royalty Properties”).   Our partnership agreement requires that we distribute quarterly an amount equal to all funds that we receive from the Royalty Properties and the NPI (other than cash proceeds received by the Partnership from a public or private offering of securities of the Partnership) less certain expenses and reasonable reserves.   Our partnership agreement allows us to grow by acquiring additional oil and natural gas properties, subject to the limitations described below. The approval of the holders of a majority of our outstanding common units is required for our General Partner to cause us to acquire or obtain any oil and natural gas property interest, unless the acquisition is complementary to our business and is made either:     ● in exchange for our limited partner interests, including common units, not exceeding 40% of the common units outstanding after issuance; or   1 Table of Contents     ● in exchange for cash proceeds of any public or private offer and sale of limited partner interests, including common units, or options, rights, warrants or appreciation rights relating to the limited partner interests, including common units; or     ● in exchange for other cash from our operations, if the aggregate cost of any acquisitions made for cash during the twelve-month period ending on the first to occur of the execution of a definitive agreement for the acquisition or its consummation is no more than 10% of our aggregate cash distributions for the four most recent fiscal quarters.   Unless otherwise approved by the holders of a majority of our common units, in the event that we acquire properties for a combination of cash and limited partner interests, including common units, (i) the cash component of the acquisition consideration must be equal to or less than 5% of the aggregate cash distributions made by the Partnership for the four most recent quarters and (ii) the amount of limited partnership interests, including common units, to be issued in such acquisition, after giving effect to such issuance, shall not exceed 10% of the common units outstanding.   Credit Facilities and Financing Plans   We do not have a credit facility in place, nor do we anticipate doing so. We do not anticipate incurring any debt, other than trade debt incurred in the ordinary course of our business. Our partnership agreement prohibits us from incurring 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), in order to avoid unrelated business taxable income for federal income tax purposes. We may finance any growth of our business through acquisitions of oil and natural gas properties by issuing additional limited partnership interests or with cash, subject to the limits described above and in our partnership agreement.   Under our partnership agreement, we may also finance our growth through the issuance of additional partnership securities, including options, rights, warrants and appreciation rights with respect to partnership securities from time to time in exchange for the consideration and on the terms and conditions established by our General Partner in its sole discretion. However, we may not issue limited partnership interests that would represent over 40% of the outstanding limited partnership interests immediately after giving effect to such issuance or that would have greater rights or powers than our common units without the approval of the holders of a majority of our outstanding common units. Except in connection with qualifying acquisitions, we do not currently anticipate issuing additional partnership securities. We have effective registration statements registering an aggregate of 20,000,000 common units that may be offered and issued by the Partnership from time to time in connection with asset acquisitions or other business combination transactions. At present, 20,000,000 units remain available under the Partnership’s registration statements.   Regulation   Many aspects of the production, pricing and marketing of oil and natural gas are regulated by federal and state agencies. Legislation affecting the oil and natural gas industry is under constant review for amendment or expansion, which frequently increases the regulatory burden on affected members of the industry.   Exploration and production operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes:     ● permits for the drilling of wells;     ● bonding requirements in order to drill or operate wells;     ● the location and number of wells;     ● the method of drilling and completing wells;     ● the surface use and restoration of properties upon which wells are drilled;     ● the plugging and abandonment of wells;     ● numerous federal and state safety requirements;     ● environmental requirements;     ● property taxes and severance taxes; and     ● specific state and federal income tax provisions.   Oil and natural gas operations are also subject to various conservation laws and regulations. These regulations govern the size of drilling and spacing units or proration units and the density of wells that may be drilled and the unitization or pooling of oil and natural gas properties. In addition, state conservation laws establish a maximum allowable production from oil and natural gas wells. These state laws also generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. These regulations can limit the amount of oil and natural gas that the operators of our properties can produce.   2 Table of Contents   The transportation of oil and natural gas after sale by operators of our properties is sometimes subject to regulation by state authorities. The interstate transportation of oil and natural gas is subject to federal governmental regulation, including regulation of tariffs and various other matters, primarily by the Federal Energy Regulatory Commission.   Significant Customers   If we were to lose a significant customer, such loss could impact revenue. The loss of any single customer is mitigated by our diversified customer base, and we do not believe that the loss of any single customer would have a long-term material adverse effect on our financial position or the results of operations.   Customer and Commodity Price Risks   The pricing of oil and natural gas sales is primarily determined by supply and demand in the marketplace and can fluctuate considerably. As a royalty owner and non-operator, we have extremely limited access to timely information and involvement and no operational control over the volumes of oil and natural gas produced and sold and the terms and conditions on which such volumes are marketed and sold.   Our profitability is affected by oil and natural gas market prices. Oil and natural gas market prices have fluctuated significantly in recent years in response to changes in the supply and demand for oil and natural gas in the market, along with domestic and international political and economic conditions.   In January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally, and subsequently, throughout the second, third, and fourth quarters of 2020 and thereafter, COVID-19 continued to spread throughout the U.S. and worldwide. In addition, after OPEC, and a group of oil producing nations led by Russia failed in March 2020 to agree on oil production cuts, Saudi Arabia announced that it would cut oil prices and increase production, leading to a sharp, further decline in oil and natural gas prices. While OPEC, Russia and other oil producing countries reached an agreement in April 2020 to reduce production levels, and U.S. production has declined, oil prices remain low.   The COVID-19 pandemic and oil and natural gas market volatility have resulted in a significant decrease in oil prices and significant disruption and uncertainty in the oil and natural gas market. These recent events have negatively impacted operators throughout the energy industry in 2020. While these market disruptions may be temporary and continue into 2021, we cannot reliably estimate the duration of the COVID-19 pandemic or current market conditions, or the ultimate impact these events will have on our future financial position, results of operations, cash flows or liquidity.   Competition   The energy industry in which we compete is subject to intense competition among many companies, both larger and smaller than we are, many of which have financial and other resources greater than we have.   Business Opportunities Agreement   Pursuant to a business opportunities agreement among us, our General Partner, the general partner of our General Partner, and the owners of the general partner of our General Partner (the “GP Parties”), we have agreed that, except with the consent of our General Partner, which it may withhold in its sole discretion, we will not engage in any business not permitted by our partnership agreement, and we will have no interest or expectancy in any business opportunity that does not consist exclusively of the oil and natural gas business within a designated area that includes portions of Texas County, Oklahoma and Stevens County, Kansas. All opportunities that are outside the designated area or are not oil and natural gas business activities are called renounced opportunities.   The parties also have agreed that, as long as the activities of the General Partner, the GP Parties and their affiliates or manager designees are conducted in accordance with specified standards, or are renounced opportunities:     ● our General Partner, the GP Parties and their affiliates or the manager designees will not be prohibited from engaging in the oil and natural gas business or any other business, even if such activity is in direct or indirect competition with our business activities;     ● affiliates of our General Partner, the GP Parties and their affiliates and the manager designees will not have to offer us any business opportunity;   3 Table of Contents     ● we will have no interest or expectancy in any business opportunity pursued by affiliates of our General Partner, the GP Parties or their affiliates and the manager designees; and     ● we waive any claim that any business opportunity pursued by our General Partner, the GP Parties or their affiliates and the manager designees constitutes a corporate opportunity that should have been presented to us.   The standards specified in the business opportunities agreement generally provide that the GP Parties and their affiliates and manager designees must conduct their business through the use of their own personnel and assets and not with the use of any personnel or assets of us, our General Partner or Operating Partnership. A manager designee or personnel of a company in which any affiliate of our General Partner or any GP Party or their affiliates has an interest or in which a manager designee is an owner, director, manager, partner or employee (except for our General Partner and its general partner and their subsidiaries) is not allowed to usurp a business opportunity solely for his or her personal benefit, as opposed to pursuing, for the benefit of the separate party an opportunity in accordance with the specified standards.   In certain circumstances, if a GP Party or any subsidiary thereof, any officer of the general partner of our General Partner or any of their subsidiaries, or a manager of the general partner of our General Partner that is an affiliate of a GP Party signs a binding agreement to purchase oil and natural gas interests, excluding oil and natural gas working interests, then such party must notify us prior to the consummation of the transactions so that we may determine whether to pursue the purchase of the oil and natural gas interests directly from the seller. If we do not pursue the purchase of the oil and natural gas interests or fail to respond to the purchasing party's notice within the provided time, the opportunity will also be considered a renounced opportunity.   In the event any GP Party or one of their subsidiaries acquires an oil and natural gas interest, including oil and natural gas working interests, in the designated area, it will offer to sell these interests to us within one month of completing the acquisition. This obligation also applies to any package of oil and natural gas interests, including oil and natural gas working interests, if at least 20% of the net acreage of the package is within the designated area; however, this obligation does not apply to interests purchased in a transaction in which the procedures described above were applied and followed by the applicable affiliate.   Operating Hazards and Uninsured Risks   Our operations do not directly involve the operational risks and uncertainties associated with drilling for, and the production and transportation of, oil and natural gas. However, we may be indirectly affected by the operational risks and uncertainties faced by the operators of our properties, whose operations may be materially curtailed, delayed or canceled as a result of numerous factors, including:     ● the presence of unanticipated pressure or irregularities in formations;     ● accidents;     ● title problems;     ● weather conditions;     ● compliance with governmental requirements; and     ● shortages or delays in the delivery of equipment.   Also, the ability of the operators of our properties to market oil and natural gas production depends on numerous factors, many of which are beyond their control, including:     ● capacity and availability of oil and natural gas systems and pipelines;     ● effect of federal and state production and transportation regulations;     ● changes in supply and demand for oil and natural gas; and     ● creditworthiness of the purchasers of oil and natural gas.   The occurrence of an operational risk or uncertainty that materially impacts the operations of the operators of our properties could have a material adverse effect on the amount that we receive in connection with our interests in production from our properties, which could have a material adverse effect on our financial condition or result of operations.   In accordance with customary industry practices, we maintain insurance against some, but not all, of the risks to which our business exposes us. While we believe that we are reasonably insured against these risks, the occurrence of an uninsured loss could have a material adverse effect on our financial condition or results of operations.   4 Table of Contents   Employees   As of February 25, 2021, the Operating Partnership had 24 full-time employees in our Dallas, Texas corporate office. Due to state and locally imposed COVID-19 restrictions on the maximum number of personnel working from the office at any time, we have a rotational work from home program in place. The health and safety of our employees is a high priority. We have added safety measures and protocols in our office to enhance employee and visitor protection against COVID-19.