You would think a master limited partnership (MLP) that has outperformed its industry peers by 88% and the Nasdaq 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. No Wall Street analysts follow this company, and institutions hold only 11% of its shares.
However, if you're looking for a profitable high yielder poised for growth from rising energy prices, this is a name you should know.
The stock I'm talking about is Dorchester Minerals (DMLP), an energy MLP formed in 2003 through a merger of three smaller companies.
Dorchester generates revenue 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 Granite Wash.
Perhaps best of all, only about 30% of Dorchester's holdings are developed. That adds to the potential for a rising income 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 the sales 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 more cash flow when natural gas prices are rising.
Dorchester also differs from many of its MLP peers in that its general 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 flow.
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 to offset production declines from a steady stream of new wells on its acreage.
During 2012, 490 new wells were completed on the MLP's properties.
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 a year 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 reduced earnings, 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.