After looking through the numbers for Dorchester Minerals (DMLP) again this morning, I decided that I can’t see a way forward for them to pay a distribution that’s much more than half of their trailing distribution over the next couple quarters. I think the annualized payout is going to drop to something in the neighborhood of 80-90 cents unless oil and gas spike up nicely early this year, and I think that will hit the shares. So I’m selling my shares at $25 and change, with the thought that I will re-enter this position after oil and gas prices have stabilized.

I do still like the company and their low-cost, low-key business of collecting royalties on owned properties around the country and juicing that with a little bit of partnering to boost production… but they are, almost by definition, pretty passive and won’t be able to do much to boost returns if oil and gas prices are very low. The shares are down in price considerably from the Summer highs, but I suspect they’ll fall further as the primarily income-focused investors who own the shares realize that the forward yield is not going to be anywhere near the trailing yield.

The current trailing distribution is $1.89 for the past four quarters, which makes the yield look pretty enticing again (that’s a 7.4% yield at the current price). But I think we’ll see substantially lower distributions, and that some income investors who haven’t been following the company closely will be surprised at the size of the drop in payout and sell, making the $25 level look like a much more appealing sell price. DMLP has been emphasizing oil more of late (though it’s still only about 25% of production), and has also been investing more into net profits interest operations, mostly in oil in the Bakken, that increase their cost and give them greater exposure to oil profits… but that means they’ve gradually become more levered to oil prices. That was a good thing until the Summer, when it started to be a bad thing (natural gas is down too, but it’s only down about 25% versus the 50%+ fall for oil).

Dorchester Minerals is still more of a gas royalty company than an oil royalty/net profits interest company, but they also depend not just on continuing royalties but on interest in new leases and production increases to counter the ...