Q3 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the third quarter 2019 of Blackstone Minerals LP earnings call.

This time, all participants are in listen only mode leader, who will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then tariff on its tough to all telephone.

I would now like kind of contracts over to your host Mr., Brent Collins, Vice President Investor Relations. Please go ahead Sir.

Thank you Bella good morning, everyone I think for funniest either buy online for Blackstone minerals third quarter 2019 earnings conference call.

Today's call is being recorded and will be available on our website along with the earnings release, which was issued yesterday afternoon.

Before we start I'd like to budget that we will be making forward looking statements. During this call about our plans expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially.

From the results expressed or implied in our forward looking statements.

Especially these risks you should refer to the forward looking to the cautionary information about forward looking statements in our press release from yesterday and the risk factor section of our 10-Q.

We filed later today, we may refer to certain non-GAAP financial measures that we believe are useful in about <unk> valuating. Our performance a reconciliation of those measures most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release yesterday, which can be found on our website at Blackstone minerals telecom.

How many officials on the call. This morning are come harder chairman and CEO , Jeff what President and CFO Holbrook Dorn Senior Vice President of business development Front, Morris Senior Vice President of Engineering, geology, and Steve Putnam.

Senior Vice President and General counsel with that I'll turn the call her to Tom.

Thank you good morning to everyone and thanks for calling into the third quarter conference call.

We feel that Blackstone reported solid results for the third quarter total production for the quarter averaged 49000.

Oh the per day.

Royalty volumes increased 14% year over year, driven mostly by growth in our Permian and Shelby trough production.

Our working interest volumes declined by 25% versus last year.

And that was done on purpose, we participated as a working interest partner with two key operators during the last downturn in order to facilitate continued development of our mineral acreage.

That program Kickstarted. The current original round of Shelby trough development and create a lot of value for our shareholders.

Continue to benefit from that working interest investment even after farming out all of our capital obligations through additional override volumes and backend potential.

Overall, our production is trending in line with our revised expectations.

You'll recall that we increased our full year production guidance last quarter, and we're tracking to be right in the middle of that range for the year.

Weaker commodity prices impacted our financial results for the quarter.

Including wider differentials for natural gas and lower NGL realizations distributable cash flow was down a bit for the quarter, but we were able to maintain our distribution at 37 cents per common unit, while generating excess distribution coverage, which allowed us to pay down too.

The 3 million of death in the quarter.

At the end of the third quarter, we had a total of 97 drilling rigs operating on our acreage over 60% of those are running in the Midland and Delaware basins.

The haynesville and the Bakken had 10% or more share of our rig count with the balance spread of course cross that.

The entire portfolio.

We continue to see good levels of permitting activity and well additions despite the general slowdown in drilling activity.

During the quarter, we added 4.8 net wells on our acreage consistent with what we've seen over the last year the largest contributor.

Were the Midland and Delaware basins with 1.7 net wells, the Haynesville Bakken and Eagle Ford contribute to further 2.1 net wells with the remaining net wells coming from outside the top four place.

In 2018, we added 21 net wells across our acreage, which was a company record year to date, we that a little over 16 net wells. So I think we have a great chance to meet or beat that record in 2019.

In fact, we're aware of approximately 10 net wells in the Permian alone that have recently been completed or in the process of being completed so those wells could potentially move that number up meeting fully if we see the income and this year.

In terms of permitting activity, we saw 454 horizontal permits and are in our acreage during the third quarter.

Which is down slightly from 474 last quarter.

The decrease related to fewer Eagle Ford permits permitting activity was flat in both the Midland Delaware area and the Haynesville and we actually saw an increase in permitting in the Bakken.

We didnt have any meaningful acquisitions during this quarter the macro environment is frankly tough right now and in response to that we've pulled in our horns. Some on acquisition on the acquisition front and are being more selective.

We havent seen anything that we can't live without we're being a bit more defensive at the moment and while we're in that mode, we'll prioritize paying down the revolver, which will position us for future acquisitions or share repurchases.

Last quarter, we discussed the slowdown in activity in the Shelby trough, particularly on the part of BPX <unk>.

Formally.

The lower 48.

Following our earnings call. We received a number of inbound calls from various parties inquiring about that project.

The level of genuine interest is encourage encouraging and we're in discussions now with a few of those groups. Our focus has been on getting activity moving out there again as quickly as possible and I think things are proceeding well on that front.

Obviously, the Shelby trough is an important asset to us and has long term implications on cash flow profile of the company.

In addition to our effort efforts in the Shelby trough, we're doing everything we can to promote additional activity on our.

Acreage generally those of you follow US regularly no that active management of our acreage is something that we believe differentiates us from others in our space and is particularly beneficial in times such as these with commodity prices, where they are and access to capital so restricted for MPS.

We are coming to the end of 2019 was strong current distribution coverage and a very attractive distribution yield over 11% at the current price unit price we plan to give our initial guidance around 2020 as usual in connection with our fourth quarter call.

Okay.

Using February .

With that ill turn the call over to Jeff.

Okay. Thank you Tom and good morning, everyone. We released our third quarter 2019 earnings release yesterday afternoon.

As Tom mentioned, our reported total production of 49000 Boe per day with at the midpoint of the revised guidance range that we issued last quarter and of course that range was revised upwards from our original guidance that we issued in February of 2019.

Royalty production was near the upper end of that guidance range and costs were generally favorable compared to guidance.

Specifically, both DNA and DDNA are trending below our expectations.

Production cost and out of Lauren taxes came in a little bit higher on a percentage basis from what we guided that's as a result of lower oil and gas prices, bringing down revenues.

Ill then information is available through the earnings release, so so here I'm going to focus on a few the items that impacted our financial results for the quarter.

The first of those items I wanted to touch on as pricing, we're all aware that WT and Henry hub prices have moved down through most of 2019, although we have seen a nice bounce here recently.

Were impacted by that but frankly, our hedge portfolios designed to mitigate that impact and it has as you can see by the positive cash realizations from hedges that we recorded this year, including almost $14 million in the third quarter.

Because we don't market our own volumes and therefore don't have perfect visibility on where the oil and gas is ultimately sold we have not historically hedge price differentials between those sales points and hub prices.

Those differentials for oil actually improved this quarter, but gas differentials worse.

In addition, NGL prices were just historically bad in the third quarter trading down to levels that we haven't seen since early 16.

So the combination of worsening differentials and lower NGL prices caused our realized natural gas prices for the quarter. The fall below to Henry hub price, which is an unusual occurrence for us.

Overall, our realized gas price for the quarter was $2.09, an mcf, that's down 20% from last quarter and down over 35% from the third quarter of last year.

The other topic I want to cover at the balance sheet on our current liquidity because as Tom said, we've been even more focused on that in the current environment.

Reduced total debt by $23 million in the third quarter to 413 million as of September 30, and our debt to trailing 12 month EBITDAX ratio came down a little where we are now under 1.1 times.

We had a small price related.

Hi Tech related decrease to our borrowing base in conjunction with the fall Redetermination that just occurred.

Despite that we had almost $240 million of liquidity available to us at quarter end.

As of last Friday, our revolver balance was down to 380 million. So we continue to make good progress on that front.

These lower debt levels and greater liquidity levels are especially important in this difficult energy environment not only does it further de risk what do you.

Minerals business model, but the extra liquidity also positions us to acquire assets at a time when frankly, we're not too excited about using our equity as a funding source for acquisitions.

So overall, we remain very strong financial position, which we hope will set us up to succeed even if this tough energy environment continues.

Finally in this does not have a direct impact on the financials, but some of you may have seen that we filed an S. Three registration statement last Friday.

Statement covers the 14.7 million common units underlying the $300 million of preferred shares that we issued to Carlyle two years ago.

Carlyle now has the right to convert its preferred shares to common so we needed a registered those underlying common shares.

Certainly does not indicate that we plan to sell additional shares and we have no indication from Carlyle that they intend to convert out of their preferred position and to comment at this time.

With that fell I will turn the call over two questions.

Ladies and gentlemen, if you have a question at this time. Please press the star and the number one key touched on telephone. If your question has been answered or you wish to remove yourself from the Q. Please press.

First question comes from the line of PS Haven.

Energy Your line is open.

Good morning, and thanks for taking my questions.

Okay.

So my first question pertains to capital allocation.

You just sort of your thoughts on you unit buybacks versus distributions versus debt reductions. Obviously this quarter you paid down some debt $20 million worth, but given where the units are right now does that kind of bump up the priority on unit buyback. So just wanted to get.

To get your thoughts on that subject.

Sure appears this is Jeff Thats a great question we.

It really just depends on the opportunities at the time I mean first priority all ways for us is to maintain a really strong balance sheets that we were as you cited we were focused more on that this quarter with.

Using virtually all of our excess cash flow to reduce debt balances and we just think that positions us to be in a better positioned to take advantage of opportunities down the line, especially when as I mentioned in my comments were not too excited about.

Using equity directly to finance acquisitions, I think from that point and we feel pretty good about our liquidity position today. They from that point, it's just what gives us the best opportunity I think as.

As you mentioned that potential for share repurchases. It's certainly there we are seeing some interesting things in the acquisition environment. So it's just what provides us the best.

Kind of long term IR ROI on the use of that capital. So again kind of focused on debt reduction, but we feel pretty good about our liquidity today.

And it's just kind of really depend on primarily what we see out there and the acquisition market going forward.

Great and then my follow up.

Jeff It pertains to Shelby trough and I know you guys are working hard to get some other producers in there.

Drilling in the area, but given that.

Exzeo is postponing the completion of some of those Ducs that I think you thought might get done last quarter. When you reported how does how does it.

Impact the 2020 production profile for the company because I thought previously we thought it might be more of an impact at 21, rather than a 20.

Yes, so appears maybe I'll take that and then see if Tom I just want to comment on Shelby trough progress.

Generally I think thats right so less.

Last quarter, the expectation was that Exzeo was going to move in and do those.

Complete those ducs on a little more rapid timeframe and that was going to push out the impact I think now look.

Yeah.

Well, we trust one of our bigger areas of production I will point out again that it's dry gas so.

So it's not as big a percentage of our total cash flows, but I think with those dogs. Our current understanding of what echoes plans are out there, which is a little more delayed than we originally thought they were going to be I think as we get into the back half of 2020, we'll see.

More of the volume impact just given the way that those wells generally.

Come online and stay at pretty flat rates for for 12 to 18 months. So I think as we get into the back half of 2020.

That will.

That will come more into play as Tom mentioned in his remarks, where we are certainly out there trying to pull every lever that we can to accelerate volumes not only in the shelby trough, but across our portfolio. So there's just there's a lot of balls in the air right now.

And we'll have to see how some of those things play out, but yes, I think it's safe to say that that with the delays on some of those completions. The effect moves forward a little bit as you said and I want to know if you wanted to.

Well listen I would just.

I would just make some additional comments on the Shelby trough.

You know.

We have.

In the Shelby trough, probably somewhere in the 552 600.

Viable locations.

Out there.

And.

At the 30 wells a year, that's 20 plus years of inventory and we're not anywhere near 30 wells a year.

We are.

We are working.

Two.

Try to position the economics on those wells.

Where they can compete for capital.

Other plays on a.

A full cost basis, a low low entry.

But strong drilling commitments.

And working with our.

Carter's around royalty rates to allow them to have economic success in a constrained natural gas pricing market.

But this is a very very long term project.

And it's going to be around for a long time, and we are going to do everything we can to efficiently manage that property to produce cash flow to provide distributions to our unitholders for years to come.

Thank you Tom Thank you Jeff.

Thanks beers.

Again.

I would like to ask a question. Please press Star then number one on the telephone keypad that is Taiwan telephone keypad.

Our next question comes from the line of Schultz from RBC capital markets your lines.

Hey, good morning.

Just on the gas differentials is that something you expect to reverse you hedge that going forward. I know you said you have kind of limited line of sight, there or just any more insight on kind of what caused that impact this last quarter.

Well I think TJ. This is Jeff and others may want to chime in I think.

You just saw a little bit of a perfect storm of a lot of Permian gas.

It's coming from the West and Marcellus gas coming from the east that all negatively impacted differentials around these Texas.

There are a couple of large pipelines that are.

Ones.

Underway now that that's meant to alleviate some of that that will bring the gas down to the Gulf coast.

So I think you'll see it just.

Come and go until those pipelines are complete just depending on how much gas is flowing into the area. So it's probably something.

That.

I know I'd have to be back as bad as it was this quarter again that two of nine realized price on gas for us was very low.

But we'll have to see how that goes until until those pipelines are completed.

As I said, it's really tough for us to hedge differential since we're not the ones actually marketing the gas our producers do that for us it's tough to have great visibility on exactly where the specific sales points are so we have not historically hedged differences for that reason for that we don't get the physician that we're hedging something that we're not actually exposed to.

So I don't think that practice.

We will change but.

Yes, I don't know.

As other comments, yes, I think thats the physician TJ I doubt, we hedge it and.

And help should be coming in the near term on solving those differentials.

Okay that makes sense and then just on the distribution.

Thinking about coverage is there a certain level.

Coverage, where you kind of reevaluate the distribution level, just how should we think about that over the next 12 months.

Yes. So this is Jeff.

What I'd say that we've found coverage to be very valuable for a number of reasons right. One it keeps the balance sheet in shape.

It gets opportunities not only does it help to fund acquisitions or share repurchases or debt repayment in times when markets are more choppy, but frankly, it gives us a little greater flexibility in what we can acquire for example.

We have often acquired production that is more backend weighted weighted right. So it allows us to sort of feather in a portfolio of acquisition that doesn't just focus on PDP heavy stuff. So we get cash flows immediately but you know it's going to come off soon and so it allows you to construct.

A nice acquisition cash flow profile that extends accretion.

Across a number of years and again, having coverage and not having to focus so much on the immediate impact of addition of of an acquisition has been very helpful. So what I'd say as I think that that's going to continue and.

And we will continue to look to have some level of distribution coverage.

As we go forward and that will.

Well with us in with the board go into our thoughts as we're deciding on distribution models.

Got it makes sense, that's all I got thanks, Jeff.

Thank you Sir.

Your next question comes from the line of fuel Stewart with Scotiabank. Your line is open.

Good morning, guys.

So I appreciate the appreciate the information on the Shelby trough I understand that you are working on some kind of creative solutions to potentially bring in partners on just kind of curious adult men in the last time that you all gave a well cost number for that area, but can you maybe remind us what.

BPX ANEXIO are averaging in terms of well costs in that area.

Yes.

Sorry, this is Brock Morris.

The next year wells during the $12 million to $13 million range.

And the BP wells are about $18 million.

Okay understood and then I guess as you all are evaluating options on is there potential that you all would participate and are working interest fashion in order to.

Tracked and operators or is that an off the table and syntel kind of pivoted away from that more recently.

This is Tom I would tell you that.

Everything is on the table.

In terms of looking out over the next two to three years in terms of proper management of our balance sheet as well as proper management of our distributions.

You know.

Our legacy long term owners are our owners of this company because of the distributions.

We certainly like to maintain and grow our distributions, but sometimes the industry doesn't allow that and we're not going to chase growth just for growth sake. We are very focused on distributions were also very focused on our balance sheet.

And.

Working interest can work for you at certain times, it's not our preferred way to go but I would tell you that that question that you asked is very much in our minds around.

How we're going to reconstruct the program over the next couple of years in the Shelby draw.

Hi, and we'll have.

More on that later.

Your next question comes from the line.

Thank you Maam your line open.

Thanks, just just a quick follow up I'm, just curious what you guys you're seeing.

No you're not active right this moment, but and in the middle market as far as acquisitions is that a buyers or sellers market.

And specifically, what what's kind of going on in the Permian.

They are tied as this holbrooke.

It's more of.

In the markets actually gotten somewhat slow I think there is a broadening gap in my opinion between.

Buyers and sellers sellers, especially in the Permian are still looking back to kind of 18.

Prices when things are feeling pretty good in the third quarter.

And the market just from a from the buy side, just feels a little bit more rocky than that.

And I don't think so our expectations have come in accordingly.

That's just our opinion.

Some other soundbar peers out there have been more active on the acquisition front and then.

We didn't have weight, but.

As it were seeing right now.

With with other public companies like one that IPO to earlier this year does it make it a more competitive market.

Or do you not necessarily all play in the same areas.

Yes, I mean, I think it takes a competitive market right now is more information comes out on all these place people price the pricing gets more and more efficient.

And everyone's working with.

With a similar toolbox, so yes I think.

A lot of these plays go on the more competitive against because everyone knows more about these plays.

Appears this is Jeff I mean.

There was so much private equity money coming into this space in a few years before.

19 that.

I don't know I know that we felt like the competitive environment has changed a lot of its been competitive now for a number of years.

And just because someone went public.

They are may not give some more access the capital I think they had a lot of these PE bad guys. We're getting re upped and there was a lot of availability.

The company was active before they went public and.

Im sure that we active deemed public as well.

Great. That's very helpful. Thanks, guys.

It appears.

Thanks.

Again, ladies and gentlemen, if you have a question at this time.

For the number one can you touch on telephone.

That is Taiwan Touchtone telephone.

Okay, well, we don't seem to have any further questions. So we thank you all for participating in our third quarter 2019.

Earnings call and we look forward to speaking with you the fee.

This concludes today's conference call. Thank you for your participation you may now disconnect.