Q4 2019 Earnings Call
Yeah.
Ladies and gentlemen, thank you for spending by and welcome to the Q4 2019, Blackstone Minerals LP earnings Conference call.
At this time.
Concerning the listen only mode.
After Despegar presentation, there will be a question answer session to ask a question. During this time, there will need to press star one on your telephone.
Now I'd like to turn it over to Mr. Brent.
Colin Investor Relations you May begin your conference.
Thank you John Good morning, everyone and thank you for joining us either by phone or online Blackstone minerals fourth quarter and full year 2019 earnings conference call. Today's call is being recorded in will be available on our website along with the earnings release, which was issued yesterday afternoon.
Let me start I'd like to advise you that we'll 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 <unk> results expressed or implied in our forward looking statements.
But especially these risks you should refer to the customer information about forward looking statements in our press release from yesterday and the rest risk factor section of our 10-K, which will be filed later today.
We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance reconciliation of those measures. The 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.
On the call. This morning are Tom harder, Jeff would Holbrook, Dorn Soc Morris and Steve.
I'll now turn it over to Tom.
Thanks Brent.
Good morning to you all call this morning.
[noise] begin by recapping 19 in and speaking about the beginning of 20, which I.
I must say is a.
Quite Oh, yeah.
Oh snapshot of a rapid change in the oil and gas industry from the beginning of 19 to the beginning of 20 so.
Are we go from from an activity standpoint, 2019 was he busy year with the company, adding 19.3 net wells for the year.
Little bit shy of 21 wells.
That we had in 2018, but is it.
But it isn't surprising given the slowdown in the industry activity that occurred throughout the year. We are benefiting from the continued industry attention in the Permian, where we've added 6.7 net wells in the Midland Delaware program in 19 compared to five in 18.
We saw 3.5 net wells added in the Shelby trough dominated the Haynesville program, which was weighted to the first half of the year for sure and is higher than the 2.8. We added an 80, we've discussed previously how activity the Shelby trough slowed during the year in response to.
Rapidly declining natural gas prices. So it wouldn't shock anyone that completion in the haynesville slowed in the back yeah.
2019, we continued to see will add to the Bakken three forks in Eagle Ford with 2.3 at 1.3 net wells added 19, respectively.
At the end of the fourth quarter, we had a total of 95 drilling rigs operating on our acreage two thirds those rigs where the Midland Delaware.
Interestingly.
Approximately 50, Univer pursuit of our rig count.
Is active in programs outside of the higher profile resource plays which tells you that despite the negative sentiment surrounding the oil and gas industry. Today, there continues to be drilling activity, even outside the big selfless.
In terms of permitting activity Blackstone saw roughly.
<unk> 875 permits added on its acreage and 19, that's 5% more than we saw an 80.
And over half of those permits were in the Midland Delaware.
Actually 450 horizontal permits were added owner acreage during the fourth quarter, which is basically flat with third quarter.
Acquisition front, we did 44 million of acquisition to 19, most of which was done in the first half of the year.
I talked about this a little on our last quarterly call.
And we have become much more selective about what we look at in terms of acquisitions were being a bit more cautious and while we're in the mode.
We'll prioritize paying down debt.
With our excess cash flow.
In the Shelby trough discussions are ongoing regarding development that important NAFTA.
It's definitely it's a difficult time to be negotiating.
Transactions in natural gas deals.
Right now and.
It is a very challenging time on to put those things to put into play.
Because typically a folks that are willing to come into that play are looking for very long term.
Commitments with a lower royalties and we're trying to balance maintaining activity currently with optionality in the future.
We remain hopeful that our efforts will result in bringing development capital back to the area, where we are.
Dominant mineral loan with almost 50000 net minerals and a resource base that we estimate to contain over six.
Tcf natural gas.
We're also seeing renewed signs of life in East, Texas, Austin Chalk play.
Very early stages, I would say where recent positive drilling results have spurred discussions around some of our extensive acreage position. There. We don't have any new activity in the Shelby draw or that show in our 2020 guidance. The Jeff will cover in a moment, but it's encouraging to see producers interest in the areas where we own.
Concentrated mineral positions that we think that interested only grow with some degree of price recovery.
From a financial perspective, we are in pretty good shape, our focus on balance sheet strength resulted in the outstanding borrowings.
394 million as of year end, which is down about 40 million for mid year and our current debt to EBITDA ratio stands at a very healthy one time.
So while blackstone's business is fundamentally solid we have to acknowledge that we're in a tough industry environment.
Rig count has dropped about 27% since the end of 2018.
As most operators now trying to live within cash flow.
And have moderated their activity.
We're in February the prompt month contract for natural gas has been well below $2 since the start of the year and the forward strip stays below 250 for the foreseeable future.
With all this as a backdrop, we have made some had to make some.
Our choices.
First as we previously reported we made the decision to decrease the distribution attributable to the fourth quarter to 30 cents per share.
Yes.
Even though we had very good coverage if current conditions persist, we expect to target a total payout of a dollar per share for 2020.
This should allow us to further reduce outstanding borrowings during the year through retained cash flow.
We know the importance of distributions to our unitholders and we believe this path balances our historic history of conservative balance sheet management, while preserving a meaningful return to our owners.
Second last night, we announced that we will be significantly reducing our DNA cost through lowering.
Executive compensation and reducing the head count of our organization by approximately 20%.
It's really difficult.
Two to talk about pad.
If it is to par colleagues and friends.
It's an incredibly difficult decision because the impact on those employees affected.
Take killer.
I'd like to thank holbrooke, and Brock and Brent who are in this on this call today for what they've done for many years for our organization.
As well as all the other folks who've been affected by this change.
With that I'll turn the call over to Jeff.
Okay. Thank you Tom Good morning, everyone I'm going to quickly cover our guidance for 2020 and give a little bit more color on our balance sheet. Then we'll open the call up for questions.
As Tom mentioned, despite some of the current headwinds coming off another solid year in 2019 a.
Royalty volumes were up 14% from 2018, and we generated $400 million of adjusted EBITDA for the year.
As we looked at 2020, we expect royalty volumes at 32 to 34000 via we per day.
We base I don't producer feedback on known permits and one other data that we've got a good line of sight on it does not include any contributions from acquisitions, we may make during the year.
Or from areas like the chart, which have real potential, but where we don't have a clear view, we're not giving on activity.
Our royalty volume estimate represents a 9% decline from 19 volumes.
Slightly ahead of what we reported for 2018.
We expect we may see some declines are relatively mature Bakken and Eagle Ford positions.
But most of that decrease is driven by reduced activity in the haynesville.
Well, we saw a huge spike in activity in 18, and 19 that was the main contributor to our royalty volumes growing by 65% over that time.
With the decline in gas prices, we've seen some of our larger producers costs activity.
The resource base there remains of course, and we believe it competes with the best guess plan economics in the country, especially given the proximity of the Gulf Coast Industrial and LNG export markets.
So that area is going to continue to be an important driver of our long term cash flows, but like all gas plays it is challenged right now.
We expect working interest volumes to decline by about 25% in 2020 relative to last year.
That is by design as we intentionally stopped investing in that part of the business in 2017.
As result of all that we expect royalty volumes to increase almost 80% of our total production volumes in 2020.
The other components of our 2020 guidance are generally in line with what we experienced for 2019. That's of course with the notable exception of our general and administrative expenses.
I want to gas industry is facing pressure on a number of French right now.
One of the great things about being a minerals companies, we don't incur the capital the operating costs that can weigh down MP sector at times like this.
The downside is that there's only so many levers we can pull to control our volume growth and distribution levels.
We try to buying the right areas and we promote our undeveloped acreage through creative deals with operators.
The other lever lever that we have to pull is around our internal DNA costs.
As Tom discussions you probably saw in our earnings release yesterday, we've taken big decisive and frankly really painful steps to reduce our cost profile in the face a week natural gas prices and more constrained DMP spending.
Our total DNA guidance for 2020 is $39 million to $43 million for the year.
At the midpoint of that range has a 35% reduction from our total DNA in 2019.
We expect to reduce both cash and noncash DNA cost by over $10 million each for 2020.
As Tom mentioned, the primary areas contributing to that reduction or lower executive salaries and bonuses lower executive long term incentive grants, which will limit share count dilution.
And the head count reductions and Tom talked about.
We do expect to incur a onetime charge connected with these reductions of about $5 million I think thats going to be recorded in the first quarter of 2020, I want to make clear that the guidance range for DNA does not reflect that nonrecurring charge.
Finally, Tom mentioned, our focus on the balance sheet, we had coverage of one and a half times on the fourth quarter distribution that translated in almost $30 million retained cash flow.
Our total debt at year end was 394 million from million or one times, our 2019 EBITDA.
And that debt amount was down to 362 million prior to paying the distribution yesterday.
Expect to continue to maintain healthy coverage ratios throughout 2020, which should further our debt reduction efforts and enhance our overall financial flexibility when the Mark These markets rebound.
With that John I think we'll open the call up for questions.
Certainly again at this time, if you would like to ask a question you can press star one on your telephone keypad.
Again far one on your telephone keypad, if you would like to ask a question well plus just for a moment to compile the Q any roster.
Yes.
[laughter].
Hello.
<unk>.
Okay. So all we have a question from Derrick.
Well with fields from Stifel. Your line is open.
Sure. Thanks, Good morning all.
Or is there.
We regarding your royalty production outlook could you speak to the net well additions.
Implied in your 2020 plan and knows the amount of new net wells the sand from the Haynesville.
Yeah.
Well there because this is Jeff.
I don't think we've broken down expected net wells by specific area, maybe we can follow up with you.
On that I mean, as Tom mentioned the guidance doesn't for example end to end the Shelby trial, even though we've got conversations ongoing about bringing new operator operators into that area or forecast does not assume any net wells into that area, that's really the Louisiana haynesville.
That we're talking about there were.
59, total new wells added in the Haynesville in 2019, which was a.
Big year of activity for us. So, we're certainly expecting that to come down, but again I don't know that we've we've given that specific guidance by area. At this point I'd just add to that the just from a.
Upside.
The possibility and I'm not saying, it's the probability.
Our numbers of wells in the Haynesville in our forecast or de Minimis.
Especially in the Shelby trough like zero.
And there are quite a few ducs out there and there are quite a few wells that we could get drilled by incenting operators through reduced royalties.
But we are we are.
Still playing that out.
And.
You can always.
No in our business as the cycles are what they are.
In gas prices go down people quit drilling.
And then eventually gas prices go up which causes more drilling.
How that cycle plays out.
You can read a lot about that in the financial press and I won't try to suggest a path for that but.
There has been a significant amount of capitulation in the gas side and the drilling is falling off at a very rapid pace, which means there's going to be a rapid decline.
That makes sense and perhaps staying on that topic specifically.
Could you speak to broadly the market interest at present and your motivation to release the acreage in a sub two mcf environment I, certainly sensed a bit attention in your earlier comments as it relates to your desire to write out there and release it.
But certainly its high quality acreage.
That has a market value.
I'll answer that this way.
We've given quite a bit of thought and negotiation with industry on that and we've talked about and a lot of the board level and our.
Our current.
Thought is that we will move towards putting some of our acreage into play.
This year in the shall we draw.
And we will keep certain parts of it out of play.
And that is primarily to give us more exposure to the upside when the gas markets do come back when if they do.
Where and also on the downside.
Adding.
Oh.
Cash flow to the system in 21 and 22.
Two.
To hedge distribution.
So we're really.
We're we're playing it in a hedge manner, we're going to keep.
A fair amount of.
Exposure to the upside, but we're also going to put some acreage in the play now.
Very helpful. Thanks for your detailed comments.
<unk>.
We have a question from peers Hammond from Simmons energy.
Line is open.
Hi, Good morning, and thank you for taking my question.
Jeff Bihar modeling Blackstone is it's fine from a leverage standpoint during this downturn, but I wanted to understand how you plan to manage the level drawn on the credit facility. It looks like your approximately 55% drawn currently do you expect to stay at that level over the next year given the added flexibility from the distribution.
Cutting the Gionee reductions or do you think that percentage could move lower and then finally just.
General thoughts if you can provide them on the upcoming spring borrowing base redetermination.
Sure.
Appears.
Generally the main metric that we.
Well Theres a number of debt metrics that we focus on one is as you mentioned how much we've got drawn relative to our borrowing base and therefore, how much liquidity we maintain.
Just on a on a given time and the other is just making sure that our amount of Undrawn borrowing is really matches up with the way the business is performing and Thats why we focus on debt to EBITDA metrics. So we have historically run in that sort of sub one and a half times really kind of one one to 1.2 times.
A leverage ratio I think we would intend do continue to stick in there in that range in terms of just sort of absolute borrowings and especially after the bonds relative to the borrowing base.
Certainly.
With where prices have gone, we think theres going to be pressure not just on our borrowing base, but on them.
Across the entire industry.
It's been a pretty unusual bank market, where some of these BNP bankruptcies have actually significantly impaired the first lien guys ability to recover capital and we think that that may make thanks, just overall in the space a little more cautious in there and there.
Lending levels. So yes. This is all just part of this conservative approach that we're trying to take to the balance sheet side. So we have thought about 2020 distribution levels.
In a way that will allow us to continue to maintain a pretty meaningful coverage levels. So that we can move debt down and so that either it's going to benefit us and just making step more comfortable with debt levels that they are outstanding or it's sort of loads the spring a bad.
For wind acquisition or buyback opportunities present themselves or when this market turns around you know, we think having a very very clean balance sheet will put us in a position to compete for those assets and a good way so.
It's not so much a specific percentage of the given borrowing base, but we're certainly taking up maybe even more conservative stance just given what we think could be.
Some difficulties across the sector over both the spring and fall Redetermination season this year.
Thank you check for the detailed answer I appreciate it.
Okay.
We have a question from Harry <unk>, how Bob from Raymond James Your line is open.
Good morning, and thanks for taking my questions. My first question is in regards to Deboning coverage.
The last five years, Sheldon or bounce around 1.3 times coverage that what we should assume going forward or is there anything that you think would change that.
Hey, This is Jeff I think in that 1.2 to 1.3 range is where we're really.
Comfortable we obviously ran a little higher than that this past quarter, just to push debt levels down a little bit more but I think in general that's a very comfortable range for us.
Thank you and then my next question is in terms of the production.
Only gave annual guidance would you expect those declines be more fell in the first half the year kind of moderate in the back half or just any general comments on the cadence.
Yeah, well I think it really.
Harry just depends in part on some of the timing of.
Doug skin turned over and then just to see where.
Commodity prices go what I'd say is we would continue to expect that are working interest volumes would fall off more since we're not investing in that part of the business.
At all anymore. So I think you'd see see those production volumes come down in our overall.
Percent royalty our royalty as a percentage of total production continued to trend up during the year. So.
Absent that royalty volumes.
Certainly more stable.
But we are going to be in a bit of.
Down dip here just to some of these existing Shelby Trump volumes play out and I.
Assuming we bring in new operator in which as Tom said that is the intention for this year, it's probably going to be very late 20 or more likely 21 before those new well start to come up so maybe so maybe a.
Slightly front weighted during the year certainly on working interest volumes and maybe a bit on royalty as well.
Great. Thanks that answers all my questions really appreciate it.
Thank you.
Next we have Jeffrey Campbell from Tuohy brothers.
Good morning.
I just wanted to ask two questions surrounding the working interest and of the business. The first one.
Just broadly is the withholding of the investment in the working answer swells set a permanent shift or is that temporary until commodity prices improve.
No.
Jeff. This is Jeff that is more of a permanent shift I mean.
I say that so where weve used working volumes in the past is really to promote or accelerate our royalty volumes that for example, most of our working interest volumes today come out of the Shelby trial, where we participated alongside alongside X T Auto and 15 and 16.
To really kick start that program.
And 17, we farmed out all of those working interest volumes, which is why.
That's declining by design as we mentioned if we had an opportunity to where we thought participating in working interest volumes would promote or accelerate royalty volumes again than we'd take a hard look at that but from a distant overall business standpoint, we are a royalty company and we'll continue to think about working interest volume.
As a way.
Merely just to promote that side of the business.
Okay and then.
My follow up I think you may have just as my follow up was do you have any other non abortion answers and the portfolio other than Shelby trough that might be fungible assets that you would consider selling and yeah. I think you mentioned earlier you might do sell some stuff in Shelby. So yeah, we realize there's a trade off between debt reduction and cash flow sold so I'm just kind of interested in your thanks.
About that as a general premise.
Yeah, well, we've got working interest optionality across several parts of our portfolio and we routinely well sell.
Individual working interest in a in a given well when those opportunities come up. So that's just part of day to day business and we'll continue to happen, but it's not of a scale that really impacts the business and the Jeff I just wanted them to make clear we have no intention of selling.
Anything in that Shelby trough I'm not like you know we sold our working interest rights to outside capital providers in Turkey, and in exchange for overrides and backend.
But we remain very very bullish on the Shelby trough and expected to be in a meaningful contributor to long term volumes. So theres no intention to sell any mineral acreage in that area.
Great I appreciate that color on the last point, thanks very much.
Yes.
Next we have filled two words from scotiabank.
Good morning, guys. Appreciate you all taking the time.
I Wonder if we could.
Talk a little about a little bit about hedging obviously, you all are very well hedged and 2020 I'm just trying to think you know obviously, a very challenging commodity price environment that that we're dealing with today. So just wondering how you all are thinking about hedging into 2021.
And maybe what kind of you know if theres a target percentage of oil and gas production that you're looking to hedge by a certain time and 2020 for 2021, just kind of trying to get the updated thoughts there.
Yep.
Well, Phil as you know we would normally at least have established some initial 21 physicians has been such a difficult forward market that we haven't done that yet.
But.
All of these.
Distribution expectations, we tried to lay out today and our forecast obviously just run off the strip.
So I would think at some point here relatively soon we would start adding physicians for 21 to sort of opportunistically.
But yeah, we would certainly not intend to go into 21.
Unhedged, it's just been we've been a little more hesitant than normal just given how weak the forward prices have been today.
Oh, I'd, just add sort of tongue in cheek.
You know that's one good way to get the prices to go up as to add some hedges.
Yes.
Understood.
And then I Wonder I'm sure this will be kind of out and the 10-K whenever you file that I believe later today, but just curious if you all can give a breakdown of production by area maybe just.
Overall, Permian Haynesville, Shelby trough, Bakken and Eagle Ford.
As a percentage of total production in each area. If you have that handy.
Yeah, we can do that for 19.
The Midland Delaware.
It was about 13, 14%.
[noise] Haynesville.
[noise], Haynesville bowsher, but we'd deanna and Texas was around half.
[noise] Bakken was about 10% and Eagle Ford was relatively small percentage in about three 4%.
And then of course other would get remainder.
Right understood.
Right.
I'm not sure if you all can share this at this time, but.
Joe maybe you know Directionally point us to.
Kind of where you see the Permian growing as a percentage of total production within the company for full year 2020, that's kind of embedded in the guidance.
Yes, we've not given that specific.
Get filled and we certainly expect to continue to see growth.
Out of the Permian.
And likely double digit growth into next year, but.
And given that specific.
Yeah.
Alright, guys I appreciate the time, that's it for me.
Thanks Bill.
Again, if you would like to ask a question you Me Press Star then the number one on your telephone keypad.
I've been star one if he would like to ask a question.
Next we have TJ Schultz from RBC capital markets.
[noise] clarification on the distribution for 2020 is the dollar what you feel gives you plenty of coverage or is there any shifts and how you handle the payout each quarter to now manage distributions.
Each quarter to keep that one to one three times coverage level. Thanks.
[laughter].
I'd I'd answer that this way I think that.
As we have done historically.
We would probably 10 to keep the distribution constant unless there was a meaningful shift away from the benchmark coverage either positively or negatively.
Throughout the year, but.
We set.
We set the dollar target.
Relative to our budget for distributable cash flow and adjusted EBITDA for the year such that we would have a nice comfortable coverage shield that would make that dollar pretty sustainable throughout the year.
And.
Certainly.
Downside activity could could affect it but I think it's more likely that it's got a little bit of upside in it than than downside given the hedges.
[music].
Okay, Great makes sense. Thank you.
Thanks TJ.
I don't have questions at this time I'd like to turn it over to Mr. Tom Carter.
Alright, well.
Thanks, everybody for joining the call today, and we look forward to.
Speaking with you all more in the future. Thanks.
And this concludes todays conference call. Thank you all for participating you may now disconnect.
[music].