Q1 2020 Earnings Call

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Later, we will conduct a question and answer session and instructions will follow at the time.

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I would now like to turn the conference over to your host, yes, what President and Chief Financial Officer. Please go ahead Sir.

Thank you Angela and good morning, everyone.

Thank you for joining us either by phone or online for the Blackstone minerals first quarter 2020 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 evening.

Before we start I'd like to advise you that we will be making forward looking statements. During this call about our plans expectations and assumptions regarding 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.

For a discussion of these risks you should refer to the cautionary information about forward looking statements in our press release from yesterday and in a risk factor section of our 10-Q, which we anticipate 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 to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at www Dot Blackstone minerals dotcom.

Joining me today on the call from the company or Tom Carter, Our chairman and CEO, Steve Putman, Our senior Vice President and General Counsel and Garik Remy on our director of engineering.

So I'm going to kick things off today, we're living through as we all know very challenging time to Mr. This global pandemic. We're just had a big impact on all of our lives.

Given the unique circumstances facing our industry and Blackstone, we're gonna take a little different approach to the call today.

We had a very solid quarter from an operational and financial perspective, despite the worsening commodity price environment.

We have included all the usual details about our performance for the quarter in the earnings release, we posted yesterday.

But I suspect most of you we're more interested in our plans to deal with the incredible disruption that we're going through as an oil and gas industry. So I was going to touch on a few points of our around our financial condition, and then I'm going to turn it over to Tom to discuss our response to everything going on.

First as you may have seen in the earnings release from last night, we have withdrawn our production and distribution guidance for 2020.

To the extent that we can get greater clarity around our producers plans for the year, we are happy to revisit those guidance measures, but for now there's just simply too much uncertainty in the market and our Crystal ball is frankly, a little cloudier than usual.

Because of this market uncertainty and are concerned that it may persist for some time, we've put in place substantial hedges for 2021 for both oil and gas. The further are already robust 2020 hedge positions.

We added 480000 barrels per quarter, a crude oil hedges at an average price of 36 18 per barrel.

And we put in around 7.3 Bcf per quarter on natural gas hedges at an average price of 260 per Mcf and just to put a little context around those volumes. They represent about 40% of our reported first quarter 2020 production for both oil and gas.

Full details of this hedge position can be found in the 10-Q that we plan to filed later today.

So just quickly turning to the balance sheet, our borrowing base was set at $460 million last Friday as part of our regular semiannual redetermination process.

Obviously, the weak commodity price environment had a negative impact on that borrowing base.

Well, we were able to get through the process with no increase in our bank pricing and a very difficult banking environment. I think that reflects the moves we've made a really shore up the balance sheet recently and present Blackstone is a very strong credit.

Speaking of our debt balance we continue to make very important strides in lowering our total debt load and maintaining our leverage ratio at very healthy one times trailing EBITDA.

Total debt at the end of the first quarter was $388 million and as of today that debt balances down to $350 million.

We will continue to aggressively target further debt reduction throughout the year.

So I'm going to leave it there my prepared remarks and turn it over to Tom before we open it up for your questions.

Thanks, Jeff.

Turning to everyone.

We want to start let's say in that we hope you're all healthy and doing well.

Some we've taken steps to protect the health and welfare employees.

As well as the health of our company combination of simultaneous supply and demand shocks have created a challenging as challenging environment is obviously.

Over my career.

Our visibility into producer activity is more limited today than it normally is we do know that the rig count.

Our down by more than 50%.

Global Capex in the energy sector is down over 30%.

Many producer balance sheets are strength.

This will have an impact on the volumes produced on our minerals and the rule and royalty acreage at the root of this is a dramatic crash in the oil prices that we are all well where supply is contracting quickly, but it's difficult to overcome more than 25 million barrels of oil today.

Hold at 19 related demand destruction.

It's tough to know how long this will continue so.

So we have taken the approach that we will be prepared for the worthwhile, hoping for a speedy recovery.

So let's talk about how we are responding to this downturn.

We moved early in the cycle to reduce our costs as we've discussed on the call in February we made it difficult decision to reduce our workforce by approximately 20%.

We also reduce board and executive compensation.

To put some context to that our total target executive compensation for 2020 is down 64%.

For 2019.

We're seeing the benefit of these cost reduction efforts in our reported gionee and expected to be at or below the low end of our original guidance range of 39 to 43 million of total DNA for 2020.

Excluding the restructuring charges, we recorded in the United in the first quarter.

As we announced in April our board of directors decided to lower the distribution on our common units to the very low eight cents per unit for the quarter.

This allows us to retain substantial amounts of free cash flow from the business.

Well production volumes remain strong and our extensive hedge portfolio provides protection from the low price environment.

With a coverage ratio of four times for the first quarter of 2020, we've already made good progress on our debt reduction efforts and expect to exit 2020, with our balance sheet in a very strong position.

As we go into the next year.

We're taking advantage of the relatively optimistic view on natural gas prices to aggressively pursue new development opportunities across our acreage.

Our reserve base is approximately 70% weighted to gas.

And we have numerous high interest positions in the leading gas basins like Haynesville and Austin Chalk for example.

We're very excited to have signed a deal with ace on to restart development on our acreage in the Shelby trough in 2020, and Angelina County, Texas.

This is an area previously operated by BP energy.

Our agreement with eight on was just finalized.

Actually today.

And is similar to our deal with BP in that eight on receipts reduced royalty rates for our acreage in exchange for minimum drilling commitments, assuming the initial wells in the program go well.

It should lead to significant drilling activity on our high interest acreage there as we move into 21 and beyond.

As a private company, but has been a major player throughout the Haynesville for some time their capital resources and extensive experience drilling in the Haynesville make them an ideal partner for us at this in this important area.

We hope this is the first.

In a program that could last well over a decade.

We're also diligently pursuing ways to stimulate additional activity in the San Augustine side of the Shelby trough via the existing operator, and bringing in an additional operator for operators.

Our objective with the crude forward gas price curve is received this large resource over the coming years, and we feel we're off to a great start with the thought in group.

All of these strategic decisions are designed to make Blackstone ready to deal with whatever the market may throw at us in the coming quarters.

We will continue to for prioritize the balance sheet and seek to drive activity on our acreage as we've always done.

This will ensure our ability to whether the current store.

Position us with ample liquidity to take advantage of opportunities once energy sector recover.

Finally, I want to thank our employees for staying focused and for working really hard while adapting to a rapidly changing environment in March we transition to a fully remote workplace and since that time, our employees have continued to make.

The trains run well and on time and execute on the many strategic initiatives we are pursuing.

With that operator, we'll open it up for questions.

Ladies and gentlemen, if you have a question at this time, Please press Star Sydney number one on your key.

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And your first question comes from Steve Decker with Keybanc.

Hey, guys.

Just wanted to get a sense of what you guys need to see to start paying out more of your cash flow.

Is there certain debt metric or maybe commodity price you guys are looking for.

I'll take a stab at that Steve.

We don't have a defined debt.

Metric that we're trying to get to right now and in an absolute sense today.

This is a function.

Of there's there's obviously a very clear circular relationship between reserves production volumes commodity prices borrowing base the termination as dependent upon those.

And.

Our outstanding debt as a percentage of our borrowing base so as we.

Look forward.

And see.

What our production is going to look like as we can get a more stable position on that as we see where commodity prices are going.

We will continue to refine.

Our our.

Our debt metrics and are.

Direction so.

Until we see clarity in those areas, we will continue to pay our debt down pretty aggressively.

Yes, once we do see what those metrics will look like and should they indicate.

We've got plenty of coverage, we will as soon as that happens we will commence to increase our distribution payout.

If that answers that question.

Yeah. That's a that's very helpful. And then I am I just said one question on the eighth on deal.

These are the initial four wells in the first year do you had a net number on that and then.

For is the minimum.

A maximum range associated with that as well.

Steve This is Jeff.

Yeah, we are generally.

Around a 50% mineral owner in the entire area. So I think just from a very round number perspective.

You can use that as a basis on any given well, let's drill probably frankly were were normally a little higher than that.

But just probably a good round number in terms of of how they would net down.

And then while fourth amendment for the first of the well commitments step up pretty.

Significantly from there I think as we mentioned in the press release by the third year. It moves up to a 15 well per year commitment, there's certainly no maximum.

I would face on wants to.

Drill more than they are they are welcome to do that.

Which will be very much probably results in commodity prices.

Got it okay, great. Yes, that's that's very helpful.

Okay.

Your next question comes from Brian and Downey with Citigroup.

Morning, guys. Thanks for taking my questions on that the Haynesville and Shelby trough.

Nice job on the agreement announced this morning.

You touched on the prepared remarks, but I'm wondering if you could characterize more broadly with other operators what interest levels, you're seeing in dry gas plays like the haynesville versus prior quarters and from your conversations how you think operators and potentially thinking about dry gas activity given oil volume curtailments, we're hearing.

Cross the industry and the potential for us for associated declines associated gas declines more broadly.

Yes. This is Tom I'll take the.

They have at that and then Jeff can chime in as well.

I would the first thing I would say is I think it's a little bit early to really understand.

The.

Industry.

Reaction to the seeing the six to one BT you equivalency between gas prices and oil West, Texas intermediate prices.

Being.

Hit on a BT basis for the first on that I can remember in quite some time.

And.

The inferred.

Benefit, but that may bring to dry gas plays like the haynesville, but we're we're optimistic that those areas will.

Get more activity relatively speaking then they've than they've gotten in the past, Jeff you want to.

Yes, Brian So just to add to Toms comments I think that.

One we are seeing a little more interest in drier gas plays I mean for so long range it.

All of the capital was rushing to the Permian.

And now with the collapse in oil prices and again as Tom mentioned earlier kind of relatively optimistic view on gas, we're starting to see some some real rebounding interest.

In gas and.

We have looked at in internally and looked at some third party sources as well and for example, you take our Shelby trough dry gas wells in the economics at $3 gas and we think they are actually much superior to core midale at a 30 to $40 oil price and so.

I think that will bring some capital back to these spaces and then the the other thing that's sort of beneficial for Blackstone is we own so much of east, Texas is that we can.

As a as a high net mineral owner and a lot of these areas weaken structure deals like the deal with based on that can incentivize producer activity.

So hopefully we're going to see the marriage of both more producer interest and our ability to kind of match that up with creative deals and maybe it really works out to something and is and again as Tom said in his remarks, we think eight onto a first step we would certainly like to take it further.

Okay. That's helpful color and then maybe a quick one on go forward strategy around 2021 hedging.

I guess, how should we think about potentially layering more on overtime is that something that theres, a particular price point you'd like to see to add more thats that'll be more methodical from this point given the amount you've you've hedged thus far just how thank dot sir.

Yes, what we wanted to do first we're just take a big chunk of the risk off the table and so we were.

Pretty pleased that but.

Gas hedges on it to Fiftys and then the two Sixtys and then got some in the two seventys as well.

Which is very consistent with our price levels for the 2020 hedge book obviously.

The the average price on those hedges for oil is coming down, but again that was more about risk removal I think you'll see us continue to be methodical in our hedging as we always have we just with especially in this time, we're really focused on getting the debt balance down is that we are just valuing greater certainty of cash flows window.

Production picture so.

Yeah, we'd be really happy to be meaningfully wrong on a significant hedge program in 2021.

Great I appreciate appreciate the color.

Your next question comes from Pearce Hammond with Simmons.

Good morning, and thanks for taking my questions. My first question is kind of a hard one but I know you're not providing guidance for 2020 I completely understand why but just curious if if you did have a sense from some producers about kind of at the level of volume. So it could be impacted in Q2 Q3 from production shut ins curtailment.

Yes, I mean are there any rough guardrails, you can provide around that.

Yes, this is Jeff and obviously.

Bomber Garrett want to chime in they can I mean, all I would say and Tom sort of touched on it and as in his opening remarks is that we are.

We have a broad broad acreage position around a lower 48, and so you look at what's happening in rig counts and to maybe to a little bit lesser extent permits, but we're starting to see it in terms of new well adds trending down as well so.

Look we are sort of.

Battening down the hatches here to prepare for what could be a rough spell.

In the oil patch for awhile, and I think thats going to be youre going to see that manifested by.

Continued reductions in rig count and continue.

Deferrals of completion activity.

And to a more limited extent some shut ins, we havent seen was wide scale shut ins yet, but we've seen a few and it's as we said just really tough to know where that's all going to go see your guess theres, probably as good as ours.

Okay completely understand thanks, Jeff and then my follow up.

You know when you look at the credit facility or 77% drawn as of May the first I assume that you would expect that percentage to decline as the year progresses since you're retaining more cash to fortify the balance sheet do you have a target that you want to get too and it given the environment right now with where the fed.

Just kind of supporting the bond market could you consider a bond offering to pay down the credit facility and improve the liquidity.

Well to answer the first.

Question their peers as we do expect to continue to.

Pay down debt pretty aggressively I mean, just this quarter rhyming just coverage and this quarter was in the neighborhood of $50 million net probably compresses a bit as we get through the year just as you know because we'll feel the the full impact of the price decline specifically for for oil a little more fully next quarter.

And then whatever happens with shut ins and other volume declines.

But we have position the distribution to aggressively pay down debt, while we've got such a strong hedge portfolio and while production levels are relatively good so.

We would expect to continue to pay down pretty aggressively I don't know that there's a specific target what we want to do is just make sure that we've got sufficient cushion against the borrowing base.

And so we feel like we've got a good plan to do that completely here you on the high yield at the those two words were sort of the words that would not be spoken around this company for a long time I think thats, probably the case, if nothing else you're going to be looking at.

Pretty good increase in interest rate risk. So I think as long as we feel comfortable like we do today.

That we can appropriately manage our liquidity around the credit facility, we probably stay there but.

Everyday is a new day in this market.

Thank you Jeff.

Thank you for your thanks.

Your next question comes from Derek.

With Stifel.

Hello, Good morning off.

Good morning to Eric.

I am I understanding the challenges associated with 40 guidance could you offer color on where activity, including rigs permits and net wells added stands for for Q1.

Sure so.

We had a pretty good production increase in the Midland and Delaware, but we are seeing.

Rig counts fall there we saw rig counts go from around 64 in the middle of the ended the year down to 47 at the end of the first quarter.

Also probably the biggest decline in.

In active rigs no surprise, probably anybody was across the Bakken.

Where at the ended the quarter, we set a single rig running on our Bakken acreage.

And then in terms of new well adds I mean, we had.

For the first quarter, we had a nice quarter in terms of.

New well as we had 415 wells added across the portfolio in the first quarter that compares to just under.

500, and in Fourq, you have 19, there's actually above what we saw in in Q1, two and three of 19 so.

Again, I, so so pretty pretty solid quarter overall I think the issue is just where it all goes from here that we're trying to protect against.

Understood and as my follow up I know you guys have taken a very cautious near term view to improve the balance sheet and manage the risk associated with the current commodity environment.

With that said as we look forward what will be you're guiding principles for increasing the percentage of distributable cash flow as to commodity price environment improves.

I would say the answer to that is making sure that our debt balances.

As a percentage of our borrowing base.

Our our further reduced than they are today meaningfully.

Even while our borrowing base may be reduced.

And well we can once we have clarity on that.

And have those metrics established.

We will start distributing more.

Very helpful. Thanks for your commentary guys.

Thanks Derek.

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

Press Star and then the number one key on your telephone.

Okay.

And at this time I would like to turn it back over to the speakers for any further comments.

Well.

This is Tom.

Thank you all for joining us today.

These are clearly.

Times that.

None of us have really experienced before in so many ways and.

I'm, just very grateful to our team.

And feel good about.

The way that we're all working together to put ourselves in a pretty safe position as safe as we can be going through.

These uncharted waters, and we look forward to getting.

Into a better place and returning to a more robust distribution.

Scenario.

But we're going to make sure that the the Companys on sound footing. Thank you all for joining us today.

Ladies and gentlemen. This concludes today's conference. Thank you for participation and have a wonderful day.

Connect.

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