Q2 2020 Black Stone Minerals LP Earnings Call
Good morning, My name is FIA and I will be the conference operator today at this time I would like to welcome everyone to the second quarter Twentytwenty Blackstone Minerals earnings conference all lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session. If he would like to ask a question. During this time simply put star and the number one on the telephone keypad to withdraw the question press the pound Keith. Thank you at this time I would like to turn the conference over to Evan Kiefer Director of Investor Relations. Please go ahead.
Thank you see a good morning, everyone and thank you for joining us either by phone or online for the Blackstone minerals second quarter 2020 earnings Conference call. Today's call is being recorded and will be available on our website with the earnings release that was issued yesterday afternoon.
Before we 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 risk they will cause actual results.
To defer can cause actual results could differ materially from the results expressed or implied in our forward looking statements for discussion of these risks. Please refer to the cautionary information about forward looking statements in our press release from yesterday and the risk factor section in our 10-Q, which we filed later today.
We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance reconciliations 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, what can be found on our website at Blackstone minerals Dot com.
Joining me on the call from the company, our Tom Carter, Chairman and CEO, Jeff would president and Chief Financial Officer, Steve Bartman, Senior Vice President General Counsel and Gary Grammy on Director of Engineering, now I'll turn the call over to Tom.
Thanks, and good morning to everyone on the call and thank you for joining us today.
I want to start the call once again by saying, we hope that your families are healthy and doing well as we all managed through this difficult period.
I also want to thank our employees, we're continuing to perform at such a high level, while taking the necessary steps to ensure we do our part to limit the spread of this bars.
It's been a very busy quarter at Blackstone as we grapple with the impacts of lower commodity prices reduced producer activity and constrained capital and credit markets.
We've responded with aggressive actions to lower our internal cost significantly reduced outstanding debt.
An intensified our efforts to drive new activity on our existing acreage.
Before getting into some of the specific steps taken in pursuit of these goals quickly review the environment, we are facing right now.
Thirdly across our acreage we've seen a 40% to 50% decrease from last quarter in terms of permitting activity.
New well ads and active rigs.
We added 2.9 net wells during the second quarter down 25% from last quarter not surprisingly the decrease was most pronounced in the Midland and Delaware basins in the Permian, where we added 0.8 net wells in the second quarter compared to 1.6 last quarter.
At the end of the second quarter, we had a total of 29 drilling rigs operating on our acreage down from 50 at the end of the first quarter.
From about 100 operating on our acreage at this time last year.
As with new well additions the majority of the decrease in the rig activity is attributable to the Midland Delaware area.
On our last call in May we discussed our initial steps in responding to the industry downturn, including are meaningful reduction in Gina expenses reduced distributions and initial success and restarting development in our Shelby Trollope Haynesville book Bowser play in East, Texas.
We built on those steps in the second quarter to further strengthen our balance sheet and to offset some of the expected production declines in early June we announced the sale of two asset packages in the Permian both of those transactions closed in July and brought in net cash proceeds of 150 million.
That cash together.
With the retain free cash flow from our operations enabled us to reduce total debt by over 230 million or 60% from the end of the first quarter of this year.
Our outstanding debt as of July 31st was down to 153 million.
Well, it's been a challenge it's been challenging to find many silver linings lately one of them is more constructive outlook for natural gas prices with several of our major equity research firms, calling for gas prices well above the strip for 2021.
Against that backdrop, we made significant process progress and developing a couldn't development activity in the Shelby trough.
Hey, we signed a new development agreement would they thought energy covering the western side of the Shelby trough.
That arrangement is proceeding as planned and we expect the first well under the program to be spud in October.
Hey thought has already done.
It is considerable land geology in engineering resources to this development plan for the area and we're excited to have them as a partner in this important area.
We've also made progress during the quarter with respect to the eastern side of the play in San Augustine County.
We were able to work with Exzeo energy to incentivize.
Them to complete and turned to sales 31 drilled but uncompleted wells are ducks.
[noise] that were spud in late 2018 and 19 these are expected to <unk>.
Begin coming online later this year with the full 13 turned to sales by the end of the first quarter of 2021.
We continue to work with X T O and other potential operators to move beyond completing ducs and start drilling activity in the eastern so the Shelby trough play.
Those long term development deals take time, but we're very focused on it and are optimistic that we can get something done, particularly as some of those.
If some of those expectations around higher gas prices start to appear in the forward strip.
The reward for these process steps on balance sheet strength in future development activity is our ability would turn more cash flow to the unit holders, we made it difficult, but prudent decision last quarter to reduce distributions and work to retain more of our cash flow with a lower debt balance our board.
Phil of directors felt comfortable increasing our payout ratio.
We believe the 15 cents per unit for the second quarter balances our goal to provide a strong cash returned to investors with our ability to continue reducing absolute debt levels going forward, even as we expect our production to contrast contract to the rest of year as indicated by our revised guidance.
Overall.
I'm very pleased with the progress we've made in a number of important areas and with that I'll turn the call over to Jeff.
Thank you Tom and good morning, everyone.
We generated 34000 deal we per day of mineral royalty production in the second quarter down 7% from last quarter and generated 42.6 and be a we per day in total production volumes.
We benefited in the second quarter as we normally do from a wedge of checks received during the quarter for production that we had not previously accrued.
As a normal benefit from owning such a large mineral portfolio.
Helped to offset some of the production declines in curtailments, we experienced in the quarter.
We expect that benefit to less than in the coming quarters at the lower rig count should result in fewer of these new checks representing prior periods and that expectation is incorporated into the revised guidance that I'll discuss here in a moment.
We reported $72.4 million of adjusted EBITDA for the second quarter, that's actually up slightly from what we reported in Q1.
Distributable cash flow for the quarter with 64.4 million down just slightly from last quarter and that's a 15 cents per unit distribution that we announced for the second quarter that represents coverage of approximately 2.1 times.
As Tom mentioned, we've made great strides and reducing our outstanding debts during the year.
$153 million outstanding as of July 31st.
Represents a reduction of 58% in total debt since beginning of this year.
We are maintaining a healthy liquidity cushion rather to our borrowing base.
Which was lowered slightly in July to $430 million in conjunction with the closing of the two asset sale transaction.
Our total liquidity as at the end of July was approximately $280 million.
We did update certain of our guidance measures for 2020 in the earnings release yesterday afternoon.
We lowered total production guidance for the full year by approximately 4%.
And the expected production mix is now weighted more towards gas.
This should come as no surprise given that much of the shut ins and the rig count declines have been focused in or their plays like the Midland Delaware and the bucket.
We are building and continued shut ins and reflecting the overall decrease in permitting and rig activity in the revised production range.
Which implies production levels in the back half of 2020 in the mid 30000 via we per day range.
With that I, just want to caution all of you that even in normal times.
A large diverse mineral and royalty position, it's hard to forecast, it's even harder in times like this of rapid change.
So this is our best look as of now with limited information as a non operator, and if anything meaningfully changes in our outlook will provide further update.
We also lowered our lease bonus guidance from the original range of 20 to 30 million to our revised estimate of under $10 million for the year.
We're not seeing.
Much in a way of operators willingness or ability to pay large upfront bonus payments and we expect that trend to continue through the remainder of the year.
The other updates are pretty self explanatory, we expect slightly lower lease operating costs and a slightly higher rate for production and AD valorem taxes, given there is a fixed component to that metric.
We did not make any revisions to our DNA guidance, we are still tracking to meet our reduce our DNA reduction targets for the year as reflected in our original guidance of $39 million to $43 million.
Total DNA through the first half a 2020 was 23.4 million, but I'll note that we did incur up about $5 million of restructuring charges in the first quarter that ran through GNS. So we're making continued progress there. That's as a result of our smaller team working that much harder so I want to join Tom and recognizing our employee.
He is for accomplishing so many important initiatives during the quarter after doing so in a safe and responsible manner, while we adjust to continued working remotely.
With that I will open the call to questions.
At this time I would like to remind everyone that if he would like to ask your question you May Press star one on your telephone keypad now again that star one for any questions, we'll pause for just a moment.
And the first question will come from.
Steven Decker with Keybanc. Please go ahead.
Hey, guys. Good morning, and just want to get a sense the level of shut ins that you guys might have had in the second quarter.
[noise] well.
So David this is Jeff.
We're modeling about 30% with what you know a lot of that concentrated in the Bakken. That's been you know the sort of the poster child for shut ins and the second quarter.
We are seeing more of those come online and we expect that to continue through the year, but in making our estimates for this quarter and then looking at the revised guidance levels. It's at around those levels and then assuming they generally start to come onto the remainder of the year.
Got it okay. Thanks, and then just.
A question here with this nice debt pay down and you guys have had recently is there sort of a plan in place to get do not have cash we're paying out closer to 100%.
Well again this is Jeff and Tom May want to.
Weigh on weigh in on this as well.
But.
As we kind of mentioned in the prepared comments right. What we're trying to do right now is balance a nice return for our investors at these levels with the idea that we could continue to to pay down debt. We don't know how this is all the way the world's going to turn over next.
12 to 24 month, or we're going to continue to be cautious around and prioritize the balance sheet, but obviously with the significant pay down that we had in the in recent months here, we felt more comfortable raising the payout ratio I think that that the idea on this 15 cents is that that should be.
You know what a sustainable level now of course, you know.
We're not variable until we are in these and that's sort of environment, but we'd like to provide as much certainty and stability around that distribution. We just think that's meaningful to our investor groups. So that certainly the intention.
And that given the expected you know some expected production declines in some rollover in hedges that probably does require to the payout ratio creeps up a bit over time I don't know that we would get to 100, because I feel like the idea of retaining some cash flow from debt repayment or share repurchases or acquisitions down the road.
Load or whatever it may be but I think you can see that we'd be comfortable increasing that payout ratio.
Okay, great appreciate the time.
Thanks.
The next question will come from Brian Delaney with Citigroup. Please go ahead.
Hey, good morning help everyone's well thanks for taking the question I guess, given the recent Shelby trough development, an incentive agreements that you recaps could you discuss directionally, where you see your natural gas volumes trending into next year working interest volumes continue to decline, but trying to get a better sense to the other other benefits that that should mainly impact next year given the activity cadence.
You laid out there.
Yeah, Brian. Thanks for the question. This is Jeff look in generally it's [laughter], it's gonna be it a little early right that the based on program will ramp up over the course of 2021, and then step up further as we get.
And to 2022, you know obviously, we haven't put any production guidance as far forward is 2021 that frankly.
To look out that bar at the moment.
But if you just look at royalty and mineral and royalty volumes you know, we should we're going to be offsetting declines in those Shelby trough with these new volumes will certainly be offsetting that decline working as volumes, what can which are almost exclusively gas. We'll continue to decline just because again, we haven't put capital into that business.
Since 2017 so.
I'm not trying to skirt your question here, Brian, but as we look at that 21, we're gonna have a lot of positive things going on and gas.
It's really just going to depend on sort of the more general level of activity across a lot of the other plays to as to whether we are fully arresting the decline are starting to grow gas as we get into.
Later reaches of 2021.
Jeff I'd just add that.
We're working not only the Shelby trough. We're also working in Louisiana in the Haynesville, but we're also working.
Oh on other plays as well and.
We have every hope and expectation of growing our production.
As we can get some of these projects spooled up but it does take time, but.
But we're working very hard on it and.
We expect some production growth eventually once we move through this cycle.
Great and obviously you you think these two agreements recently, but any any additional comments on so what you're seeing compared to the commentary from last quarter on operator attitudes towards towards gas acreage.
I guess I would say that there there is a.
There's still a lot of uncertainty.
On operators on any kind of activity right now certainly.
The industry is getting.
More comfortable with gas, but I think.
She has got quite a ways to go yet I think most people think LNG exports or are still a ways off and so.
I think we're just we're being very cautious about.
Getting too far out in front of.
What we expect but we do see a good long term outlook for gas.
Okay I appreciate it.
The next question will come from TJ Schultz with RBC capital markets. Please go ahead.
Hey, good morning.
Outside of completing the 13 docs you mentioned pursuing deals in the eastern.
Shelby trough in and that it.
It does take time is there any notable reason why you're able to move forward with the development deal and Angelina County based taking more time in Saint Augustine or is it just producers specific plans and their gas price.
Looking forward that move says discussion toward.
I would you do quick answer on that.
It mostly has to do with our contractual relations with our operator in the eastern part of the play and.
We are currently about to reach a point in our contract where we can begin to look at bringing in additional operators out there.
In the event the existing operators don't want to.
Develop at the pace that we're going to try to.
Create out there so.
It has to do with specific contracts and I'll, just say that were working pretty hard to.
Regenerate that area as well and we hope to have some definitive things to say about that before too long.
Okay. When do you reached the 0.22 with other operators <unk>, where are you can reach out to other operators.
Well, it's basically this month.
Okay understood and just lastly on the distribution again, I'm, just kind of kind of think of it in the context of M&A really how big a factor does.
The M&A market play into your say your payout ratio I know you're not variable per se, but is there a view that maybe you moved the payout ratio down in periods, where there's more active M&A market. Just generally how are you thinking about financing acquisitions. Thanks.
Yes, TJ. This is Jeff look that's a great point I think it's something that we'll.
Think about really hard with the board once we get through this.
Kind of period or greater turbulence right now what we're really focused on is kind of balance sheet first.
And then returning sufficient cash to our investors and then really trying to get as much as we can out of the existing asset base right. I mean today extensive weaken can get a new play that whether the chalker or the other part of the Shelby trial like Yep, that's basically for US. It's an acquisition that you don't have to pay for right. It's a new.
Stream of cash flows that you don't have an upfront payment on so that's really what we're focused on if the world starts to really brighten and.
The the banking Martin Lucent, loosened up a little bit and capital becomes a little more available and we can supplement or an active M&A program with a little more retained cash flow then I think that's certainly something that will discuss.
But for right now I think it's it's really focused more on on balance sheet and current assets and then maintaining the right payout ratio to to make sure. We're taking care of those two things.
Alright, Thanks [noise].
The next question will come from Pearce Hammond with Simmons Energy. Please go ahead.
Yeah. Thanks for taking my questions and good morning first question is Jeff what are your latest thoughts on on hedging.
Hi, good morning peers. So as you know we put in a have a pretty significant round of.
Hedge is a little earlier this year I'd say, we'll just continue to be often opportunistic around adding levels I mean, obviously.
Levels for for 21 have improved and hopefully continue to improve so I think with it we will look as we always do to systematically build our hedge portfolio over the course of the year and then at some point you know as we get closer towards the end of the year look to potentially adding some initial 22.
Hedges, so we're going to continue to be programmatic about this it served us very very well in this quarter or with a lot of protection through our hedges and so I think we're just going to continue that corporate philosophy and at all just kind of goes into that comment I made earlier about trying to provide a decent level of visible.
Realty uncertainty around the distribution.
Great. Thank you and then my follow up.
And this touches on earlier question pertaining to the balance sheet, but first of all congratulations on the success you've made on the balance sheet, what metrics or are you looking at to define hey, we think the balance sheets in good shape, because a leverage ratio right now is low.
But are you looking more just the absolute level looked at where I'm going with this is just to better understand you know when do you feel like the balance sheets at the level to support a higher payout.
Similar to what someone was asking earlier.
There's all this is Jeff I'll start with that than anyone welcome to chime in but we have historically looked at a number of things right. So its absolute debt levels. It's degree of cushion between outstanding borrowings and the borrowing base and then we we pay a lot of it.
Tension to our leverage ratio as well so debt to trailing EBITDA.
And we continue to look at all of those things I think what I'd say is it in times like this.
Where you've got a corporate banking market that is really pulling their talent then pretty dramatically or do you don't know if if of lender that that is there for you today, it's going to be there for you Tomorrow. We've got a great Bank group that has been with us for years and years, So I feel good.
Comfortable with that group, but it's just a difficult in changing time. So I. So I think the perspective right now is on all of those things, but with just an added layer of conservatism. So we again, we think about absolute debt levels, we think a lot about what's the cushion.
To the existing borrowing base, because again that borrowing basis is can can be determined by a lot of things, including what sort of advance rate. The banks are willing to give you an that can change over time. So we're just being generally more conservative across the board I don't think Theres. Some specific target I can point you to right now that says.
Oh man as soon as we hit you know 0.5 times on our leverage ratio, we're going to open things back up it's just going to have to continue to monitor the environment and its and our attitudes going to continue to prioritize balance sheet just.
Given given how about the Tyler.
Well that makes sense. Thanks, so much for the helpful answer Jeff.
Thanks, Chris.
The next question will come from Derrick Whitfield with Stifel. Please go ahead.
Hi, Good morning, all certainly want to commend you guys on offering for guidance in this challenging environment and for your success in driving activity across your Shelby trough physician.
Well My first question I wanted to follow up on your curtailments could you, possibly quantify the curtailments in the Bakken in approximate barrels per day for QVC.
Where the I don't have that off the top of my head we can follow up with you on that.
Or maybe we could even.
Give me just two seconds.
And we can follow up if needed I can add move I know like another 30% to the backend yeah.
I was trying to find it yeah. I think you know if you look Derek I would think that's probably end up.
1.3 to 1.5, EMEA, we a day or just kind of.
Estimate of what they've shut ins probably meant for the Bakken.
Perfect.
And then as my second question regarding your lease bonus guidance I understand certainly appreciate.
The direction you guys have taken that.
With that say could could you speak to potential meaningful unleased exposure that you have in gas basins outside of the haynesville that could convert and more bullish gas environment.
I'm sure this is Jeff and well see who wants to comment, but I mean, we've got.
Tremendous.
Average focused on gas you know Tom mentioned that the shock in the and the work that we're trying to do there we've got hundreds of thousands of acres across the chalk in Texas and Louisiana. So you know we talked before there's a company thats drilled up a very nice well on the east Texas item.
Chuck continues to be a very very nice performing well and that was using modern can you know one of the first really is modern completion techniques.
In that area of the chalk and so we're encouraged by that but it's obviously, it's one well it's very early but I'll tell you I just don't know it's tough to say right now how that could translate into lease bonus what we found to be very successful in times. Like this is that you know you need to be more of a partner with your operator.
There is now than than maybe you do in really good times, where capital is more available. So what we found ways to be successful, especially in areas, where we have such large contiguous acreage position is to stay to producers and you know, let us work with you truly as a partner and.
That's what you know maybe will lessen or forego upfront bonuses in exchange for a more identified development program ultimately, we would rather see revenues.
Through royalties then through lease bonus and so we make that tradeoff, sometimes and frankly more often in times like this and more often where we have really large positions where that development plan can be even more meaningful. So that's a circuitous rally around your question I think as gas.
Prices tick up you probably see some spots that pop up where we do see a bit of a resurgence in lease bonus, but our focus is really on.
Mineral and royalty volumes.
More than it is on lease bonus.
That makes sense very helpful.
The next question is from feel Stewart with Scotia Bank. Please go ahead.
Good morning, guys I appreciate you taking time this morning I.
I guess my first question is on natural gas production for two Q.
It was you know held up I guess, a little bit better than we were expecting I'm just kind of curious what's the biggest drivers of that we're or was it you know isn't just kind of be.
Lower declines that the wells in the Shelby trough area typically exhibit over the first 12 18 months or was there.
Some contribution from another gas play within the portfolio that kind of.
Helped improve that number.
Hey, Phil I'm. Good morning, this is Jeff.
In the in the second quarter, specifically, we saw a little bit more of a but the spiked than we were expecting in our Louisiana Haynesville volumes that was probably the biggest single contributor to our.
Gas volumes exceeding expectations, a bit I guess, what I'd say, it's that that's just.
Yeah, that's just.
Part of owning such a giant portfolio of acreage right. You did hope that you're going to get to a shark fin from from something as you go forward and this time it was Louisiana haynesville more than others I don't know that that's.
Portends anything specifically other than just in a more constructive gas environment, which we've seen.
You know, we would hope that activity broadly starts to come back a bit and we saw that and the second quarter at least in the in the Louisiana Haynesville.
Okay, Great and then I guess my follow up just some clarification on the X T O deal for the 13 Ducks.
Thank you know that the agreement is that they have to complete all 13 docs to get the royalty relief is that the case I just want to clarify that.
Uh huh.
That's correct so they need to not just complete but turned to sales by the ended the first quarter next year for those 13 does.
Okay, Great and then I guess, maybe just one more quick follow up on that.
If we take one Q 21 is the starting point assuming that those 13 docs are turned to sales.
Yes in one Q 21, do you eat that those 13, Ducs plus you know well line of sight that you have on the on wells that will be completed do you think that would be enough to hold shall be chalk production flat kind of one Q 21 to one Q 22, I'm just kind of trying to think of it.
On an asset level basis.
Yeah, Phil and Unfortunately, I think we're just going to have to you know hopefully be in a position again 21 guidance you know on our normal timeframe, but it's it's just tough for me.
Right now to to comment on that to be honest.
Okay sounds good I appreciate the time guys. Thanks.
The one one comment I would make is.
We are spending a lot of effort trying to get additional drilling going on in the eastern side of the play and we hope to get that done in 21.
And once again, ladies and gentlemen, if he would like to ask a question. Please press star one at this time well pause for just a moment.
Okay, and if there's times there no further questions I'd like to turn the conference back over to Tom Carter for any closing comments.
Well, thank you all for joining us today.
We look forward to speaking with you next quarter and.
Good luck to everyone. Thank you so much.
Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.
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