Q4 2020 Black Stone Minerals LP Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin momentarily until then your line is will again be placed on music hold thank you for your patience.
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Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Black Stone minerals fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Evan Keefer, Vice President of Finance and Investor Relations. Thank you and please go ahead.
Thank you Samantha good morning to everyone and thank you for joining us either by phone or online for the Black stone minerals fourth quarter and full year 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 afternoon.
Before we start I'd like to advise you the 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 the actual results to differ materially from the results expressed or implied in our forward looking statements for a discussion of these risks you should refer to the cautionary information.
The about forward looking statements in our press release from yesterday and the risk factors section in our 10-K, which we 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 Blackstone minerals Dot com.
Joining me on the call from the company are Tom Carter, Chairman and CEO.
Jeff Wood, President and Chief Financial Officer.
Steve Putman, Senior Vice President and General Counsel, and Gary <unk>, Vice President and engineering and geology.
And now I'll turn the call over to Tom Thank you Evan.
Good morning, everyone on the call. Thanks for joining us we're coming off of.
Difficult week of severe winter storms, and I hope that everybody made it through relatively safely in the.
The water pipes are getting fixed and they have electricity and all of those other things that we take for granted.
I'll begin the call. This morning with a quick recap of 2020 of the entire oil and gas industry has undergone a period of extreme change in volatility over the past year.
It's not an environment any of us of expected or hoped for.
We did what was necessary in response to the unprecedented challenges brought about by the pandemic.
Our first strategic priority was to further strengthen our liquidity and balance sheet position. We moved very early on in the year with aggressive actions to reduce our costs and reduce our debt over the course of the year, we paid down a total of $273 million of outstanding borrowings under our credit facility.
Funded by the proceeds from two asset sales, we completed in July and from retained cash flow.
As of December 31, our total debt balance was down to 121 million and was further reduced to below 100 million prior to paying out of our fourth quarter distribution today.
As a result, we are in a very strong financial position entering 2021 with liquidity of over $250 million under our current borrowing base.
It is important to view this deleveraging in the through the lens of the second and third quarters of 2020, the uncertainty around commodity prices of global economic realities was huge and the goal was to be around for the recovery.
Our other major strategic priority, which we have discussed on previous earnings calls was to drive greater activity on our existing acreage.
The acquisition market was slow in 2020 of sellers did not want to part with assets at low prices.
So we're dealing with the cost of capital and limited new capital availability and or unwillingness to take on additional debt.
From a future production standpoint, bringing new capital onto our existing land position is equivalent to an acquisition that we don't have to pay for so we've focused our efforts from attracting producers.
To some of our significant acreage positions outside of major shale plays.
As we announced earlier in 2020, we struck the deal with eight on energy to resume development of our Shelby trough Haynesville Bossier acreage in Angelina County.
After BP exited in 2019.
Eight dawn has successfully drilled the vertical section of the initial two program wells and has reached total depth on one of these ladder was just in the past week. So far those wells have been on time and on budget and we remain optimistic around eight dawn's plans and ability to execute in this area.
As a reminder.
Under our development program with eight on calls for four wells in the first program year, increasing to 15 wells annually, but the.
The third program year and this is an important factor to recognize as you consider the.
The effort it takes to spool these plays backup to there.
Peaks of prior years the <unk>.
Other significant piece of our Shelby trough.
Acreage is just east of San Augustine County, and we continue to make progress attracting capital to that area as well.
We entered into an incident of agreement with <unk> in 2020 to complete its existing DUC inventory in the area and as of last month, all 13 of those wells have been turned to sales.
We are also working with them to reach a mutually beneficial agreement that will help facilitate us bringing another operator interest in obviously.
We hope to have positive news to report on that front in the near future and are optimistic about the effort.
The other area, we feel holds tremendous undeveloped potential as the Austin chalk play in East, Texas, We have seen success with operators using modern fracking completion techniques to significantly improve well performance. We're currently working with existing operators on that acreage to test and develop the area as well as new.
Entrance on unleashed acreage in fact earlier this month, we entered into an agreement with a large publicly traded operator to drill test and complete wells in the Austin Chalk formation on some of our East Texas acreage.
If successful the operator has the option to expand its drilling program over significant acreage owned and controlled by us.
Overall, we hold over 200000 net acres in the East, Texas Austin Chalk play that we believe are prospective for enhanced fracking. These acres are in areas that have been produced productive in prior generations.
If results across the acreage deliver a similar uplift to what we see in neighboring parts of the chalk it would create a significant new wedge of long term production and revenue to Blackstone.
We are still in the early stages of trying to drive toward the development deals, but they are important in this atmosphere of overall upstream upstream.
Upstream activity, we're working with producers to provide incentives for them to put our acreage at the top of their drilling inventory because producers in general are being more selective in where they deploy capex capital.
We've seen the impact of that across our acreage as of year end. There were 38 rigs active on our acreage and the count has grown to 50 rigs by the end of January of.
This is above the 29 rigs operating on us at the end of the third quarter, but is down sharply from activity levels, we saw a year ago.
It was a similar story in terms of net well adds on our acreage we added two net wells in the fourth quarter, primarily in the Permian and the Haynesville.
Which was up from the third quarter, but more of the full well lower than what we saw in the fourth quarter of 2019.
We try to base, our near term forecast on activity, where we have of line of sight, Jeff will go into more detail about our 'twenty one guidance, but we are fully incorporated.
The lower level of current rig activity and of that guidance.
And hope it will prove to be conservative as things continue to recover to.
To be specific our long term thesis is to maximize the royalty production in a responsible way and to create distribution growth for our unit holders.
And in fact, we were able to announce an increase in our distribution. This year, we have maintained the substantial coverage ratio to our distribution over the past year as we.
Diverted retained cash flow towards debt repayment.
With our significant progress on that front the board felt it.
To pay out of higher percentage of our free cash flow. So one of the great results of our balance sheet efforts is the ability to return more cash to of our unit holders.
We set the annualized run rate distribution of <unk> 70 per unit at a level, we believe the sustainable throughout 2021.
We look forward to updating you on our strategic initiatives throughout the year.
With that I'm going to turn the call over to Jeff.
Alright, well, thank you Tom and good morning to everyone.
The results for the fourth quarter of 2020 came in a bit above our expectations net was driven by outperformance in the Louisiana, Haynesville and the Bakken three forks.
We generated 32000 Boe per day of mineral and royalty production in the fourth quarter.
That was of 3% increase from last quarter.
And we had 39000 Boe per day and total production volume Thats also.
Up 3% from the third quarter.
Total production for the full year was 41, six <unk> per day, which was at the upper end of our revised guidance range.
Realized prices for oil and gas continued to improve in the fourth quarter, you'll remember we had unusually wide oil differentials in the third quarter and those normalize this quarter to result in an average realized oil price of $40 20 per barrel.
Gas differentials also benefited from improving NGL prices during the quarter, resulting in a realized gas price averaging $2.68 per <unk> that was slightly higher than the average Henry hub price.
Even with the improving price environment of our hedge portfolio generated $14 $6 million in cash settlements to our favor during the fourth quarter.
Expenses.
The expenses came in a little better than our expectations with LOE and production costs below our guidance levels.
Tom mentioned the efforts that we took in the beginning of 2020 to lower G&A expenses total G&A costs were $10 2 million for the quarter and were $43 million for the full year debt numbers of decrease of 32% over our 2019 G&A levels.
We reported $72 3 million of adjusted EBITDA, and $65 9 million of distributable cash flow for the fourth quarter.
Both of those metrics were up over 10% relative relative to the third quarter.
Even with the distribution increased to $17.05 per unit of <unk> 70 per unit annualized we generated distribution coverage of one eight times, which allowed us to repay $26 million of debt during the fourth quarter.
As part of our release yesterday afternoon, we gave guidance for 2021 as Tom said, we based this guidance on producer feedback known permits and other data that we've got a good line of sight on it does not.
Any contributions from acquisitions, we may make during the year and in areas like the chalk. We only include limited contributions from producers with clear drilling plans.
Our royalty volume estimate represents a 13% decline from 2020 volumes, that's reflecting declines in a relatively mature Bakken and Eagle Ford positions, a full year impact of the Permian asset sales and a lower level of drilling activity outside the major shale plays.
We also expect our Shelby trough production to trend lower in 'twenty, one from existing PDP declines before the expected ramp up in activity from our new development deals.
Adding to that some existing Shelby trough wells took frac hits and will require some workover activity before returning to previous production levels and that also negatively impacts our 'twenty one forecast.
We expect working interest volume to decline by about 25% net of course is by design as we intentionally stopped investing in that part of the business in the 2017.
And as a result, we expect royalty volumes to increase to about 83% of total production volumes in 2021.
We're estimating lease bonus for the year of around $10 million debt reflects overall leasing activity that is consistent with 2020 levels and also reflects our decision to forego lease bonus in certain situations in favor of more robust drilling commitments from our operators.
We expect lease operating expenses and production cost to be in line with 2020 levels. We also expect total G&A expenses to be comparable to the reduced levels of 2020.
But to be composed of lower cash G&A cost and slightly higher noncash costs.
This outlook for 'twenty, one supports the <unk> 70 per unit distribution run rate beginning with the fourth quarter distribution being paid today.
We anticipate the distribution coverage will come down a bit over the course of the year due to the lower production volumes and lower realized oil prices after taking into account our hedge portfolio.
But as Tom said, one of the benefits of having such a clean balance sheet has the ability to increase our payout ratio and return more of our cash sort of unit holders.
As Tom mentioned in his opening remarks, we're coming off of a very challenging week here in Texas and we hope all of you in the area of made it through intact.
And with that Samantha we will open it up for questions.
Ladies and gentlemen, as a reminder, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad again net of Starwood to ask the question.
Your first question comes from the line of Brian Downey.
Good morning, Thanks for taking the question. The question on the guidance I'm curious first how you see the production trajectory during the year, particularly on the the gas side with.
With the recent DUC completions in the the Shelby trough development agreement.
Alluded to those volumes rebounding, how should we think about the cadence of those rebounding volumes versus PDP declines as we go through 'twenty one.
Yes, Brian Hey, this is Jeff.
For the question I think.
Frankly, you sort of answered it I mean, we would expect that over the course of the year, primarily driven by gas volumes of those would trend down.
And for really for the factors that you cited there right we had a pretty good uptick in volumes from the X Geo Ducks, all 13 of those that got completed by the end of January.
So we're seeing the volume impact of those early in the year and those will trend down.
And again, I think that will trend down in advance of of the new levels of activity coming in that Shelby trough area from from Athos and hopefully others.
But yes, I would call. It just sort of of general decline, primarily led by gas through the course of the year I would just add to that.
When you think about 2021.
In the context of 2020 in 2019, and 2018 and going forward do you have to.
Understand that we brought in a whole new set of capital providers out there and they are ramping those programs back up and they were at very high levels.
But for BP.
Left the area.
<unk> slowed down and it does take time for those things to spool back up.
We are very happy with what's happening there in 2021 will be a transition year from the prior.
The tenants if you will too.
Activity by the new tenants.
And I guess just to clarify how should we think about first quarter volumes relative to the sort of where we're for Q volumes, where I know theres. Some understandably some some weather noise there as well, but is that the full effect of those docs is that more early 2021.
Got you.
Yes. So this is evan.
Taking the kind of around where Q1 is really kind of our start rate is where we've been kind of guiding everyone kind of around Q4 and kind of assuming that we're going to see kind of the mid 30 production level.
Got it off.
Got it and then I guess my follow up question.
The the leasing and development agreement side, you clearly had some nice successes in the Shelby trough on the gas side in 2020 of your you mentioned that the East, Texas Austin Chalk in your remarks, the commodity macro outlook has improved is there any other areas where.
Early discussions we could here of maybe some incremental leasing or development agreements as we go through this year.
Well this is Jeff.
I'd say were pushing on every front, we can given the improving commodity price environment. Obviously some of those early deals that we've struck in 'twenty. We're in just completely.
The different.
Overall look especially outlook on gas.
So I'd say, we're focused on the San Augustine side of the Shelby trough. There are numerous numerous areas across the Austin chalk that we're working just given the size of our acreage position there.
And then look Theres, others, Wilcox, Louisiana, Haynes, Louisiana, Haynesville that we're doing everything we can to try to move up in the operator's capital stack as we go through and.
It's not just in Texas as Gary just mentioned, but we did have success with the major operator on the Louisiana, Haynesville side, and structuring and incentive deal.
Broad capital on the onto the Louisiana acreage and as I mentioned in my prepared remarks, that's one of the areas the sort of outperformed in the fourth quarter. So we would hope to continue to see those opportunities and they should be a little easier to come by in a more constructive gas environment.
Keep in mind, we're talking about East Texas.
Versus some of the Bakken and Permian went went out those are areas of very high acreage concentrations for us with substantial ownership as opposed to.
The lower net of some of the other plays and we.
We have so much acreage there debt.
Those are highly impactful.
The develop.
For us and we're going to be work from those very hard.
Great I appreciate the color.
Thanks, Brian.
Your next question comes from the line of Derrick Whitfield with Stifel.
Good morning, all congrats on the Austin Chalk agreement.
Thanks, Eric regarding the.
Regarding your 2021 guidance.
Could you offer any color on line of sight activity.
<unk> net permits of net Ducks, and then also speak to the degree of weather impacts in Frac hits factored into your guidance.
Well I mean, clearly the last part from more specific to Q1 just to clarify.
Yes, I may let Evan take a shot at your first one I mean, we did so so.
<unk> was completing those 13 wells.
There were just some existing PDP that had some brackets and we think probably.
Overall, that's in the range of seven 700 to 800 BOE a day off of 'twenty, one production guidance in total and that would be sort of front loaded.
In the early part of the year.
In terms of.
Permitting in rig activity and those other things that tend to drive our forecast.
We have seen those step up I think Tom mentioned this in some of his.
The opening remarks, I mean, we.
Had.
38 rigs on us at the end of the year that had moved up to <unk>.
<unk> by the end of January and while that's the big improvement from what we saw in the second and third quarters, it's still sort of half of where we were a year ago and it was a similar.
Similar story in terms of.
Permits for the trend is definitely moving in the right direction, but it's quite a bit lower.
I don't know if theres other color you'd want to get but that's the kind of stuff that we tend to look at on a play by play basis to drive the forecast, yes, Thats exactly correct. So we will go and look at any existing permits on our acreage and whenever we're saying line of sight. We typically just rely on the data that we have a good visibility on.
So we're not factoring any future permits that'll be harvested throughout the year.
And lots of operators told us otherwise the we're focused purely on what we currently see.
Out there and Thats, what were expecting to be drilled throughout the year.
And then kind of your other comment as far as the weather.
We're still kind of working through trying to figure out what the overall impact is obviously.
We've seen the impact in the Permian from what we've seen out there as well as kind of any other areas.
It could be any of these trees over so we're trying to kind of work through and see what the overall impact of that could be.
That makes sense and with my follow up I wanted to drill down on your comments regarding.
You guys working with the next to you on a mutually beneficial agreement that will help.
You guys.
And of the operator to develop the San Augustine acreage could.
Could you offer any color on how that might take shape and the degree of interest youre seeing in this area.
Yes, well look we've got interest in the area right the the.
The issue is I think that the.
<unk> of Exxon at the moment just has.
A lot on their plate and B, maybe other areas that they're focused on so yes, we jointly own sort of the core piece in San Augustine County that we call the Brent Miller area.
So to the extent that we can just work something out where where they can develop a piece on their own timeline and maybe we could.
The piece out two of different operator that may want to do something on a little more aggressive timeline that hopefully that would work with both but I think it would be tough to say anything more right now just given where.
In discussions with those guys about working something that hopefully benefits both of us.
Wood at when Jeff says we.
Sure.
Joint owners with them out there.
Just to clarify because of the question.
He is talking about from a working interest standpoint, because we own the minerals under a lot of that acreage.
Sure.
As two day.
But we're talking about the working interest side and Thats. The outgrowth of the evolution of that play and we had a working interest out there, which we farmed out.
But.
What we are doing is looking to take our working interest on specific areas and bring another operator in there so.
And actually doubled down on developing out there but.
But beyond that we hope to be able to say more later.
That's just one area that we share the working interest with the next year, we've got a ton of additional open acreage in Saint Augustine. So the idea is just can we put together.
Larger program.
Somebody in there and.
The underscore we're not saying that we're going to start taking working interest we are.
Internally with our own capital, but it does give us the ability to bring.
A partner in to work.
Work from the area.
Understood. Thanks for your clarification on the working interest comments. Thanks again very helpful guys.
Thanks Jordan.
Your next question comes from the line of Pearce Hammond with Simmons energy.
Yes, good morning, and thanks for taking my questions.
Jeff I wanted to start off just wanted to get your thoughts on gas hedging do you prefer to keep a certain hedge percentage in front of you for the next 12 months just wanted to understand how youre thinking about that right now.
Yeah. We just we have historically just tried to be pretty programmatic about that fears.
So we don't I mean, I guess every time.
Hughes of hedge on one day versus another.
Making of many call on price, but we but we try to just do it.
The somatic Lee and so.
What I would expect as is in keeping with prior.
Years that we would look to in pretty short order start to establish some 'twenty two hedge positions on both oil and gas and then just ramped those up over the course of the year to where as we're coming into 'twenty. Two that we would be in that traditional kind of 70 to 80 plus percent.
<unk> hedged range.
Okay perfect. Thank you and then my follow up I'm, just curious if you could provide some more color on the Austin chalk congrats on that agreement and what is the producer see there or is it really good gassy wells.
Wood.
The fairly deep wells expensive wells just curious what the.
What the Austin chalk looks like for you and what the producers are seeing.
Hey, Pearce this is Gary so it's a pretty good combination of condensate and gas.
The older wells in the area, we're completely on stimulated.
We've recently had some good data points on multi stage Frac wells.
And what we're seeing.
The first well that was very successful as over 300, producing days well made 300000 barrels and two bcf compared to the direct offset which was stimulated at about 50000 barrels and one Bcf snow.
We're kind of hoping we have.
Getting field redevelopment and look alike area over here and we're certainly pushing to try to get the future development.
And some more new wells this year.
Great. Thanks for the color.
Sure.
Again, ladies and gentlemen, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Leo Mariani with Keybanc.
Hey, guys.
Just wanted to get a sense of.
A little bit more color of potentially on your 'twenty one guidance just made some comments about it already but.
Just wanted to clarify it sounds like Youre kind of assuming 2020 levels in the Permian I think that was one of your comments.
And then just additionally, you had some some haynesville activity to start the year, but it sounds like youre expecting that the trail off.
Quite a bit as we get into <unk> 'twenty, one and <unk> 21.
The kind of verify that's what you guys are the sort of framing up and is there any way to roughly quantify.
The number of net kind of Haynesville true.
The lines you would expect here in 'twenty one.
Yes, so the way we're looking at the gas production is the Youre right in that we have the the 13 docs that were completed here in January and that has offset a little bit by several wells that were.
Take it offline just for Workovers due to the Frac hits, but then kind of continuing that activity out in the Shelby trough, that's going to be the eighth on wells. They have already drilled the first two two of the vertical sections are currently in the horizontal.
And whenever those come online later in the year, that's where we're going to start to see a little bit more of a kind of the.
The ramp up in those volumes, but thats going to be later in the year.
So we are seeing a decline.
In the gas volumes throughout the year, and then kind of holding steady towards the end.
Beyond that there is.
Some agreements that we've done out in Louisiana side Thats going to.
Help bolster some of that production going forward as well.
Okay great.
And just also wanted to ask a kind of a.
A bit of the strategic question for you folks.
You've done a great job kind of cleaning up the balance sheet. The point. When you are the Leverages is pretty de Minimis at the end of the day here.
Clearly in a slightly different A&D market than we were a couple of months ago, certainly looks like things are kind of loosen up.
Also starting to happen.
What's the appetite of blacks down to potentially get a little bit more at the bare I know, there's a big push to get people to leasing existing minerals, but those are also kind of a second component here, where you guys may try and get a little more active now that things are maybe more open in 'twenty one.
Lee I'll start this is Jeff.
Sure I think the appetite is always there it's really just been a function of the market I think what we saw.
In late 19, and all of 'twenty is that the sellers many of whom had acquired the assets in a different commodity environment.
More active M&A environment more expensive M&A environment frankly.
We're not looking to part with those assets.
Cheaper.
The less expensive less active M&A environment, and so you just you had a bit of a mismatch between between sellers and buyers who had had their cost of capital beat up pretty hard.
I think we're seeing that continue a bit I mean, now that prices have rebounded pretty significantly we've seen prices move of la we've seen our equity values recover somewhat so I still think there's a bit of a disconnect probably between what of a seller is going to want to see and what at least the public buyer.
It is.
Is willing and able to pay given access to capital.
So in short I think the appetite there, but that deal is going to have to make sense for us on a long term both the accretion and.
Both distribution and accrete.
The accretion basis, if we can find those deals we would love to do them.
And we will be looking but in the meantime.
The time that we can get new streams of cash flows out of our existing assets. That's just a huge win for us of our unit holders.
Okay. Thanks for the color.
Okay.
Your next.
Question comes from the line of Harry Halbach with Raymond James.
Hi, congratulations on Y'alls enhance shareholder return policy.
In regards to the 75 nine of our buyback program and I was kind of wondering what is your philosophy around implementing that and sort of certain next 12 months the equity yield being targeted or just kind of tell me. How you all are thinking about that.
Yes, I think that's just that's there for us to be opportunistic I think the the focus is more to now that the balance sheet is really pretty bulletproof to the.
The focus is really to put as much cash as we can into our unit holders pockets and that probably takes priority over.
Share repurchases in the near term now.
There is another.
Another giant dislocation of the market and it looks even more compelling.
Then we're going to revisit that but I think in the near term.
The again the focus is going to be can we increase debt payout ratio and put more money in.
Shareholders' hands.
Thanks for the color and then just debt quick question what is your federal acreage exposure across your portfolio in the Permian specifically you all of its Permian position is heavily weighted towards Texas I wouldn't think it would be much but just wanted some additional detail.
Yeah.
This is Jeff I'll start and others may want to look we definitely have areas, where there is federal exposure. So the balance of this whole by the administration is probably as one of the larger <unk>.
<unk> of.
Minerals on private lands.
Frictions on public moves more activity to us so that's a net positive that the.
Negative that are areas, where we have acreage where theres also federal ownership, which could make things more difficult.
We don't for example in the Permian.
The new Mexico is not a big position for US which is more of federally owned then the Texas side. So.
Raul, we don't think and going through the 'twenty, one guidance and the longer forecast internally.
We don't think that that's a huge impediment to Blackstone and.
Maybe it's a bit of a push from the positives of driving more capital on the private acreage, which we're obviously a huge oil owner of it.
Great. Thanks, I appreciate you all taking my questions.
Thanks Harry.
We have reached our allotted time for questions and answers I would like to turn the call back over to management for any additional or closing remarks.
Well.
Great to speak with you all today.
It's been a long year, it's been a long week.
The Sky is blue today, it's 70 degrees in Houston, we're looking forward to a great year and we hope you all have one yourselves will talk to you next quarter.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect your lines.
Thank you.
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