Q2 2021 Black Stone Minerals LP Earnings Call
Good day, and thank you for standing by and welcome to the Black Stone minerals second quarter 2021 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 a question. During the session you will need to press star 1 on your telephone.
Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today, Mr. Ebb and Keefer. Please go ahead Sir.
Thank you and good morning to everyone and thank you for joining us either by phone or online for Black stone minerals second quarter, 2020..1 earnings conference call. Today's call is being recorded and will be available on our website along with the earnings release, which was issued last night.
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 risks that may cause our 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 about forward looking statements and our press release from yesterday and the risk factors section from our 2020.10-K.
We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance a 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 also be found on our website at black stone minerals dotcom and <unk>.
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 Carey Park, Senior Vice President land and legal and Gary for me on <unk>, Vice President of engineering and geology.
I'll now turn the call over to Tom.
Thank you Anne.
And to everyone on the call and thanks for joining us to discuss what was a very strong quarter on both the operational and financial fronts.
We reported $38.2000 Boe per day for the second quarter of 'twenty 1.
Of that royalty volumes increased by 5% from last quarter to a total of $32.5.
Working interest volumes held stable to last quarter and $5.7 and Bo.
Okay.
And the increase in royalty volumes was mainly due to the Midland and Delaware properties, but we also saw nice increases outside of our major shale plays as well.
We've seen a remarkable rebound and commodity prices since middle of last year and are currently well above pre pandemic price levels.
Operator activity continues to grind higher as well.
We have 64 rigs operating across our acreage at the end of the second quarter.
Up slightly from last quarter and is more than double what we saw in the middle of last year, the slower recovery and rig count relative to prices reflects producers' holdings and their promise to exercise greater capital discipline and focus on returns rather than simple production growth.
And should prove good for the long term health and the industry.
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Higher price environment increase and drilling activity and leasing efforts and the Austin chalk contribute to our best financial performance since 2019.
We reported adjusted EBITDA for the second quarter of $78.4 million.
Which is an increase of 31% from last quarter.
And 8% from the second quarter of 2020.
Distributable cash flow for the second quarter was $72.1 million, which equates to 35 cents per unit.
That's also an increase of over 30% from the last quarter too.
The improved fundamentals and positive outlook across many of the core areas of.
Of development.
And the increase and the base level of our distribution and <unk> 26 per unit for the rest of this year, which is 14% or 14% increase from last quarter. We also had a number of items break to the right the right way for us and the second quarter, including higher than expected gas realizations and a big quarter.
In terms of lease bumps and.
And the past we've taken the proceeds from those 1 time cash flow events and repaid debt.
Given our very low debt balance, which is currently under 100 million and total our board elected return that additional cash flow to our investors in the form of a special distribution of <unk> <unk> per unit for the second quarter, resulting in a total distribution of 25% 25.
Which is an increase of 43% from last quarter.
I want to be clear that absent any disruption and the business or significant positive.
Our plan here is to recommend distributions as I said of 'twenty.
Per unit for the third and fourth quarters as well.
On the last call, we discussed a number of new deals with producers around some large high net acreage positions and east Texas.
The majority of those deals were signed up early and the second quarter and our Shelby trough play Asos and has turned to sales and initial 2 wells under their development program.
And Angelina County, we are encouraged by the early results and Haytham and his commenced drilling another 4 wells and the euro which puts them ahead of schedule relative to what is required under our agreement.
We were seeing big wells out there from Bp's operations prior to mid 2019 and were happy to see that robust activity.
See commodity roby.
Robust activity commenced to pick up again with our new partner.
Hey, Don is also gearing up for new Shelby trough development and San Augustine County under this under a separate agreement we entered into 2 and April with them and that agreement contemplates a minimum 5 wells drilled.
Drilled and the first program year and ramps up from there.
In summary, we're optimistic around <unk> and ramping up to pre 2020.
Level seen with BP and <unk> combined in this area.
Moving a little South we have had several programs underway to test the development and the Austin chalk trend and East, Texas as we've discussed on the last call. This is an area, where we have broad geographic coverage across the play and very high net ownership and those areas.
We have 2 wells currently drilling and several others planned for the remainder of this year all of which involve.
High intensity multi stage completions and.
That have proven successful and other areas of the chalk.
Attracting development capital to our existing acreage has always been a major area of focus for US we will continue to be going forward on that as part of the effort. We're very happy to welcome Carrie Clark to our team Cary started with US yesterday and comes to us from heading land and legal efforts at universe.
He lands, which manages surface and mineral interest across $2.1 million acres managed by the University of Texas system.
He has a lot of experience working with operators to encourage greater activity and that will be a key part of carrier contribution to Blackstone.
Look forward to working with her on that and other initiatives.
We've made tremendous progress on the development front, but as.
1 of the largest mineral owners and the country. We also recognize the need to be a leader and the space in terms of environmental responsibility.
We are evaluating a number of ways to work with the producer community to reduce our collective emissions footprint.
We have also created a modest program to purchase carbon offsets with the proceeds from the surface use flavors and favor solar development on our mineral acreage.
Solar developers must secure surface rights, but must also obtain a waiver from the mineral owner as part of the project. So the rigs do not disrupt their project, we received approximately $1.1 million and proceeds from such waivers and 2021.
And plan to use a portion of those proceeds to purchase carbon credits that way, where both supporting clean energy development about facilitating solar installation and reducing our own emissions footprint through the credits we expect that the credit the credit and purchase for use in 2021 will meaningfully offset.
The direct cotwo emissions from our existing reduced production and Shelby trough and Angelina County, and this is a first and modest step, but we look forward to finding additional creative ways to work with the features to further our environmental goals.
And.
As you can see it was another busy quarter.
And encouraging to see that both general industry conditions continue to improve and to see the tough development work we've undertaken over the past couple of years start to pay off all of this is with a goal in mind and returning greater cash flow to our unitholders and we were able to accomplish at this quarter and see great.
To further that goal heading into 2022.
With that I'll turn it over to Jeff.
Okay. Thank you Tom and good morning, everyone.
And whenever we had a very strong quarter on a number of for us.
And rebounded from the first quarter and of course commodity prices were much healthier, we saw big gains and WTO and Henry hub prices and further benefited from improved differentials, resulting and a 21% uptick and realized prices from last quarter.
Oil differentials continued to move up that's a trend we've seen since mid last year, while our gas differentials spiked to 127% of Henry hub that was due to stronger NGL prices and higher than expected realizations on checks, we received and the second quarter related to February production.
This combination of gains and production and price plus a strong quarter of lease bonus payments led to our adjusted EBITDA and distributable cash flow outpacing the first quarter amounts by over 30% growth.
Both metrics were held back a little bit by our 2021 hedges that we put in place last year, which day or below current market levels.
Right side of the head story is that we stand to see meaningful increases in cash flow going into 2022, just from better hedge realizations.
We did add to our 2022 hedged portfolio during the quarter at prices, averaging around $3 per mcf for gas and $62 per barrel for oil for oil.
Overall, our average hedge price for 2022 versus this year is 11% higher for gas and 54% higher for oil.
We generated $72.1 million and distributable cash flow for the second quarter or <unk> 35 per unit.
That gave us a lot of flexibility to increase our distribution, while still holding some cash and reserve for further debt repayment as.
And as Tom discussed we increased the base are sustainable distribution to <unk> 20 per unit for the quarter.
We paid out another 5 cents per unit as a special distribution to reflect cash flows we view as nonrecurring and we held in reserve the remaining 10 per unit.
Our distribution coverage for the second quarter was 1.4 times on a full 25 cents per unit and <unk>.
1.7 times on just the base distribution of <unk> 20 per unit.
The amount, we held and reserved allowed us to fund the $10 million cash portion of our Midland acquisition, which closed in the second quarter as well as repay another $15 million of outstanding debt under our revolver.
Speaking of our debt balance we ended the second quarter with $96 million of total debt and a total debt to EBITDA ratio of just <unk> 4 times.
It's the first time since 2015, we've been under $100 million of debt and as.
This past Friday debt balance was down further to $81 million.
We also provided updated 2021 guidance and the earnings release from yesterday afternoon.
Production through the first half of 2021 has exceeded our original guidance expectations.
Production is anticipated to trend lower and the second half of 'twenty, 1 driven in part by declines and mature plays such as the Bakken and Gulf Coast and by lower natural gas volumes and the Shelby trough from existing PDP declines and advance of the expected ramp up and new drilling activity under our new development deals.
Despite the increase in rig count through the second quarter, we do anticipate that trend to flatten and through the remainder of the year as operators maintained our capital discipline.
Therefore, we have not incorporated into the revised guidance any significant volumes beyond those for which we have a line of sight.
Wherever we often do see some volume adds and the form of new unidentified and identified wells across our acreage and that is part of what drove the beat through the first half of the year relative to our original guidance.
Other changes to that original guidance include a slightly higher range for lease bonus given the big quarter, We just had.
Lower production costs as a percentage of revenue that's due to the fixed component costs and higher expected prices and a small move up and our estimated cash G&A.
And with that Delta and we will open the line for questions.
Thank you Jeff.
Quick reminder, to all the participants to ask a question. Please press star 1 through your telephone and again price is total laundry telephone.
<unk> second while we compile the Q&A roster.
And he was our first question coming in from Mr.
Brian Downey bumps.
From Citigroup.
Okay.
My question, you announced the increase to your base distribution to <unk> 20 per unit and noted your low debt balance of only $81 million at the end of July given where the balance sheet. Currently sits how you're thinking about distribution payout or coverage into next year, particularly once those lots of attractive hedges roll off.
As a and D and <unk> and other potential uses of that cash.
Good morning, Brian This is Jeff I'll start with that and then look I think we've said for a long time now 1 of the big benefits of the massive debt reduction that we went through in 'twenty and early 'twenty..1 is that we'd be in a position to to really prioritize.
Increasing payouts. So we started that a bit although we still even with the special distribution at 1.4 times coverage fell pretty healthy, but I think part of this as we think about the sustainability of that 'twenty and and as you mentioned potential for going higher than that and 'twenty 2 as hedge prices increase.
Look there is there's sort of 4 things you can do with your excess cash flow rate and you can pay down debt you can save it for acquisitions, you can do buybacks and our U can increased.
Distributions and I think where we are at least today is to prioritize increasing distributions. So I would expect debt.
As we anticipate production coming down and down a bit and the back half of this year.
And that coverage will just naturally come in on that 20.
Planned distribution of course, the board's got to approve that and well.
We'll see if things change, but the idea is to pay out that 20% coverage will come down a little bit, but then as we get into 'twenty..2 I would think that we would maintain.
Lower levels of coverage and we have and the past just as you mentioned because of the debt levels.
Yeah.
That makes sense and then separate topic you highlighted your newest sustainability initiative and surface use waiver supporting mineral development, which I found interesting how much runway is there on utilizing your middle or all acreage for similar types of initiatives, perhaps quantifying potential proceeds over the coming quarters, and if you could remind us if you.
1 any notable amount of surface acreage itself that could be used as well.
Hi, Brian This is Tom Carter I'll take a shot at debt.
First I would say debt are.
Efforts.
Around this part of the growing part of responsibility.
All of us.
And as is nascent and we are.
Looking at multiple different.
Ways to go at this.
And there are a lot of them and this particular case.
You may or may not know and we don't own any substantial amount of surface acreage any longer but in Texas and and a lot of other states. The minerals state is the dominant state which means that.
And there is a.
A right to drill a well to access the minerals and you can obviously, if you can imagine a bunch of drilling rigs and show up on surface that has been leased to a solar farm.
Disruption of debt wood costs. So these folks seek surface use and flavors by the mineral estate before they put those.
Raise out there and we that's where we come into play.
And we do interrupt our rights to use that we usually secure pre.
Pre agreed upon drill sites, so that drilling can occur, but the solar folks know where theyre going to be you put all that together I think there is an opportunity.
For the mineral estate and the surface of state owners to work together to facilitate operators being able to put.
These lands together so that they can effectively build these farms, it's getting more and more competitive every day.
In addition to that.
There are lot of other things.
We are researching and I don't want to get too far out over my skis on this but.
And it could be as much as and I don't want any of our operators to flinch on this too much but.
As long as commodity prices are robust and economics for drilling are good.
We may seek to encourage some of our lessees to also seek ways to mitigate.
Carbon production by buying their own credits or other types of sequestration and this is just a new area that we're <unk>.
Looking at and I think.
It behooves, everybody and the oil and gas business to be as progressive as we can be at addressing this issue for the long term runway of our business. So we're just getting started this was just an effort to tip our hat to the.
Knowledge that we see this as an important factor and the future for all of us.
Great I appreciate the color and thanks, everyone.
Thanks, Brian.
And our next question is from Mr. Pearce Hammond of Piper Sandler.
Yes, good morning, and thanks for taking my questions.
The first pertains to production first half production better than expected second half looks a little weaker relative to our expectations. Just curious what accounted for that what do you think accounted for that stronger production and the first half and and then do you think maybe you are being conservative and the second half it just seems like a bit of and abrupt <unk>.
From the first half to the second half.
Hey, <unk> good morning, and thanks for the question this is Jeff.
Yes look.
No.
As I said in the prepared comments right.
Really tried and when we put out production guidance, we try to rely on things that we have.
Real line of sight on and so.
And there is a lot of serendipity that happens across our asset base and we certainly saw that and the first half of the year frankly.
Some of those mature plays that I mentioned that we expect to see declines from <unk> and the.
Gulf Coast and and the Bakken.
Just continue to outperform our expectations that can't happen forever, but it's.
But it's been pretty consistently happening here over recent quarters.
So I think in general we have a conservative bent when we give guidance just because we try not to.
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Forecast a lot of things that we can't see even though we tend.
To have some good things.
Happen across our.
Acreage every quarter, so look the hope would be that debt.
Are being a little conservative, but I think the good news here is that we've put this 20 <unk> based distribution with an eye towards our revised guidance and what that means for production levels for the second half of the year and and.
And think we should still be able to.
Fund that distribution level and.
And obviously, if we continue to see some things outperform that may give us further flexibility in terms of additional debt paydown or whatever but yes, we realized debt.
It may look a little conservative given the outperformance and the first half of the year, but frankly.
We'd probably rather and beyond that side of things.
And I understand and thank you for the helpful color, Jeff and then my follow up.
Congrats on all the progress you guys have made.
And East Texas.
The various operators and clearly it seems like things are moving at a bit of a faster pace, which is good. So I'm just curious back to production when do you see that inflection point when all of this new activity, that's getting spooled up.
To really show up and offset some of those declines.
Yes.
Fears and I know you know this because you can cover the story, so well, but just context per others right I mean between BP and <unk> and net Shelby trough area, which between royalty and working interest was fully a third of our production as we were coming out of 18.
And that was that was 30 plus wells a year on pretty high net acreage for us and when BP and <unk> stopped drilling.
And the PDP profile of those existing wells hold flat per year, or so and then start to turn over pretty quick. So we're in that we are and that sort of high decline curve on the existing <unk>.
<unk> big round of PDP.
Big round of wells that were drilled by BP and <unk>.
And while as you mentioned, we're very encouraged by <unk> early results. It is early and.
And it just takes a while for those programs to get ramped up and to really provide that inflection point that youre talking about.
We're expecting that and 'twenty 2 debt inflection point and debt relatively steep decline and the existing PDP of course is a big driver.
Some of those declines and second half of 'twenty, 1 versus first but I will tell you based on early well results based on the fact that they are running ahead of there.
Required performance under the agreement and we're really optimistic about 8 tons of activity there and of course, the other big part of that inflection point is going to be we've got 4 to 5 wells that are going to be that have either already been spud or will be spud over the course of this year and the Austin chalk and where.
Excited there just given the extent of our.
Ownership around that play.
And as Greg.
If you take our contractual situations out there.
And full compliance.
And you could see.
Words of 30 wells a year moving up from where we are to 30 wells a year and the Shelby trough portion of the Haynesville Bossier and.
And if our initiatives our collective initiatives and the chalk.
And out which we're optimistic about.
And we could see that ramping up to 20 to 30 wells a year. So you put those 2 things together will be growing into those shoes, if you will but.
It could.
Roll back up pretty quickly.
Great. Thank you so much Tom and Jeff I appreciate it.
Thanks Bruce.
Once again to all our participants if you want to ask a question. Please press star 1 again these price Taiwan on your telephone.
Okay.
And it looks like Thats, all the questions and as always we thank you for joining us and.
We look forward to.
Discussing matters with you next quarter. Thanks, so much thank you.
And this concludes today's conference. Thank you for your participation you may now all disconnect. Thank you so much.
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