Q3 2021 Black Stone Minerals LP Earnings Call

November 2, 2021

Good day, ladies and gentlemen, and welcome to the Blackstone minerals third quarter earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero unattached.

Telephone as a reminder, this conference call is being recorded I would now.

I'd like to turn the conference over to your host even Keefer, Vice President Finance and Investor Relations. Thank you. Please go ahead.

Thank you and good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals' third quarter 2021 earnings Conference call. Today's call is being recorded and will be available for our website are available on our website along with the earnings release, which was issued last night before.

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 future performance. These statements involve risks and 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 in our press release from yesterday and the risk factors sector section in our 2020 10-K.

We'll refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance.

Reconciliation of those metrics 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 from 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 Kerry Clark Senior Vice President land, and legal and Gary <unk>, Vice President of Engineering, and geology, I'll now turn the call over to Tom Thanks, Kevin.

Good morning to everyone on the call. Thank you for joining us today to discuss our third quarter financial and operating results. We had another very solid quarter as prices and production levels have exceeded our expectations.

The rebound in global demand as Covid cases trend down combined with an extended period of producer cutbacks in Capex and continued capital discipline.

Resulted in a big move up in oil and gas prices.

October oil prices rose above $80, a barrel levels, we have not seen since 2014 natural gas prices have risen even more dramatically with floor prices are at their highest level since 2009.

To put that in context, our realized price for the third quarter was $38 61 per barrel of oil equivalent which was more than doubled to 18 18 per barrel, we realized in the third quarter of 2020.

The impact of the increase in prices was somewhat muted on our financial results for the quarter. Since we had hedged approximately 70% of our production last year.

But we benefit directly on the unhedged, 30% and we benefit indirectly in many other ways like increased producer activity and then discussions around development deals on our acreage.

We reported total production of 38.

Yes.

The OE per day for the third quarter of 2021 of that royalty volumes increased by 2% from last quarter to 33000 Boe per day. This.

This increase in royalty volumes was mainly driven from Midland the Midland and Delaware area of the Permian and Louisiana Haynesville properties working interest volumes continued to decline and declined by 11% from the last quarter to $5 one.

Yeah.

B O E. As a result royalty volumes made up 87% of our total production for the quarter.

We had 59 rigs operating across our acreage at the end of the third quarter, that's down slightly from the end of last quarter, but overall operator activity has been on an upward trend since the middle of last year.

In fact that rig count number jumped to 72 as of the end of October we.

We see the same trend and permitted.

We had approximately 400 permits on our acreage in the third quarter, which was roughly in line with what we experienced in the second quarter of this year and well above the approximately 250 permits we saw in the third quarter of last year.

Higher prices and royalty production levels contributed to another quarter of strong financial performance.

We reported adjusted EBITDA for the third quarter of $76 5 million, which is 2% below last quarter and 17% above the third quarter of 2020.

Distributable cash flow through the third quarter was $70 two.

$2 million, which equated to <unk> 34 per unit last week, we announced our distribution for the third quarter of 25.

Cents per unit that is equal to the distribution, we paid for the second quarter and 25% above our original distribution expectations for the third quarter that we discussed on last quarter's earnings call.

The 25 cents per unit of <unk>, 67% higher than our third quarter distribution from last year and 43% higher than we were paying at the start of this year.

Even with the increased payout, we maintain distribution coverage of 135 times for the third quarter going forward, given our very low debt balances, which is currently below $90 million in total we will continue to prioritize returning cash flow to our investors.

As you've heard from us repeatedly over the last several quarters. The entire team here is focused on exploiting our core acreage positions by continuing to attract new capital to airlines.

<unk> is in a unique position and that we have significant acreage and highly economic plays that remain available for new development to.

To the extent that we can generate new production volumes and cash flow streams from existing acreage.

We equate that to doing an acquisition for zero dollars of new capital to.

Two of the areas, where we've had success around these organic growth initiatives are in the Shelby trough and the Austin chalk.

I'll start with an update on the Shelby trough, which is in the southern extent of the Haynesville and Bossier play in East Texas.

Our acreage in that area is operated by <unk> on one of the most experienced producers in the Haynesville Hey, Don has turned to sales two well.

Wells under our development program with them in Angelina County, those wells are performing very nicely and providing some early encouragement that development could involve tighter well spacing than BP envisioned when it was operating in that area.

As of October.

Avon is spud four additional wells in Angelina County.

Don is also progressing under our development agreement covering San Augustine County, where <unk> has spud its first three wells in the area, where <unk> formerly operated.

The Austin chalk trend in Texas continues to garner a lot of attention.

Sam Energy EOG, Magnolia and others are seeing strong.

<unk> results by Redeveloped, a chop deals using highly high intensity completions.

We have entered into agreements with multiple operators to drill wells in the Austin chalk in East, Texas, where Blackstone has significant large interest acreage positions.

One newer well in addition to the first new vintage Hancock, well has been drilled and turned to sales in five additional wells are currently being drilled under these agreements. We are encouraged by the early results and with the design of the test well program, we will have better visibility.

Across the development area over the next six months as these initial wells come online.

We have a lot of positive momentum around the asset base, some of which is driven by improved commodity price.

In it by an improved commodity price environment, but much of which is a result of hard work by the team here.

And done during the market downturn.

In addition to the Haynesville and Austin Chalk, we will be focused on our entire core acreage position working with industry to move our attractive land to the top of the industry capital stacks.

With that I'll turn the call over to Jeff.

Thank you Tom and good morning, everyone.

It was a really clean clean quarter, so I'm going to keep my remarks pretty brief so that we can just move on to your questions. As Tom mentioned, we had robust royalty production and an improving commodity price environment.

Those things led to another strong quarter of financial performance.

Oil benchmark prices averaged over $70 a barrel for the third quarter and our realized prices before hedges held steady from last quarter at 95% of WTS prices.

Gas prices at the Henry hub averaged over $4 per Btu, and our realized price for the quarter again before hedges was 118% of that amount much of that driven by strong NGL prices.

We generated adjusted EBITDA of $76 5 million and distributable cash flow of $72 million for the third quarter. Both of those are consistent with second quarter results.

That allowed us to stay with our increased distribution level from last quarter of <unk> 25 per common unit.

You may remember from last quarter's discussion that we divided the second quarter distribution into our base distribution level of <unk> 20 per unit and what we call. The special distribution of <unk> <unk> per unit.

That was because the second quarter results were positively impacted by a number of onetime items and we felt at the time that the 'twenty based distribution was more sustainable through the end of the year.

Well, we dropped that distinction for the third quarter distribution as third quarter results were more reflective of our recurring operations and to better than expected performance fully supported that 25.

In fact, even at the 25 cent distribution as Tom mentioned, we maintained a very healthy distribution coverage of 135 times.

Our balance sheet remains very strong we ended the quarter with $99 million of total debt and a total debt to EBITDA ratio of three times as of last Friday that debt balance was down to $86 million.

So the business continues to trend in a positive direction and we now believe production for the full year of 2021 will be at or near the high end of the revised guidance range of 34, 5% to 37000.

<unk> thousand Boe per day that we announced just last quarter.

We expect lease operating expenses and production costs as a percentage of oil and gas revenues to be at the low end of revised the revised guidance ranges of $10 million to $12 million and 10% to 12% respectively.

Finally, we now expect cash and noncash G&A to be slightly above the revised guidance ranges from last quarter. That's due primarily to the outperformance of 2021 financial and operating results to date relative to our original targets.

And with that we will open the call for questions.

Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question is from Steven Becker of Keybanc. Your line is open.

Hey, guys.

We noticed that your oil production was up 6% sequentially in the third quarter, just curious to see what you guys are attributing that to.

Yes, I think primarily and I'll, let others chime in but I think that the uptick in oil production is primarily due to a little outperformance relative to our expectation in the Permian and the Midland Midland Delaware basins.

Honestly I think it was as simple as that.

Got it Okay and then.

Just wanted to see if there's any more detail you guys can give on the improved well results in the Austin chalk. So you talked about in the release.

Well I mean to be clear, there's only we only have two producing wells and that kind of a core area of our Austin chalk.

That had utilized the higher intensity completion.

Technology.

And.

That is the Hancock and the Hooper wells and both of those wells look very very strong I would say just round numbers two to three times the performance of vintage less stimulated horizontals in the same area. So that's what we mean by that I will just note.

We note in the release that we've got another five wells using similar.

Completion technology that will be coming on over the next.

Several months, we've got three that should turn to sales right around the very end of this year. Another in February and another in March So we're going to have.

A number of additional tests that come but overall our early results are very encouraging.

Okay, great. Thanks.

Your next.

Next question is from Derrick Whitfield from Stifel. Your line is open.

Good morning, all and congrats on your quarter and update.

Hey, good morning.

As a follow up on the previous question on Q3 oil production.

Given the strength of your Q3 oil production in general how should we think about the oil trajectory through year end based on the Permian and Austin Chalk development. She noted in your prepared remarks.

Well as you can.

This is Jeff Derik I'll start with that and then others can chime in if they like I mean as you can tell from our revised guidance, we're still taking a fairly cautious approach to.

Q4 numbers that we will see how that ultimately turns out and so.

Again I think between.

Improved performance in the Middle I would I would hope that that continues.

And thinking back around the quarter wasn't an unusual amount of out of period activity that affected oil. So I would say it gives us more positive orientation around where that may go for the fourth quarter and thats going to depend again.

Well I would say.

Permian was a little above our expectations and frankly, the Bakken just continues to sort of chug along in a way that surprises us so.

We're going to continue to take a relatively cautious outlook on the Bakken.

The Permian continues but I think that.

From a trend perspective.

We hope that that continues to run that way.

Terrific.

My follow up.

Again, I'll, probably get back to the Austin chalk just because I'm trying to understand.

The total update that's been provided to date when you think about the two wells that have been turned to sales in the five wells that have been spud could you help us since what the aerial extent of that activities. That's covered by that wells, how large of an area is that for you guys.

So the two wells that have.

<unk> produced thus far.

Are both in Tyler County, the Hancock, one H over 20 months.

Three six.

Tcf of gas 531000 barrels that is far and above what the offsets produced.

The Hooper <unk> on our part from our produced two tenths of a b and 41000 barrels so it looks very good relative to the offsets.

Again, the older field did not have any stage fracs.

So we're certainly hoping that this is a.

<unk> look alike, where operators can come in and fill in the main field.

We do have an operator, who is trying to stretch the C.

Yield to the north and what I would say is we're seeing activity in Polk and Tyler counties, mainly but in a very positive.

Comment too, we're seeing a very large public operator.

Spud, a well recently over in Newton County.

It's testing another bench within the.

The play and look forward to seeing results over there. So the field itself. The older fields is spread out over four to five <unk> and we're seeing activity within all of those areas and Derek. This is Jeff I'll, just add to that I mean from an aerial extent perspective, we're talking about well over 200000 acres.

Total extent and we've got additional large acreage blocks that are.

Following on to those and so.

It's a massive position for us.

Thanks very helpful guys.

Again to ask a question. Please press the Star then the number one key on your Touchtone telephone again Thats Star one on your Touchtone telephone.

Okay, well, if there arent any more questions.

We thank you for your interest in Blackstone and we look forward to talking with you next quarter. Thanks, so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yeah.

Okay.

Thanks.

Okay.

[music].

Okay.

Yes.

[music].

For the year.

Okay.

[music].

Okay.

[music].

I'm Gonna Touchtone telephone as a reminder, this conference call is being recorded I would like to turn the conference over to your host even Keefer, Vice President Finance and Investor Relations. Thank you. Please go ahead.

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

Statements involve risks and may cause our actual results to differ materially from the results expressed or implied in our forward looking statements for.

We'll refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance reconciliation of those metrics 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.

The rebound in global demand as Covid cases trend down combined with an extended period of producer cutbacks in Capex and continued capital discipline.

Resulted in a big move up in oil and gas prices in October oil prices rose above $80, a barrel levels. We have not seen since 2014 natural gas prices have risen even more dramatically with floor prices are at their highest level since 2009.

To put that in context, our realized price for the third quarter was $38 61 per barrel of oil equivalent which was more than doubled to 18 18 per barrel, we realized in the third quarter of 2020.

The impact of the increase in prices was somewhat muted on our financial results for the quarter. Since we had hedged approximately 70% of our production last year.

But we benefit directly on the unhedged, 30% and we benefit indirectly in many other ways like increased producer activity and then discussions around development deals on our acreage.

We reported total production of 38.

Yes.

Bo per day for the third quarter of 2021 of that royalty volumes increased by 2% from last quarter to 33000 BOE per day. This increase in royalty volumes was mainly driven from Midland the Midland and Delaware area of the Permian and Louisiana Haynes.

So properties working interest volumes.

Continued to decline and declined by 11% from the last quarter to five 1000.

<unk> Oh E. As a result royalty volumes made up 87% of our total production for the quarter.

In fact that rig count number jumped to 72 as of the end of October.

We see the same trend and permitted.

We had approximately 400 comments on our acreage in the third quarter, which was roughly in line with what we experienced in the second quarter of this year and well above the approximately 250 permits we saw in the third quarter of last year.

Higher prices and royalty production levels contributed to another quarter of strong financial performance.

We reported adjusted EBITDA for the third quarter of $76 5 million, which is 2% below last quarter and 17% above the third quarter of 2020.

Distributable cash flow through the third quarter was $70 two.

$2 million, which equates to <unk> 34 per unit last week, we announced our distribution for the third quarter of 25.

<unk> per unit that is equal to the distribution, we paid for the second quarter and 25% above our original distribution expectations for the third quarter that we discussed on last quarter's earnings call.

The 25 cents per unit of <unk>, 67% higher than our third quarter distribution from last year and 43% higher than we were paying at the start of this year.

Even with the increased payout, we maintaining distribution coverage of 135 times for the third quarter going forward, given our very low debt balances, which is currently below $90 million in total we will continue to prioritize returning cash flow to our investors.

And as you've heard from us repeatedly over the last several quarters. The entire team here is focused on exploiting our core acreage positions by continuing to attract new capital to our lands.

<unk> is in a unique position and that we have significant acreage and highly economic plays that remain available for new development to.

To the extent that we can generate new production volumes and cash flow streams from existing acreage.

We equate that to doing an acquisition for zero dollars of new capital to.

Two of the areas, where we've had success around these organic growth initiatives are in the Shelby trough and the Austin chalk.

I'll start with an update on the Shelby trough, which is in the southern extent of the Haynesville and Bossier play in East Texas.

Our acreage in that area is operated by <unk> on one of the most experienced producers in the Haynesville Hey, Don has turned to sales two well.

As of October.

Based on this but four additional wells in Angelina County.

<unk> is also progressing under our development agreement covering San Augustine County.

Don has spud its first three wells in the area, where <unk> formerly operated.

The Austin chalk trend in Texas continues to garner a lot of attention.

M energy EOG, Magnolia and others are seeing strong well results.

<unk> Bye Redeveloped, a chop deals using highly high intensity completions.

We have entered into agreements with multiple operators to drill wells in the Austin chalk in East, Texas, where Blackstone has significant large interest acreage positions.

<unk> development area over the next six months as these initial wells come online.

We have a lot of positive momentum around the asset base, some of which is driven by improved commodity price buy in and.

By an improved commodity price environment, but much of which is a result of hard work by the team here.

And done during the market downturn.

In addition to the Haynesville and Austin Chalk, we will be focused on our entire core acreage position working with industry to move our attractive land to the top of the industry capital stacks.

With that I'll turn the call over to Jeff.

Thank you Tom and good morning, everyone.

It was a really clean clean quarter, so I'm going to keep my remarks pretty brief so that we can just move onto your questions. As Tom mentioned, we had robust royalty production and an improving commodity price environment.

Those things led to another strong quarter of financial performance.

Oil benchmark prices averaged over $70 a barrel for the third quarter and our realized prices before hedges held steady from last quarter at 95% of WTS prices.

Gas prices at the Henry hub averaged over $4 per Btu, and our realized price for the quarter again before hedges was 118% of that amount much of that driven by strong NGL prices.

We generated adjusted EBITDA of $76 $5 million and distributable cash flow of $70 2 million for the third quarter. Both of those are consistent with second quarter results.

That allowed us to stay with our increased distribution level from last quarter of <unk> 25 per common unit.

You may remember from last quarter's discussion that we divided the second quarter distribution into our base distribution level of <unk> 20 per unit and what we called a special distribution of <unk> <unk> per unit.

In fact, even at the 25 distribution as Tom mentioned, we maintained a very healthy distribution coverage of 135 times.

Our balance sheet remains very strong we ended the quarter with $99 million of total debt and a total debt to EBITDA ratio of three times as of last Friday that debt balance was down to $86 million.

So the business continues to trend in a positive direction and we now believe production for the full year of 2021 will be at or near the high end of our revised guidance range of 34, 5% to 37000.

<unk> thousand Boe per day that we announced just last quarter.

Finally, we now expect cash and noncash G&A to be slightly above the revised guidance range is from last quarter. That's due primarily to the outperformance of 2021 financial and operating results to date relative to our original targets.

And with that we will open the call for questions.

Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one on your Touchtone telephone answer. Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Your first question is from Steven Becker of Keybanc. Your line is open.

Hey, guys.

We noticed that your oil production was up 6% sequentially in the third quarter, just curious to see what you guys are attributing that to you.

Honestly I think it was as simple as that.

Got it Okay and then.

Just wanted to see if there's any more detail you guys can give on the improved well results in the Austin chalk you talked about in our release.

Well I mean to be clear, there's only we only have two producing wells and that kind of a core area of our Austin chalk.

That has utilized the higher intensity completion.

Technology.

And.

We note in the release that we've got another five wells using similar.

Completion technology that will be coming on over the next.

Several months, we've got three that should turn to sales right around the very end of this year and another in February and another in March So we're going to have.

A number of additional tests that come but overall early results are very encouraging.

Okay, great. Thanks.

Your next question is from Derrick Whitfield from Stifel. Your line is open.

Good morning, all and congrats.

Congrats on your quarter and update.

Hey, good morning.

As a follow up on the previous question on Q3 oil production.

Given the strength of your Q3 oil production in general how should we think about the oil trajectory through year end based on the Permian and Austin chalk developments you've noted in your prepared remarks.

Well as you can.

This is Jeff Derik I'll start with that and then others can chime in if they like I mean as you can tell from our revised guidance, we're still taking a fairly cautious approach to.

Q4 numbers that we will see how that ultimately turns out and so.

Again I think between.

Improved performance in the Middle I would I would hope that that continues.

And thinking back around the quarter, there wasn't an unusual amount of out of out of period activity that affected oil. So I would say it gives us more positive orientation around where that may go for the fourth quarter and thats going to depend again.

I would say.

Permian was a little above our expectations and frankly, the Bakken just continues to sort of chug along in a way that surprises us. So we're going to continue to take a relatively cautious outlook on the Bakken hopefully the Permian continues but I think that.

From a trend perspective.

We hope that it continues to run that way.

Terrific.

My follow up.

Again, I'll, probably get back to the Austin chalk just because I'm trying to understand.

Thats covered by that wells, how large of an area is that for you guys.

So the two wells that have.

<unk> produced thus far are both in Tyler County, the Hancock, one H over 20 months.

It produced three six.

Tcf of gas 531000 barrels that is far and above what the offsets produced.

Hooper <unk> on our part from our produced two tenths of a b and 41000 barrels so it looks very good relative to the offsets.

The older field.

Not have any stage fracs.

So we're certainly hoping that this is getting us look alike, where operators can come in and fill in the main field.

You have an operator, who is trying to stretch.

The field to the north and what I would say is we're seeing activity in Polk and Tyler counties, mainly but in a in a very positive.

Comment too, we're seeing a very large public operator.

<unk> recently over in Newton County.

Testing another bench within the.

The play and look forward to seeing results over there. So the field itself. The older field is spread out over four to five counties and we are seeing activity within all of those areas and Derek. This is Jeff I'll, just add to that I mean from an aerial extent perspective, we're talking about well over 208.

Acres.

Total extent and we've got additional large acreage blocks that are.

Following on to those and so.

It's a massive position for us.

Thanks very helpful guys.

Again to ask a question. Please press the Star then the number one key on your Touchtone telephone again Thats Star one on your Touchtone telephone.

Okay, well, if there arent any more questions.

We thank you for your interest in Blackstone and we look forward to talking with you next quarter. Thanks much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 Black Stone Minerals LP Earnings Call

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