Q1 2022 Black Stone Minerals LP Earnings Call

Yeah.

Ladies and gentlemen, thank you for standing by and welcome to the Blackstone minerals first quarter 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

A question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero. Thank you.

I would now like to hand, the conference over to your Speaker today, Kevin Keefer, Vice President of Investor Relations. Please go ahead Sir.

Thank you Ron and good morning to everyone and thank you for joining us either by phone or online for Black Stone Minerals' first quarter 2022 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 the 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 in our press release from yesterday and the risk factors section of our 2021 and 10-K.

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 today from the company are Jeff Wood, President and Chief Financial Officer, Steve Putman, Senior Vice President General Counsel.

Kerry Clark Senior Vice President land, and commercial Gary Permian, Vice President of engineering, and geology and that Montgomery Vice President of land I'll now turn the call over to Tom.

Good morning.

To all of you and thanks for joining us on the call today for our first quarter financial and operating results, we generated almost $100 million of adjusted EBITDA in the first quarter.

That was an increase of 27% over the fourth quarter of 21 distributable cash flow for the quarter came in at over $92 million.

These results benefited from the continued rise in oil and gas properties in the first quarter realized prices were up 16% over the fourth quarter drilling activity remained robust during the first quarter.

We had 88 rigs operating on our acreage as of March 31.

One slightly from 95 at the end of.

Last year and higher than the 59 rigs at this time last year, despite relatively steady rig activity. We saw a decrease in royalty production in the first quarter compared with the last quarter's levels.

And the decrease came from Shelby trough.

Hey, Don is meeting or exceeding its minimum well requirements in the Shelby trough under our development agreement covering Angelina in San Augustine counties.

Timing of when these wells are brought on line can result in some variability in production volumes, especially since these wells.

Typically generate over 20 million cubic feet of gas when turned to sales and we typically have.

Hi, royalty interest in <unk> relative to some other wells.

Make a big difference.

Yes.

Timing wise overall, we are very excited about drilling activity in the Shelby trough.

Separate development agreements with eight on covering our minerals acreage in Angelina and San Augustine counties and Angelina Aegon has successfully turned six wells to sales for which came online in April of 2022.

And have commenced operations on four additional wells in San Augustine County, Avon is currently drilling two wells and has another two wells awaiting completion operations from there our overall activity levels across the Shelby trough.

There are expected to increase quickly over the next two years, leading to 20% to 30 wells a year and the area drilled by Asos alone. We remain very happy to have chosen such an experienced and well capitalized operating partners for this important development area.

Don just drilling results, thus far in the Shelby trough had been very encouraging and we expect this to be mutually beneficial partnership for many years to come.

Further benefiting the volume picture in the area <unk> energy has resumed drilling three wells on Blackstone stroke, Shelby trough acreage in San Augustine County that were originally spud in 2019.

As we discussed last quarter, we had fully farmed out all of Blackstone's working interest in the Shelby trough as well.

We will benefit from the carrier provisions in those deals while ensuring that we have no ongoing capital burdens associated with Athens aggressive development program.

Recent world events have highlighted the global strategic importance of U S gas reserves and we believe the Haynesville shale is the best positioned play to benefit from continued growth in LNG exports volumes over time.

I've discussed over the past several calls our ongoing efforts to bring additional operator capital onto our extensive minerals in east Texas.

Last year, we entered into agreements with several operators to drill Austin chalk wells in East, Texas.

These operators use high intensity completions in an area, where prior generations of <unk> wells yield yielded solid results.

The outcome of that test prep program was very encouraging.

Several of our key operators in the area have now committed to rig contracts for ongoing development of the field.

Currently four operators are actively engaged in redevelopment of the field with two rigs running continuously in the blood.

Date, seven wells with modern completions are now producing in the area and additional five are currently either being drilled or completed.

We also remain engaged with additional potential operators to commence development on surrounding acreage things continue to move in the right direction in this important acreage for Blackstone.

And we're working hard to create a scenario where multiple operators are drilling multiple wells per year in the area.

We're nicely positioned with key organic growth projects ramping up.

A very constructive pricing environment, and a leverage ratio of two times.

That combination of factors allowed for sizable distribution increases announced last week.

40, <unk> per unit or $1 60 annualized is the highest distribution level.

Since our IPO in 2015, hi.

High prices certainly contributed to that but we were also able to increase our payout ratio given our very low debt balances and an increasing.

A line of sight on volume growth going forward.

We are excited that the hard work through the down cycle has enabled us to come back even stronger and return more cash to our shareholders with that I'll turn it over to Jeff to go through some of the details of the quarter.

Alright, well, thank you Tom and good morning, everyone.

After several consecutive quarters of production growth, our oil and gas volumes came in a little bit lower in the first quarter. The royalty volumes in the first quarter totaled $29 6000 Boe per day that was down 16% relative to fourth quarter royalty volumes.

As Tom mentioned, there were some high net Shelby trough wells that were turned to sales just after the end of the quarter and in addition, <unk> shut in some existing production in the Shelby trough has it resumed drilling operations on three wells in St. Augustine County.

Both of those factors contributed to the falloff in our gas volumes the.

The decrease in oil volumes was primarily a result of lower suspended revenue volumes received in this quarter as compared to last quarter.

Our SaaS successfully worked with producers in the second half of last year to release suspended production volumes across our mineral position and particularly in the Permian and the Bakken, which.

Which as we mentioned on the last call increased reported oil and gas volumes by almost 4000 Boe per day in the fourth quarter.

Given the temporary nature of these items and combined with the generally positive industry environment and the ramp up in activity, we expect to see in the Haynesville and Austin chalk through our organic growth programs, we expect that growth trajectory to resume throughout the year and we're sticking to our original production guidance for the full year.

34% to 37000 Boe per day.

Spot prices and our differentials both improved in the first quarter, resulting in realized prices per Boe of over $51 per barrel, that's a 16% improvement over what we saw last quarter.

Combined with higher hedge settlement prices, our total oil and gas revenues rose by 18% over the fourth quarter of last year.

Our financial results also benefited from a very solid quarter of lease bonus at almost $5 million.

Cash operating expenses were generally in line with expectations, so that higher revenues translated into higher adjusted EBITDA and distributable cash flow as well.

Our DCF per unit for the quarter Rose by 10 cents as Tom said with our low debt balance and solid progress on our organic growth efforts. Our board of directors supported paying out a much higher percentage of our DCF to our shareholders for the first quarter.

That distribution of <unk> 40 per quarter. This this quarter per unit. This quarter represents a 48% increase over the distribution with respect to the fourth quarter of 2021.

Turning to the balance sheet, our total debt balance was $69 million at the end of the quarter and is down further to just $44 million today.

The borrowing base on our revolving credit facility was reaffirmed reaffirmed at $400 million last month, we could have pushed that number higher.

Frankly, with such little debt outstanding we elected to maintain it at that $400 million level.

With that we will turn the call over for questions. Please.

Alright.

To remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again Thats Star then the number one on your telephone keypad.

Your first question comes from the line of.

Mariani from Keybanc Your line is open.

Yes.

Hey, guys.

First of all I was hoping maybe you could quantify a little bit the impact of those first quarter shut ins that you saw it sounds like that definitely it was a big contributor to the lower volumes this quarter.

Yeah.

Hey, Leo and thank you for the question. This is Ed ill start on that so with SDO drilling those three wells that Jeff mentioned, we think that the shut in impacts of that just in Q1 alone is going to be about 500 Boe.

Good day, maybe a little bit above that but kind of in that range for the Q1 impact.

Okay.

And I guess just.

I wanted to kind of follow up a little bit on one of the prepared comments, if I sort of heard your comments correctly, Jeff I think you've kind of said that you expected first quarter to kind of be the bottom on production for the year than you expected to see.

<unk> kind of start to ramp here in <unk> for the rest of the year as the activity kicks in in the Haynesville. The chalk is that generally right.

Yes, I think Thats generally right I mean, if you look at just what the guidance would imply we would expect that.

<unk> production.

I'm up to that mid <unk> range for the rest of the year and hopefully with a little bit of a growth trajectory onto that.

Got it.

And then I guess also could you comment on sort of the current M&A environment, Youre, clearly kind of rapidly paying down the debt here as you look at the landscape just in a high price environment deals just still kind of pricy out there right now.

Yes.

There is a lot of deals I think coming over the transom that doesn't really surprise us right. If you've had assets that you were sitting on through the downturn and all of a sudden oil and gas popped up to a 107, it's probably a good time to sell it.

So we are remaining I would say very.

Cautious around our M&A activity.

The team is really highly focused on what we think are just much higher return projects right to the extent that we can bring producers onto existing acreage that we already own. That's an acquisition, we don't have to pay for it right a new cash flow stream and frankly in this price environment, we do see more risk and do.

<unk> deals because there's just almost definitional more downside to <unk>.

<unk> at these levels. So I think youre going to see us remained pretty quiet on the M&A front and stay very very focused on driving more activity to existing acreage and then we'll get back to the M&A maybe once things.

Tenda.

Normalize a bit.

Yes, I mean, it sounded like you all were fairly confident that you can probably maybe get some new operators in the chalk I know you've got a big position over there, but given the successful results in these prices I would think guys who want to get out there and drill.

Yeah, that's what we're seeing I mean, the good news is right you've already seen this translation from a test well program to those operators, who had existing physicians already know committing to rig contracts to start to ramp up development and we are working very hard not only to help spur additional.

Final activity from existing producers in the area, but then also of course to.

Bring in new operators.

Two surrounding acreage that's unleashed at the moment, but yes I mean.

The Iron is hot right. This is the time to strike on all of that.

Okay. Thanks, guys. Thank.

Thank you Liam.

Your next question comes from the line of Derrick Whitfield from Stifel. Your line is open.

Good morning, all.

Hey, Derik.

With my first question I wanted to focus on the Austin chalk in your prepared remarks, you noted the three well test program and the book when Phil demonstrated greatly improved production rate.

Could you offer some color on the degree of performance Youre seeing in these results Pat in comparison to past results.

Sure.

So this is Gary Permian and engineering, so the three tests well program included well Pi navigator trial, the Hooper over five months that well has made.

One in a quarter Bcf of gas 218000 barrels.

The second well the DLR, which leaves a good infill test for the main field.

Been producing for two months with some very encouraging rates.

Third world demand.

<unk> has been producing for three months and is also.

Better than the unseen related offsets for sure. So there's a couple more wells that are coming online the oldest well with.

The newer vintage completion in the field has been producing for 25 months.

That well has <unk> $4 three BS of gas 625000 barrels.

So with the older producers still hanging in there and producing at.

At really healthy rates 4 million a day.

Over 1000 barrels of condensate per day.

We're encouraged by what we're seeing.

Yeah.

Great and then shifting over to the Haynesville could you comment on the expected timing of completions with the three <unk>.

And if you're expecting additional activity beyond those three wells from that deal.

So.

We.

<unk> is finished.

Finishing drilling the third well at the moment I actually am unsure of their completion schedule for those three wells.

But we would expect that they are beyond before year end and then Myron.

My understanding is that they are going to kind of use that area in the haynesville as a place to kind of place rigs when they can and it's available on their drilling schedule.

Great Yeah, so derrick.

Hi, Brian .

Go ahead. Please go ahead.

Please go ahead I was just going to say Hey, we have got this is Jeff we have we haven't gotten any specific new drill schedule timing from X GSO Garrett is exactly right. We think that this could be kind of a swing play for them.

You may see.

Move rigs around from Shelby county into here and back and forth, but there's no specific drill schedule at this time for <unk> in the area.

And Jeff if I could just.

One clarification question on oil or the benefit of modeling when we think about Q2 oil production.

And really think about in light of the impacts noted during Q1 and recent events in the Bakken could you offer some directional guidance on how to think about Q2 I E.

<unk>.

Down et cetera versus Q1.

Yes, I would say, we would hope that the oil volumes would recover a bit in Q2 from Q1.

I would point out again as I mentioned in my prepared remarks that debt.

The quantum of oil that we saw Permian and Bakken from the suspense work that the team here did through the end of last year.

Propped up Q4 oil volumes, specifically, so I wouldn't expect that we would see that level again.

But yes, we're certainly expecting to see a little bit better oil volumes in Q2 than what we recognized this quarter.

Thanks very helpful guys.

Once again to ask a question you will need to press star one on your telephone keypad again Thats star one on your telephone keypad.

Your next question comes from the line of Ken <unk> from.

Sage point your line is open.

Good morning, gentlemen.

I'd like to step away from the mic growth for a while and just kind of look at some of the macro things that have been going on.

<unk> analysis on Dell backwardation in oil and gas and.

To that point, if senior management across energy companies right now.

It starts to constrain increased production to keep prices high.

I'm wondering why you put these hedges.

And if you could talk about the hedging and whats how does this affect earnings I would appreciate that as you know Ken Antero had a blowout quarter yesterday.

And that's all reports tomorrow.

Well, so I'd like your thoughts thank you.

Yeah, Ken this is Jeff.

I'll start on that look.

As anyone who has followed this company for a long time knows we have been consistent hedgers and so for example that benefited us greatly in 2021 and hampered result, I mean, sorry in 'twenty and hampered results in 'twenty, one, but what it's done is just created some stability.

As to our cash flow stream that would otherwise be more volatile.

And what our board has indicated it our board is comprised almost entirely of large shareholders of Blackstone is that they appreciate that consistency as opposed to just saying hey, we're going to be a proxy for lower 48 production and fully swing with prices. So it's just it's a corporate philosophy. So.

Yes undoubtedly results would've been higher you can see that in the release had we not.

Put hedges in but it's benefited us and other categories as well.

And I don't know I mean.

In terms of your opening statement that producers are self constraining just to keep prices high.

I don't know that I fully agree with that there's capital constraints in the industry, we are seeing pickups in.

Rig activity, there's obviously a lot of factors that go into supply and demand and we don't presume to be smart enough to do.

Better at predicting those then that people that are buying and selling across the curve every day. So anyway. It's just a corporate philosophy issue for us and it's what we've done consistently for years that shouldnt surprise investors and sometimes we benefit and sometimes we get hurt.

What percentage of your production is hedged.

We're about we're probably 65% to 70% hedged for 'twenty, two and probably in that 10% to 20% hedged for 'twenty three as we stand here today.

Okay, alright, thanks for your time.

Thanks, Tim.

Well.

Once again Thats a question Thats Star one on your telephone Keypad. Your next question comes from the line of T. J Schultz from RBC capital. Your line is open.

Hey, good morning, just one.

One question from me on the on the distribution.

The increase that we had this quarter is the plan moving forward to maintain a higher payout ratio as volumes improve assuming prices.

Stay elevated or do you expect to.

Maintain the current level and just build more cash.

This is Tom.

I would say.

Generally speaking.

If we can continue to have confidence and flat to growing production.

And.

Keeping we already have low debt balances then.

We think moving to a higher payout ratio.

As long as we have continuity of.

Sustaining those higher distributions and growing them in the future.

We will continue to.

Lower our coverage ratio as long as we're not creating excess volatility.

Okay.

Is the overarching goal to have a smooth and growing distribution rather than kind of purely variable.

Absolutely okay.

Yes.

Thanks T J.

Once again to ask a question Thats Star one on your telephone Keypad. Your next question comes from the line of <unk> from Raymond James Your line is open.

Hey, guys. Thanks for taking my call just one quick question on the lease bonus payments for <unk> I saw that it more than doubled <unk> and it was based in the Wolfcamp.

Was that a factor of existing leases coming up for re lease or is that on lease land or majority unleash lands being leased.

Hey, Steve.

This is thad.

The majority of that lease bonus came from leases that expired because of the downturn in 'twenty, just not a lot of activity.

They expired under their own terms, and we were able to release them quickly.

Lease them again quickly one was to Diamondback and another was a small private equity company in Midland County.

Perfect. Thank you.

Okay.

As a reminder to ask a question you will need to press star one on your telephone keypad.

Okay.

Okay, if there aren't any further questions.

Thank you all for joining us today, and we look forward to.

Talking with you again in the future.

Okay.

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

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