Q2 2022 Black Stone Minerals LP Earnings Call

Lower costs, even choke back these wells typically come in at over 20 million cubic feet per day and can stay at those rates for over a year. So we see a lot of growth from a paper on activity in the Shelby trough and Lo and Behold X T O us back out there in San Augustine as well on our acreage for three wells this year in <unk>.

Possibly more going forward.

So while our while royalty volumes are down by approximately 5000 Boe per day in the Shelby trough through 2000 from 2019.

Our run rate on royalty driven growth there is about as good as it's ever been and we anticipate that the area will spool back up quickly.

We've also seen volumes trend up in the Louisiana side of the Haynesville play driven by our efforts described accelerated development deals with operators like Comstock. In addition to the general increase in activity by producers responding to the favorable market dynamics of the <unk>.

Coast gas and LNG exports.

In the Permian, we peaked at over 6000 Boe per day by the end of 2019.

Beginning in 2020.

Today, we're at averaging around 33 point 3500 Boe per day run rate.

Remember that in the Permian.

In the depths of the pandemic, we sold properties generating approximately 1700 Boe per day of.

Production to reduce our debt from a peak of $450 million to around $55 million today.

We've recently seen new deals and some of our highest interest lands in the Pecos and Reeves County area, and expect increasing drilling activity and production growth there as well and as you know the rest of the acreage tends to follow the trend which is up in the in the Permian.

A new Kid on the block is the same as the old one East, Texas Austin chalk.

Since this play was restarted in 2019 in the middle of the commodity downturn and just before the real fun of the pandemic.

Took hold.

There have been 18 wells drilled in this play and we have.

And we are working towards contractual well commitments on our acreage delivering a strong line of sight.

225% to 30 wells per year spud over the next 12 months.

This part of the Austin Chalk play with summarize we are very positive report by <unk> on June 29th in the exciting part of that.

Is it the report didn't include the last well out there that's flowing.

'twenty 200 barrels of oil per day, and almost 12 million cubic feet of gas per day.

That is a monster well by any standard is it standard and as part of the reason we're excited about our prospects out there.

This Austin chalk play certainly has variability and cover multiple counties yet this environment in this environment. We believe many sub areas have solid to outstanding economics.

We and our operators in the area are getting up the learning curve quickly.

Where and how to drill this generate new generation of chalk wells, we have a lot of inventory.

And high interest territory. So we're excited about what this might turn into.

Especially with hundreds of thousands acres and what may be the core and with that much more in areas still to be tested.

And we're continuing discussions now with solid large private and public E&P companies to expand the play towards.

New areas and previously untested areas, where we have significant acreage position.

Certainly more to come on this in coming quarters.

The foregoing points.

So how we went from 2019 peak of over 50000 Boe per day to the current mid 30 thousands.

The story of voluntary unpaid curtailment of non op sale of prompt some permian to strengthen our balance sheet and.

In a period of acute.

Activity reduction during the pandemic, but we see that is in the rearview mirror with new and old operators Spooling back up strongly in revival plays looking very promising.

We've made a strategic decision to focus on organic growth centered around our existing acreage and to maintain our balance sheet strength and to take advantage of rising prices in this environment.

The team has rallied around the mandate and deliver so we feel great about our volumes as we move from this.

Last cycle forward.

Plays are there the operators are there the economics are there and we will grow production.

Assuming the macro environment stays constructive and our key operators in the Shelby trough in Austin chalk deliver on their stated and mostly contractual plans, we expect to grow production through 2023 and exit next year at close to 40000 Boe per day.

Finally, let's focus on inventory.

And let's do that in the context of the general macro view on global oil and gas consumption.

Two years ago in early mid twenties, many said oil and gas would be over in two to three years that renewables, we're just going to pop up until the board.

Today, I think the macro view is less reactionary to 100 year crisis headlines and other realities.

Sure, we believe oil and gas.

Have a good run ahead.

As the world looks to transition to more environmentally sound ways to meet increasing energy man demand.

Of a growing and evolving global economy, so with that said.

I'll make a statement about blackstone's inventory.

We see all in with various categories of cost and risk efficiencies Blackstone's knowable inventory.

At the last 12 months production rates to be well in excess of 20 years.

That's a very healthy inventory number no matter, how you slice it.

And very importantly, you might remember that 15 years ago, our Shelby trough Haynesville Bossier known inventory was zero because that play hadn't even been put in play yet.

No what other major surprises are out there and our remaining acreage.

But blackstone has millions of undeveloped acreage that today are not included in these inventory numbers.

With that I'll now turn it over to Jeff to go through some of the details for the quarter.

Alright, well, thank you and good morning, everyone I'm going to keep my comments brief. This morning is Tom really covered the important stuff.

Reduction both for this quarter and of course, our expectations for future growth in those volumes.

Do you want to make a quick one just on price realizations in our outlook around that.

<unk> for the second quarter were consistent with last quarter at.

At almost 100% of average <unk> prices for crude and 120% of average Henry hub prices for our gas.

That is before the impact of commodity hedges.

And I'll note that even though as Tom mentioned, we reported record highs for adjusted EBITDA and DCF. This quarter those amounts were constrained by our hedges that should be no surprise.

The positive news around that as those hedges roll at the end of the year and the swap prices for our gas hedges increased by over 50% going from 22 to 2023.

And our oil hedged swap prices are up almost 30% for next year. So at current strip prices and our existing hedges in place for both 'twenty, two and 'twenty three realized prices would increase by 11% next year. Despite the backwardation in the current curves.

So even if production levels stayed flat from 2022 to 2023, which of course is not our expectation that would apply over $50 million of incremental distributable cash flow next year.

Now as you might expect in this environment, we do get a lot of questions around our hedging philosophy and our hedging practices now I'll just say during our entire history as a public company, we have hedged a certain percentage of our near term forecasted production volumes typically thats around 70%, one year out and 50% or less two years out.

We designed that hedging strategy to even out and reduce volatility in our cash distributions and looking at the history of that hedging program since our IPO in 2015. It has generally been positive, including a big benefit in 2020, when commodity prices turn down so dramatically.

In 2021, and so far this year as prices have risen just as dramatically. The hedging program has limited some of that upside for us.

So you take the bad with the good and we continue to believe that a systematic hedging program serves its purpose over the long term.

And frankly, the worst outcome would be to hedge through a down cycle stop hedging at a time like this when prices are relatively attractive and then watch prices just ball again, when we don't have that hedged production protection.

The other thing that we like about hedging for 2023 is that it locks in some of that incremental DCF over this year that I just mentioned and.

And as a management team, we feel good about the extent to which we can use hedges to provide greater certainty to investor distributions and particularly when that points to locking in a distribution increase.

As I said last quarter in response to a question around all of this it's just the corporate philosophy is one that we've been consistent around since our IPO recognizing that in some years, we'll benefit from it and in some years we will.

Okay. So in our earnings release yesterday, we updated our guidance with the expectation that we would come in for the full year around the low end of our original guidance range.

We see the ramp up in some of our more active play is facing some headwinds by global supply chain interruptions that are happening across the industry and we've also had some well timing slipped in some high interest areas as our operators optimized for multi pad drilling over the long term that's going to be good for us, but it can tamp down some near term volumes.

And as Tom said, we absolutely view these as temporary issues. Our focus is to facilitate activity on our existing acreage that leads to production growth in 2023 and beyond and we believe we're very well positioned to do that.

And finally, the balance sheet remains in great shape, the borrowing base for our revolving credit facility was reaffirmed at $400 million in April our total debt balance was $86 million at the end of this quarter and is down further to $54 million today and of course that has an advance of paying our second quarter distribution, which will occur on August 19.

So that concludes our prepared remarks, so poly we will open this up for questions.

Thank you all speakers at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brian Fitzgerald Private Investor. Your line is now open.

Hi, Thank you for a very good quarter great results.

You add more commentary on the eastern is chalk and operators.

In the area now that you set up a royalty program favorable royalty program.

They are drilling.

Yeah.

Sure Brian I'll start on that and this is Jeff and others can chime in look we're very excited about the chart. This is honestly.

Two years of a lot of hard work by the team as we've as we've said in prior calls we had an existing.

Group.

Three main operators in the core of that field and so we've just done a number of banks, we have worked with those existing operators to try to accelerate their activity on existing leases.

And we have brought in new players.

To start new development activity around it.

So I think as we've mentioned we've had 19 wells spud around that area.

Over the past year plus.

<unk>.

11 wells producing now we see that area is getting better and better delineated all the time and what we're excited about is with this new completion technology, we're absolutely seeing a nice fairway of acreage, where we're seeing consistent and very very strong results as Tom mentioned there.

The most recent.

Well out here came in just an absolute barnburner.

2000, plus barrels a day and almost 12 million cubic feet of gas a day so yes.

Yes look we're excited about this it's been a ton of hard work and we think that as we look into 'twenty three and beyond it's going to be a real area of growth for us.

Okay.

Thank you.

Thank you Brian .

As a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad and your next question comes from the line of traffic Lamar of Raymond James Your line is open.

Hi, guys. Thanks for taking my call.

My first question kind of revolves around.

Distribution coverage I know in the first quarter, you're about at one Onex and then this quarter was closer to 1.2.

Just looking at the second half of the year.

And on like a modeling basis.

We expect <unk> and.

An average of that are closer to 1.2 or revert back to one one just one on <unk> thoughts on that.

Sure sure traffic this is Jeff I'll start on that as well.

Yes, so look we have sort of.

Said on some of these past calls that we expect distribution to come down and payout ratios to come up over time, just given the fact that the balance sheet is so clean and we are prioritizing.

Returning our excess cash to investors second quarter was a little unusual obviously theres some backwardation in price curves through three Q3 and Q4.

Before the uptick in hedges.

Kick in for 2023, so really that we ran a little higher coverage than we would anticipate going forward this quarter at a one to one times.

Really just to sort of balance it out through the rest of the year.

So, but there has been no change in philosophy here I think we will continue to prioritize returning cash to investors over.

Like buybacks for the moment.

Sure.

And so you should see that coverage ratio come down as we go forward through the year.

Okay perfect great. Thank you for that and then my second question.

Revolves around hedges I, just wanted to get shelf thoughts on maybe 23 and onwards.

If the possibility of callers have youll talk about that versus swaps and <unk> strictly swaps in 'twenty two and then right now for 'twenty three just wondering itself thoughts on that.

Yes, so we look at.

At collars and swaps, where every time, we go to put on trades.

Seeing those swap levels as attractive so colors will be something that we continue to look at it I think the last time, we had maybe in 19.

And use some collars and we've been pretty simple with the swaps. Since then so I think.

Most likely what you'll see is the.

Hedge program will continue to be dominated by swaps, but if we see some areas that really makes sense.

Two maybe preserve a little more upside and still get nice downside protection through it through a caller, we may do that but but again, we like to stay pretty simple with us we're not trying to do anything other than provide stability in the distribution and what we found is that swaps tend to do that most effectively.

Okay perfect. Thank you.

Thank you.

Thank you. Your next question comes from the line of William <unk> from the Marlin <unk> Fund your line is open.

Congratulations on a great year for you.

Never Dream.

The dividend will go up quite that much.

What percent do you hedge on your oil and gas.

William.

Yes. Thank you for the question, Brian It really depends I mean, historically, what we've done is we will look to systematically layer in hedges that give us something like 70% coverage for one year forward and then we will typically hedged some level of our expected volumes two years forward from there.

The current plan that we put on our hedged so again sort of call. It in that one year forward range up to 70% and and two year forward in the 30% to 50% range and then we would just periodically layer those hedges on.

Okay that answers my question.

I would add a comment on that on the hedging. If you just if you think about that in the context of the comment around inventory of 20 plus years.

We are systematically covering 12 months out so in terms of the total resource space, we're substantially unhedged.

Okay.

Okay.

Thank you. Thank you.

There are no further questions at this time I would like to turn the call back over to CEO and chairman Mr. Tom Carter.

Well, thank you all for joining today.

We're excited about what's going on on our assets and we look forward to talking with you next quarter.

This now concludes the presentation you may now disconnect.

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