Q4 2022 Black Stone Minerals LP Earnings Call

Good day, everyone and welcome to today's Blackstone minerals fourth quarter earnings release Conference call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star one on your Touchtone phone you may withdraw yourself.

From the queue by pressing star and two please note. This call may be recorded and it will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to senior Vice President and General Counsel, Steve Putman.

Thank you good morning to everyone and thank you for joining us either by phone or online for Black Stone's fourth quarter and full year of 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 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 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 our cautionary information about forward looking statements in our press release from yesterday.

Risk factors section of our 2022 10-K that we expect to file 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 .

Gary Clark Senior Vice President land and commercial.

Keefer, Vice President of Finance and Investor Relations.

Gary <unk>, Vice President of Engineering, and geology from Tom Mcgough, Murray Vice President of land.

I'll now turn the call over to Tom Thanks.

Thank you Steve.

Good morning to everyone on the call and thanks for joining us today to discuss our fourth quarter and full year 'twenty two results.

We posted a very strong quarter across the board and in fact set new records in production and cash flow.

We generated total production volumes for the quarter of 42000 Boe per day, an increase of 5% over our third quarter volumes.

That increase was driven by.

And by higher royalty volumes, which totaled 40000 Boe per day up 7% from the last quarter and the highest level of royalty production in our history.

Oil volumes trended up in the Bakken in the Midland Delaware plays while the increase in natural gas volumes, primarily came from the Shelby trough Haynesville Bossier positions.

Where our operating partner Aegon has four rigs on location and where we had a large contribution from overruns associated with our farmed out working interests in the play.

He's override contributed $2 8000 Boe per day of volumes in the quarter that cover multiple months of production.

We also saw a step up in volume from our Austin chalk acreage.

Both of these are strong examples of our potential of the potential in our organic growth efforts, where we attract operators onto our existing concentrated acreage positions through creative incentive structures.

And maximize the value of our retained interest in farm outs with third party capital providers.

To date 14 wells have been turned to sales in the Shelby trough under our development agreement with Asos.

And another 16 are in various stages of drilling or completion.

In addition, 18, new generation multi stage completion wells have been turned to sales in our concentrated.

Acreage position in the East, Texas Austin chalk.

The goal is to accelerate production, where it matters. The most while shielding Blackstone from any meaningful capital requirements that.

That strategy paid dividend in the fourth quarter, and we expect that to continue into future years as well.

Our record results came against a healthy overall.

Environment for our producers.

Realized prices for the fourth quarter.

Proximately $35, a barrel at $6 50 per Btu.

Btu for gas.

Both down relative in the last couple of quarters, but clearly high enough to encourage continued development activity.

We had 108 rigs operating across our acreage.

December 31.

An increase of 17% relative to where we were at the end of the third quarter and is 14% higher than we saw at the end of 'twenty one.

Since 2020, we've averaged 10% to 15% of the active rigs in the lower 48 on our acreage and with our organic initiatives continue working on attracting more capital and development activity going forward.

The record royalty volumes and favorable commodity price environment.

Environment combined to generate the highest single quarter cash flow for Blackstone minerals as a public company.

We reported adjusted EBITDA of 131 million and distributable cash flow of $125 million for the fourth quarter, both up 7% to 8% from the third quarter.

Most importantly, these record results and our confidence in our outlook for 2023.

Added to the fifth consecutive distribution increase with fourth quarter distributions of 47 five cents per unit.

That we announced earlier this month.

This also establishes a new high watermark for Blackstone.

Overall, it was a great quarter, and we have a lot of positive momentum going into 2023.

Im sure. Many of you saw our announcement last week that Jeff Wood is stepping down as president and Chief Financial officers Officer effective next week.

We really are.

Appreciate just contribution to Blackstone over six years with us.

And we sure wish him the best in his future endeavors.

Keefer, who has been Blackstone and Blackstone for nine years, and currently serves as VP of finance and Investor Relations, who will step into the CFO role.

We're fortunate to have Evan and his expertise and deep knowledge of the company and I am very confident the CEO CFO transition will be seamless.

With that I'll turn it over to Pam to walk through the details of the quarter and discuss our 2023 guidance.

Thank you Tom and good morning to everyone since joining the company in late 2013, I have supported the IPO process I've seen the Shelby trough transitioned through multiple operators into the program that has grown into today and worked alongside our team through many other strategic projects I am very excited to step into the CFO role and what this company will achieve their art.

Continued efforts to develop our existing asset base as Tom mentioned it was a record setting quarter in terms of royalty production adjusted EBITDA distributable cash flow and distributions paid leave.

We've accomplished all of this despite working interest volumes continuing to trend down which was by design through various farm out agreement that we started back in 2017 and $41 million of realized hedge losses for the quarter.

For the full year, we generated $771 million of oil and gas revenues, which was up 57% over 2021 level.

$466 million of adjusted EBITDA from $37 1000, BOE a day of total production for the year.

We paid out a total distribution of $1 75 per unit for 2022, which is an increase of 85% over 2021 level.

We retained approximately $75 million for re debt debt.

Throughout the year as well.

In conjunction with that the earnings release that we put out our 'twenty three guidance yesterday as.

As we look forward to the full year 2023, we forecast annual royalty production to be up slightly from 2022 levels with the majority of those gains coming from our key organic growth plays.

We expect to see production growth in the Shelby trough is Avon continues to ramp up development activity targeting a minimum pace of 27 wells per year by the end of this year as well as higher volumes in the East, Texas Austin Chalk as we work with our operating partners there to accelerate activity.

We have had 24, new generation multi stage completion wells spud in the Austin chalk with 18 of those that are currently producing.

We also expect production growth from our Permian and Bakken positions, where we have visibility into some high interest development locations.

This is partially offset by a slowdown in Louisiana Haynesville. After a very robust 2022, and some natural production declines on our acreage outside of these core place.

We mentioned last year that we expect it to grow production through 2023 with an exited target rate of close to 40000 Boe per day.

Despite the recent pullback in natural gas prices, our expectations are to be at or above that level by the end of this year, which will be driven largely in part from our development agreements with our key operators in the Shelby trough and Austin chalk.

We expect lease bonus operating expenses and production costs to be roughly in line with 2022 levels.

G&A is also expected to increase slightly in 2023 as a result of inflationary costs and selective hires to support our ability to evaluate market and manage our undeveloped acreage position to potential operators.

While we don't normally give specific cash flow guidance I will note that strike prices on our natural gas swaps increased from approximately $3 per <unk> in 2022 to over $5 per <unk> in 2023, an increase of over 60%.

The average strike price of our oil hedges increased by over 20% from approximately $65 per barrel in 2022 to over $80 per barrel in 2023.

We are in our normal range of hedging approximately 60% of our proxy of our estimated volumes for the rest of this year.

I will provide a great deal of support to our cash flows in 2023, even with the recent pullback in pricing.

And speaking of hedges, we've started the 2024 natural gas position with in the recent weeks to protect against what could be a difficult period in gas prices in advance of increasing LNG exports in 2025.

We currently have hedges covering approximately 15 Bcf of natural gas production for the full year of 2024 with an average strike price of $3 67.

We will remain consistent with our hedge program continuing to build a 2024 position throughout this year targeting 70 plus percent of our estimated volumes by the end of the year.

Yeah.

Even with the distribution increase we generated.

Distribution coverage of 126 times for the fourth quarter.

Which further strengthened our already solid balance sheet, we had a total debt of $10 million at the end of the year and currently have $57 million net cash position in advance of pay in the fourth quarter distribution.

This has all been very positive for Blackstone, and we have been able to grow our royalty production through organic efforts without incurring debt or issuing new equity for acquisitions. We are very well positioned to continue this trend into 2023 and offer a compelling value proposition to new and existing investors with virtually no.

That and a distribution, which we believe is sustainable in 2023 that delivers a yield of over 12% to our current unit price.

And so with that we'll open the call to any questions.

At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue by pressing star and two.

Once again to ask a question please press the star and one.

We will take our first question from Derrick Whitfield with Stifel. Your line is open.

Good morning, all and congrats to you Evan on your promotion.

Thank you Derek and good morning.

Well My first question I wanted to focus on your 2023 guidance with the lower gas prices, we are observing at present.

Are you thinking about the conversion of ducks to production in your guidance.

Yes, Eric that's a great question, and obviously gas prices have pulled back pretty significantly since the middle of December and so we do see it as a challenged market going into this year and what we see going forward. One thing I will point to that we do have a lot of visibility into is really the <unk> agreement.

The Shelby trough.

That's up by a minimum development pace through those.

Those contracts. So we do have some visibility there as well as some of the development agreements that we have also in the Austin chalk.

Now, we do think theres going to be a decrease in our overall haynesville, Louisiana volumes compared to what we saw in 'twenty two because of the prices. We even saw the comstock announce that they're laying down two rigs. So we do expect it to be a little bit of a challenged year with slightly lower volumes on the gas side in the Louisiana.

The Haynesville this year.

Terrific and maybe shifting over to the Austin chalk.

Since there were no material updates in your press release I wanted to see if you could offer some perspective on 2023 as it relates to your general expectations for activity and if there are any specific developments, we should place in our radar.

Yes, so overall everything out there still.

Sure.

Going forward as we expect.

Mentioned in my commentary that we have 24 wells have been spud 18 of them are online. So that leaves six wells currently that have been spud that are coming online here very soon.

We do think kind of for the remainder of the year. There is potential for an additional eight to 10 wells to be drilled out there this year with further development going forward.

Overall, our view is that even with kind of gas prices pulling back that is still a very economic and very attractive returns to operators out. There. So we're excited with working with the existing operators that we have and potentially new ones that we can bring to the acreage going forward.

We continue to develop at the pace that we would like.

We overall still see within the fairway approximately 250, plus remaining locations out there at <unk>.

Current prices and so we do see a lot of runway a lot of potential activity that we can drive on this position going forward.

I'd just add to that.

While the.

The chalk play generally over time has had a fair amount of variability in it and this brought.

Brooklyn.

Redevelopment is still in its early stages.

The last two wells that have been drilled in what we call. The core of the core are outstanding wells one of them producing over 500 barrels of oil a day and 12 million cubic feet of gas over the last 30 days.

That's terrific great update guys.

Thank you Derek.

As a reminder, if you would like to ask a question. Please press the star and Gwen and we'll go next to Tim <unk> with Keybanc. Your line is open.

Hey, good morning, everybody and congratulations on the promotion.

Yes, Thank you Tim.

Okay.

I'll pick on you first.

I've asked repeatedly in the past about the distribution level and.

As you showed in the report.

You continue to have de minimis debt and leverage.

How do you think about 79 call it 80% distribution this quarter, how do you think about that rate going forward and why would you why wouldn't you kind of increase it.

Given that that they have.

Yes, so I'll just start off by saying when we look at the distribution and our internal policy as far as trying to establish what we wanted.

Set that going forward is that we will look forward to the next 12 to 24 months at overall general activity in.

The sector pricing trends and everything else and try to establish what we think is a reasonable distribution that can be maintained over the forward quarters, we like the idea of having a stable.

To growing distribution, which is what we've done over the last five quarters, where we've been able to slowly increase that as prices and production has improved.

Looking at the fourth quarter with increasing it again to the 47 five cents, it's something that we feel is fairly stable and achievable throughout this year. Despite some of the pricing pullback.

While able to at this point have all of our debt significantly paid off obviously that will increase whenever the distribution gets paid out.

$57 million today and go back up call it around the $50 million Mark going forward and so it's really a product of.

Looking at what we see that the guidance going forward and trying to set a distribution that we feel very comfortable and achievable going forward. Despite some volatility in overall pricing.

Okay. Okay. That's helpful context, and then if I could switch gears a bit.

It's been a fairly active M&A period for most of the public minerals companies Blackstone has been an outlier.

To be focused on the overrides.

You can do to increase activity.

What are your thoughts on that are you not at all looking at M&A is it more that you havent liked the prices you see.

Again with the balance sheet you have you certainly can can support some inorganic growth. So just kind of curious how management and the board is thinking about that.

Tim This is Tom.

I'll answer that historically for a long time, we've been.

An acquisition company.

Our feeling today as that.

The market is very competitive in that arena.

And we really look at the efficiency of that source of.

Of production relative to the.

Cash flow per share production per share and it is.

<unk> to find things of size and pricing levels that we feel are competitive with what we can do on our own properties.

But.

Your question earlier around our.

Our coverage if you will.

We may be a little bit different from others. We don't have any problem whatsoever with building up a fair amount of liquidity on our balance sheet, because we've got things that we can do with it over the near next 24 months and.

If an acquisition that we just.

Had to have because it was very well priced.

We'd be in a really great position to do that but.

We're currently trading our stock is trading at a 12% yield and it's it's.

It's hard in our opinion to buy things that have a 12% internal rate of return.

When our equity is trading at a 12% yield.

Not that compelling.

That doesn't mean, we won't ever do it again, but it's just it's not a we don't see it as an efficient way.

For us to grow because we don't want to lever our balance sheet up a lot.

With the way our.

Units are trading its a challenge.

Okay.

Appreciate that color if I could sneak one last one in.

Circle back to that.

The Haynesville you talked about the the axon agreements that you have in place.

How confident are you that those agreements will hold if we were to see gas prices kind of kind of gapped down in.

I don't know if you know or can share any details on maybe hedges that they have in place or kind of what assurances you have that they would honor that if we see a worst case scenario for gas.

Yes, so Tim this is Ed I'll start with that and one of the biggest points that I'll, Mark too and I can't really comment too much on eighth on hedge position and everything just because we typically don't have those conversations with them but.

When we originally struck the deal with a thorn in Angelina County was May of 2020, when prices were sub $2 at the time and so we kind of set up this program with them to be interesting to them at those price environment and so we're we still see economics on these wells.

<unk> been very attracted to them going forward and so obviously, there will probably be a threshold to where it dipped below that but at current prices.

Current levels as we said in negotiating those deals at sub $2 pricing gives us a lot of leeway and confidence into that program going forward.

Yes, I'd like to add to that.

The <unk> agreement and the assets that they have.

Under their umbrella with us are in fact R&D to.

Big deal to Us and I think it was a pretty big deal to them.

We have contractual relations with those guys that are.

Pretty.

Okay.

<unk> constructed to address a long term development program not just.

Given six or nine or 12 or 24 months cycle. Because this is a 20 year development program out there our royalty rates vary with gas prices.

And.

We also stay in touch with those folks.

Never say never on.

People changing their direction, but we don't we don't have any indication.

Of that with a fund at this point in time.

And we think they are great operators and great long term partners and we will be responsive to them and I think they to us.

In developing that program for the long haul.

Okay I appreciate the comments thank you all.

As a reminder, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue by pressing star into.

And we'll pause a moment to allow further questions to queue.

And we'll take a question from Monroe helm with Clemenson capital. Your line is open.

Okay. Thanks, a lot and thanks for the information so far I'm kind of new to the <unk>.

Your story and I appreciate some of the color on the agreement.

<unk> agreement since you just mentioned kind of a 20 year development plan is there a certain number of wells, we're committed to drill in 2020.

By year over the next two or three years not just two.

2023, but 2020 for 2025.

Yes. This is evan so I'll start with that and so at.

At the end of this year, where they start ramping up to 27 wells per year. That's the current terminal rates that it goes to going forward and so that program. Originally started with Angelina County at four wells per year ramped up to 10 and 15, and then also including the development of Grill agreed.

<unk> and St. Augustine.

They went from five to 10 to 12 going forward and so that's where we get to the growing into that 'twenty seven well pace at the end of this year, that's going to continue into future development years.

Okay.

There's a lot there.

A lot of sub subtleties in things in those agreements.

<unk>.

They can use.

To control their own destiny there in fact.

If they go above 27 wells a year, they actually get even a lower royalty from us which is a win win for them and for us.

And.

Who knows that may be happening also.

It's a it's a complicated agreement.

Keeps our land administration team on its toes.

But it's a great.

Partnership so far.

Okay can you tell me a little bit about how you entice.

Producers to drill on your acreage.

And I think I noted during the press release that there were some completion techniques.

If enhance the rate of returns over and over in Austin Chalk could you maybe talk about at all.

Putting all too small to tell me more.

Globally.

Well.

I would say this is an area, where we have a lot of acreage some of it is.

Very old production, that's been out there sure.

Many spending 20 plus year old wells.

And.

We are doing taking steps with the operators of those older properties to encourage them to redevelop the property.

And Thats hope.

Hopefully going to pay some dividends and in addition to that we have acreage that.

As in the play that wasn't.

Tied up where we have made trades with folks to come in and drill wells on the property.

Not charging them large upfront fees and working with them on royalty to stimulate activity.

As the critical math of the whole area.

Which is several hundred thousand acres.

Increases the likelihood of more rapid development increases.

The wells that have been drilled to date in the core of the play have been very good wells.

There is a lot more of them to look at like the ones I mentioned earlier.

Okay.

Okay.

When you are setting your.

Most recent distribution increase did you take the Cao.

I'm curious would you consider an environment, where we might have $2 $2 50 gas for some extended period of time.

Well I think I think we believe and took into account.

That 23, and 'twenty four and maybe some into 2005.

That would be challenging.

The natural gas markets everyone.

As we've all looked out.

Over the last five years I think.

General consensus in the industry that until some of these newer LNG export facilities come online.

Going to be a lull.

<unk>.

Growth.

<unk> of natural gas because.

Production has gone up and the prices that were in existence last year.

Really saw some increases in <unk> and.

And activity.

We think it's going to be.

A period of time, where we don't see that much growth.

But we are well hedged and we have agreements that we don't.

Our operators are going to be highly volatile and they're well count.

Okay.

While I appreciate your answers.

Welcome.

And as a reminder, if you would like to ask a question. Please press star one on your Touchtone phone.

Yes.

And it appears we have no further questions I'll turn the program back to the speakers.

Well. Thank you all for joining us today, and we look forward to talking with you in a couple of months.

Yes.

This does conclude today's program. Thank you for your participation and you may disconnect at any time.

Yes.

Okay.

Okay.

Okay.

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