Black Stone Minerals' (BSM) CEO Tom Carter on Q1 2022 Results - Earnings Call Transcript

Black Stone Minerals, L.P. (NYSE:BSM) Q1 2022 Earnings Conference Call May 3, 2022 11:30 AM ET

Company Participants

Evan Kiefer – Vice President of Investor Relations

Tom Carter – Chairman and Chief Executive Officer

Jeff Wood – President and Chief Financial Officer

Garrett Gremillion – Vice President of Engineering and Geology

Thad Montgomery – Vice President of Land

Conference Call Participants

Leo Mariani – KeyBanc

Derrick Whitfield – Stifel

Ken Reese – Sagepoint

TJ Schultz – RBC Capital

Trafford Lamar – Raymond James

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Black Stone 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. [Operator Instructions] Thank you.

I would now like to hand the conference over to your speaker today, Evan Kiefer, Vice President of Investor Relations. Please go ahead, sir.

Evan Kiefer

Thank you, Ren, and good morning to everyone. Thank you for joining us either by phone or online for the 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 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 the cautionary information about forward-looking statements in our press release from yesterday and the Risk Factor sections of our 2021 10-K. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. A reconciliation of those measures to the most directly comparable GAAP measure and other information about these non-GAAP metrics are described in our earnings press release from yesterday, which can be found on our website at blackstoneminerals.com.

Joining me on the call today from the company are Jeff Wood, President and Chief Financial Officer; Steve Putman, Senior Vice President and General Counsel; Carrie Clark, Senior Vice President, Land and Legal; Garrett Gremillion, Vice President of Engineering and Geology; and Thad Montgomery, Vice President of Land.

I’ll now turn the call over to Tom.

Tom Carter

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 a $100 million of adjusted EBITDA in the first quarter, that was an increase of 27% over the fourth quarter of 2021. 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. That’s down 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. Much of the decrease came from Shelby Trough. Aethon is meeting or exceeding its minimum well requirements in the Shelby Trough under our development agreement, covering Angelina and San Augustine counties.

The 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 turn to sales. And we typically have high royalty interest in them relative to some other wells. So they make a big difference timing wise.

Overall, we are very excited about the drilling activity in the Shelby Trough. We have separate development agreements with Aethon covering our minerals acreage in Angelina and San Augustine counties. In Angelina, Aethon 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, Aethon is currently drilling two wells and has another two wells of weighting completion operations.

From there, our overall activity levels across the Shelby Trough are expected to increase quickly over the next two years leading to 20 to 30 wells a year in the area drill by Aethon alone. We remain very happy to have chosen such an experience and well capitalized operating partner for this important development area. Aethon’s drilling results thus far in the Shelby Trough have been very encouraging and we expect this to be mutually beneficial partnership for many years to come.

Further benefitting the volume picture in the area XTO Energy has resumed drilling three wells on Black Stone Shelby Trough acreage in San Augustine County that were originally spud in 2019. As we discussed last quarter, we have fully farmed out all of Black Stone’s working interest in the Shelby Trough as well.

We will benefit from the carry provisions in those deals while ensuring that we have no ongoing capital burdens associated with Aethon’s 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 position play to benefit from continued growth in LNG export 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 unstimulated wells yielded solid results.

The outcome of that test program was very encouraging. And so 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 flow. To-date, seven wells with modern completions are now producing in the area and additional five are currently either being drilled or completed.

We also remained engage with additional potential operators to commence development on surrounding acreage. Things continue to move in the right direction in this important acreage for Black Stone. And we are 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 0.2 times. That combination of factors allowed for sizeable distribution increases announced last week. The $0.40 per unit or $1.60 annualized is the highest distribution level since our IPO in 2015. High prices, certainly, contributed to that, but we are also able to increase our payout ratio, given our very low debt balances and an increasing 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.

Jeff Wood

All right. 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 29,600 Boe per day, that was down to 16% relative to fourth quarter royalty volumes.

As Tom mentioned, there were some high net Shelby Trough wells that returned to sales just after the end of the quarter. And in addition, XTO shut in some existing production in the Shelby Trough, as it resumed drilling operations on three wells in San Augustine County. Both of those factors contributed to the fall off in our gas volumes.

The decrease in oil volumes was primarily a result of lower suspended revenue volumes received in this quarter as compared to last quarter. Our staff 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 as we mentioned on the last call, increased reported oil and gas volumes by almost 4,000 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 shock 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 of 34,000 to 37,000 Boe per day. Spot prices and our differentials both improved in the first quarter, resulting in realized prices for 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 Bcf per unit for the quarter rose by $0.10. 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 Bcf to our shareholders for the first quarter. The distribution of $0.40 per quarter – 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 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 at $400 million last month. We could have pushed that number higher, but frankly, with such little debt outstanding, we elected to maintain it at that $400 million level.

With that, Ren, we will turn the call over for questions, please.

Question-and-Answer Session

Operator

All right. [Operator Instructions] Your first question comes from the line of Leo Mariani from KeyBanc. Your line is open.

Leo Mariani

Hey guys. First off, 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 was a big contributor to the lower volumes this quarter.

Evan Kiefer

Hey, Leo. And thank you for the question. So this is Evan and I’ll start on that. So with XTO drilling those three wells that Jeff mentioned, we think the shut-in impact of that just in Q1 alone is going to be about 500 Boe a day maybe a little bit above that, but kind of in that range for the Q1 impact.

Leo Mariani

Okay. And I guess, just 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 kind of said that you expected first quarter to kind of be the bottom on production for the year. And then you expected to see volumes kind of start to ramp here in 2Q for the rest of the year as the activity kicks in and the Haynesville shock. Is that generally right?

Tom Carter

Yes, I think that’s generally right. Leo, if you look at just what the guidance would imply, we would expect that that production would climb up to that mid-30s range for the of the year and hopefully with a little bit of a growth trajectory onto that.

Leo Mariani

Got it. And then I guess also, could you all comment on sort of the current M&A environment you’re currently kind of rapidly paying down the debt here, as you look at the landscape, just in a high price environment, are deals just still kind of pricey out there right now?

Tom Carter

Yes. Look, there’s a lot of deals, I think, coming over the trends and that doesn’t really surprise us, right? If you had assets that you were sitting on through the downturn and all of a sudden oil and gas popped up to 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 on to existing acreage that we already own. That’s an acquisition we don’t have to pay for, right, a new cash flow stream. And frankly, in this price environment, we do see more risk in doing deals, because there’s just almost definitionally more downside to prices at these levels. So I think you’re going to see us remain 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 M&A maybe once things tend to normalize a bit.

Leo Mariani

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 and these prices, I would think guys, we want to get out there and drill.

Tom Carter

Yes. I mean, 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 positions already now committing to rig contracts to start to ramp up development. And we are working very hard, not only to help spur additional activity from existing producers in the area, but then also of course to bring in new operators to surrounding acreage that’s unleashed at the moment. But yes, it’s – I mean, the iron’s hot, right. This is the time to strike on all that.

Leo Mariani

Okay. Thanks guys.

Tom Carter

Thank you, Leo.

Operator

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

Derrick Whitfield

Good morning all.

Tom Carter

Hey, Derrick.

Derrick Whitfield

With my first question, I wanted to focus on the Austin Chalk, in your prepared remarks, you noted the three well test program in the Brooklyn field demonstrated greatly improved production rates. Could you offer some color on the degree of performance you’re seeing in these results in comparison to past results?

Garrett Gremillion

Sure. So this is Garrett Gremillion in Engineering. So the three test well program included a well by [indiscernible] over five months that well has made 1.25 Bcf of gas, 218,000 barrels, the second well DLR, which was at a good Intel test for the main field. It’s been producing for two months with some very encouraging rates.

The third well demand has been producing for three months and is also better than the unstimulated 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 tuned 4.3 Bcf of gas, 625,000 barrels. So with the older producers still hanging in there and producing at really healthy rates, 4 million a day over 1,000 barrels of condensate a day. We’re very encouraged by what we’re seeing.

Derrick Whitfield

Great. And then shifting over to the Haynesville, could you comment on the expected timing of completions with the three XTO wells and if you’re expecting additional activity beyond those three wells from XTO?

Garrett Gremillion

So we – XTO is 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’d be on before year end. And then my understanding is that they’re 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 drill schedule.

Derrick Whitfield

Great. Yes, go ahead.

Jeff Wood

No, I was just going to say, we have got – this is Jeff. We haven’t gotten any specific new drill schedule timing from XTO, so Garrett’s exactly right. We think that this could be kind of a swing play for them. They 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 XTO in the area.

Derrick Whitfield

And Jeff, if I could just one clarification question on oil for 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., flat up down, et cetera, versus Q1?

Jeff Wood

Yes. I mean, I would say we would hope that that oil volumes would recover a bit in Q2 from Q1. I would point out again as I mentioned in my prepared remarks that, that, 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 it 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 recognize this quarter.

Derrick Whitfield

Thanks. Very helpful, guys.

Operator

[Operator Instructions] Your next question comes from the line of Ken Reese from Sagepoint. Your line is open.

Ken Reese

Good morning, gentlemen. I’d like to step away from the micro for a while, and just kind of look at some of the macro things that have been going on. I’d like your analysis on current backwardation in oil and gas. And to that point, if senior management across energy companies right now, your thought is to constrain increased production to keep prices high. I’m wondering why you put these hedges in? And if you could talk about the hedging and what’s – how it’s affect earnings, I would appreciate that. As you know, [indiscernible] had a blow up court yesterday, continental reports tomorrow, and they’re unhitched as well. So I like your thoughts. Thank you.

Jeff Wood

Yes. Ken, this is Jeff. I’ll start on that. Look, as anyone who’s 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 2020 and hampered results in 2021, but what it’s done is just created some stability to our cash flow stream that it would otherwise be more volatile and what our Board has indicated and our Board is comprised almost entirely of large shareholders of Black Stone 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 in other categories as well. And I don’t know. I mean the – 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 be better at predicting those than the 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. It shouldn’t surprise investors and sometimes we benefit and sometimes we get hurt.

Ken Reese

What percentage of your production is hedged?

Jeff Wood

We’re about – we’re probably 65% to 70% hedged for 2022 and probably in the 10% to 20% hedged for 2023 as we stand here today.

Ken Reese

Okay. All right. Thanks for your time.

Jeff Wood

Thanks, Ken.

Operator

[Operator Instructions] Your next question comes from the line of TJ Schultz from RBC Capital. Your line is open.

TJ Schultz

Hey, good morning. Just a one question for me on the distribution. Given the increase that we have this quarter as the plan moving forward to maintain a higher payout ratio as volumes approve, assuming prices stay elevated or do you expect to maintain the current level and just build more cash? Thanks.

Tom Carter

This is Tom. I would say that I generally speaking, if we can continue to have confidence in 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.

TJ Schultz

Okay. But is the overarching goal to have a smooth and growing distribution rather than kind of purely variable?

Tom Carter

Absolutely.

TJ Schultz

Okay. Thank you.

Tom Carter

Thanks, TJ.

Operator

[Operator Instructions] Your next question comes from the line of Trafford Lamar from Raymond James. Your line is open.

Trafford Lamar

Hey guys, thanks for taking my call. Just one quick question on the lease bonus payments from 1Q. I saw that it more than doubled 4Q and it was based in Wolfcamp. Was than a factor of existing leases coming up release or is that unleashed land or majority unleashed lands being leased?

Thad Montgomery

Hey, excuse me, this is Thad. The majority of that lease bonus came from leases that expired because of the downturn in 2020, 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 two diamond back and another was a small private equity company in Midland County.

Trafford Lamar

Perfect. Thank you.

Tom Carter

Yes.

Operator

[Operator Instructions]

Tom Carter

Okay. If there aren’t any further questions, we thank you all for joining us today and we look forward to talking with you again in the future.

Operator

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

Comments

[bringearplugs]

And that is the complete problem, they have left so much money on the table with the hedges. They will never be rewarded when energy prices eventually go down. The stock will fall, with investors anticipating the decline of the income as hedges roll off. It is a lose / lose strategy.

[houtex]

@bringearplugs
The stock will fall when commodity prices do. I don’t think anyone, including management, disagrees with that. You have 80%+ of the NPV exposure to the forward curve (or whatever — it’s a large number), so even though the 20% part is hedged, it won’t keep the units flat overall. It’s an open question whether or not the reduced volatility of cash flows reduces value through the cycle as lower vol means a lower discount rate. I *suspect* that it doesn’t create value because the current owners (unlike the pre-IPO owners) own the units for the commodity price exposure, but to prove that I’d have to somehow create a White Stone Minerals that has the same assets and liabilities but no hedges.

[Go and do likewise]

Jeff Wood:
"We’re about – we’re probably 65% to 70% hedged for 2022 and probably in the 10% to 20% hedged for 2023 as we stand here today."

[Go and do likewise]

Jeff Wood:
"Look, as anyone who’s 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 2020 and hampered results in 2021, but what it’s done is just created some stability to our cash flow stream that it would otherwise be more volatile and what our Board has indicated and our Board is comprised almost entirely of large shareholders of Black Stone 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."