Black Stone Minerals: Distributions Should Increase Further In 2023

Sep. 28, 2022 11:11 PM ETBlack Stone Minerals, L.P. (BSM)14 Comments

Summary

  • Black Stone now expects 2022 production to come in at the low end of guidance due to well delays.
  • 2023 production is expected to increase throughout the year, though, with an exit rate close to 40,000 BOEPD.
  • Black Stone appears likely to maintain its current $0.42 distribution during 2022 and then increase it to around $0.475 to $0.50 in 2023 based on current strip prices.
  • Distribution coverage would be around 1.1x to 1.2x in this scenario.
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Black Stone Minerals (NYSE:BSM) indicated that its 2022 production would end up at the low end of its guidance due to delays with well completions on its acreage. Combined with the lowered expectations for commodity prices (based on current strip), I now expect Black Stone to keep its quarterly distribution at around $0.42 per unit (same as its Q2 2022 distribution) for the rest of the year.

Black Stone does expect production to ramp up throughout 2023, with exit rate production approaching 40,000 BOEPD. While 2023 strip prices aren't as strong as before, they are still high enough for Black Stone to be able to increase its distribution from current levels.

Thus, I have trimmed my expectations for Black Stone's 2023 distributions, but still believe that it could offer a quarterly distribution in around the high-40s or 50 cents per unit. At current 2023 strip, it would then have distribution coverage of 1.1x to 1.2x, allowing it to put some funds towards debt reduction and unit repurchases as well.

2H 2022 Outlook

Black Stone noted that it expected its 2022 production to end up at the low end of its original guidance for 34,000 to 37,000 BOEPD. This was due to some delays with operators getting wells into production on Black Stone's acreage.

As a result, Black Stone's 2H 2022 production may average around 35,000 BOEPD. At current strip (roughly $87 WTI oil and $7.45 Henry Hub natural gas) for the second half of 2022, Black Stone may generate $369 million in revenues before hedges during the second half of the year. Its 2H 2022 hedges have an estimated value of negative $105 million.

Type

Barrels/Mcf

Realized $ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

1,835,400

$86.00

$158

Natural Gas [MCF]

27,627,600

$7.50

$207

Lease Bonus and Other Income

$4

Hedge Value

-$105

Total

$264

This results in an estimate of $189 million in distributable cash flow for the second half of 2022, or $0.90 per common unit.

$ Million

Lease Operating Expense

$6

Production Costs And Ad Valorem Taxes

$37

Cash G&A

$19

Cash Interest

$2

Preferred Distributions

$11

Total Expenses

$75

Black Stone may choose to keep its quarterly distribution at $0.42 per unit. This would be relatively low distribution coverage at 1.1x, but would still allow it to put $13 million towards debt reduction in the second half of the year, reducing its net debt to approximately $61 million at the end of 2022. Black Stone probably doesn't want to decrease its distribution, so it will look to 2023 to put more money towards debt reduction.

Updated 2023 Outlook

I am keeping Black Stone's projected 2023 production at around 38,000 BOEPD. Black Stone's management indicated that it expects production volumes to increase throughout 2023 and approach 40,000 BOEPD by the end of 2023, primarily due to activity in the Austin Chalk and Shelby Trough plays.

Thus, at current 2023 strip of approximately $75 WTI oil and $5.45 NYMEX gas, I project Black Stone to generate $621 million in revenues before hedges, while its 2023 hedges have an estimated value of negative $13 million.

Type

Barrels/Mcf

Realized $ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

3,781,400

$74.00

$280

Natural Gas [MCF]

60,531,600

$5.50

$333

Lease Bonus and Other Income

$8

Hedge Value

-$13

Total

$608

This leads to a projection that Black Stone can generate $473 million in distributable cash flow during 2023 at the current strip. This is $2.26 per common unit.

Black Stone could then pay an average of $0.475 per unit in quarterly distributions (related to 2023 results), and also have $75 million to put towards debt reduction and unit repurchases.

It could also pay a $0.50 per unit quarterly distribution and have $54 million to put towards unit repurchases and debt reduction.

$ Million

Lease Operating Expense

$12

Production Costs And Ad Valorem Taxes

$63

Cash G&A

$37

Cash Interest

$2

Preferred Distributions

$21

Total Expenses

$135

Notes On Valuation

I now estimate Black Stone's value at approximately $17.50 per unit in a long-term (after 2023) $70 WTI oil and $4.00 NYMEX gas scenario. This assumes current strip prices until the end of 2023 and then those long-term oil and gas prices after that point.

Black Stone appears capable of generating approximately $1.85 per unit in unhedged distributable cash flow at $70 WTI oil and $4.00 NYMEX gas. This also assumes around 38,000 BOEPD in average production, which is around expected 2023 levels.

Conclusion

Black Stone Minerals now expects its 2022 production to come in at the low end of guidance. Combined with the deterioration in strip prices, this makes it less likely that it will increase its quarterly distribution from $0.42 per unit during 2022.

Black Stone does appear capable of supporting a quarterly distribution of around $0.475 to $0.50 per unit in 2023 though. This would also leave enough funds to pay down most/all of its debt and potentially do unit repurchases as well.

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