Black Stone Minerals, L.P. (NYSE:BSM) Q1 2024 Earnings Call Transcript

Black Stone Minerals, L.P. (NYSE:BSM) Q1 2024 Earnings Call Transcript May 7, 2024

Black Stone Minerals, L.P. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Black Stone Minerals First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]. I’d now like to turn the call over to Mark Meaux, Director of Finance. Please go ahead.

Mark Meaux: Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals First Quarter 2024 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 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 2023 10-K.

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 www.blackstoneminerals.com. Joining me on the call from the company are Tom Carter, Chairman, CEO, and President, Evan Kiefer, Senior Vice President, Chief Financial Officer and Treasurer, Carrie Clark, Senior Vice President, Chief Commercial Officer, and Steve Putman, Senior Vice President and General Counsel. I’ll now turn the call over to Tom.

Tom Carter: Thank you, Mark. Good morning, everyone, and thank you for joining us this morning to discuss the quarter. We posted a good first quarter with net income of $63.9 million and adjusted EBITDA of $104.1 million. We generated total production volumes for the first quarter of 40.3 MBoe/d, a decrease of 2% from our fourth quarter of ’23 volumes. Royalty volumes for the quarter were 38.9 MBoe/d. Oil volumes trended down in the Midland and Delaware Basins but were partially offset by an increase in the resilient Bakken area. And despite the ongoing natural gas challenges, natural gas volumes increased from the fourth quarter in the Fayetteville, Gulf Coast, Lance, Mesa, Verity, and other trends. Factors like these continue to illustrate the benefit of a diversified portfolio where we continue to see additions in non-core plays that contribute to new production year-over-year.

Our unique asset mix has a strategic advantage that continues to consistently add long-term value to Black Stone and its unit holders. With that, let me just turn to focus on the Haynesville Bossier, which is, as everyone knows, a significant long-term growth engine for Black Stone. In the Shelby Trough, we announced in December that one of our operators invoked a “timeout” under the provision of our joint exploration agreement, which would allow them to cease activity for a period of time. We have a good group of operators in the Shelby Trough, being XTO, Aethon, Pine Wave, Milestone, XCO, and others. And in addition, in Louisiana, we have Chesapeake, Southwestern, Comstock, and others. So we’ve got a great portfolio of operators. The operator that declared a timeout, however, is currently drilling three wells and is expected to continue levels of activity there.

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Q&A Session

This suggests that either the operator is no longer in timeout and back on the clock under our joint exploration agreement, or alternatively that these operations will not qualify for contractual minimums under our contract. This just underscores the strength of the structure of our joint exploration agreements with respect to activity in various different environments, price environments on our properties. One second here. I’m just scrolling up. We continue to work closely with our operators in all of these areas. And we do not anticipate a material impact in our volumes in Haynesville through 24, 25, even though a lot of the operators are slowing down in response to the low-price environment. We believe that there are positive results continually being added in the basin, and we’re very encouraged by performance on new wells in the area, ranging anywhere from 25 million to 30 million cubic feet a day in pressures in excess of [indiscernible].

In addition to our interest with existing operators, Black Stone has an additional existing 170,000-plus net acres of undeveloped inventory in the Shelby Trough with an estimated 15 TCF of resource in the ground. We look forward to that acreage coming in juxtaposition to what we are a believer in, and that is natural gas demand increases coming into ’26 and beyond with the LNG export markets firming up and expanding. In response to lower natural gas prices, some of our operators have been involved in some curtailment, as we said, we do not expect this to be meaningfully challenging to our volumes. As these challenging commodity prices persist, we continue to focus on our long-term strategy while employing prudent balance sheet management. Our focus for several years has been centered around organic initiatives to develop our existing asset base that has been a significant long-term adder to our production.

Starting in the fourth quarter of 2023, we expanded those efforts, including targeted grassroot acquisitions programs that are aimed to supplement our existing and expanding footprint in the Gulf Coast and Shelby Trough areas. These efforts have allowed us to weather a lot of different cycles. In 2022, we mentioned that we expected to grow production through ’23 with a targeted exit rate close of 40,000 Boe per day, and we’re able to execute on those expectations. Now in 2024, we have set our plan to grow the distribution back to the highwater level mark by 2026 through production growth alongside liquefied natural gas demand that is expected to drive higher natural gas prices. We intend to capitalize on our existing portfolio and acquired acreage and add meaningfully to our development program in these Gulf Coast regions.

We’ve added over $50 million worth of non-producing assets since September of 2023, and this is just a fraction of what we intend to do going forward. Overall, it’s a strong quarter, and despite a challenging commodity price environment, we’re encouraged by the long-term natural gas outlook. We continue to make progress working with our key operators and strategic initiatives to grow and bringing additional operators into our Shelby Trough area. With that, I’ll ask Evan to take over.

Evan Kiefer: Thank you, Tom, and good morning to everyone. As Tom pointed out, we had a positive first quarter. We generated 38.1 MBoe/d of mineral and royalty production for the first quarter, which was down 2% from last quarter and 40.3 MBoe/d in total production volume. This resulted in our net income of $63.9 million and adjusted EBITDA for the first quarter of $104.1 million. We previously announced that we were reducing our distribution to $0.375 per unit, or $1.50 on an annualized basis. As reported yesterday, distributable cash flow for the quarter was $96.4 million, which represents 1.22x coverage for the quarter. Due to the challenges with natural gas prices, production curtailments, and delays in turning wells on production, our Board elected to reduce the distribution and utilize the excess coverage in the first quarter towards growth opportunities.

We continue to have a very strong balance sheet that gives us a lot of flexibility through these dynamic market cycles. As Tom mentioned, we have acquired approximately $50 million of non-producing mineral and royalty interest and utilizing that excess cash from the first quarter to supplement these acquisitions, we continue to have no outstanding borrowings on our revolver. As of last week, we had approximately $89 million of cash, and that’s prior to the payment of the distribution later this month. The borrowing base for our revolving credit facility was reaffirmed at $580 million, while we elected to hold commitments at $375 million. Yesterday, we also announced updated production guidance that reflects the challenges that we’re seeing in the natural gas environment today.

In response to production curtailments and a continued slowdown in bringing new production online, we’re lowering our 2024 production guidance range for the full year by approximately 4% to between 38.5000 DOE per day and 40.5000 DOE per day. As Tom mentioned, Aethon has started curtailing a number of properties in the Shelby Trough and has indicated plans to delay the initial production on additional properties until later this year when prices are expected to improve. Now, off the heels of 2023, where we had natural gas hedges at over $5 per MMbtu, our 2024 natural gas hedge position is at approximately $3.55 per MMbtu. Comparing that to an average price at Henry Hub of $2.24 per MMbtu for the first quarter, we’ve benefited from a realized gain of approximately $14 million.

We had over 60% of our expected volume hedged for the remainder of 2024 that will help insulate our cash flows from any continued near-term pricing volatility. We have continued to add to that hedge position for 2025, both for crude and natural gas, and will continue so throughout the remainder of the year. Overall, we had a positive quarter despite some headwinds created by the continued lower gas environment, but we remain focused on our commercial strategy of growing production and returning the distribution to its previous high-water mark. This environment provides a very unique opportunity to be selectively acquisitive to the benefit of our unit holders in the next year and beyond as we continue to execute on those plans. And so with that, we’ll open the call up to questions.

Operator: Thank you. [Operator Instructions] We’ll go first to Derrick Whitfield with Stifel.

Derrick Whitfield: For my first question, I wanted to focus on your 2024 guidance. With your lower guidance, could you help frame how you’re thinking about the cadence of production throughout the year? And while clearly price is dependent and not as material as some might think, what is your assumption on curtailment in your guidance?