Black Stone Minerals LP

NYSE:BSM

Earnings Call Analysis

Strong Q2 Performance and Strategic Growth Initiatives

The company reported a solid second quarter with total production stable at 40,400 BOE per day, resulting in $68 million net income and over $100 million in adjusted EBITDA. A steady distribution of $0.375 per unit was maintained. The company continues to focus on organic growth and strategic acquisitions, adding $26.5 million in minerals and royalty acquisitions this quarter. Positive developments in East Texas and Louisiana included new wells with strong initial rates. With a clean balance sheet and robust hedging strategy, the company is optimistic about future growth and value creation for shareholders.

Quarterly Performance Overview

In the second quarter, Black Stone Minerals reported steady performance, matching the first quarter's total production of 40,400 BOE per day, with mineral and royalty production at 38,200 BOE per day. This consistency highlights the company's operational stability during a time of fluctuating oil and natural gas prices. The company generated a net income of $68 million with adjusted EBITDA surpassing $100 million, leading to a solid foundation for potential continued growth.

Financial Stability and Distribution Strategy

With a robust distribution policy, Black Stone Minerals maintained distribution at $0.375 per unit, or an annualized rate of $1.50, demonstrating its commitment to returning value to shareholders. The company's distributable cash flow hit $92.5 million, signifying a coverage ratio of 1.17x for the quarter. This approach allows the management to reinvest the excess cash into valuable acquisition opportunities, ensuring future growth.

Growth Opportunities and Strategic Initiatives

Looking ahead, Black Stone Minerals has outlined an ambitious growth strategy with a targeted grassroots acquisition program aimed at enhancing its asset base. The company invested $26.5 million in mineral and royalty acquisitions during the quarter, part of a broader $65 million investment since September in high-value metals and royalty interests. This strategy coincides with a strategic focus on operational development in East Texas and Louisiana.

Market Dynamics and Natural Gas Outlook

The earnings call painted a positive picture for natural gas, with expectations for market improvements. Black Stone holds significant natural gas resources, with over 15 Tcf available in the Gulf Coast region. Moreover, there were eight new wells brought online during the quarter, showcasing promising initial production rates of 25 million to 30 million cubic feet per day. The company is continuing to monitor market conditions closely, anticipating an uptick in production later in the year.

Hedging Strategy and Future Cash Flow Stability

To mitigate short-term pricing volatility, Black Stone Minerals has hedged over 60% of its expected production volumes for 2024. The company is effectively hedged at approximately $3.55 per MMBtu, in contrast to the average Henry Hub price of about $2. This proactive hedging strategy is forecasted to generate an estimated $12 million in gains, which will support consistent cash flows in the near term.

Conclusion and Long-Term Vision

Overall, the second-quarter results reflect a company well-prepared for both current challenges and future opportunities. Black Stone Minerals' solid financial performance, strategic acquisitions, and effective hedging approach paints a promising picture for investors focused on long-term stability and growth potential. The management remains committed to enhancing shareholder value by focusing on organic growth and by navigating the changing dynamics of the energy sector.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, everyone, and welcome to today's Black Stone Minerals Q2 Earnings Call. [Operator Instructions] Please note this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Mark Meaux, Director of Finance. Please go ahead.

[Mark Meaux, executive]

Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals Second 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 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 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; Taylor DeWalch, 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, executive]

Good morning, and thank you all for joining us today. In the second quarter, we continued to see solid results from our unique asset base and we remain focused on our organic growth strategy, along with targeted acquisitions to further enhance our existing long runway of high interest development opportunities.

Total production for the quarter was in line with the first quarter at 40,400 BOE per day, which generated $68 million of net income and just over $100 million in adjusted EBITDA. 67% of our oil and gas revenues in the quarter came from oil and condensate production. We maintained our distribution at $0.375 per unit with excess coverage utilized on growth opportunities.

With our clean balance sheet, commercial strategy and asset mix, we're uniquely positioned to remain focused on the long-term decision-making opportunities, strong oil production and revenues with multiple basins as well as constructive natural -- as a constructive natural gas outlook remain the foundation of a very positive future for the company.

On the acquisitions front, as we discussed previously, starting in the fourth quarter of 2023, we expanded our commercial initiatives to include a targeted grassroot acquisition program to enhance our existing asset position and to elongate our runway of development opportunities. During the quarter, we added another $26.5 million in minerals and royalty acquisitions and have acquired about $65 million in metals and royalty interest in these areas since September of '23. We continue to see accretive opportunities to add to our position and we -- which will ultimately add value for our shareholders.

In East Texas and Louisiana, we continue to work with multiple operators to promote development on our acreage while monitoring the current environment and preparing for the anticipated improvement in the natural gas market. We also remain focused on the Shelby Trough operations and our extensive undeveloped inventory, totaling over 15 Tcf of on Gulf Coast resource with multiple successful recent well results.

Another 8 wells on our minerals were brought online in the second quarter in this area with initial rates in the range of 25 million to 30 million cubic feet per day and several more wells are scheduled to come online in the second half of the year after being drilled in the first half of the year. Overall, it was a strong quarter, and we've maintained our strategic objective of working with the operators to achieve full field development across all our assets. We continue looking toward the future by advancing our commercial initiatives and growing production and returning the distribution to the high watermark previously set.

With that, I'll turn it over to Taylor to walk through the financial details of the quarter.

[Taylor DeWalch, executive]

Thanks, Tom, and good morning, everyone. As Tom pointed out, we had a very solid second quarter. Mineral and royalty production was 38,200 BOE per day and total production volumes were just over 40,000 Boe per day. Both of which are about flat from last quarter. We saw an increase in our oil volumes, which helped offset the continued downturn in the gas market.

We maintain our updated full year guidance for the first quarter, continue to thoughtfully review current market dynamics. As Tom previously mentioned, net income was $68.3 million for the quarter with adjusted EBITDA being $100.2 million. We previously announced that our distribution for the quarter is $0.375 per unit or $1.50 on an annualized basis. Distributable cash flow for the quarter was $92.5 million, which represents 1.17x coverage for the quarter.

Our Board elected to keep the distribution flat from the previous quarter so that we can continue to use the excess coverage to pursue attractive mineral and royalty acquisitions. We continue to have a strong balance sheet that gives us flexibility through these dynamic market cycles.

Total commitments under the credit facility remained at $375 million and there are currently no outstanding borrowings on the revolver. As of the end of last week, we had just over $61 million in cash. We are well hedged for the remainder of the year. Our 2024 natural gas hedges are at approximately $3.55 per MMBtu, comparing that to an average price at Henry Hub of about $2 per MMBtu for the second quarter, we benefited with a realized gain of approximately $12 million.

We have over 60% of our expected volumes hedged for the remainder of 2024 that will help inflate our cash flows from near-term price volatility. We have continued to add to our hedge portfolio for 2025, and we'll maintain our strategy of adding on hedges for 2026. Again, we had another solid quarter, and we'll continue to focus on generating long-term value for our shareholders.

With that, we'll open the call for questions.

[Operator]

[Operator Instructions] And our first question will come from Tim Rezvan with KeyBanc.

[Timothy Rezvan, analyst]

My first question, in the release, you gave some comments on Aethon, but I was hoping to maybe get a little more color. You mentioned in the release a delayed initial production from some wells in the second quarter. Can you clarify what that means? Is that a deferred till or are they choking back production?

And then if you could kind of give broader comments on if Aethon has sort of formally come out of this time out that they entered in December.

[Taylor DeWalch, executive]

Thanks, Tim. Appreciate the question. And I guess -- this is Taylor, I'll take a quick pass on just your first part of that question on the delayed production. To clarify what we said in the release -- so we had previously announced that there was a number of wells that the first production date was just going to be delayed a little bit. And so the comment there in the release is specific to those wells that were previously announced, and we're excited to see those wells go ahead and come online like we mentioned, 8 of the 10 and anticipate the other 2 coming along in the second half of the year.

[Timothy Rezvan, analyst]

Okay. Okay. So that's -- the IP rates you gave suggests those are the typical fully producing rates. Okay. And then can you clarify on the time out part of that question, are they officially out? Do you get notification? How does that process work?

[Carrie Clark, executive]

Tim, this is Carrie Clark. Yes, I think not to -- we can't really speak to that, not withholding any information, but I think what was put in the press release is we're still talking with Aethon as far as a formal declaration of coming out of time out. That's not really -- it's something that we can speak to definitively right now. But I can say that they did put 3 new wells in February -- and those wells, I think, have just come online.

We have not seen additional -- initial production rate yet, but we're still talking with them on how best to move forward holistically.

[Timothy Rezvan, analyst]

Okay. Okay. I understand. I appreciate that. And then as my follow-up, in the release, you continue to highlight mineral acquisitions in this emerging but not yet disclosed Gulf Coast area. And I was curious kind of what is precluding you from discussing it more openly, is there a critical mass of acreage you want to acquire? Are you waiting to get some sort of formal agreement with an operator. I know you can't give color, but I was wondering if you could give a little more detail on what the guideposts are to evolve that process.

[Carrie Clark, executive]

Sure. Yes. I mean, we're -- as is pretty standard, we're not speaking in a great amount of detail publicly or formally about that acquisition program that we've shared quite a bit of information about it. We're just still trying to maintain -- we're trying to assimilate a position that's accretive to the position that we already have that lines up with the science and some technical work that we've done over the last year. And it's that, I think, pretty much covers it as far as the acquisition program.

[Timothy Rezvan, analyst]

Okay. All right. I understand you can't say too much.

[Operator]

[Operator Instructions] It looks like we have no additional questions at this time. I'd like to pass it now back to speakers for any closing remarks.

[Tom Carter, executive]

Okay. Thank you all very much for joining us for the 2Q '24 earnings call, and we look forward to speaking with you at the next quarter. Thank you so much.

[Operator]

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.