Black Stone Minerals LP

NYSE:BSM

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Q4 2017 Black Stone Minerals LP Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Brent Collins, Vice President of Investor Relations. Sir, you may begin.

[Brent Collins, VP, IR]

Thank you, Brian. Good morning to everyone. Thank you for joining us either by phone or online for Black Stone Minerals' fourth quarter and full year 2017 earnings conference call. Today's call is being recorded and will be available on our website along with the earnings release which was issued yesterday afternoon.

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 on 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 section of our 10-K, which will be filed tomorrow.

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 blackstoneminerals.com.

The company officials on the call this morning are Tom Carter, Chairman, President and CEO; Jeff Wood, Senior Vice President and CFO; Holbrook Dorn, Senior Vice President of Business Development; Brock Morris, Senior Vice President of Engineering and Geology; and Steve Putman, Senior Vice President and General Counsel.

I'll now turn the call over to Tom.

[Thomas Carter, Chairman, President & CEO]

Good morning, thanks for joining us today. We had a very strong fourth quarter to cap off what was an exceptional year for Black Stone Minerals. Operationally, we set a new quarterly production record of 38.1 MBoe per day, by growing total production by 3% over the last quarter. Last year we laid out a plan to gradually reduce our working interest volumes while still growing our total production. And we're very pleased that how that has played out so far. When we break down our production levels for the quarter minerals and royalty production grew by 15% over last quarter, while our working interest volumes declined 13% for the same period.

As we've seen for most of this year the Haynesville/Bossier and the horizontal Midland/Delaware plays in the Permian are driving the majority of our production growth with the Bakken/Three Forks and the rest of our portfolio posting solid results for the period as well. Working interest volumes declined as expected following the farmouts we put in place during 2017 covering our working interest in the Haynesville/Bossier and selective monetization of our working interest in the Bakken/Three Forks. Record production led to record adjusted EBITDA and distributable cash flow in the fourth quarter as well.

In addition to the strong financial performance, we also completed a number of important transactions during the fourth quarter. First, we announced and closed a $335 million acquisition of a diverse set of minerals and royalty assets from affiliates of Noble Energy. It was a largest acquisition dollar wise in our history and significantly bolstered our Permian basin footprint while adding to our Williston Basin in Mid-Continent portfolios.

This was an ideal acquisition for us, large scale with complementary acreage around some of our core positions, together with a diverse footprint where we hope to focus our technical and land teams to move more of the acreage in the development. Coincident with the Noble acquisition, we raised 300 million in convertible preferred equity from The Carlyle Group to help us fund the acquisition. Carlyle Is a well-known high-quality capital provider and we're glad to be working with them.

Lastly in November, we entered into a farmout agreement with pivotal partners that covers all of Black Stone's remaining working interest in the Shelby Trough for the next 8 to 10 years. I'll come back to the working interest participation in a moment. During the quarter, we averaged 64 growth well adds per month on our acreage and the quarter's activity was on higher interest acreage. As a result, we saw higher net revenue point adds in the fourth quarter than we averaged in the prior three quarters. We added over 900 gross wells in 2017, which is a meaningful improvement compared with 2016.

As we said Q4'17 was a very strong quarter which capped-off a great year for the partnership. In fact, I think we will look back on 2017 as one of the most important years in our history for the following reasons. First, we had a great year on the acquisition front, in addition of Noble.

We had a very high quality acreage in the Delaware Basin early in the year, and then we did a series of transactions in East Texas, including the Angelina County Lumber Company and associated acquisitions, that saw us consolidate a lot of minerals in the Shelby Trough. In total, we invested approximately $500 million [ph] last year in acquisition that provide additional scale and opportunity to our portfolio.

Second, we completed agreements that we believe would drive significant development in the Haynesville and Bossier plays, while on our minerals in the Southern Shelby trial. We now have two excellent well-capitalized highly motivated operators, who are focused on this acreage over the next several years, and that in turn would drive a lot of growth from that asset.

To help put this -- and the importance of this into perspective, BP PLC on its most recent quarterly earnings call out of the UK, specifically cited our area of the Shelby Trough, which they call SoHa for South Haynesville, as possibly the most lucrative gas play in the United States. Further they stated that they plan to direct over half of BP's 2018 capital budget for the lower 48 to this area.

Third, we farmed out substantially all of our future working interest in the Shelby Trough which allows Black Stone to benefit as a mineral owner from the development of the Haynesville/Bossier play while transitioning the production and cash flow base away from working interest participation. I mentioned our goal to de-emphasize the working interest program and replace those volumes with mineral and royalties. We have worked hard towards this goal and are starting to see the results of those efforts.

For example, the Haynesville/Bossier was the largest contributor to our mineral and royalty production in the fourth quarter of 2016. A year later, it still is and we have grown that by over 50%. In the Permian, we've more than tripled our mineral and royalty production year-over-year. Since our IPO, we've done a lot of work to bulk up and what we consider to be the core of the Midland and Delaware Basins.

We sit here today with approximately 55,000 net royalty acres in those two basins. We believe our exposure in the core of Midland and Delaware Basins is an under-appreciated part of story. We have a lot of acreage that is just now beginning to be actively developed in multiple intervals across those basins and will drive production higher in the coming years. I know if that doesn't include things in other parts of the broader Permian like the Central Basin Platform that are at earlier stages of testing by various operators.

Four, quarter-to-quarter, we grew total mineral and production for the partnership about 34%. Those facts combined with the outlook for mineral and royalty production growth that we laid out yesterday in our press release show that we are delivering on our commitment to focus our core -- on our core minerals and royalty business.

In the yesterday's release, we laid out compelling five year production forecast that incorporates everything I just review. Over that five year period royalty production is expected to grow annually at a compound rate of roughly 16% and by 2022, we expect Black Stone's mineral and royalty volumes will make up approximately 90% of the total volumes, that forecast does not include acquisitions in it. However, at our core, we are an acquisition company and I fully expect that we will be active in the acquisition market in the years to come, which would move both the growth and the percentage royalty numbers even higher.

Based on the -- this pre-acquisition outlook and improved commodity prices, Black Stone expects to be in a position to convert the subordinated units into common units on a one-to-one basis, while growing distributions and remaining strong and maintaining strong coverage ratios following distribution. We will continue to monitor both the market conditions and the business performance over the conversion period when determining the level of subordinated distributions. I'm very proud of what our team accomplished in 2017 and I think it shows the value we provide to actively managing our assets.

Before turning the call over to Jeff, I'd like to say a couple of words about our PepperJack project. Last quarter, we announced that we were drilling a lower Wilcox exploration well. We logged the PepperJack A1 well earlier this month. And the results support our original view that the prospect may contain significant resource potential. We plan to drill a second well very soon to further delineate the prospect. I want to be clear, our intention is not to fully develop the PepperJack prospect ourselves.

Our goal is to de-risk the process -- the prospect to a level that will allow us to attract third-party development capital. We'd like to structure something that commits an operator to a relatively aggressive development pace and we think the best way to secure this is by having at least two delineation wells, of which one we already have.

We've done a lot of technical work generating this and the size of the prize is big. So we think it makes a lot of sense to make a modest capital investments approximately 10 million to 12 million to try to prove this up. This is another example of where Black Stone akin to the Haynesville/Bossier and other plays has actually actively managed its minerals. What we have referred to previously as incubation and navigational input on development in order to add timely sizable value to our unitholders.

With that, I'll turn the call over to Jeff.

[Jeffrey Wood, SVP & CFO]

Okay. Thanks Tom, and good morning everybody. So we posted another very solid quarter across all of our key financial metrics, and that was on the back of the record production level that Tom just discussed.

Total oil and gas revenues for the fourth quarter were almost $100 million and we generated 5 million of least bonus and other income. We also realized about 2.9 million in cash gains from our hedge settlements during the quarter. LOE fourth quarter of '17 was 4.4 million and production taxes average 12% of oil and gas revenues, both of those were right in line with our expectations. Total G&A for the fourth quarter rose to 25.6 million and that is well above our normal run rate, that increase was primarily due to non-cash accruals related to some performance-based unit grants we made around our IPO in 2015.

We have previously written-off those accruals, both with improved commodity prices and our expectation of higher production levels, we put those accruals back on the books in the past fourth quarter. To that total again non-cash charge of G&A for the quarter related to this was about $7 million. And that represents the full expense of those awards that would have been recognized ratably from early '15, the time of the IPO through the end of 2017.

So really we're playing catch up here more than 2.5 years of these charges all in the fourth quarter. Looking at cash G&A for the fourth quarter, we were at $11.1 million and that's very consistent with recent run rates and reflects some continue transaction related expenses associated with our acquisition efforts this year. Overall adjusted EBITDA for the fourth quarter was 79.5 million that's a 2% increase from last quarter and a 36% increase from the fourth quarter of 2016.

Distributable cash flow for the quarter was $69.4 million, and that is the highest level of DCF we've generated since going public. We previously announced our distributions attributable to the fourth quarter, common unitholders will receive $0.3125 per unit or $1.25 per unit on an annualized basis, and subordinated unitholders will receive $0.20875 per unit. Distribution coverage for the fourth quarter was a very healthy 1.3 times on all of our units and 2.1 times on just on common.

Over the past several quarters, we've also track an additional coverage measure which is distribution coverage after deducting our net working interest CapEx. The idea there was to help ensure our goal over the long-term to make sure that we're funding working interest CapEx through retained cash flow. Our net working interest CapEx for the fourth quarter was $5.4 million and taking that into account our coverage after deducting that amount was 1.2 times.

The second DCF coverage measure was put in place to reflect an environment where we have large scale ongoing CapEx associated with working interest volumes. With completion of the two working interest farmouts last year, we now expect that our net working interest CapEx will follow the relatively de minimis levels by mid-18, and as a result we no longer plan to track DCF after working interest CapEx. But of course we will continue to report whatever amounts we do spend on working interest opportunities.

Before turning back to the financials, I want to add just a bit of color to what Tom mentioned around conversion of the subordinated units. I guess the first issue is why we're talking about conversion at all given that conversion can't happen before mid-2019. Well, as you remember, we gave guidance to mid-last year, indicating a range of about 70% to 100% on conversion of the subs depending primarily on commodity prices.

We now have a more constructive commodity gate [ph] and more importantly, we have a more constructive view on our production outlook. And so while it's true that conversion does not happen until 2019, I remind you that it is a backward looking test. So our distributions starting in 2Q of this year, ultimately what drives the conversion percentage. So the reason we're discussing this now is that our view has changed since last year, and we simply want to update you, especially given that the impact is coming over the next couple of quarters of that.

Okay. So back to the earnings release, for the full year of 2017, we reported 37,000 Boe per day of production, that's up 17% from 2016 and we generated almost $310 million of adjusted EBITDA for the year, that is an 18% increase from the prior year. We also maintain distribution coverage for the full year of almost 1.4 times.

As Tom mentioned, yesterday we put out updated long-term production guidance, this shows our confidence in being able to deliver stable production growth, while at the same time reducing the contribution from working interest volumes from about 40% in 2017 to only about 10% by 2022.

We also provided more detailed guidance for 2018, including our expectations to deliver total production for the year of 41 to 43 MBoe per day. To break that number down just a little bit, we expect first quarter '18 production to be up slightly from the fourth quarter with a more significant ramp-up if we move into second quarter and beyond.

So finally turning to the balance sheet, our overall leverage levels and our liquidity position remain in great shape. As of the end of the quarter, we had $388 million of debt outstanding, and our debt to trailing 12 months EBITDAX was about 1.3 times and that's consistent with last quarter. We had over $150 million of liquidity available to us at quarter end and during the fourth quarter, we closed on an amended credit facility with our existing bank group debt, among other things, it extends the maturity date until November of 2022.

So in closing, I just want to echo Tom's comments, that the fourth quarter was a really strong finish to just a remarkable year, one of which we laid the groundwork for a lot of good things to come in 2018 and beyond. Some of that is reflected in the initial '18 guidance and long-term production guidance we released yesterday. With that the initiatives we already have underway for this year, we look forward to continuing to find ways to drive value for all of our unitholders.

And with that, I will turn the call over for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Nick Raza from Citi. Your line is now open.

[Nick Raza, Citi]

Thank you. Just a quick question on your five year forecast. Could you sort of point out what's driving the production increase year-over-year? And that's the first part. Second part of question is how much, if any of that growth is from your expectations of eventually leasing out the PepperJack prospect?

[Jeffrey Wood, SVP & CFO]

Yeah. So this is Jeff, Nick, so good morning and I'll start and others may chime in. Maybe I'll take it in reverse. We don't have any production volume specifically from PepperJack. As Tom mentioned, while we're certainly encouraged by the logging of that first well the idea there is to bring in external capital to develop it, and that's little early for us to start baking those types of volumes in the forecast, which is not how we typically do long range forecast. So hopefully that is just bonus volumes to the outlook here and obviously we'll keep you all informed as that goes forward, but kind of early days for that and nothing baked in.

In terms of overall production outlook, there is a number of kind of major drivers, the two that we've been talking about the most over the past quarters will remain the two that are probably most important to that growth over the forecast, the first is the Haynesville/Bossier, primarily in East Texas. As Tom mentioned, we've got two major operators there that are very committed to the area and we structured development deals that really encourage, continued drilling activity there.

So we're excited about what we're seeing there and expect that to be a big volume driver. And then the other one kind of no surprises as we beefed-up our Permian position significantly over the past year plus, and we're just seeing fantastic activity levels there. So we would expect that to be a big driver as well.

[Thomas Carter, Chairman, President & CEO]

Just to add to that, I think the biggest changes were Shelby Trough, Haynesville where we just have a more constructive view on type curves and activity levels than previously. And then as well as Brock mentioned -- excuse me Jeff mentioned in the Permian Basin, the activity there is just outpacing what we originally got.

[Nick Raza, Citi]

Great. And then -- go ahead.

[Thomas Carter, Chairman, President & CEO]

No, please go ahead, Nick.

[Nick Raza, Citi]

I was just going to ask if you could sort of -- somewhat similar question to the production forecast that includes acquisitions. I mean reducing the -- you just kind of do more bolt-on acquisitions within the Shelby Trough or the Haynesville or more Permian or just curious how your views changed in terms of just branching out into other sort of basins?

[Holbrook Dorn, SVP of Business Development]

Yeah, this is Holbrook, as always we're somewhat basin agnostic and we're just looking for the best risk reward opportunity from our point of view, and it just so happened. And 2017 we saw a lot of opportunities in the Shelby Trough, we still see a lot of opportunities in the Shelby Trough, so we love to continue to accrete that position. We still see opportunities in both the Midland and the Delaware, albeit that those areas continue to get more and more expensive. So it's hard to find opportunities in bulk, so to speak. But I mean we're -- we remain very excited about the lower 48 more broadly, whether it's the DJ, the Marcellus, you name it. You just need to pick your spots and our model is not to be one basin focus.

[Nick Raza, Citi]

Okay. And sorry, I apologize, one last question. But in terms of just constraints out of the Permian, I mean there is a lot of industry talk about a lot of pipeline getting built and how producers are sort of hesitant to take up capacity. I was just wondering from your perspective, if you could just provide your views about that going forward, what you think about it?

[Thomas Carter, Chairman, President & CEO]

I think there was a lot of midstream that needs to get built out in the Permian Basin.

[Nick Raza, Citi]

Okay, and any sort of views on oil versus gas, I mean I know your acreage probably is moreover focused in the Permian. But any sort of thoughts initially in terms of the just net back received?

[Jeffrey Wood, SVP & CFO]

Yeah, I mean we -- I mean, we think gas differential in the Permian will continue to get worse in the near-term or probably mid-term. And there will be headwinds as they always are in plays that have production, that's really ramping up.

[Thomas Carter, Chairman, President & CEO]

But to the extent, we can see those or anticipate those, they are baked into our forecast.

[Nick Raza, Citi]

Okay. Fair enough. That's all I had. Thank you.

[Jeffrey Wood, SVP & CFO]

Thanks, Nick.

[Operator]

And our next question comes from line of Brent Cotches [ph] from Raymond James. Your line is now open.

[Unidentified Analyst]

Hey, good morning, guys. Congrats on a nice 2017, just a couple of clarification questions. The capital spending guidance 10 million to 12 million for the Wilcox step out wells. Does that include the first Wilcox well drilled? And then separately the 10 to 12 is in fact separate from the 15 to 25 for working interest participation is that right?

[Jeffrey Wood, SVP & CFO]

Yeah. Bran, this is Jeff. Both of those are correct. So we've got 15 to 25 sort of what I would call residual working interest participation capital, where we're going alongside the operator and those are just wells that were frankly spud free the farmout dates, and so the completion cost of those wells. And then the 10 to 12 for the PepperJack delineation includes a well and that's a good point that you bring up, and includes a well that frankly we've already drilled, and so it's that plus one more.

[Unidentified Analyst]

Okay. And is there any timing -- expected timing on the second well? And if you could maybe, is there any specifics you can share on what was wallocks [ph]

[Thomas Carter, Chairman, President & CEO]

Yeah. We are endeavoring to spud that well on or before March 31st and the well that we drilled, there are three primary pay zones in the Gilly Field, the Segno series, the Gilchrease series and the Blackwood series, those zones kind of come and go in the Gilly Field to the North. But in a macro sense the Segno B section was about 90 feet thick and about 40 plus feet of that was very good pay. The Gilchrease section was about 170 feet thick and over 30 feet of that was really good pay.

The Blackwood section was -- that we got on our log because we stopped drilling a little early was 200 feet thick and -- but for about a 40 foot shale section it was all very high quality rock. So, we think that we know the log looks very good. In addition, the bottom hole pressures at Gilly are somewhere in the 11,000 pounds range, this will probably has closer to 14,000 pounds, that's 2,000 feet thicker and the pay zones have thickened up quite nicely, and so we're very pleased with what we've seen.

[Unidentified Analyst]

Okay. Great. And then if I could just maybe a couple of modeling questions. So, Jeff, just thinking about the conversion a little bit more. Just trying to figure what price assumptions are you assuming looking forward, is that surplus your hedging impact. And then if I could is there any kind of early indication as far as the Board's opinion on raising the subordinated distribution. And then finally, thinking about replacing capital. Is that expected, do you think that will be in the $13 million neighborhood again this year?

[Jeffrey Wood, SVP & CFO]

Yes, let me take those three, Bran. So one yeah, we don't ever kind of speculate on prices here. So all of our modeling is just based on the strip with of course, our hedge impact which really just today covers pretty well covered in '18 and call it 20-ish percent covered in '19. But otherwise it's just strip prices as we look forward. I think the board's view right now and why we felt that was an appropriate time to come out with an updated view, I think, the Board's intention now would be to bring the subs distribution to parity with the common when we move to the $35 MQD with the second quarter of 2018.

And then finally on replacement or maintenance CapEx, we will be going through that calculation this quarter, and so that we've typically will come out with that on sort of an April 1 to April 1 time frame, we ramp 13 million last year, we're reducing our working interest volumes obviously in a pretty significant way. So we'll have to see the impact of that on overall maintenance capital levels. So I think I'll just defer that to next quarter if you don't mind.

[Unidentified Analyst]

Okay. Fair enough. Thanks, guys.

[Jeffrey Wood, SVP & CFO]

Thanks, Bran

[Operator]

And our next question comes from the line of Phil Stuart from Scotia Howard Weil. Your line is now open.

[Philip Stuart, Scotia Howard Weil]

Good morning, guys. And I apologize, I missed a little bit of the beginning of the call. So I apologize if some of this has been asked already. But thinking more broadly on the acquisition strategy, given that you're going to have significant growth over the Shelby Trough in terms of gas volumes. Does that lead you to be a little bit more biased towards acquiring oil focused properties in your future acquisitions. Obviously in 2017 you did a great job of adding to the Bakken and the Permian. But just kind of wondering, as we look out 2018 through kind of 2022, what your bias is in terms of commodity mix of the acquisitions?

[Thomas Carter, Chairman, President & CEO]

This is Tom. I would answer that question somewhat similarly to the way Bernard Looney, who is the Global Exploration Manager for BP answered the same type of question that they got on their earnings call about 10 days ago. And that is that the cost of entry into the Payne closure area for acquisitions are much to use a phrase saner than they are in the Permian. And -- but the rates of return are still very, very, very good. And so I would say that we are very much a gas story and it would be to turn us away from being a gas story into being a significant liquid story, we would have to make some massive acquisitions.

So -- I would say that we will not be consciously pivoting towards oil acquisitions. However, if we can make good oil acquisitions, we will make them, but we certainly like the long-term nature of the gas play in East Texas especially in juxtapose to what's going on with gas markets domestically and internationally along the Gulf Coast.

[Jeffrey Wood, SVP & CFO]

Phil, this is, Jeff. I would you say just to add to Tom's comments. As Holbrook said we're relatively agnostic. But really IRR driven when it comes to IRR ROI driven when it comes to acquisitions. And the second thing to point out, I know this is -- I know you're aware of this. But just given the differential and pricing between oil and gas, while we're heavy on gas on the production side. From a revenue standpoint, we're pretty well blended, we're about 50-50 on a revenue standpoint between oil and gas. So long answer to your very short question, but I think again the -- from an acquisition standpoint, we're going to just go after the best deals out there.

[Holbrook Dorn, SVP of Business Development]

I'll just add that, we've got a pretty large mineral position and we've got exposure to not only the Permian from an oil perspective, not only the Bakken, not only the Eagle Ford. But we've got a great mid-time position. And then we have great positions and emerging plays, or plays that are experiencing a renaissance like the Austin Chalk for instance. So we've got exposure to a lot of oily rich acreage, our liquid rich acreage already in Black Stone today. So there is all sorts of avenues and growth from the liquid side outside of acquisitions.

[Jeffrey Wood, SVP & CFO]

And the Wilcox has liquids.

[Holbrook Dorn, SVP of Business Development]

The Wilcox has liquids.

[Philip Stuart, Scotia Howard Weil]

Okay. I really appreciate all the comments there. And I guess, as we look to lease bonus for 2018, again, you might have already mentioned this. But what areas specifically do you think are probably the best candidates to kind of drive the lease bonus is revenue in 2018? Is that primarily going to be Shelby Trough and the Austin Chalk or is there a good bit of Permian mixed in there?

[Jeffrey Wood, SVP & CFO]

The Permian has been a great lease bonus driver over the last few years here. I'm sure we already -- yes we've got some more trades in the Permian in this year and works. The Shelby Trough that's going to have a lesser impact frankly because of the development deals we've struck with our two primary operators. We've kind of passed on bonus and exchange for increased development commitments, only thing that was a good decision in terms of accreting PV to our unitholders.

We've got a lot of interest in our Chalk acreage, we have a tremendous shock position. So we are hopeful that, that will be a significant bonus driver. This year plays like the Canyon line have already contributed a fair amount of bonus this year. And then we're seeing a lot of activity in the Mid-Con Stack/Scoop areas, as well as up in -- kind of consistent yield or bonus over the last few years.

And then to date, there is really only been one player in the lower Wilcox and East Texas, and that's been unit Petroleum. They discovered the Gilly Field, which we have a significant mineral position in, and that was a Great Lower Wilcox discovery after Gilly Field was discovered, we spent approximately a year, generating a number of additional Lower Wilcox prospects. We sold one of those two units, which they call --

[Holbrook Dorn, SVP of Business Development]

Cherry Creek.

[Jeffrey Wood, SVP & CFO]

Cherry Creek, thank you, and that was a discovery. And then the second prospect that has been tested from more inventory was PepperJack, and that was the largest in terms of potential of all of our prospects, and so far so good. That said, we are hopeful that with continued success for instances with PepperJack that the lower Wilcox could also be a bonus driver for '18.

So we have a view as where bonus is going to come from this year. And we do every year and every year we're also surprised it comes from plays that we wanting to thinking about.

[Philip Stuart, Scotia Howard Weil]

All right. Great. I appreciate the color. That's it from me.

[Jeffrey Wood, SVP & CFO]

Thanks, Phil.

[Operator]

[Operator Instructions] And our next question comes from the line of Tim Howard from Stifel. Sir, your line is now open.

[Tim Howard, Stifel Nicolaus]

Thanks for taking my question. Just want to understand how you guys balance distribution growth and coverage, following the subordinated conversion? Do you anticipate moving coverage cost into a one-times coverage given the limited needs from working interest?

[Jeffrey Wood, SVP & CFO]

Well, I think that's a fair point, Tim. We do think that we are -- working interest CapEx falling to really low levels mid '18 and beyond, that it obviates a little bit of the need for coverage again, one of the things that we are always very focused on was to make sure that we were funding working interest CapEx through our retained cash flow and not off of the balance sheet. So that relieves some of the pressure there. So look, I think just in very general terms, we think that coverage going forward of 1.1-ish is appropriate, that's a little bit lower than what we've done historically, in part driven by the lower amount of working interest CapEx.

And then in terms of growth, I think we're still -- where we've always been, which is we think low to mid-single digit growth is a pretty good run rate to shoot for maybe with some upside to that with big acquisitions et cetera.

[Tim Howard, Stifel Nicolaus]

Okay. Thank you.

[Holbrook Dorn, SVP of Business Development]

And this is Hol, just to add that real quick, I mean that's our long-term forecast. And we forecast what we have a high degree of conviction in. And we can't touch everything out there. And so hopefully there is upside to that.

[Operator]

And I am showing no further questions. And I would now like to turn the call back to you Tom Carter, President and CEO for any further remarks.

[Thomas Carter, Chairman, President & CEO]

Well, we just thank all of you for joining us today. And we thank you for your interest in Black Stone and we're very excited about what's going on. Thanks.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day