Black Stone Minerals Q4 2023 Earnings Call Transcript

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February 20, 2024

Key Takeaways

  • Blackstone reported Q4 adjusted EBITDA of $125.5 million and full-year EBITDA of $474.7 million, with production of 41,400 BOE/day, exceeding guidance ranges.
  • Natural gas volumes declined in the Louisiana Haynesville amid low prices, and management noted the possibility of falling below 1× distribution coverage if commodity prices do not recover.
  • Under the Aethon agreement, 39 wells have turned to sales and the price-triggered time-out is not expected to impact the next 12-month drilling cycle, with additional wells potentially being drilled during the pause.
  • 2024 production is guided to be flat to slightly higher than 2023, driven by modest growth in the East Texas Austin Chalk, offset by stable Permian activity and declines in the Bakken and Haynesville.
  • The company ended the year with $103 million cash, zero net debt, over $80 million of realized hedge gains, and maintains a 60–70% hedging program to support 2024 cash flows.
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Earnings Conference Call
Black Stone Minerals Q4 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day, and welcome to the Blackstone Minerals 4th Quarter and Year End Earnings Call. At this time, all participants are in a listen only mode. Later, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to turn the call over to Mark Moe, Director of Finance.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning to everyone. Thank you for joining us either by phone or online for Blackstone Minerals' 4th quarter and full year 2023 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.

Speaker 1

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 ks that we expect to file later today. You 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 Kerry Clark, Senior President, Land and Commercial and Steve Putman, Senior Vice President and General Counsel.

Speaker 1

I'll now turn the call over to Tom.

Speaker 2

Good morning to everyone on the call and thank you for joining us today to discuss our Q4 and full year 'twenty three results. We posted strong results with adjusted EBITDA of $125,500,000 for the quarter, bringing us to $474,700,000 in 2023. We generated total production volumes for the 4th quarter of 41,400 BOE per day, 2% above the upper end of our full year guidance range. Royalty volumes for the quarter were 38,900 BOE, where we saw oil volumes trend down in the Bakken Methondell. We also saw a modest decrease in natural gas volumes primarily in the Louisiana Haynesville conforming with natural gas trends in our industry.

Speaker 2

Yet we see the glass as half full. Today, 39 wells have been turned to sales in the Shelby Trough under our development agreements with Aethon. We announced in December that Aethon elected to use a time out provision on our development agreement that specifies that when prices fall below a certain threshold, they may elect to temporarily suspend contractually obligated drilling At this time, we do not expect the time out will impact the next 12 month cycle for the drilling and completion of Aethon operated wells that were spud prior to the time out. And in fact, Aethon has indicated they may drill additional wells during the time out period and have actually begun operations on several. We are working closely with A BOND to determine the effects of the time out as we focus on longer term expectations for production in 2025.

Speaker 2

We had 63 rigs running on our acreage at the end of the quarter, representing approximately 10% of the U. S. Rig count a reduction of 13 rigs compared to the Q3. Like most in our business, we are seeing general slowdown in drilling in the Haynesville and Gulf Coast as a response to lower natural gas prices. With oil prices remaining around the $70 per barrel range, we did see a small increase in Midland, Delaware and the Bakken play trends.

Speaker 2

We previously announced that we were maintaining our 0.47 $5 per unit for the last quarter or $1.90 on an annualized basis, which as reported yesterday represents 1.19 times coverage for the quarter. Despite the challenges with natural gas prices, we've been able to maintain a strong balance sheet throughout the year and hold distributions at its highest level since going public. Due to the suppressed price environment, we may be in a position where at current distribution rates, we could fall below 1 times coverage, something we likely would not let stand, implying a possible reduced distribution until pricing recoveries. In 2022, we mentioned that we expected to grow production through 'twenty three with a target exit rate close to 40,000 BOE per day, and we're able to execute and exceed those expectations. As we enter 2024, there are headwinds due to but due to the quality of our acreage and no debt on our balance sheet, we adjusted our commercial efforts to be proactive in a down cycle and have included targeted mineral and royalty acquisitions that complement our existing acreage position.

Speaker 2

In 2023, we acquired non producing minerals and royalties totaling $15,000,000 Our strategy in 'twenty four includes a continuation of targeted acquisitions that support our commercial initiatives and provide long term accretive growth to our unitholders. Overall, it's a strong quarter and despite challenging commodity price environment, we remain encouraged by the long term natural gas outlook as we continue to make progress on strategic initiatives in 'twenty four and beyond. With that, I'll turn it over to Evan. Thank you, Tom,

Speaker 3

and good morning, everyone. As Tom pointed out, we had a very good Q4 where we reported average daily production of 41,100 BOE per day. For the full year, we generated $474,700,000 of adjusted EBITDA from 39,800 BOE per day, which is just above the high end of our full year guidance range. In conjunction with the earnings release, we put out our 2024 guidance yesterday. And as we look forward to the full year 2024, we forecast annual production to be up slightly from 2023 levels.

Speaker 3

As Tom mentioned in the Shelby Trough, Aethon has indicated their intentions to turn in line in 2024 the wells that have been spud prior to the time out provision and we're working very closely with them to determine the long term impact on future production volumes. We expect a modest increase in volumes in the East Texas, Austin Chalk, where we now have 30 new generation multistage completion wells that are currently producing, as we are working with our operating partners in the area to accelerate activity. Our Permian position is broadly expected to remain in line with 2023 levels as operators continue to focus on capital discipline, but is offset by expected decline in the Bakken as that play continues to mature. On the heels of a robust 20222023, we expect a slowdown in Louisiana Haynesville in response to lower natural gas prices evidenced by recent announcement of rig cuts, as well as some natural production declines on our acreage outside of these four plays. Lease bonus and other income was $3,800,000 for the 4th quarter and $12,500,000 for the full year.

Speaker 3

The Q4 included leasing from primarily in the Haynesville, the Granite Wash and Gulf Coast, but we remain encouraged by continued activity in these plays despite the lower price environment. We expect lease bonus, operating expenses, production costs for 2024 to be in line with 2023 levels. G and A is expected to increase slightly in 2024 as a result of inflationary costs and our continued efforts to support our ability to evaluate market and manage our undeveloped acreage position to potential operators. In 2023, Henry Hub averaged $2.74 per MMBtu, while our natural gas hedges had a strike price of over $5 per MMBtu, which provided over $80,000,000 of realized hedge gains for the year. In 2024, we see those levels move lower to $3.55 per MMBtu, while our oil hedges are currently just above $71 per barrel.

Speaker 3

We are in our normal range of hedging approximately 60% to 70 plus percent of expected volumes for the rest of the year. That will continue to provide support to our cash flows for 2024 due to the recent pullback in pricing. With the previously announced 4th quarter distribution, we will pay out total distributions of $1.90 per unit for 2023, which represents a 9% increase over 2022. Distributable cash flow for the quarter was $119,100,000 and results in distribution coverage for the Q4 of 1.19 times and 1.13 times for the full year. That allowed us to fully pay off the debt at the end of 2022 and remain at a 0 debt balance throughout the year.

Speaker 3

We currently have $103,000,000 of cash in advance of paying the 4th quarter distribution. So now moving on from the common units to the preferred, as we have discussed on prior calls, we have the option to redeem our outstanding preferred units at 105 percent of par or $21.41 per unit through February 26, 2024 or next week. We have not redeemed and do not expect to redeem any units before the redemption window closes, which will not reopen for 2 years until November of 2025, had a redemption price of 100% of par or $20.39 per unit. The rate on the preferred units reset in November of 2023 from 7% to the 10 year treasury plus 5.50 basis points or 9.8%. As you recall, we also put in place $150,000,000 unit repurchase program in October of 2023.

Speaker 3

This gives us the flexibility to opportunistically buy our common units which currently trade as a discount to the preferred units redemption Given the low natural gas environment today and the liquefied natural gas export capacity expected to increase going into 2025 and beyond, we remain bullish on our long term gas exposure and unit price. And so with that, I will turn the call open for questions.

Operator

Thank We'll go first to Tim Rezvan with KeyBanc.

Speaker 4

Thank you for taking my questions, folks. I want to start on the comments. You've mentioned expanding your growth strategy into buying minerals in the Gulf Coast. The $15,000,000 is relatively small relative to some acquisitions that your public peers have made in the last couple of years. I was wondering if you could expand a bit on this growth strategy.

Speaker 4

How big are you willing to go? And then if you could talk you mentioned the Gulf Coast, they're non producing. Can you talk specifically where that is and your line of sight on production from that area?

Speaker 2

Thanks for the question, Tim. I'll be this is Tom. I'll be glad to answer that as follows. We do acknowledge that 15,000,000 dollars is not a needle mover for Blackstone and we do expect to continue those efforts and substantially expand upon that number maybe tenfold. And with respect to the type of acquisitions and where those are, I don't want to say too much because of competitive reasons.

Speaker 2

But suffice it to say that our goals here are to buy properties that are not already well overpriced like in the Permian, so that our capital will have better running room and can be accretive to our production profile.

Speaker 4

Okay. So it's fair to think of this as maybe a third leg on the growth stool in addition to the Chalk and Haynesville agreements?

Speaker 2

Well, I would tell you that typically speaking, we are expanding areas where we're already in place. So it's probably more expansive of things that we already own than adding new plays.

Speaker 4

Okay. Okay. I appreciate those details. And then, I appreciated Ebony's comments about not redeeming the preferreds. It makes sense that where prices are today.

Speaker 4

How are you thinking about that repurchase program? You intentionally put that in the release. And I'm just trying to understand the difference between with that cash on hand, you're repurchasing shares in weakness versus maybe maintaining you seem to indicate you don't want to maintain that $0.475 per unit if it's over 100% of your cash flow. Just I think how you're thinking about uses of cash given you have no debt between the repurchases and distributions in 2024?

Speaker 3

Yes, Sam. This is Evan. As we think about overall cash and kind of our debt balances as well, we don't really like the idea of going below one time coverage for a period of time and effectively having to borrow to support the distribution. That said, we also see value in our units over a long term and see that there could be accretion to repurchasing

Speaker 4

those units at where

Speaker 3

we're at today at lower on the preferred. And so overall, we feel more comfortable using some of the revolver as it exists to be able to repurchase our common units as opposed to supporting a distribution level that would require coverage be less than one time.

Speaker 4

Okay. So I guess we'll just stay tuned and see if you start that program with repurchases?

Speaker 3

Yes, that's correct. It's something that with the current environment, we think it makes sense and something where we have the opportunity to utilize kind of throughout the year and expect more on that to come.

Speaker 5

Okay. I appreciate the details. I'll hop back

Speaker 4

in the queue. Thank you.

Speaker 3

Thank

Operator

you. We'll go next to Derrick Whitfield with Stifel.

Speaker 5

Good morning all and congrats on a strong year end.

Speaker 3

Good morning, Derrick.

Speaker 5

And my first question, I wanted to focus on your 2024 guidance. With the lower gas prices we're observing at present, how are you thinking about the conversion of the Aethion DUC to production in your guidance? Meaning, are you expecting uniform cadence across the quarters or more second half weighted activity?

Speaker 3

Yes, Derek and great question. So overall based off our conversations with Aethon and the existing docs, we do expect those to come online as they provide it. They're as you would expect with multi pad completions, it becomes a little bit lumpy as multiple wells are going to and expected to come online at the same time. What that's going to do is you'll likely see some earlier on in the year, call it the first or second quarter and then a little bit more towards the end of the year based off the current expectations that they have provided to us.

Speaker 5

So lumpy but relatively uniform across the year, is that a fair characterization? Yes. Okay. And then shifting over to the competitive landscape, we've seen considerable M and A across the upstream sector over the last few years, but only limited amounts of activity in the mineral subsector. With that said, what are your thoughts on the impact E and P consolidation could have on your business, namely Chesapeake, Southwestern?

Speaker 5

And if you're expecting to see greater consolidation within the mineral sector?

Speaker 3

Yes. So this is Evan and I'll kind of hit on the operator consolidation first. And I think overall consolidation within the industry and the operator side to be beneficial. I think specifically thinking about comps or thinking about the Southwestern deal, there's benefits that can be gained through operator efficiencies, costs and everything that I think will trickle down in such a benefit on the mineral owner side as additional development could persist. Now on the other side of that, there's capital discipline and I know Diamondback Endeavor has indicated possibly rig cuts and maybe a little bit more to what I was seeing was really flatter production.

Speaker 3

So I think overall, we're still kind of waiting to see how everything ultimately transaction and how that kind of post transaction world looks. But I think at a reasonable level, it's probably neutral on the moderate to low growth story particularly in the Permian and overall kind of efficiencies to be gained on the gas side particularly on the Haynesville piece.

Speaker 5

And just on more of the minerals consolidation side of the equation, what are your thoughts on that?

Speaker 6

This is Teri Clark. Thanks for the question. I think in the mineral space just on a relative basis, of course, there is a much smaller pool, but there has been some significant consolidation over the last couple of years just off the top of my head, the City of Bergen transaction from last year. And to touch back a bit on the operator consolidation and its impact to us, we're always monitoring these deals come about, what the specific impact is to us and trying to quantify that. And I think for the Chesapeake and Swin consolidation that we don't expect a material impact to us from based on that transaction.

Speaker 6

But of course, as I said, again, we're always looking at those operator consolidations and understand that capital can shift from priority projects for 1 company and as they form a different company that could shift around. And that's what we are monitoring on that front. I don't as far as outlook on mineral consolidation, there's nothing out there that we see at this point that we're anticipating. But so I think that's all we really have to share on that is just we're kind of seeing the same things that you all might be seeing in the market.

Speaker 5

Terrific. Thanks for the added color. Sure.

Operator

And at this time, I'd like to turn the call back over to Tom Carter for any closing comments or additional remarks.

Speaker 2

Well, thank you all for joining the call today, and we look forward to speaking with you again in 90 days or so.

Operator

Once again, ladies and gentlemen, that does conclude today's call. Thank you for your participation. You may disconnect at this time.

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