BSM - NYSE

Good day, everyone, and welcome to today's Black Stone Minerals First Quarter 2023 Earnings Release. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note, on this call, I will be reporting and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Steve Putman, Senior Vice President and General Counsel. Please go ahead.

Thanks, Todd, and good morning to everyone. Thank you for joining us either by phone or online for Black Stone's first quarter 2023 earnings conference call. Today's call is being recorded and will be available on our website along with our 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 our cautionary information about forward-looking statements in our press release yesterday, the Risk Factors section of our 2022 10-K, and our 10-Q we file later today. 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 measures are described in our earnings press release from yesterday, which can be found on our website at blackstoneminerals.com. Joining me on the call from the company are Tom Carter, Chairman, and CEO; Evan Kiefer, Chief Financial Officer, and Treasurer, Carrie Clark' Senior Vice President, Land, and Commercial; Garrett Gremillion, Vice President of Engineering and Geology; and Thad Montgomery, Vice President of Land. I'll now turn the call over to Tom.

Thanks, Steve. Good morning to you all. And thank you for joining us today to discuss our first quarter '23 results. We posted a strong quarter and despite headwinds in the current pricing environment, we continue to see success in our development programs with Aethon and various operators in the Chalk, among others. We generated total production volumes for the quarter of 39.3 MBoe/d. A decrease of 8% from our fourth quarter volumes. The primary driver of that boost oil, was reduced oil volumes and the Permian. Fourth quarter '22 volumes were unusually hard due to first time payments from several major operators that spanned multiple months that were collected in that period. Royalty volumes came in at 36.8 MBoe/d and 24% above the first quarter of 2022. We continue to see strong production in the Haynesville Bowsher, both Louisiana and in the Shelby trough in East Texas. Aethon continues to ramp up production in the Shelby Trough, and had five rigs on location at the end of the quarter and is expected to meet the minimum pace of 27 wells per year by the end of the year and Angelina and San Augustine county. To date 20 wells have been turned to sales in the Shelby Trough under our development agreements with Aethon, six new wells since the beginning of the year, and another 19 are in various stages of drilling and/or completion. In addition, '21 new gen multistage completions -- completion wells have been turned to sales in our concentrated acreage position in the East Texas Austin Chalk with potential for an additional 14 wells this year. It is exciting to see the positive momentum from the organic initiatives that we focused on over the last couple of years and we continue to work, putting in place new long-term development deals to further accelerate production on our acreage with minimal capital requirements. This strategy has created incentives to continue developing through the commodity cycles and we expect it to add long-term value to Blackstone and its unit holders. We saw a decrease in rigs operating on our acreage in the first quarter was 78 rigs running currently running on our acreage as of March 31st. The decrease was driven largely from the Permian, where we had a higher than average number of rigs in the fourth quarter. Blackstone's averages approximately 10% to 15% of the U.S. rigs drilling on our acreage and expect that to continue going forward. Despite the lower rig count in the first quarter, permitted activity in the first quarter remains in line with the fourth quarter with over 400 horizontal permits added on our acreage. Realized prices for the first quarter were approximately $77 per barrel and $350 per MMBtu. While both crude and natural gas were down in the quarter, we saw the benefit of our hedge portfolio bringing in over $13 million for the quarter with hedge natural gas prices over $5 per MMBtu. We reported adjusted EBITDA of $109 million and distributable cash flow of $104 million for the first quarter, both up 11% to 12% from the first quarter of 2022. Despite some challenges with natural gas prices. We're confident in our guidance and we are able to maintain the highest distribution Blackstone has had as a public company at $0.475 per unit for the first quarter. Overall, it was a great start to the year and we continue to work on our new and existing operators to continue driving activity on our acreage. With that I'll turn it over to Evan to walk through the details of the quarter.

Thank you, Tom, and good morning to everyone. After several records setting quarter's oil and gas volume came in lower for the first quarter. Our royalty volumes for the first quarter as Tom mentioned totaled 36.8 MBoe/d, which was down 8% relative to the fourth quarter, and total production for the quarter was 39.3 MBoe/d. We received the benefit of several new payments coming in from volumes that span multiple periods in the Haynesville and Permian in the fourth quarter of 2022. As a result, the first part quarter oil volumes are down primarily in the Permian. Whereas we just mentioned that there were several first-time payments from multiple operators that was collected over that period. While this is temporary in nature, the benefit of a large diversified mineral position is that this does occur from time to time, although it is difficult predicting it going forward. And speaking of the Permian, we saw a decrease of in rig activity on our acreage in the first quarter, which was down from 108 rigs at the end of the year. The decrease in rig activity was primarily driven by a significant number of rigs added on our Permian acreage in December, where we saw that move off in the first quarter. As you would expect, we see these ebbs and flows as operators move on and off our acreage as part of their normal development plans and expect to see the benefit of that drilling activity later this year. We also saw a reduction in Haynesville in response to lower gas prices, which was contemplated in our full-year guidance. These ebbs and flows and development activity for mineral owners. It's just highlights the importance of the organic initiatives that we've been focusing on over the last couple years. As Tom mentioned, Aethon has recently turned to sail six new wells and is expected to meet their minimum well commitments this year. We've also made headway in the Austin Chalk, where we have 21 New Generation multistage generation wells online to date, and are expecting potential for 14 more this year. These are just two areas of our portfolio where we see 10 years to 20 years of future development activity and we're excited to see continued momentum from the operators there. Realized prices per Boe for the first quarter were approximately $33 per barrel, which was a decrease of 35% relative to the $51 per barrel seen in the fourth quarter. This just highlights the importance of our hedge program that is designed to provide some stability to our cash flows and provide downside protection in periods of high volatility. Our hedges brought in $13.3 million or realized hedge gains in the first quarter for the average strike price for natural gas is over $5 per MMBtu and approximately $80 per barrel for crude oil. These hedges will continue to provide support for our cash flow this year, and it's in the challenge pricing environment we currently face. We continue to add to our 2024 hedge position, with an average strike price for natural gas at $3.64 per MMBtu and crude at $69.79 per barrel. We will continue to build to the 2024 position targeting approximately 70 plus percent of our estimated volumes throughout the remainder of the year. For the first quarter, we reported $109.9 million of adjusted EBITDA and distributable cash flow for the quarter of $104.1 million. This is down 17% from last quarter, but our financial results benefited from a solid quarter of lease bonus and almost $4 million as well as reduced cash operating costs of approximately $3 million compared to the fourth quarter. Our total debt balance was $0 at the end of the quarter, and we currently have $66 million of cash on the balance sheet today. Prior to the distribution payment later this month. The borrowing base for our revolving credit facility was reaffirmed at $550 million with $375 million that commitments in April. Given the undrawn revolver and cash generated in the quarter, our Board of Directors supported maintaining the existing distribution of $0.475 per unit, which translates to 1.04 times coverage for the quarter. And with that, we'll go ahead and open the call for questions.

[Operator Instructions]. Our first question will come from Derrick Whitfield with Stifel.

Good morning, all. For my first question, I wanted to focus on your 2023 guidance, assuming the midpoint of the guy that you laid out in Q4. The implied trajectory for the balance of 2023 would be 2000 barrels per day up on oil and 40 million to 50 million down on gas. Is that an accurate depiction of your projections based on wells in the process? Or is it just simply too early to update guidance?

Yeah, thanks, Derrick. This is Evan, and thanks for the question. Yeah. Typically, in the past, we've always updated our guidance in the middle of the year. And I think just really right now with where the gas price environment is we're still looking at see where rig counts and everything settles out. And really the Louisiana Haynesville signed before we update that guidance. Right now, we got off to a strong start on the gas volumes, particularly with the existing contracts with Aethon and everything in place with the Shelby Trough. And so, we're really just planning on waiting until the 2Q update whenever we'll put out revised guidance numbers for everyone.

And as my follow-up and maybe leaning on the gas side. With regard to your higher NRI development with Aethon and Exxon, are you expecting a change in operating behaviors relates to completion flow back and/or curtailment activities?

Yeah, so really focusing on the Shelby Trough with Aethon and even [indiscernible] as you mentioned, we don't see any change in the current development pace or completion scheduled there. With the development agreements we have in place, there are criteria that requires them to drill and complete those wells. So, as you probably remember, several years ago, we did have wells that were spotted, and then waited several years actually to be turned to sales. And so, we've incorporated that knowledge into the current agreement that limits the amount of time from spot to overall completion in the Shelby Trough. And so, we do not expect any major delays due to completion, timing or changing of operations in the area.

Our next question comes from Tim Rezvan with KeyBanc Capital Markets.

Good morning, everybody. Thank you, for taking my questions. I think to first ask about I guess Evan's final prepared comments on the distribution. You have the balance sheet flexibility to kind of have had essentially 100% of distributable cash flow and you were we're near that level in the second quarter. But, the gas price environment is sort of challenged in the near-term. How do you think or how should investors think about a payout ratio kind of going forward? I mean, you could keep that $0.0475. And draw on the balance sheet, but maybe that doesn't seem optimal. How are you thinking about that distribution longer term and the payout?

That's a great question and something that we look at a lot internally. And so right now with a 1.04 times coverage, and really just with where the balance sheet is today. We do feel comfortable, maintain a little bit lower coverage in the near-term. Something that we always look for as we establish our distribution policy and what we look for going forward is something that we can have a stable to slightly growing distribution as we look at our forecasts. And so, I recognize that right now, there is some challenges on the national GAAP side, as well as potential volumes, resulting in those lower prices. And as we continue to look at our forecast going forward, we'll revise and look at what we think the appropriate level is quarter-to-quarter. But whenever we set out that number, and held that flat for the fourth quarter, this latest distribution. We were still expecting to have decent coverage going forward. And that's where we'll continue to look at that and potentially adjust as necessary if things change in the future. But really, with the Aethon development agreements, and even the Austin Chalk, where we expect to see ramping up production for the second half of the year. We still see growing volumes, potentially from those areas that may mitigate some of the risks and the others. And that gives us confidence in the current guidance that we have outstanding.

For my second question, I'd like to dig into the chocolate a bit more, some pretty constructive comments on visibility provided. So how should we, can you generalize kind of the oil cuts of these talk wells coming on? I know it's variable across the play. And when we could really start seeing that impact total production. Do you think that's more a 3Q event? Should we look this quarter? When does the chalk really become a big wedge in total production for you all?

Hi, Tim. This is, Garrett Gremilion. Thanks, for the question. So certainly Q3, Q4. We expect volumes to start ramping up heavily, more heavily in that area. Within the play, we have seen a good number of areas tested across that four-county area. Operators seem to be starting to concentrate some of their feature development in the existing field where we see 14 plus wells per year over 200 locations. And oil cuts tend, as you say to vary across, but at the same time healthy enough to be very economical in the current environment.

Do you have any context on what sort of oil you've seen as a percent of production in that area?

You can get anywhere from 100 to 175 barrels per million within some of the areas that they drill.

Some of the recent wells that have come online, the Middle Earth, 2H and 1H. You've got current rates of 1,700 barrels a day and 8.5 million cubic feet a day, for the 2H and then for the 1H 400 barrels a day at about 2.3 million barrels a day.

[Operator Instructions] Our next question comes from Trafford Lamar with Raymond James.

Hi, guys. Thanks for taking my question. Kind of circling back to the payout ratio in potentially lowering that going forward. Expanding on that and how do you all kind of think about buybacks with a lowered payout ratio given you guys have $75 million authorized and obviously no debt on the balance sheet, just want to get some color from the on that?

This is Tom, I'll take a stab at that. Buybacks are something that we have looked at, and we will continue to look at it. We don't have any current aggressive plans in that area. We do have a preferred security that is in place that could see some focus as we go through the year. And I would just answer that question with, we have absolutely cleaned up our balance sheet tremendously. And that scenario that you're mentioning is certainly something that's available to us and that we're keeping a sharp eye on.

Perfect, appreciate to color on that. And then one quick one real quick. On the lease bonus, I noticed y'all had a pretty good step up quarter-over-quarter. And you mentioned, both Wolfcamp and Hainesville Bowsher. Regarding the Hainesville Bowsher. I'm assuming that is not that leaves bones activity wasn't related to Atheon. Is that correct? That was what third-party operator bonus.

That is correct. It's a third-party.

[Operator Instructions] Next question will come from Tim Rezvan with KeyBanc Capital Markets.

Thanks for letting me back in. I did want to follow-up on that preferred, I believe in first quarter of 2024 the rate steps up on that? It's more of a kind of floating rate and certainly in a much different interest rate environment than we were a couple years ago. How do you think is that just something you will just deal with? Or I guess I'm trying to give them more color and kind of how you think about the capital structure and possibly using free cash flow to whittle that down or just kind of retire that completely?

This is Tom again. We have not made any firm decisions around what we're going to do relative to the preferred as it becomes redeemable in the fourth quarter, but we're looking at it very closely. And as I said, just a moment ago, our balance sheet has been cleaned up significantly. Our distribution is at its highest level. And we are very closely looking at that issue and we'll be making some decisions as the year progresses around that. I don't think there are any other questions. So, we just thank you all for joining us on the call today, and we look forward to catching up with you next quarter.