BSM - Black Stone Minerals: Production Increases And Better Nat Gas Prices Brighten Its Prospects

2023-11-02 02:11:09 ET

Summary

• Black Stone Minerals saw a big sequential jump in production in Q3.
• Meanwhile, natural gas futures have had a nice rally and look nicely higher heading into 2024.
• The combination of solid production and higher natural gas prices should bode well for the stock and its distribution.

I've written about Black Stone Minerals ( BSM ) a few times. I first took a bullish view in February , before switching to a neutral stance on the name in May . Meanwhile, in August I wrote that a distribution cut looked likely in 2024. With the company reporting earnings earlier this week let's catch up on the name.

Company Profile

As a reminder, BSM is a mineral interest holder that gets a percentage of the production or revenue from the production, from the land that it leases to E&Ps that drill the land. It doesn't have to pay for any operating, transport, or F&D costs, and typically gets between a 20-25% royalty interest, as well as an upfront lease bonus payments when it leases new land.

The company also has some non-operated working interests, predominantly in Haynesville, where it is responsible for some of the costs.

BSM and Aethon, meanwhile, have an agreement where the E&P gets a preferred royalty rates in exchange for increased drilling in the Shelby Trough.

Q3 Earnings

For Q3, BSM saw revenue fall -49% to $109.8 million, missing analyst estimates by about $31.7 million. The decline was due to lower commodity prices.

Earnings attributable to common unitholders came in at $56.8 million, or 27 cents per unit, down from $163.2 million, or 75 cents per unit. That missed the consensus estimate by -15 cents.

Adjusted EBITDA rose 6% to $130.0 million. Distributable cash flow ((DCF)) jumped 7% to $124.4 million. On a per unit basis, DCF rose 6% to 59.2 cents from 55.6 cents.

BSM paid out a 47.5-cent distribution in the quarter. Its distribution coverage ratio was 1.25x.

Total production climbed nearly 7% to 42.6 MBoe/d while working interest production fell -12% to 2.3 MBoe/d. Total volumes were up nearly 18% sequentially.

Mineral and royalty volumes rose 8% to 40.3 MBoe/d year over year from 37.3 MBoe/d. These volumes jumped nearly 20% sequentially from 33.6 MBoe/d in Q2.

Total natural gas production was about breakeven at 16,980 MMcf, while oil & condensate volumes soared by 29% to 1,092 MBbls. Oil volumes were boosted by new wells coming online in the Permian.

The company said overall rig counts in the U.S. declined -6%, while it saw a 4% increase in its acreage, mainly in the Haynesville and Gulf Coast. Aethon had 6 rigs on its Shelby Trough acreage and is above its minimum pace of 27 wells with 35 wells in the drilling completion phase.

BSM ended the quarter with zero debt and had $90.6 million in cash at the end of October.

Looking ahead, the company said it now expects total production to be at the high end of its 37 to 39 Mboe/d guidance. It also expects cash G&A to be at the low end of its $42-44 guidance range of $42 to $44 million.

Discussing its outlook on its earnings call, Treasurer and Interim CFO Evan Kiefer said:

“Yes, when we model our forecast and look forward, we typically just model what we have very clean visibility and line of sight into. So that's going to be based off of any feedback we received from operators from permits and drilling activity that we see on our acreage. And so whenever we look into our results for the third quarter, that was all from new wells that we saw drill at the beginning of the year. With the lower rig count in the Haynesville, we see some challenges there going forward and expect overall production, although it was up for the quarter to still remain fairly flat going into next year. But there's always things that occur on a large diversified position such as ours that we don't necessarily have that clean visibility into. And so because we model what we see and have that visibility into, there's that inherent conservatism built into our views. Right now with where we see the program going and where we see with the drill pace and everything, there is that decrease from current volumes into the fourth quarter. But we're still encouraged and optimistic as to what volumes can go into next year and beyond.”

The company’s board also approved a new $150 million unit buyback. The company said it could look to repurchase preferred units, which are trading below their redemption price of 105% of par. The company noted that the interest rate on its preferreds reset from 7% to 10.4%.

This was a much-improved quarter from BSM versus prior quarters where it was seeing declining sequential volume and a tight coverage ratio. While predominantly a natural gas-oriented company, BSM saw a nice boost in oil production from the Permian. In fact, while its production remains mostly natural gas, it is getting more revenue from oil at this point.

It also continues to see some solid activity out of Haynesville despite the overall drop in rigs in that basin. This points to the strength of its acreage in the basin, which is generally higher cost than places like Appalachia. However, the company is projecting volumes to fall in Q4 and to be pretty flat in 2024.

Hedge Book And Distribution

BSM continues to currently benefit from the roll-off of low-priced hedges to more attractive hedges. In Q3, the company realized cash settlements of $24 million from its hedge book.

For Q4, its natural gas hedges have a weighted average price of $5.15 compared to $3.12 a year ago, which is 65% higher. For 2024, its weighted average price for natural gas hedges is $3.57. That's still above 2022 levels, but a big decline versus 2023 levels.

For oil, weighted average oil hedges are $80.80 for the rest of 2023. The company has oil hedges for 2024 at a weighted average price of $71.45.

While the hedge book is currently a tailwind, it will likely turn into a headwind next year.

With its increased production, especially on the oil side, BSM will be close to meeting its distribution. The decrease in hedging costs on the natural gas side will impact DCF per unit by about 6 cents, while on the oil side, it will be about 2-3 cents.

However, natural gas price futures are solidly higher from earlier this year, which bodes well for BSM and its 2024 distribution. We’ll still have to see how the winter weather plays out, especially with an EL Nino, but things are currently looking up for nat gas prices versus 2023. At the current strip, it looks like BSM will be able to maintain its distribution in 2024.

Conclusion

In my last write-up, I said needed to see a natural gas price rally before I could get on board with BSM, as barring that rally it likely needed to cut its distribution next year. Well, that natural gas rally has occurred, and 2024 future prices are currently meaningfully higher. At the same time, the company not only stopped the sequential declines in volumes it had been seeing, but it grew volumes quite substantially in Q3.

At this point in time, I feel more comfortable with BSM and its distribution. Investors will have to watch the impact of winter weather on natural gas prices, but right now it looks to be in a much better position than just a quarter ago. As such, I feel more comfortable “Holding” the stock at these levels and see potential upside in the name if natural gas prices can rally further.

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