BSM - Black Stone Minerals: Production Jumps By 18% In Q3 2023

2023-12-01 06:42:01 ET

Summary

• Black Stone Minerals delivered 18% production growth in Q3 2023 compared to Q2 2023.
• It now expects to hit the high end of its full-year production guidance even with a conservative outlook for Q4 2023.
• I have increased my expectations for Black Stone's 2024 production to 39,500 BOEPD now, a 3% increase from my previous model.
• This increased production should allow Black Stone to roughly cover its current distribution in 2024 despite the natural gas strip falling to around $3 now.
• Black Stone also has $56 million in cash on hand and no debt, allowing for potential unit repurchases with its new $150 million repurchase program.

Black Stone Minerals (BSM) reported excellent production growth in Q3 2023 , with total production increasing by 18% from Q2 2023. It should be able to reach the high end of its full-year production guidance now, even with a relatively conservative outlook for Q4 2023.

Black Stone Minerals also had $56 million in cash on hand (as of the end of Q3 2023), allowing it to potentially do common unit repurchases under its new $150 million repurchase program.

Black Stone's strong Q3 2023 results and expectations to end up with 39,000+ BOEPD in 2023 production have led me to increase my modeled production for 2024 to 39,500 BOEPD. This is a 3% increase from what I had modeled earlier after Q2 2023 and results in its estimated value increasing to around $19.00 to $19.50. This is a $0.50 per unit increase from my previous value for Black Stone.

The increased production also counteracts the impact of weakening strip prices for 2024. Despite natural gas strip prices falling to around $3 now, Black Stone should still be able to roughly cover its current distribution with the help of the increased production and its hedges.

Q3 2023 Results

Black Stone Minerals reported excellent results in Q3 2023, with a total production of approximately 42,600 BOEPD (28% oil, 72% natural gas). This was an 18% increase from its Q2 2023 production, and it attributed the increase to new Permian wells plus better-than-expected Shelby Trough results.

The strong production allowed it to generate $124.4 million in distributable cash flow during the quarter. Black Stone's distribution coverage was 1.25x for its $0.475 per unit distribution.

Black Stone has maintained a distribution coverage above 1.0x in every quarter during 2023 so far, allowing it to build its net cash position up to $56 million at the end of Q3 2023. This compares to $6 million in net debt at the end of 2022.

The strong production results in Q3 2023 have also resulted in Black Stone indicating that its total production for 2023 should be at the upper end of its guidance range of 37,000 to 39,000 BOEPD for the full year.

Black Stone has averaged approximately 39,400 BOEPD during the first three quarters of 2023, so it can hit 39,000 BOEPD for the full year with approximately 37,800 BOEPD in Q4 2023 production. Black Stone's guidance is probably at least slightly conservative, although Q4 2023 production will fall from Q3 2023 levels due to the timing of new wells coming online .

Notes On Unit Repurchase Program

Black Stone terminated the $75 million common unit repurchase program that was approved in 2018 and replaced it with a new $150 million common unit repurchase program.

Black Stone had $56 million in cash on hand and no credit facility debt at the end of Q3 2023, so it has some funds for unit repurchases without taking on debt. It could repurchase a couple of million units and still have cash on hand to pay for its distribution if its distribution coverage drops slightly below 1.0x in 2024.

Preferred Unit Distribution Adjustment

Black Stone appears to have received a bit of a break with the adjustment of the distribution rate on its preferred units. Those units had a 7% distribution rate, and that rate was scheduled to be adjusted to the 10-year Treasury Rate + 5.5% on November 28th. The closing 10-year Treasury Rate on November 28 ended up being 4.27%, which was down around 71 basis points from the high in mid-October. Thus, the new distribution rate on the preferred units should be 9.77%. Black Stone will now pay out $29.3 million per year in preferred distributions. This is an $8.3 million per year increase from before, but it could have been approximately $2 million higher if the adjustment had taken place in mid-October instead.

This distribution rate becomes the new floor for any adjustment (scheduled for every two years) going forward. Black Stone is able to redeem all or a portion (at least $100 million) at 105% of par now, or at 100% of par starting in November 2025.

Since the distribution rate on the preferred units ended up below 10% and Black Stone also started its common unit repurchase program, I don't expect Black Stone to redeem preferred units for at least a couple of years.

Updated 2024 Outlook

Commodity prices have slumped a bit recently, so the 2024 strip is now around $75 to $76 WTI oil and $3 Henry Hub gas.

Black Stone's strong 2023 production has led me to bump up my projections for 2024 to around 39,500 BOEPD (28% oil) though, which is around 3% higher than what I had previously modeled for it.

Black Stone has around 65% of its 2024 natural gas production hedged at $3.57 and 56% of its 2024 oil production hedged at $71.45. At the current 2024 strip, these hedges have approximately $14 million in positive value.

Black Stone is thus now expected to generate $386 million in distributable cash flow in 2024, or $1.84 per unit. This assumes that Black Stone has 210 million outstanding common units and that it doesn't repurchase units. This is distribution coverage of 0.97x based on Black Stone's current $0.475 per unit quarterly distribution.

Repurchasing units would increase its distributable cash flow per unit slightly.

Notes On Valuation

I've increased my estimate of Black Stone's value to approximately $19.00 to $19.50 per unit at long-term commodity prices, involving $75 WTI oil and $3.75 Henry Hub natural gas. This increase is due to Black Stone's production tracking a bit higher than what I previously modeled.

I have kept my long-term commodity price model at $75 for oil and $3.75 for natural gas, although it should be noted as a risk factor that the current oil strip for 2025 is down to around $71 now.

Given that its distribution coverage is projected to be near 1.0x in 2024, I'd expect Black Stone to keep its quarterly distribution at $0.475 per unit for now. If Black Stone's production in 2024 averaged around 42,000 BOEPD (28% oil) instead of the 39,500 BOEPD that I have modeled, it would end up with close to $2 per unit in 2024 distributable cash flow at the current strip. If it saw that production growth, it would be a scenario that I could see Black Stone increasing its quarterly distribution to around $0.50 per unit.

Conclusion

Black Stone Minerals reported excellent results in Q3 2023, with production increasing by 18% compared to Q2 2023. This helped it achieve 1.25x distribution coverage for the quarter.

Going forward, Black Stone's production is likely to fall at least a bit from its Q3 2023 heights, but I now expect its 2024 production to be around 39,500 BOEPD. This would be around 1% to 2% production growth compared to 2023 and is 3% higher than what I had previously modeled for Black Stone.

This should allow Black Stone to roughly cover its current distribution, despite the 2024 natural gas strip averaging around $3 now. The increased production also supports a slightly increased value for Black Stone and I now estimate its value at around $19.00 to $19.50 per unit.

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