Black Stone Minerals, L.P.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Welcome to the Black Stone Minerals First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Brent Collins, Vice President of Investor Relations. Sir, you may begin.

[Brent Collins:]

Thank you, Antoine. Good morning to everyone and thank you for joining us either by phone or online for Black Stone Minerals' first quarter 2016 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 in our forward-looking statements. For 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 10-K that was filed earlier this year and our Form 10-Q which will be filed later today. We may refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. A reconciliation of those measures to the most directly comparable GAAP measures 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 which can be found on our website at BlackStoneMinerals.com. Company officials on a call this morning are Tom Carter, Chairman, President and CEO; Marc Carroll, 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.

[Tom Carter:]

Thanks, Brent and thank you all for joining the call this morning. Black Stone's off to a good start in 2016. Actually, we're well into the year and are encouraged. Our production for the first quarter was better than we had budgeted or forecast. This was largely driven by higher levels of activity in the Eagle Ford and Bakken coming from late last year that showed up for the first time in the first quarter. This performance is encouraging and is demonstrative of the quality of our assets. Second, we continue to find traction in our acquisition efforts. Yesterday we announced that we had entered into an agreement to acquire a mineral position in the Wattenberg Field in Colorado for $35 million. This is in addition to the approximately $100 million deal we entered into with Freeport-McMoRan last month as well as an acquisition we did in the Permian during the quarter. Acquisitions aren't easy and they never have been and we have looked at a lot of transactions in recent months. From our perspective, we think the buyers and sellers expectations are -- the difference between those are narrowing and have moved to levels that are more reasonable and we've been able to get a couple of deals signed up and we hope to continue to do so. Our acquisition strategy is something that's important to the long term potential of the Partnership, so I'm pleased that we've been able to show the investment community that we're executing on our plan. Holbrook will talk little bit more about this in a little bit. Our practice is to include production volumes in our forecasts and budget relative to acquisitions that we expect to make during the year. These announced transactions satisfy the volume targets that we have planned for the year. Given that fact in the robust performance of our assets thus far, we expect that we will be increasing our production guidance at midyear. As we sit here today, the industry environment seems more constructive that it did late last year and earlier this year. Industry continues to be drilling on our minerals as the first quarter results demonstrate. We're seeing interest also in more exploratory portions of our portfolio and the Partnership is well-positioned, with a great set of assets soon to be complemented by the announced acquisitions and our financial position remains solid. Our common distributions provide an attractive yield to investors and we think it's important to note that this is scheduled; this common distribution is scheduled to increase by 10% in the second quarter of this year. In summary, I think it's a great time to be an investor in Black Stone. With that, I'll hand it over to Marc Carroll.

[Marc Carroll:]

Thanks, Tom. Good morning, everyone. At this time a briefly touch on the highlights of the quarter and then I'll turn it over to Holbrook Dorn, our Senior Vice President of Business Development and Land. Production for the quarter came in at 30,300 Boe per day, an increase of 12% over Q4 of 2015 and a 4% increase over 29,200 Boe per day that we saw the same period last year. Excluding hedges, realized prices in the first quarter were $30.75 per barrel for oil and $2.23 per Mcf for nat gas. We had realized gains of $20.6 million and a net unrealized loss of $10 million. That results in the $10.6 million gain you see in revenues for the first quarter. Lease bonus came in at $1.4 million for the quarter. We've mentioned this on previous calls; the timing and amount of lease bonus is variable from quarter to quarter. Historically, we've seen leasing activity in the accompanying revenue increase as the year progresses. We're opportunistic the trend will continue this year. On the cost side, total LOE was relatively flat compared with the previous quarter and on a unit-of-production basis, it was down relative to the previous quarter end of Q1 of 2015. This reflects a general downward trend for operating costs industry-wide, but the reduction's also influenced by several high-rate Haynesville gas wells which came on right at the end of 2015 and this has just driven the overall average operating cost per Boe down. Production costs and ad valorem tax as a percentage of oil and gas revenue were in line the same period for the prior year. G&A for the first quarter was $17.4 million and included about $6 million of non-cash equity comps. Expenses were up from a year ago due to an increase in this long term incentive comp and also we had some additional audit taxes associated with our first year as a public company. DD&A decreased as a result of the impairments we took in 2015 and during the quarter we had a non-cash impairment of $6 million, due primarily to lower nat gas prices as of March 31. Our net income for the quarter was $10.7 million. Adjusted EBITDA came in at $55.7 million and cash available for distributions and reinvestment was $48.2 million. Our coverage ratio for the quarter was approximately 1.1 on all units or 1.9 times on solely the common units. The balance sheet remains in great shape. At the end of the quarter we had $116 million outstanding on our revolver and as of today that balance is about $131 million. We'll be revisiting guidance at midyear. As Tom mentioned, we've met our target on acquisition production with the two pending transactions that we've announced. We've also see more activity and better performance from our assets than we had expected. Since we don't operate the drill-bit, we prefer to get a little more comfort on these trends that we're seeing in our operations before changing guidance. However, based on what we've seen so far this year, we anticipate increasing production guidance at midyear. With that, I'll turn it over to Holbrook.

[Holbrook Dorn:]

Thanks, Marc. As Tom mentioned, we've looked at a lot of transactions since going public. The downturn in commodity prices had the effect we expected and frankly, some of the opportunities that we're seeing that we wouldn't see in more robust commodity price cycles. We participate in a lot of processes and it's been difficult to bridge the bid ask. Recently, it seems like the ask is approaching more reasonable levels and we've been fortunate enough to get a few transactions under contract, namely the Freeport deal and our recent Weld County opportunity. As it relates to the Freeport transaction, this particular deal is really right down our fairway. It's a very large gross position, 1.2 million gross acres in around 120,000 net mineral acres covering multiple oil and gas basins. It's got a very attractive Permian position along with it. We believe the asset has been under managed at Freeport because that was not a core asset of that company's and we're hoping that once we get that asset in-house we're going to be able to unlock more potential. The Weld County deal that we just signed up yesterday is very much in line with our more targeted basin acquisition strategy, where we think we're buying some of the best acreage in the Wattenberg complex. The primary operator is Anadarko and there are a number other smaller operators across the position. It's coming with an attractive yield and there are existing permits across the position. Just to give you a little bit more color on what we've been doing, we haven't spoke about this in much detail since going public, but we've been very active in a number of different plays, specifically the Permian and the Midland Basin and to a somewhat lesser extent the Delaware Basin. Since going public we've increased our core Midland Wolfcamp acreage from roughly 12,500 acres to 26,705 royalty acres. That's a 100% increase. In the Delaware, we've increased it from around 13,800 acres to close to 15,000 acres. In total, that's 42,000 royalty acres in the core parts of both the Delaware Wolfcamp and Midland Wolfcamp Spraberry plays. We're really excited about those two positions and how they've been coming together. They're smaller nets covering large gross positions, so it will take a little while to spool up but we're already seeing those benefits. Our Wolfcamp production has increased from roughly 200 barrels a day to over 700 barrels a day in the last 12 months. The acreage is actively being developed by industry. In the last year, it's gotten over 171 permits with over 146 drilling wells that are touching that acreage. So we're very excited about that. As Tom indicated, the acquisition market continues to increase in pace and we think the M&A environment is looking more and more attractive as people become more realistic on pricing expectations. With that, we will open the call to questions.

[Operator:]

[Operator Instructions]. Our first question comes from Jason Smith from Bank of America. Your line is open.

[Jason Smith:]

Guys, maybe it's too early to say given the deals haven't closed yet, but obviously a lot more acres associated with the Freeport asset than the Wattenberg deal with similar levels of current production, so I was just curious if you could provide -- hoping you can kind of touch on this -- provide any color on the potential opportunities you see on that Freeport asset and where you maybe think you can drive production there.

[Holbrook Dorn:]

Yes. The Freeport acquisition is a mix of some smaller fragment and middle fracs and a few larger tracks covering from West Texas through Louisiana, Mississippi, Arkansas, you name it, some tracks in the core of the Balkan, et cetera. We think that, that asset is underperforming what it could be and is just going to take a while to work it and get our hands on it. We think there's some leasing to be done across the position and I can't say what the ultimate potential is, but we're excited about getting it. It's an asset we've pursued, frankly since 2007. We have not been able to buy it until now. I think that's just because of the current environment.

[Tom Carter:]

Holbrook, I might add that in our portfolio we have numerous examples of acquisitions that are very similar to the Freeport acquisition, as well as ones that are very similar to the Weld County. Those things are sort of book ends on the spectrum of types of things that we like to do. They behave generally pretty differently, but both of those types of things have been very positive performers for us over time. So we really like being able to layer both of those types of deals into our portfolio.

[Jason Smith:]

Maybe one for Marc. As long as the acquisitions close, I think you'll have roughly $200 million of liquidity under the credit facilities, so just color around funding the deals, your comfort level with having that level of liquidity and any potential options that you guys are looking at on that front.

[Marc Carroll:]

Yes, Jason. You're right. We're somewhere around $200 million, we think, after these deals close. They'll come with some borrowing base uplift, because they've got some PDP associated with them, so that'll be helpful and also with our well results we're, expecting good things on our reserves. But to be honest, we're going to look at all options. If we're fortunate enough to run up that -- our revolver and max it out through acquisitions, then we're going to evaluate all the options from borrowing base to re-determination. We can do interims to all the other options on the table, too. We hope it is a problem we have that we max out our revolver through some good deals.

[Jason Smith:]

Just one last one. Marc, you had mentioned this in your prepared remarks but obviously on the lease bonus, just a comfort level. I know you guys have said historically that it typically is lower in 1Q and moves up throughout the course of the year. Just your comfort level around the $30 million guidance you guys have given.

[Holbrook Dorn:]

I'll tell you right now we've got a number of interesting trades that are in negotiation. How those trades out we have a lot of confidence towards to $30 million. If those trades don't work out, there still a lot of time left in the year and it's the environment has improved since January and February of this year, albeit we're only two months into this slight improvement. The trend could reverse. We'll see, but the phones are ringing a lot more often than they were and frankly some of our more proactive efforts are starting to gain some traction.

[Tom Carter:]

I would add on bonus income as a generic constituent of our revenue generation, it has always been a very choppy source of revenues. Yet, that being said, it has also always been there over time. It's really challenging to predict it in one quarter or another and even to some extent in a given year. But over cycles, it's pretty resilient and we, having been in this business for decades, are confident that over cycles we will generate the kind of bonus income, if not more than we're forecasting. The volatility in it however is one of the primary reasons for the structure that we put in place of having common and subunits because it will be volatile.

[Operator:]

Your next question comes from Nick Raza from Citigroup. Your line is open.

[Nick Raza:]

Just a couple of piggyback questions. In terms of NAV accretion, have you guys sort of said what that looks like for the two acquisitions? Particularly the Freeport-McMoRan--

[Holbrook Dorn:]

They're parts of Freeport-McMoRan portfolio that lend themselves to an NAV analysis, such as the Permian and they've got some positions in the Haynesville, mainly the Shelby Trough. That was all part of our analysis and our price. I would say -- I mean, if you look at our -- if you want to just talk about isolate one small part of that portfolio, for instance, I would include some of the other stuff we've done and since going public, but, I mean, the NAV on our Midland and Delaware positions is huge. It's a lot of acres and it's in the that's best parts of Martin County, Midland County, Upton, Reagan, Western Glasscock, Western Howard. It's where everyone's drawing their maps. We all kind of know where to buy at this point. There's not a big secret there. Same with the Delaware. Those maps will slowly make their way out as we get everything fully set up on our system and they'll be uploaded and those NAVs are enormous, especially if you look at the NAVs being attributed to a [indiscernible] or something like that, this acreage position's arguably bigger.

[Nick Raza:]

The other question that I want to ask was essentially EOG came out and mentioned -- or there was a lot of discussion around their Austin Chalk position and they mention that they were going to drill seven wells during this year, 2016. Is that on your acreage?

[Holbrook Dorn:]

Who is the operator?

[Nick Raza:]

EOG.

[Holbrook Dorn:]

I think EOG focused on the Chalk and more in their Eagle Ford properties and I think those wells were in Karnes County, if I'm not mistaken. We've got a great Eagle Ford position in that neck of the woods. We're excited to see the Chalk come back to life in South Texas. Historically, that was a Chalk area. Black Hawk was originally a Chalk prospect that was put together that turned into an Eagle Ford prospect. We've got a nice acreage position down there and hopefully that Eagle Ford continues to find new legs, whether it be the Chalk or the EOR discussion that EOG advertised. Time will tell.

[Operator:]

The next question comes from Kevin Smith from Raymond James. Your line is open.

[Kevin Smith:]

The first quarter production, your numbers came in a little bit higher than I was expecting. Was that primarily attributable to the Haynesville wells that you said came on at the end of 2015 or was that more activity or what should we think about the sequential growth there?

[Brock Morris:]

It was really a variety of things. The Haynesville wells were one of the areas where we had a pretty significant contribution but we also saw good performance in our other core plays like the Eagle Ford and the Bakken which had volumes that were better than expected, but if we track over 20 plays and just about all of the plays had some out performance relative to our expectations, so it was really pretty broad, the overall out-performance. Two other notables would be Wilcox and Wolfcamp. Holbrook mentioned the Wolfcamp activity there and that was a little better than we expected, too.

[Kevin Smith:]

Understandable. This was also something Holbrook mentioned was having success being able or basically negotiating or being proactive on the drilling in different commitments. Have you been able to have any success there as first getting people to drill and rework any of the royalty contracts?

[Brock Morris:]

One of the areas where we've been real successful in that is our Texas Haynesville properties where XTO because of a restructuring that we did, XTO has added a second rig and the results we're seeing there we're extremely pleased with. And not just in the Haynesville, but also in the Bossier. There's a recent Bossier completion that's performing on par with the Haynesville wells which we're as with EURs in the neighborhood of 1.7 or even higher BCF per thousand lateral feet, with the Bossier wellbeing among the better of the last five wells that have come online. We're really excited about that and from XTO's perspective there, even in today's environment, costs have come down over 30% since they started drilling in this AMI that we've got with them over the last two years. Between the well results in costs coming down, we're pretty excited about what's going on there.

[Tom Carter:]

Brock, you might also mention the very early innings new Woodbine discovery in Polk County that could have tremendous upside potential for us and the fact that it's going to be offset with what we think is the first horizontal Woodbine well.

[Brock Morris:]

That's right, Tom. There was a discovery, actually two discoveries on our acreage in Polk and Tyler Counties last year which there are plans by the operator to follow up this year with a horizontal test that will be drilled sometime in the second or third quarter. We're pretty excited about that. We're very well exposed to it, some of the better Woodbine tests that we've seen in the last several years. We've talked about Wilcox in the past. Wilcox was a place where our production outperformed. The wells in Gilly Field were performing better than expected and we talked a little bit about some of our efforts to develop prospects to market to industry and we're really excited about the feedback and the response we're getting there. We don't have anything to announce there yet, but hopefully real soon we'll have an announcement there as well.

[Operator:]

Our next question comes from Dave Kistler from Simmons & Company. Your line is open.

[Dave Kistler:]

Kind of just thinking a little bit about the activity this quarter with -- and even heading into Q2 with a number of acquisitions but also looking back and seeing a pretty decent share repo plan that's been in place, can you talk about how you think about both of those things, whether separately or together? Obviously as you get to a point of the credit facility being fully drawn down, that obviously I think would factor into the decision. If you can give me any color on that I'd greatly appreciate it.

[Marc Carroll:]

This is Marc. When we're looking to deploy capital, we're looking at all our options. We have the share repurchase program and is not major. We bought about 430,000 units today for about $6 million. Our goal is obviously deploying capital on additional assets, but what we've seen recently is that we think that our ideal asset is a diverse mineral package and we think there's none better than Black Stone. It's been a small part of our capital allocation and our focus is on growing assets and that's where we're going to focus. We get to the point where we continue to see acquisitions; we have the option to terminate that share repurchase program if we wish or to continue it.

[Tom Carter:]

I would just add to that, that when we talk about applying finite capital to acquisitions versus share repurchase, a big factor in that is one, the capacity to make acquisitions and the valuations thereof and we feel better about that side of the equation today than we did six to eight weeks ago. We also look at the valuation of our equity relative to the valuation of acquisitions in the market. Our units traded as low as $10.20 in February which was a 12% yield and that's not happening right now. We certainly don't know that it won't happen again, but buying that asset, the units at that kind of yield, is a very attractive asset as are buying diversified mineral packages.

[Dave Kistler:]

One other thing just switching gears a little. With the balance of the portfolio leaning towards gas and a structurally tighter supply demand outlook potentially for 2017, have we started to see a bunch more inquiries with respect to leasing of gas-levered acreage versus oil-levered acreage? Any color you could give us there?

[Marc Carroll:]

We can give you a little color. I'll tell you, in Haynesville we're -- over in Louisiana, we've been getting a number of lease inquiries and proposals. Some have been good; some has not been so impressive. Some of our Marcellus acreage or I should say Utica acreage, we've been getting some decent proposals. I think yes, but I would say the market is still possibly a little nervous about going all-in on gas. One thing that I think is going to position us well, because we feel the same way about the gas supply demand tightening over time here, is the activity going on, on our Shelby Trough Brent Miller assets because as you well know, the gas market can tighten really quickly and you can see a big bounce. What we're excited about as we have a commercial program at today's prices ongoing that will be a huge beneficiary of higher prices if that's to occur in the future. Production won't take any time to spool up, it will already be there.

[Operator:]

[Operator Instructions]. The next question comes from Chad Mabry from FBR Capital. Your line is open.

[Chad Mabry:]

Had a question on the CapEx side of things, specifically the $60 million of working interest CapEx that you have budgeted this year. I guess first of all, what was that in Q1? Secondly, could that change when you update guidance midyear based on some of the acquisitions and some of the commentary that you've had on the Haynesville program?

[Marc Carroll:]

The financials reflect, on a cash basis, about $25 million but actual CapEx incurred was more in line with the $60 million annual rate of about -- so $15 million for the quarter. With respect to your second question, I wouldn't expect any change in our CapEx guidance but we're still working through that.

[Chad Mabry:]

Okay. To ask another way, should we expect more of a working interest participation on some of the acquired assets, specifically in the Permian or in Weld County?

[Marc Carroll:]

No, a lot of that stuff doesn't really -- it could lend itself to participation, but the Weld County stuff has a limited working interest component with it that the mineral owner had participated across their minerals. We frankly did not attribute a lot of value to that. We're really looking at that from a royalty perspective. On the Freeport deal, we can always retain our right to participate as we lease more of that acreage. I will say the nature of that acreage is not ideal for our working interest participation program just because it's a smaller net to gross, if that means anything. It's just it's kind of more of a headache that it is value at the end of the day.

[Tom Carter:]

I would add one thing on our CapEx program and working interest. As that part of our business has come into play over time, it has generally been a mechanism to deal with volatility in mineral production, royalty production where we don't have control and it is -- and the volatility in making acquisitions. We will always generally defer to spending CapEx on acquisitions in a finite sense over working interest, but we do have a very good portfolio of working interest opportunities that we can turn on and turn off on a well-by-well basis.

[Operator:]

The next question comes from [indiscernible]. Your line is open.

[Unidentified Analyst:]

Tom and the others, Wall Street, understanding Wall Street has always been a mystery to me but when you came out at 19 or 20, I thought sure you go up to 21, 22 or something like that but instead over time you dropped about 10.5 or 11. Do you think the report that you're giving us today will be understood and appreciated by Wall Street?

[Tom Carter:]

George, I'll answer that this way. When we were at the 10, we put in effect a stock, a unit repurchase program where -- so that should answer that in some degree. But the market, I think general market perceptions were pretty dismal back then. It's not that they are rosy and robust today, but I think people generally see the future as a little bit more constructed as we had said. I hope so. The proof is to be seen. I hope so.

[Operator:]

Our next question comes from Jeff Robertson from Barclays. Your line is open.

[Jeff Robertson:]

I missed the first part of the call. On the Freeport and the Wattenberg acreage, did you all say how much of that has been leased and is under development?

[Holbrook Dorn:]

100% of the Wattenberg deal is leased and under development. On the Freeport, around, call it, 7% to 10% is leased and underdeveloped on that asset -- and under development on that asset.

[Jeff Robertson:]

Holbrook, is most of what's leased in the Freeport, did you say that's in the Permian?

[Holbrook Dorn:]

The Permian's a nice piece of that overall portfolio but there are tracks in that Permian portfolio that are unleased and we will look to move those to market. They're not big but there's still value there from a bonus perspective in the future. That kind of -- it's probably -- I would say Permian is more leased by far and away than the rest of the portfolio, arguably, even though the rest of the portfolio, it's in great oil and gas provinces. That position was put together by Mosbacher and North Central Oil back in the 1930s and 1940s where they went around and bought undivided interest in all the major oil and gas producing areas. Those areas are still great producing areas today.

[Operator:]

And we have a follow-up question from Nick Raza from Citigroup. Your line is open.

[Nick Raza:]

I just had a couple of other questions. In terms of the renegotiation with XTO in Haynesville, could you sort of comment on whether the royalty re-negotiations, assuming obviously that they were lower, are those permanent or do they sort of work back to a normal level at a certain point in time?

[Brock Morris:]

They have the right to continue to earn the incentive royalty with continued drilling. At some point they will earn a permanently reduced royalty but a higher level than during kind of this incentive period. There is somewhat of a permanent nature to the reduction, but it's still well within kind of what the market for royalties are.

[Holbrook Dorn:]

It also -- it's not just a royalty reduction. It also allows them to earn additional acreage to the existing lease. The primary lease is around 31,000 net acres and they can add another, I think, 12,000 to 15,000 acres, so this is a very large long term development program, especially when you think about not only just the Haynesville but the Bossier results coming in as strong as they have that you could have two zones out here across a huge position.

[Tom Carter:]

The other thing I would add on that is, on that transaction XTO can slow down their drilling anytime they want to but if they do, beyond a certain level, then the royalty goes back to the quarter royalty in the original lease and several other provisions of the lease like pad drilling wells not counting as continuous development wells go back into effect so there's really some -- while it is a variable program, there's a lot of alignment for them to want to continue to develop that and it reverts back to what it was if it slows down.

[Holbrook Dorn:]

Most importantly, the results have been great and it is a commercial program at today's prices and so we're really excited about it.

[Nick Raza:]

The other follow-up question I had was really the next 12 months for the Freeport assets that you guys acquired. I know your press release you mentioned it was 850 a day. Is that sort of what we should expect over the next 12 months or --

[Holbrook Dorn:]

That's how we have that model, time will tell. It could be a little higher, it could be a little lower, but we shall see.

[Operator:]

I am showing no further questions at this time. I would now like to turn the call over to Mr. Tom Carter for closing remarks.

[Tom Carter:]

Well, I would just like to say that we feel pretty positive about where we're today. We're still in a pretty rocky environment in our business, but we feel positive and we're optimistic that the future looks good. We're glad to be able to put some acquisitions on the books. We're glad to see our volumes holding up and growing. We expect that bonus income will be there over time and we're just looking forward to being able to perform and exceed on our expectations. Thank you all for joining us today.

[Operator:]

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