Black Stone Minerals, L.P. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020. The unaudited results are for a mineral and royalty owner operating across 41 U.S. states; production and drilling activity depend substantially on third-party operators.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue, including derivative gains/losses | $183.1 million | $83.8 million |
| Revenue from contracts with customers | $93.0 million | $125.0 million |
| Operating income | $80.5 million | $14.6 million |
| Net income | $76.1 million | $9.0 million |
| Adjusted EBITDA | $71.1 million | $94.9 million |
| Distributable cash flow | $66.2 million | $81.4 million |
| Cash provided by operating activities | $71.5 million | $90.2 million |
Reported revenue and earnings benefited from a $90.0 million commodity-derivative gain, including $81.1 million of unrealized gains; commodity sales and lease bonus income declined. Oil and condensate sales were $52.1 million and natural gas and NGL sales were $36.6 million. Production volumes were broadly steady: equivalent volumes rose 1.3%, while realized prices excluding derivatives fell 26.6% to $20.81 per Boe.
Operating expenses included a $51.0 million oil and gas property impairment. Operating income was approximately 44% of total revenue and net income approximately 42%; these ratios were materially affected by derivative valuation gains. Adjusted EBITDA and distributable cash flow declined year over year despite the GAAP earnings increase.
At March 31, cash was $3.0 million, current assets $159.8 million, current liabilities $10.8 million, and credit-facility debt $388.0 million. The borrowing base was $650.0 million at quarter-end, with $262.0 million of unused availability reported. Effective May 1, the borrowing base was cut to $460.0 million; the filing does not state post-amendment unused availability. Debt carried a 3.22% weighted-average interest rate at quarter-end. The Partnership reported compliance with its debt covenants as of March 31.
Operating cash flow was lower year over year, while investing activities provided $1.4 million, principally reflecting much lower property spending and farmout proceeds. Financing used $77.9 million, including $66.9 million in common and preferred distributions, $5.0 million of unit repurchases, and net debt repayments. Total assets were $1.52 billion and total equity was $803.7 million at quarter-end.
Changes, outlook, and notable items
- Contract revenue fell 25.6% year over year, principally from lower realized oil, gas, and NGL prices; total reported revenue rose because derivatives moved from a $41.2 million loss in Q1 2019 to a $90.0 million gain in Q1 2020.
- The $51.0 million impairment followed the sharp oil-price collapse amid COVID-19-related demand weakness and increased supply. Management cautioned that further low prices could cause additional impairments and further borrowing-base reductions.
- Management said low prices could lead operators to reduce drilling or shut in uneconomic wells, lowering production and royalty revenue. The effect of potential shut-ins was not yet quantifiable; the filing said no operator was known to have claimed force majeure at the time.
- The Board approved a Q1 2020 common-unit distribution of $0.08 per unit, payable May 21, versus $0.30 per common unit shown as declared and paid during Q1. The reduced distribution was intended to retain cash for debt reduction and balance-sheet protection. Common distributions are discretionary, not guaranteed.
- The May 1 credit amendment set the borrowing base at $460.0 million and added anti-cash-hoarding provisions. The facility matures November 1, 2022 and is secured by substantially all oil and gas assets.
- 2020 development capital spending for non-operated working interests was expected to be approximately $5.0 million, net of farmout reimbursements; only a nominal amount had been invested in Q1. Subsequent to quarter-end, Aethon agreed to minimum drilling commitments on undeveloped Shelby Trough acreage, starting with four wells in the initial program year and at least 15 annually beginning in the third program year.
- As of March 31, hedges covered 91% of available 2020 oil volumes and 75% of available 2020 natural-gas volumes. These instruments partially mitigate price exposure but do not remove it.
- Other unusual items included $4.8 million of workforce-restructuring charges, partly offset in reported expenses by a $4.7 million downward revision to performance-award compensation. Management stated disclosure controls were effective and identified no material change in internal control over financial reporting.
The filing provides no formal earnings or production guidance. Management emphasized uncertainty around the duration and effects of the pandemic, commodity prices, operator activity, and market conditions.
Investor verification priorities
- Separate realized and unrealized derivative gains from underlying sales, cash flow, and distributable cash flow; assess how hedge coverage and prices affect future periods.
- Review debt headroom and covenant compliance after the May 1 borrowing-base reduction and amendment, including the effect of any further redetermination.
- Track operator drilling plans, production shut-ins, lease status, and the execution of the Aethon and other farmout/development arrangements.
- Confirm subsequent distribution decisions and whether operating cash generation can support distributions, debt reduction, and planned capital needs.
- Assess whether low commodity prices lead to further property impairments or changes to reserves and expected cash flows.