Business context and reporting period
Black Stone Minerals, L.P. owns mineral and royalty interests and non-operated working interests across 41 states and 61 onshore basins. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $40.6 | $64.8 | $105.0 | $155.9 |
| Operating loss | $(19.5) | $(121.2) | $(7.9) | $(101.0) |
| Net loss | $(20.8) | $(122.8) | $(10.1) | $(105.5) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $83.5 | $144.1 |
| Cash available for distribution to common/subordinated units and reinvestment | $68.0 | $66.8 | $116.2 | $122.2 |
Adjusted EBITDA, a non-GAAP measure, was $74.0 million in Q2 2016 versus $71.3 million, and $129.8 million for the first half versus $132.2 million. These measures exclude items including impairments, unrealized derivative changes and equity compensation; they are not substitutes for GAAP results or operating cash flow.
First-half production increased 6.3% to 5.634 million Boe, while average realized price fell 28.6% to $19.26/Boe. Q2 production rose 7.4% to 2.873 million Boe; realized price declined 30.5% to $19.55/Boe. No conventional margin percentage is stated in the filing; the Partnership reported operating losses in both periods.
At June 30, cash was $9.8 million, current assets $78.9 million and current liabilities $43.5 million. Credit-facility borrowings were $285.0 million, with $165.0 million of available borrowing capacity under the $450.0 million borrowing base; weighted-average interest rate was 2.45%. The borrowing base had been reduced from $550.0 million in April, with the next redetermination scheduled for October 2016. The Partnership reported covenant compliance. First-half investing cash outflow was $172.9 million, including $136.3 million of acquisitions; financing cash inflow was $85.9 million. Cash declined $3.5 million from year-end.
Material changes versus the prior comparable period
- Revenue fell 37.4% in Q2 and 32.7% in the first half, principally from lower realized commodity prices and less favorable derivative results, partly offset by higher production and lease bonuses.
- First-half oil and gas sales declined despite higher volumes. Lease bonus and other income increased to $16.5 million from $11.8 million.
- Impairment expense dropped substantially: $0.7 million in Q2 and $6.8 million in the first half, versus $118.4 million and $131.8 million, respectively, in 2015. This largely explains why reported losses narrowed; it does not indicate a comparable improvement in commodity revenue.
- Operating cash flow declined $60.5 million year over year, primarily reflecting lower cash collections from oil and gas sales and working-capital changes. Debt increased from $66.0 million at year-end 2015 to $285.0 million.
Outlook, management commentary, risks and unusual items
- Management expected 2016 drilling expenditures of $65–70 million, including $55–60 million in Haynesville/Bossier. A $15 million replacement-capital estimate was set for April 2016–March 2017. These are estimates, not earnings guidance.
- Three disclosed 2016 acquisitions included Permian interests for $10.0 million, Colorado interests for $34.0 million, and a Freeport-McMoRan package for $87.9 million. The filing also refers to four acquisitions in its investing discussion, which includes a planned later closing and a prior-acquisition holdback.
- Commodity prices remain volatile. The Partnership uses fixed-price swaps and reported substantial hedge coverage for available volumes: including post-quarter contracts, 99.2% of available oil hedge volumes and 98.5% of available natural-gas hedge volumes for the remainder of 2016; 43.7% and 98.4%, respectively, for 2017. Derivatives are not designated as accounting hedges, so fair-value changes affect reported earnings.
- The board approved a Q2 distribution on August 8, payable August 25, of $0.2875 per common unit and $0.18375 per subordinated unit. The filing states distributions are not guaranteed and depend on cash availability, reserves and preferred-unit obligations.
- Preferred units carried $54.0 million at June 30 and bear a 10% annual distribution; some were redeemed or converted during the first half. A compensation-plan change reclassified $10.1 million of cash-settled liabilities to equity-settled liabilities.
- Key risks include commodity prices, production and operator activity, reserve replacement, acquisition execution, borrowing-base reductions, counterparty/receivable credit risk, and the ability to generate sufficient cash for distributions. Management reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and no pending litigation expected to have a material adverse effect. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether production growth and lease-bonus activity can offset low realized prices and derivative losses.
- The October 2016 borrowing-base outcome, remaining liquidity, covenant headroom and implications of higher debt.
- Acquisition close, integration and expected contribution to production and cash flow; reconcile the filing’s “four acquisitions” reference with the named transactions and cash uses.
- Distribution sustainability after replacement capital expenditures, preferred distributions and acquisition spending.
- Hedge volumes, contract pricing and counterparty exposure, including the effect of mark-to-market changes on reported earnings.