Black Stone Minerals, L.P. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. The partnership completed its IPO on May 6, 2015, so the periods include predecessor results before the IPO and public partnership results afterward. Dollar amounts below are in millions unless noted.
Business context and key financial metrics
Black Stone owns mineral and royalty interests across 41 states and 62 onshore producing basins, as well as non-operated working interests. At June 30, it reported mineral interests in approximately 14.5 million acres, with an average 48.1% ownership interest, plus nonparticipating and overriding royalty interests.
- Revenue: Q2 revenue was $64.8, down 45.5% from $118.9 a year earlier. First-half revenue was $155.9, down 36.7% from $246.3.
- Profit and impairment: Q2 operating loss was $121.2 and net loss was $122.8, versus operating income of $64.8 and net income of $62.1 in Q2 2014. First-half operating loss was $101.0 and net loss was $105.5, versus operating income of $138.0 and net income of $132.0. Property impairment was $118.4 in Q2 and $131.8 for the first half; no impairment was recorded in the comparable 2014 periods.
- Production and realized prices: Q2 production averaged 29.4 thousand Boe/day, up 11.0%; first-half production averaged 29.3 thousand Boe/day, up 12.9%. Realized oil prices fell 47.9% in Q2 and 49.4% for the first half; realized natural gas prices fell 45.5% and 48.2%, respectively.
- Cash flow: First-half operating cash flow was $144.1, compared with $165.9 in 2014. Investing cash use was $42.0 versus $59.9; financing cash use was $110.8 versus $123.3. Cash ended the period at $6.0, down from $14.8 at year-end 2014.
- Liquidity and debt: Credit-facility debt declined to $6.0 from $394.0 after the IPO proceeds were used to repay substantially all borrowings. The borrowing base was reduced from $700 to $600 effective April 10; unused borrowing capacity was $594. The company reported compliance with its financial covenants.
- Margins and distributions: The filing does not provide a headline operating-margin measure; operating results were substantially affected by the property impairment. Preferred units carry a 10% annual dividend coupon. The board later approved a prorated distribution of $0.1615 per common and subordinated unit for May 6–June 30, payable August 27, 2015.
Material changes versus prior comparable periods
- Lower commodity prices drove the revenue decline despite higher production. Management estimated the adverse price effect at $66.7 in Q2 and $137.2 for the first half; higher volumes partly offset it.
- Q2 commodity-derivative losses were $18.6, compared with losses of $2.3 in Q2 2014. For the first half, derivative results were a gain of $1.0 versus a loss of $8.3 in 2014.
- Lease bonus and other income rose to $8.2 in Q2 from $3.9, reflecting several significant lease transactions, but fell to $11.8 for the first half from $19.5 due to the absence of comparable prior-year leases.
- Depreciation, depletion and amortization increased to $32.2 in Q2 from $23.9, and to $60.1 for the first half from $47.0, reflecting higher production and downward reserve revisions.
- G&A rose to $19.7 in Q2 from $14.5, partly reflecting incentive awards and public-company costs. Interest expense fell to $1.7 from $3.4 in Q2 as borrowings declined.
- The IPO generated $391.5 of net proceeds in the equity statement; the cash-flow statement reports $399.4 of proceeds net of offering costs, reflecting presentation differences noted in the filing.
Outlook, risks and unusual items
- Capital spending: The updated 2015 drilling capital budget was $55.0; $32.8 had been incurred in the first half. Planned allocations included approximately 49% to Haynesville/Bossier, 25% to Bakken/Three Forks and 17% to Wilcox. No specific revenue or earnings guidance was provided.
- Commodity exposure and hedging: Management cited continued oil and natural gas price volatility and expects hedges and potentially lower oilfield-service costs to partially mitigate lower prices. Including post-quarter contracts, estimated production hedged for the remainder of 2015, 2016 and 2017 was 94.0%, 98.4% and 50.4% for oil, and 95.0%, 98.6% and 51.2% for natural gas, respectively.
- Distribution policy: Management said it believes operating cash flow will be sufficient for preferred distributions and minimum quarterly distributions, subject to reserves and available cash. Distributions are not contractually guaranteed and may be changed by the general partner’s board.
- Other risks: Risks include operator drilling and financing decisions, production levels, commodity prices, acquisitions, transportation and regulatory constraints. The filing highlighted uncertainty around proposed tax rules: royalty income was not specifically enumerated in proposed qualifying-income regulations, although counsel considered it qualifying income. Potential legislative changes could affect partnership tax treatment.
- Contingencies and subsequent events: Management considered pending litigation unlikely to have a material adverse effect; environmental remediation costs were not considered significant and no provision was recorded. The company acquired Permian Basin mineral and royalty interests for $7.8 on July 15. The next credit borrowing-base redetermination was scheduled for October 2015.
Important facts for investors to verify
- Whether lower commodity prices, reserve revisions and the $131.8 first-half impairment continue to affect asset values, depletion rates and earnings.
- The October 2015 borrowing-base redetermination, covenant headroom and liquidity needs, given the $600 borrowing base and $6.0 ending cash balance.
- Realized production prices, production trends and the effectiveness and fair-value volatility of the hedge portfolio.
- The sustainability of lease-bonus revenue and the coverage of preferred and common-unit distributions by cash generation.
- Developments in federal partnership tax rules and their implications for qualifying income and the partnership’s tax status.