Black Stone Minerals, L.P. — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. Black Stone Minerals owns oil and natural gas mineral and royalty interests across 41 states and 64 onshore basins, and also holds non-operated working interests. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $120.5m | $40.6m | $245.1m | $105.0m |
| Operating income (loss) | $57.8m | ($19.5m) | $122.9m | ($7.9m) |
| Net income (loss) | $54.2m | ($20.8m) | $115.8m | ($10.1m) |
| Adjusted EBITDA | $74.7m | $74.0m | $152.6m | $129.8m |
| Distributable cash flow | $66.3m | $68.0m | $134.8m | $116.2m |
| Distributable cash flow after net working-interest capex | $51.0m | $56.4m | $102.5m | $79.5m |
- Revenue and production: Q2 production averaged 37.3 thousand Boe per day, up 18.2% in total volume year over year; six-month production averaged 36.5 thousand Boe per day. Q2 oil and condensate volume fell 13.0%, while natural gas volume rose 33.5%. Six-month oil volume declined 8.1%, while natural gas increased 29.3%.
- Revenue drivers: Q2 revenue rose 197% year over year. Higher commodity prices, increased production, and a $52.7m favorable year-over-year change in derivative results were major drivers. Six-month revenue rose 134%, including a $64.8m favorable change in derivative results and higher realized prices and production.
- Profit and margins: Q2 operating and net margins, calculated as reported income divided by revenue, were approximately 48% and 45%, respectively; both were negative in Q2 2016. Six-month margins were approximately 50% and 47%, versus negative margins in the prior-year period. Derivative fair-value gains are included in revenue and can make these margins volatile.
- Cash flow: Six-month operating cash flow was $139.2m, versus $83.5m in 2016. Investing cash outflow was $98.4m, including $66.5m of acquisitions and $33.9m of property additions. Financing cash outflow was $43.1m; cash declined $2.3m to $7.5m.
- Liquidity and debt: At June 30, cash was $7.5m, current assets $94.8m, and current liabilities $43.3m. Credit-facility debt was $393.0m, up from $316.0m at year-end 2016. The borrowing base was $550m, with $157m of unused availability; the weighted-average interest rate was 3.73%. The partnership reported compliance with covenants.
- Distributions and equity: During Q2, declared and paid distributions were $0.2875 per common unit and $0.1838 per subordinated unit. On August 7, the board approved distributions for Q2 of $0.3125 and $0.20875 per unit, respectively, payable August 24. Preferred-unit redemptions totaled $20.1m in the first half; preferred units outstanding fell to 26,426 from 52,691 at year-end.
Material changes versus the prior comparable period
- Reported earnings swung from losses to profits, primarily reflecting higher realized commodity prices, increased natural gas production, and derivative gains rather than losses.
- Six-month operating cash flow improved by $55.6m. Adjusted EBITDA increased 18%, and distributable cash flow increased 16%; however, Q2 distributable cash flow was lower year over year.
- Interest expense rose to $7.5m for the first half from $2.5m, reflecting higher average borrowings. Credit-facility debt increased $77m from December 2016.
- There were no property impairments in the first half of 2017, compared with $6.8m in the first half of 2016. General and administrative expense declined modestly, partly due to lower incentive compensation costs.
Outlook, management commentary, and risks
- Management lowered its 2017 drilling expenditure estimate to $40m–$50m from $50m–$60m; approximately 90% was expected to be spent in the Haynesville/Bossier play. The board set replacement capital expenditure estimates of $13m for April 2017–March 2018.
- A Canaan Resource Partners farmout covers San Augustine County acreage. Canaan is to fund a portion of drilling and completion costs in exchange for working interests; management anticipates lower capital requirements and additional royalty income. The filing estimates savings of about $30m–$35m in 2017 and $40m–$50m annually thereafter in one discussion; MD&A also describes expected future annual reductions of $40m–$50m.
- The partnership hedges commodity exposure with fixed-price swaps and states it had hedged approximately 95.5% of available oil hedge volumes and 99.7%/99.4% of available natural gas hedge volumes for the remainder of 2017/2018. At June 30, derivative assets had a net carrying value of $20.7m. Fair-value changes affect reported earnings; six-month cash received on derivative settlements was $7.4m.
- Key risks include oil and gas price volatility, production and operator performance, acquisition execution, reserve replacement, access to transportation and services, regulation, and the ability to generate sufficient cash for distributions. The credit facility matures February 4, 2019, is secured by substantially all producing properties, and imposes financial and other covenants.
- The partnership reported no material change in risk factors from its 2016 Form 10-K, no material off-balance-sheet arrangements, and no litigation expected to materially affect its financial condition or operations. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the earnings improvement and reported margin reflects non-cash derivative fair-value movements versus realized operating performance and cash settlements.
- Whether production growth, particularly in natural gas, can persist and offset declines in oil volumes and changes in commodity prices.
- Acquisition economics, integration and funding needs, including the cash and unit consideration issued for 2017 acquisitions.
- Credit-facility borrowing-base redeterminations, covenant headroom, floating-rate exposure, and the ability to meet distributions and preferred-unit obligations.
- Actual drilling expenditures and realized capital savings from the Canaan farmout, compared with management’s estimates.
- Potential dilution from the $100m at-the-market offering program; 65,003 units had been sold for net proceeds of $1.0m through June 30, 2017.