Black Stone Minerals, L.P. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The partnership completed its IPO on May 6, 2015; comparisons with 2014 reflect the Predecessor before the IPO and are not fully comparable.
Business context and financial performance
Black Stone Minerals owns mineral and royalty interests and certain non-operated working interests across U.S. oil and gas basins. It reported one operating segment. Unless otherwise stated, amounts below are in millions of dollars.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $137.0 | $132.8 | $292.9 | $379.1 |
| Operating income (loss) | $54.7 | $61.3 | $(46.3) | $199.3 |
| Net income (loss) | $53.9 | $57.9 | $(51.6) | $189.9 |
| Operating cash flow | Not stated | Not stated | $217.2 | $278.4 |
| Adjusted EBITDA | $64.8 | $91.2 | $197.0 | $288.4 |
| Cash generated available for distribution and reinvestment | $61.1 | $84.0 | $182.6 | $264.3 |
- Q3 common and subordinated limited partner earnings were $0.27 per unit. The filing reports no comparable 2014 public-partnership per-unit result because the IPO had not occurred.
- Q3 total revenue increased 3.2%, principally from a $47.7 million increase in derivative gains and higher production volumes, partly offset by lower realized commodity prices. Nine-month revenue fell 22.8%, mainly due to lower oil and gas prices and lower lease-bonus income.
- Q3 production averaged 29.0 thousand barrels of oil equivalent per day, up 2.5% year over year; nine-month production averaged 29.2 thousand Boe/day, up 9.2%. Nine-month realized oil and condensate price fell 48.9%; realized natural gas price fell 41.8%.
- Nine-month results included $156.7 million of oil and gas property impairment charges, versus none in 2014. Q3 impairment was $24.9 million. The filing attributes impairments primarily to lower expected future realized cash flows and reserve-value changes.
- Q3 operating margin was approximately 39.9% of revenue, compared with 46.1% in Q3 2014. Nine-month operating results were a loss, largely reflecting the impairment charge.
Cash, debt and liquidity
- At September 30, cash was $5.6 million, current assets $93.7 million, and current liabilities $46.3 million. Long-term credit-facility borrowings were $43.0 million, down from $394.0 million at December 31, 2014.
- Operating cash flow of $217.2 million was below $278.4 million a year earlier. Investing used $104.2 million, including $62.2 million of acquisitions and $42.4 million of property additions. Financing used $122.2 million, including debt repayments and distributions; IPO proceeds were $399.1 million net of offering costs.
- The revolving facility had a $600 million borrowing base at September 30, 2015 and $557 million of unused borrowing availability. The borrowing base was subsequently reduced to $550 million effective October 28, 2015, and the facility maturity was extended to February 4, 2019. The partnership said it was in compliance with financial covenants at quarter-end.
- Commodity derivative assets totaled $48.4 million at quarter-end, with no derivative liabilities reported. Nine-month operating cash flow included $46.5 million net cash received on derivative settlements; reported derivative gains also reflect fair-value changes.
Outlook, commentary, risks and subsequent events
- No formal earnings or production guidance is provided. The updated 2015 drilling capital budget was $55.0 million; $39.3 million had been incurred through September 30.
- Management’s stated objective is long-term growth in reserves, production and operating cash, while paying distributions when practicable. The filing says distributions are not guaranteed. The Board later declared a $0.2625 per-unit distribution for July–September, payable November 27, 2015 to holders of record November 19.
- The company uses a rolling hedge strategy, generally hedging 18–24 months forward. As of the filing’s reported hedge estimates, 2015 and 2016 proved-developed-producing production was largely hedged, with roughly half of 2017 production hedged. Derivatives limit some price exposure but can also cap upside under collar contracts.
- Management cited volatile oil and gas prices, operator drilling decisions and access to capital, reserve replacement, acquisition execution, transportation, regulation, and the ability to generate cash for distributions as material uncertainties. Lower September 2015 SEC pricing reduced estimated reserves approximately 10% versus December 2014 pricing.
- After quarter-end, the partnership commenced a tender offer for up to all 117,963 preferred units at $1,000 per unit plus accrued unpaid yield, intending to use cash and revolving-credit availability. Preferred units carry a 10% annual distribution. The offer was scheduled to expire December 10, 2015.
- On October 28, 2015, the partnership received $18.7 million from an operator to terminate an exploration and development agreement. Management stated that existing litigation and identified environmental matters were not expected to have a material adverse effect; no environmental remediation provision was recorded.
- A disclosed risk is possible changes to partnership tax treatment, including proposed regulations concerning qualifying income and proposals that could tax certain fossil-fuel partnerships as corporations.
Important facts for investors to verify
- How much of the reported revenue and operating cash flow is supported by realized derivative settlements versus unrealized fair-value gains.
- Reserve assumptions and commodity-price inputs underlying the $156.7 million impairment and the estimated 10% reserve reduction.
- Whether the preferred-unit tender offer was completed, its final cost, and the resulting effect on debt, liquidity and distributions.
- Effects of the reduced $550 million borrowing base, future redeterminations, and covenant headroom.
- Whether production, lease-bonus activity and operator drilling can offset weak commodity prices, and whether distributions remain adequately funded.
- Potential tax-law or regulatory changes affecting the partnership’s pass-through tax status.