Black Stone Minerals, L.P. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The partnership owns mineral and royalty interests across 41 states and also holds non-operated working interests. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
- Q2 revenue: $38.5 million, down 76.5% from $163.6 million. Revenue from customer contracts fell to $57.7 million from $134.4 million; a $19.2 million derivative loss compared with a $29.2 million gain a year earlier.
- Q2 earnings: Operating loss of $5.3 million and net loss of $8.4 million, versus operating income of $100.7 million and net income of $95.1 million in Q2 2019. Loss attributable to common and subordinated units was $13.6 million, or $0.07 per common unit.
- First-half revenue and earnings: Revenue was $221.6 million, down 10.4% from $247.4 million. Net income was $67.7 million versus $104.1 million; diluted earnings per common unit were $0.28 versus $0.54. The first half included a $70.8 million derivative gain, compared with an $12.0 million loss in 2019.
- Production and realized prices: Q2 equivalent production declined 18.3% to 42.6 thousand Boe/day; realized equivalent price excluding derivatives fell 46.6% to $14.37/Boe. For the first half, production declined 9.1% to 44.7 thousand Boe/day and realized price fell 35.7% to $17.74/Boe.
- Cash flow: First-half operating cash flow was $158.0 million, down from $201.0 million. Investing activities provided $0.4 million versus using $46.0 million in 2019; financing activities used $164.9 million versus $156.5 million. Distributable cash flow, a non-GAAP measure, was $130.6 million versus $179.3 million.
- Liquidity and debt: At June 30, cash was $1.6 million and credit-facility borrowings were $323.0 million, with $137.0 million of unused availability against a $460.0 million borrowing base. The partnership reported compliance with financial covenants. The facility matures November 1, 2022.
- Balance sheet and distributions: Total assets were $1.439 billion and total liabilities $364.8 million at June 30. Q2 distributions paid were $0.08 per common unit. After quarter-end, the board declared a $0.15 per-unit Q2 distribution, payable August 21, 2020.
Material changes and notable developments
- Lower commodity prices and production reduced oil, natural gas and NGL sales; lease bonus and other income also declined. Q2 oil and gas production decreases were primarily attributed to the Permian/Bakken and Haynesville/Bossier areas, respectively.
- A $51.0 million property impairment was recorded in Q1, reflecting lower expected cash flows after the sharp commodity-price decline. No impairment was recorded in Q2.
- In July, the partnership completed two Permian Basin property sales for $150.1 million net proceeds, used to repay facility borrowings. Borrowings were $153.0 million at July 31; the borrowing base was reduced to $430.0 million effective July 21. Sold properties represented estimated production of about 1,800 Boe/day.
- General and administrative expense fell to $11.5 million in Q2 from $14.3 million, principally due to workforce reductions; a $1.1 million allowance against a long-term receivable partially offset the decrease. First-half results include $4.8 million of restructuring charges.
Outlook, risks and contingencies
- Management provided no formal full-year earnings or production guidance. It expected lower prices and pandemic-related uncertainty to continue weighing on drilling activity and noted that the duration and effects of market conditions could not be reasonably estimated.
- Uneconomic wells may be shut in, lowering production and royalty revenues; operators could also claim force majeure under some leases. The partnership said it could not yet quantify potential shut-in effects. Further low prices could cause additional impairments or borrowing-base reductions.
- The board reduced the Q1 distribution to retain cash for debt reduction and balance-sheet protection, then increased the Q2 distribution; it remained below 2019 levels. Common distributions are not contractually guaranteed and may be limited if borrowings exceed the borrowing base or covenant/default conditions apply.
- Commodity derivatives partially mitigate price exposure but create fair-value volatility. At June 30, 2020, the partnership had hedged all available 2020 oil volumes and 83% of available 2020 natural gas volumes; for 2021, 70% and 57%, respectively. It reported nine derivative counterparties, all rated Baa1 or better by Moody’s.
- The next borrowing-base redetermination was expected in fall 2020. Other risks include operator capital constraints, production and reserve uncertainty, commodity-price volatility, and variable interest rates. A 1% rate increase on June 30 debt was estimated to increase first-half interest expense by $1.6 million.
- Management said routine litigation was not expected to have a material adverse effect; no environmental remediation provision was recorded. No co-owner had exercised the put option related to the Noble acquisition as of June 30.
Most important facts for investors to verify
- Whether asset-sale proceeds reduced debt as reported, and the effect of the $430.0 million borrowing base and fall 2020 redetermination on availability and covenant headroom.
- Subsequent production, operator shut-ins, drilling activity and realized prices, including whether derivative coverage continues to offset price weakness.
- Whether the $0.15 distribution is sustainable given operating cash flow, distributable cash flow, debt repayments and preferred distributions.
- The assumptions behind the $51.0 million impairment and whether further reserve or property-value write-downs are needed.
- The filing reports no clear quantified estimate of future pandemic effects, potential force-majeure impacts, or full-year results.