Black Stone Minerals, L.P. — Q3 2017 Form 10-Q
Business context and reporting period. The partnership owns oil and natural gas mineral and royalty interests across 41 states and 64 onshore basins, and also holds non-operated working interests. This unaudited filing covers the quarter and nine months ended September 30, 2017; amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $89.1 million | $99.2 million | $334.2 million | $204.1 million |
| Operating income | $26.2 million | $39.3 million | $149.1 million | $31.4 million |
| Net income | $22.0 million | $37.5 million | $137.8 million | $27.5 million |
| Net income per common unit | $0.16 | $0.24 | $0.86 | $0.26 |
| Adjusted EBITDA | $77.7 million | $74.2 million | $230.3 million | $204.0 million |
| Distributable cash flow | $69.1 million | $66.6 million | $203.9 million | $182.8 million |
| Distributable cash flow after net working-interest capital expenditures | $67.3 million | $40.3 million | $169.8 million | $119.8 million |
Cash flow and balance sheet. For the first nine months, operating cash flow was $211.7 million, investing cash outflow was $116.5 million, and financing cash outflow was $96.0 million. Cash was $8.9 million at September 30, 2017. Credit-facility borrowings were $362.0 million, up from $316.0 million at year-end 2016; the $550.0 million borrowing base left $188.0 million available. The weighted-average borrowing rate was 3.74%, and the partnership reported compliance with its debt covenants. Total assets were $1.246 billion and total liabilities were $427.7 million.
Common-unit distributions were $0.3125 per unit and subordinated-unit distributions were $0.2088 per unit for Q3, declared after quarter-end and payable November 24, 2017. Nine-month distributions were $0.8875 and $0.5763 per common and subordinated unit, respectively.
Material changes versus the prior comparable period
- Q3 revenue declined 10.1%, primarily because commodity-derivative results shifted from a $7.8 million gain to a $9.3 million loss. Natural gas and NGL sales rose 15.5%, lease bonus and other income rose 25.6%, and total equivalent production increased 5.9% to 3.407 million Boe.
- Nine-month revenue increased 63.7%. Higher realized prices, production, derivative gains, and lease bonus income contributed. Equivalent production rose 13.1% to 10.007 million Boe; natural gas production grew 23.4%, while oil and condensate production fell 8.8%.
- Nine-month net income increased substantially from 2016, which included a $6.8 million property impairment. The 2017 period had no impairment. Interest expense rose to $11.7 million from $4.8 million as average borrowings increased.
- Production costs and ad valorem taxes increased to $35.3 million from $23.3 million over nine months, partly reflecting higher prices and gas volumes. Lease operating expense and general and administrative expense were slightly lower.
Outlook, commentary, risks and unusual items
- Management expected 2017 drilling expenditures, net of farmout reimbursements, of $50–$60 million, with nearly all allocated to the Haynesville/Bossier play. It noted that timing of operator cash calls could shift some payments into the first half of 2018. The board’s replacement-capital estimate was $13 million for April 2017–March 2018.
- The Canaan farmout is intended to fund a substantial portion of drilling and completion costs on specified San Augustine County acreage and reduce future capital needs. The filing estimates $30–$35 million of 2017 offsets in the notes and describes $40–$50 million of annual offsets during the agreement term in management discussion.
- On November 1, 2017, the partnership amended and restated its revolving credit agreement, extending maturity to November 1, 2022 without changing the $550 million borrowing base. The amendment also changed hedging and restrictive covenants.
- Commodity prices, production and operator activity are key uncertainties. Management cited Hurricane Harvey’s disruption to Gulf Coast refining and transportation and Eagle Ford production, as well as risks involving acquisitions, reserve replacement, transportation, regulation, and operators’ access to financing. A 10% reduction to SEC commodity-price assumptions would reduce proved reserve volumes by an estimated 1.6%.
- Derivative gains and losses are recorded in revenue without hedge accounting; therefore reported earnings can be volatile. At September 30, counterparties were rated Baa1 or better, and estimated counterparty exposure was $7.2 million. The partnership had no interest-rate hedges; a 1% rate increase on the reported debt balance was estimated to increase nine-month interest expense by $2.7 million.
- Preferred units carried a 10% annual distribution and could be redeemed at face value through December 31, 2017; units not redeemed were scheduled to convert to common and subordinated units in Q1 2018. During the first nine months, $19.6 million of preferred units were redeemed and $6.6 million converted.
- Management said routine litigation and identified environmental matters were not expected to have a material adverse effect; no environmental remediation provision was recorded. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether production trends, especially rising Haynesville/Bossier gas and declining oil volumes, persist and translate into realized revenue.
- How derivative settlements and fair-value movements affect reported results and cash generation; review hedge volumes, prices, and coverage beyond 2018.
- Whether the $50–$60 million net drilling-spend expectation and Canaan farmout reimbursements are realized, including any timing shifts into 2018.
- Debt, borrowing-base availability, covenant compliance, and the effect of the November 2017 credit-agreement changes and variable interest rates.
- Distribution coverage and sustainability, preferred-unit redemptions or conversions, and dilution from the ATM program and acquisition-related unit issuances.