Black Stone Minerals, L.P. — Q1 2016 Form 10-Q
Business and period. This unaudited filing covers the three months ended March 31, 2016. Black Stone Minerals owns oil and gas mineral and royalty interests across 41 states and 61 onshore basins, as well as certain non-operated working interests. The Partnership’s Q1 2015 comparison includes predecessor-period results before its May 2015 IPO, so comparisons of unit-level results are not directly available.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Total revenue | $64.4 million | $91.1 million | Down 29%; lower realized prices, derivative gains and lease bonus income |
| Operating income | $11.6 million | $20.2 million | Down 43% |
| Net income | $10.7 million | $17.3 million | Down 38% |
| EBITDA | $33.5 million | $48.1 million | Down 30%; non-GAAP |
| Adjusted EBITDA | $55.7 million | $60.9 million | Down 8%; non-GAAP |
| Cash provided by operations | $25.9 million | $74.4 million | Down 65% |
| Cash generated from operations available for common/subordinated distributions and reinvestment | $48.2 million | $55.4 million | Down 13%; non-GAAP |
Production increased 7.1% for oil and condensate and 4.3% for natural gas; total production averaged 30.3 MBoe per day, up 1.2 MBoe per day. Realized oil price fell 29.7% to $30.75/Bbl and realized natural gas price fell 23.9% to $2.23/Mcf. Revenue included $10.6 million of derivative gains, versus $19.6 million a year earlier. Q1 cash settlements received on derivatives were $20.6 million.
Operating expenses totaled $52.8 million, down from $70.9 million. Lower DD&A and impairment charges helped, while G&A rose 17% to $17.4 million, mainly due to incentive compensation and higher legal and professional costs. The Partnership recorded a $6.1 million oil and gas property impairment and a $4.7 million gain on asset sales. Net income attributable to common and subordinated units after preferred distributions was $8.9 million; reported basic earnings were $0.09 per common unit and $0.01 per subordinated unit.
Cash, debt and distributions
- Cash was $5.0 million at March 31, 2016, compared with $13.2 million at year-end 2015.
- Credit-facility borrowings were $116 million, up from $66 million at year-end. The weighted-average interest rate was 2.12%; the Partnership reported compliance with its financial covenants.
- The borrowing base was reduced from $550 million to $450 million effective April 15, 2016. After subsequent borrowings, remaining availability was $323 million as of that redetermination.
- Cash used in investing was $35.1 million, including $25.1 million of property additions and a $10 million Permian Basin acquisition. Financing activities provided $1.0 million, primarily reflecting net borrowing and distributions.
- Q1 distributions to common and subordinated unitholders were $42.9 million in cash flows. On May 9, the board approved a Q1 distribution of $0.2625 per common unit and $0.18375 per subordinated unit, payable May 26 to holders of record May 19.
Changes, outlook and risks
Despite higher production, lower commodity prices and lower lease bonus income drove the revenue decline; management attributed $19.4 million of the decline to lower realized commodity prices. U.S. rig count at quarter-end was 464, versus 1,048 a year earlier, reflecting reduced industry activity. Management reported a roughly 2% reserve reduction on a Boe basis under March 2016 SEC pricing compared with December 2015 pricing.
The Partnership hedges commodity exposure and stated that, including contracts added after quarter-end, it had hedged 97.3% of available oil and gas hedge volumes for the remainder of 2016, and 43.7% of oil and 45.0% of gas volumes for 2017. These hedges reduce, but do not eliminate, exposure to price changes; changes in derivative fair value are recorded in earnings.
Management’s 2016 drilling budget was approximately $60 million, with about 95% allocated to Haynesville/Bossier and Bakken/Three Forks. The filing gives no earnings or distribution guidance. Management’s stated objective is long-term growth in reserves, production and operating cash flow, with distributions when practicable; distributions are not guaranteed.
- Subsequent to quarter-end, the Partnership agreed to acquire a mineral asset package from Freeport-McMoRan and affiliates for $102 million, subject to adjustments, with expected Q2 closing. It also agreed to acquire another mineral package for $35 million, expected to close in Q2.
- Key risks include commodity-price volatility, production and development decisions by third-party operators, operator access to capital, acquisition execution, and potential changes in transportation, regulation or service availability.
- Environmental remediation provisions were not recorded; management considered potential costs from identified matters not significant. Management said existing litigation was not expected to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Investor verification priorities
- Track the effect of the April borrowing-base reduction, subsequent borrowings and announced acquisitions on liquidity, covenant headroom and leverage.
- Assess cash generation and distribution coverage using both GAAP operating cash flow and management’s non-GAAP cash-available measure.
- Verify realized prices, production trends, lease bonus income and hedge settlements; distinguish derivative cash receipts from noncash fair-value gains or losses.
- Review acquisition closing, financing and integration outcomes, and the ongoing $50 million common-unit repurchase authorization.
- Confirm preferred-unit redemption and conversion obligations and their priority relative to common and subordinated distributions.